Written Comments of Francis X. Degen, EA
President National Association of Enrolled Agentsi
before the House Ways and Means Committee
Subcommittee on Oversight
April 6, 2006
Thank you, Mr. Chairman, Ranking Member Lewis, and members of the Oversight Subcommittee for asking the National Association of Enrolled Agents (NAEA) to testify before you today. NAEA is the premier organization representing the interests of the 46,000 enrolled agents (EAs) across the country. EAs are the only practitioners for whom the IRS directly attests competency and ethical behavior. NAEA is dedicated to increasing the professionalism of its members and the integrity of the tax administration system as a whole.
In regard to the 2006 filing season, I am happy to report that for the most part, the season is progressing smoothly. Nonetheless, a number of major issues are affecting taxpayers and tax practitioners, and we would like to take to take this opportunity to bring a handful of issues to your attention.
- A few “bad eggs” in the paid preparer community are adversely affecting the public’s faith in the tax system.
- Complexity for individual taxpayers continues unabated, centering this year on AMT, definition of dependent, and Schedule D information.
- The Offers-in-Compromise program is in jeopardy because of a provision of the Reconciliation bill currently in conference.
- Increased enforcement actions during filing season are creating some significant headaches for enrolled agents and their clients.
HOW TO DEAL WITH A FEW BAD EGGS
Lately, it seems as if every day we pick up the papers only to read about another scheme with the potential for defrauding taxpayers. Last year, this subcommittee reviewed the trend of linking tax preparation with some unrelated services or goods, such as car or furniture sales. This season, the great new idea is to load tax refunds on gift cards. Further, we have been hearing a lot about the sale of questionable financial services linked to tax preparation. Last week, we awoke to headlines, however dubious, screaming of practitioners being allowed to sell tax data to the highest bidder.
Very quietly hidden behind these juicy headlines is in actuality a much more sinister yet mundane story: the growing problem of taxpayers’ forum shopping to maximize their refunds at the expense of the Treasury. In other words, enrolled agents are seeing taxpayers pick up their records and move down the street looking for unscrupulous preparers who will “pump-up” their refunds. Unlicensed tax return preparers are making outrageous guarantees on refunds, saying, “Come to us and we promise you a $1,000 back from Uncle Sam.” Suddenly the taxpayer is taking phony home office or business deductions or finding long lost children.
The message to taxpayers with respect to cheating is that everyone is doing it and you are a dupe if you aren’t doing it too. As practitioners licensed to practice before the IRS, we too often end up representing these taxpayers once the IRS catches up with them. Unfortunately, unlicensed paid return preparers are often outside the current regulatory rules governing competency and ethical behavior. It is our contention that this issue is the key to maintaining, and even to restoring, taxpayer faith in a fair and equitable tax collection system.
To address this situation, Mr. Chairman, we urge the subcommittee to move expeditiously to pass legislation to require all paid tax return preparers to demonstrate competency and ethical standards through licensure and continuing education.
NAEA believes that such legislation will greatly aid all taxpayers—but especially low income taxpayers—to comply with our nation’s tax laws by helping to ensure access to competent and ethical tax preparation services. In her 2003 and 2004 annual reports, the National Taxpayer Advocate expressed that oversight of unenrolled return preparers was one of the most serious problems facing taxpayers. In 2003, she noted that over 55 percent of the 130 million individual taxpayers paid a return preparer to prepare their returns. Close to half these preparers did not possess a legitimate license demonstrating basic competency or ethical standards. Shockingly, at least 57 percent of EITC earned income overclaims were attributable to returns prepared by unlicensed paid preparers, resulting in billions of dollars in lost revenue to the government.
NAEA supports S. 832 (the Taxpayer Protection and Assistance Act of 2005) because we believe the bill will help ensure the integrity of the tax system by promoting licensed tax professionals to the general public and ensuring strong enforcement against the unlicensed and unethical. We believe the proposed legislation:
Contributes significantly to taxpayer access to competent and ethical tax preparation services.
The legislation would require all paid preparers to pass an exam testing their understanding of basic tax laws and ethical standards. Further, paid preparers would be required to undergo annual continuing education and be subject to the ethical requirements of Circular 230.
This will help ensure that only qualified and ethical individuals will be preparing returns.
Builds on the existing regulatory framework and consolidates enforcement under one entity.
Rather than constructing a parallel regulatory framework and enforcement entity for different groups of paid preparers, the legislation would consolidate all persons preparing returns (lawyers, CPAs, EAs, and paid preparers) under the current regulations (Circular 230) and the existing Office of Professional Responsibility (OPR). In other words, there would be one ethical code, coordinated exams that would allow for advancement within the profession, and standardized continuing education requirements all administrated under the already existing system.
In addition to being cost effective, this consolidation would ensure uniformity of standards and enforcement across all preparers.
Ensures adequate resources for administration, promotion, and, most importantly, enforcement.
The legislation would allow OPR to retain all registration fees for administration of the program, including policing all practitioners and preparers under their jurisdiction. Most importantly, the authorization to retain these fees would ensure that the office would have adequate resources to investigate and penalize unlicensed individuals. This will discourage taxpayers from shopping for the “best deal” among preparers and will help shut down many EITC mills across the country.
Additionally, the bill would authorize OPR to retain penalties administered under the program for promotion of all Circular 230 preparers to the general public. This will assist the public in understanding the importance of paying only licensed individuals for tax preparation and will assist the public in understanding the difference between the various groups allowed to do paid preparation.
Strikes the correct balance for creating a new tax practice credential.
Congress needs to be cognizant of the ramifications of creating a new credential in the world of tax administration. Currently, the general public is presented with three options for individuals who are licensed to practice before the IRS: lawyers, CPAs, and enrolled agents. Circular 230 is very specific as to how these individuals may advertise and generally present themselves to the public. A credential that implies a higher level of authority and competency than merely preparing basic individual tax returns will cause confusion and undermine the general intent of the legislation.
Since the passage of the IRS Restructuring and Reform Act, there has been a great deal of confusion as to the credentials and bona fides of Electronic Return Originators or EROs. The IRS has issued signage denoting official endorsement of individuals qualifying as EROs, as well as financed a public awareness campaign in support of the program. Anecdotal evidence (the appearance of billboards and bus stop signage) in poorer neighborhoods demonstrates the danger of putting out to the public confusing titles or credentials that overstate competency.
Additionally, state regulators would be very leery if not outright hostile toward the creation of a new credential in the accounting/tax preparation marketplace. States regulate the use of credentials and many list a litany of titles (e.g., certified tax consultant, chartered accountant, registered accountant) and abbreviations likely or intended to be confused with CPA that may not be used. After years of conflict, the majority of state boards of accountancy have accepted that a person recognized by IRS as being enrolled may use the enrolled agent name and EA abbreviation. Creating nomenclature that might overstate its intended mission is likely to re-ignite this battle, and at the very least potentially counter the underlying intent of the legislation.
While the alternative minimum tax—which holds the distinction of being both unfair and extremely complex—continues to stand out as the poster child for dazed taxpayers, two new issues have been particularly troublesome for practitioners this filing season.
The first is the new definition of dependent as defined in §152 of the Internal Revenue Code. While we applaud Congress for trying to simplify the definition of child, the law of unintended consequences has reared its head with respect to the new definition of qualifying child and qualifying relative. (Please see our attached letter to Commissioner Everson). Quite frankly, the definitions have probably resulted in more rather than less confusion. The examples we cite in our letter need addressing. We note that the Treasury Department’s Blue Book for the 2007 budget attempts to offer solutions to some of these problems, but we need to act before the 2007 tax year.
NAEA supports efforts to simplify the filing of federal taxes and its 11,000 members stand ready to assist Congress and the President in accomplishing real, practical reform for the American taxpayer. While the concept of simplifying the tax code often plays well on the campaign trail, the nitty-gritty of what is reform and how it is accomplished makes comprehensive reform a daunting political undertaking for policymakers. May I be so bold as to suggest that the practitioner community have some role in future changes? Those of us “in the trenches” may, based on practical experience, be able to see problems staff writers may not envision.
I would also like to comment on the IRS expectation that the details of every capital transaction be reported on a Schedule D. The goal in submitting a tax return is to report the correct tax liability of the taxpayer. NAEA fails to understand why the listing of every transaction on a Schedule D is necessary to achieve that goal. The IRS should strive to lessen the burden on taxpayers. This requirement of reporting every detail is counterproductive to that concept and greatly increases the burden on taxpayers. Taxpayers who use professional assistance in preparing their tax returns are facing extra costs due to this requirement. Given the fact that many taxpayers now trade in the stock and bond markets, the goal should be to prepare an accurate tax return and not a meaningless exercise in reporting details.
Along a similar vein, our members cite a growing problem with information reporting from third parties (e.g., Forms 1099 and Schedules K-1). While Congress and the IRS have become more reliant on third-party reporting to ensure compliance, the process has become incredibly complex. Our members cite example after example of brokerage firms sending two, three, and sometimes as many as four corrections of the Form 1099. The brokerage firms point out that in this complex, multinational world we live in it is becoming more and more difficult to provide the required information within the required deadlines. We would like to caution Congress as it considers possible legislation to expand reporting requirements in this area to give the IRS and the industries involved plenty of lead time to develop and implement such an expansion.
While increasing offer quality is an admirable goal, NAEA is concerned that the approach taken by the Senate in the Reconciliation bill now in conference is unduly burdensome to taxpayers. While the steep entry cost would certainly deter frivolous offers, it will also certainly prevent most, if not all, earnest taxpayers from making their offers as well.
As you are aware, the provision requires that a taxpayer make a good faith down payment of 20 percent of any lump sum offer-in-compromise with any application for an offer. For periodic payment offers, the taxpayer is required to comply with his or her own payment schedule. The proposal also repeals the $150 user fee. Additionally, it provides that an offer will be deemed accepted if the IRS does not reject it within twenty-four months (twelve months beginning in 2010). The proposal is estimated to raise $683 million over five years.
With IRS permitted to wait twenty-four months to accept an offer, at least until 2010, one of the common concerns is the possibility that IRS may use this new rule to further slow its processing of offers (particularly in the case of taxpayers making monthly “good faith” payments).
A further concern is that many taxpayers borrow to meet their tax obligations (often from family or friends) and such taxpayers would see this plan as a great disincentive to make an offer. We do not believe it makes sense for a taxpayer to borrow in an effort to square up with the IRS only to risk that a rejected offer would put the taxpayer even more in debt, both to IRS and to the source of the borrowed “good faith” payment.
It is not clear how the provision, which NAEA believes will reduce significantly the number of offers submitted to IRS, would generate the 10-year dollars that the Senate bill claims it will.
NAEA would like to offer a counter proposal that we believe would provide true reform. In short, our proposal would:
- Require that if a taxpayer uses a paid third party to prepare the offer that such preparer be a current Circular 230 practitioner;
- Create a $5,000 frivolous filing penalty for the taxpayer and for any paid preparer assisting in the preparation of the frivolous offer;
- Maintain the current user fee; and
- Deem an offer accepted if not rejected by the IRS within twelve months.
This alternative approach should eliminate most of the frivolous offers, while at the same time giving taxpayers a time-certain for response from the IRS.
ENFORCEMENT DURING TAX FILING SEASON
NAEA has been a strong proponent of beefing up enforcement at the IRS, while maintaining good customer service levels for taxpayers. We are encouraged by the improved numbers we are seeing from the agency on both audit and collection. Many of our members, however, have reported a problem arising from this renewed emphasis. Namely, there has been a major increase in the number of audits, collections, and notices coming from the agency during the height of the tax filing season. This situation is coupled with an absolute unwillingness to work with practitioners to accommodate the sheer crush of work brought about at this time of the year. The IRS needs to consider building in some level of flexibility for its employees to be able to work with practitioners during filing season. The clear result will be higher quality audits and better responses to IRS inquiries.
In closing, Mr. Chairman and members of the subcommittee, NAEA and its members stand prepared to work with you and the IRS in ensuring a strong tax administration system and improving voluntary compliance. Thank you and I stand ready to answer any questions you may have.
i The National Association of Enrolled Agents (NAEA) is the professional society representing enrolled agents (EAs), which number some 46,000 nationwide. Its 11,000 members are licensed by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the IRS, including examination, collection, and appeals functions.
While the enrolled agent license was created in 1884 and has a long and storied past, today’s EAs are the only tax professionals tested by IRS on their knowledge of tax law and regulations. EAs provide tax preparation, representation, tax planning, and other financial services to millions of individual and business taxpayers. EAs adhere to a code of ethics and professional conduct and are required by IRS to take continuing professional education. Like attorneys and CPAs, EAs are governed by Treasury Circular 230 in their practice before the IRS.
Since its founding in 1972, NAEA has been the enrolled agents’ primary advocate before Congress and the IRS. NAEA has affiliates and chapters in forty-two states. For additional information about NAEA, please go to our website at www.naea.org.