April 8, 2014
Statement for the Record
National Association of Enrolled Agents
Senate Finance Committee
April 8, 2014
“…most people would be astounded to find out that while their barber or manicurist is licensed, their preparer may not be. Comparing the downside of a bad hair cut to incorrect tax return makes it clear it is time to establish federal standards to ensure basic competency and ethical behavior.”
Francis X. Degen, EA, Past President,
NAEA US House of Representatives, Ways and Means
July 20, 2005
The question of return preparer oversight is not a new one. As long ago as 1995, the Commissioner’s Advisory Groupi recommended amending Circular 230 to prescribe rules for the registration of commercial tax return preparers. The National Association of Enrolled Agents (NAEA), the principal organization representing the interests of the 49,000 enrolled agents (EAs) across the country, has been advocating for years that oversight is essential to protect taxpayers, to protect the federal treasury, and to level the playing field for the professional tax preparation industry.
To that end, NAEA has supported efforts—legislative, administrative, or both—to provide oversight to the widely unregulated tax preparer community. Our philosophy is simple: Americans who pay a “professional” ought to receive a professional-quality tax return. As the committee reviews testimony at the close of the 2014 filing season, many Americans unfortunately cannot be reasonably assured that a given paid preparer will indeed produce a professional-quality, accurate return. We believe that is wrong.
Those engaged in this conversation understand all too well that Loving v. IRS is not a judgment on the merits of IRS’ oversight program. We side with those who believe such a program necessary, and we believe the agency performed admirably in establishing its oversight program. What was probably most noteworthy is what the agency didn’t do: huddle behind closed doors and hammer out a program unburdened by business realities. Instead, IRS reached out in a meaningful fashion—early and often—when creating its oversight program. While we did not agree with all the decisionsii, we believe the Service listened to the concerns of all and made principled decisions. Stakeholders got their say; stakeholders did not necessarily get their way.
Notwithstanding Loving, the problem IRS attempted to address—taxpayers harmed by incompetent or unethical preparers—is real and ongoing. Members write frequently to regale us with stories of unbelievable positions so-called professionals have taken on returns. One example just to prove the point: an unenrolled preparer placed a taxpayer’s long-term rental property on a Schedule C (rather than Schedule E). Adding insult to injury, the preparer proceeded to lard up the return with illegitimate employee business expenses (suits, for instance) for the taxpayer’s physician spouse and completely unsubstantiated credits on the Form 1040 line for ‘other credits.’
We believe we find ourselves at a fork in the road; Congressional action will determine whether we have thoughtful, reasonably swift, and relatively unobtrusive policy for the long run or whether we have a chaotic, patchwork, and unpredictable policy.
In the interest of long run stability, NAEA believes taxpayers and the tax administration system are best protected by national standards for all paid return preparers and oversight of the entire community. During this debate, NAEA has consistently urged policymakers to consider some basic principles for reform:
· Competency: Taxpayers would have a reasonable expectation of competency if preparers are subject to initial testing, annual continuing education requirements, background checks, and strong ethical standards. The absence of an initial competency test could place taxpayers in a worse position than currently exists, as taxpayers will assume a preparer holding a federal license has at least demonstrated minimal competenceiii.
· Consolidation: Any program should build on the existing regulatory framework and consolidate enforcement and administration at the federal level (under the Office of Professional Responsibility and the Return Preparer Office, respectively). This structure creates a variety of benefits: a single ethics code; coordinated exams that would allow for advancement within the profession; and, standardized continuing education requirements all administered under the already existing system.
Consolidation within the agency should ensure uniformity of standards and enforcement for all return preparers and necessary privacy for taxpayer data. It also prevents the cost, redundancy, and confusion that would come from 50 different state requirements with 50 different standards.
· Resources: A successful program is predicated on adequate resources for administration, promotion and enforcement. Promotion is noteworthy because IRS needs to reach the tax professional communityiv as well as taxpayers at large. It is not unreasonable or unusual for professionals to pay for their licenses—attorneys pay for their licenses, certified public accountants pay for theirs, and EAs pay for theirs, too. IRS should retain all registration fees for program administration and promotion.
The reality, though, is that post-Loving, the agency is not in a position to implement such a program. We urge Congress to clarify that IRS has the authority to run a return preparer oversight program—and in fact always has had that authority. We strongly recommend Congress clarify IRS’ authority in such a fashion that IRS need not rebuild a program from scratch. Starting from square one would be expensive—and wastefully so considering the thoughtfulness and inclusiveness of the original process. We have waited long enough for a system that works for taxpayers and for the profession, and re-fighting old battles is not a recipe to move forward quickly and efficiently.
In the interim, though, we have two concerns. The first is that IRS will not simply revert to status quo ante, but institute a new voluntary program. We oppose a new voluntary program.
The desire to create a new program is understandable, as the agency believes (rightly, in our opinion) it must take some action to protect the federal treasury and to protect taxpayers. And a newly created voluntary program will find some supporters, particularly among those philosophically opposed to providing the agency with new authority and/or philosophically opposed to regulation.
We are concerned that creating a new voluntary program (either out of the remains of the registered tax return preparer program or otherwise) would be counterproductive. Creating multiple voluntary credentials—some of which might not even be created by the agency—will confuse the marketplace. How is a taxpayer to distinguish between a legacy Circular 230 practitioner, other IRS-created (or recognized) credentials, and something as simple as a PTIN or EFINv? Further, and just as troubling, we are concerned that a new voluntary program, particularly one that recognized a panoply of state- created or state recognized tests, would dilute standards and leave confused taxpayers in a worse circumstance than they are currently.
Should the agency decide to institute a voluntary program while awaiting Congressional action, we ask policymakers to keep in mind that IRS has for decades had a voluntary program in place—in which attorneys, certified public accountants, and enrolled agents have of their own accord subjected themselves to high and stringent standards. The agency at this moment has within its grasp rigorous Circular 230 practice standards and should at the very least fully exploit the tools at its disposal as it attempts to drain the swamp of incompetent and unethical paid preparers.
Should the agency want to promote competency in a voluntary program, it has the means in its hands. Enrolled agents are less widely known than their legacy Circular 230 brethren, but the program has practical, attractive features. It is egalitarian, owing to its low barriers to entry (neither college education nor an apprenticeship program is required). The multi-part EA test is available right now—any other test would need to be run through competitive bidding. Further, enrolled agents are widely recognized by state taxation authorities.
This leads us to our second concern: a proliferation of state regulatory programs. The longer federal policymakers take to create a program, the more likely individual states will create regulatory programs of their own. Such an approach has great potential to be patchwork, with the inevitable result that a return preparer in Ohio would find herself subject to different requirements for Kentucky, for Indiana, for Michigan, and so on.
Given the high incidence of interstate tax return preparation, this patchwork would be a nightmare administratively and, no doubt, unnecessarily expensive and bureaucratic.
Finally, we suggest neither a state-centered approach to credentialing nor accepting tests recognized by individual states make much sense for a federal power established specifically under the U.S. Constitution.
NAEA thanks Senator Wyden and Senator Hatch for this timely hearing. We have for well over a decade been deeply involved in raising awareness of the dangers of incompetent and unethical paid tax return preparers. These bad actors harm individual taxpayers, undermine the tax preparation industry, corrode the tax administration system, and erode the treasury. Federal policymakers can—and should—take vigorous steps to shore up such a significant system. After all, the National Taxpayer Advocate states in her most recent NTA Report to Congress: “For tax year (TY) 2011, taxpayers filed about 142 million 1040-series individual returns, with nearly 79 million using paid preparers. More than half (over 42 million) of these returns were prepared by preparers who are unregulated by IRS.”
We urge Congress to grant IRS authority to re-start its return preparer oversight program and to do so as quickly as possible. We have lived in the wild West long enough to know that we can—and should—do better. While we have already discussed this issue with both of your staffs, we stand ready to engage in the conversation more broadly and look forward to assisting in drafting whatever legislation is necessary to reestablish minimum tax return preparer standards.
i The Commissioner’s Advisory Group is predecessor to the current IRS Advisory Committee, commonly referred to by its acronym IRSAC.
ii For instance, we believe limited practice—representation on returns completed by a paid preparer—should have been eliminated and we believe that those who have demonstrated basic competency should not have been permitted to prepare complex returns.
iv Not only the 679,749 individuals with current Preparer Tax Identification Numbers (see IRS website for statistics), but also those who prepare returns but do not know of any preparer requirements.
v A PTIN is a preparer tax identification number and is required of all paid return preparers, though the PTIN does not require any competency or continuing education. Similarly, an EFIN is an electronic filing identification number and it is provided to those who are permitted to file electronically, though EFIN holders have neither demonstrated competency nor been required to take continuing education.