Written Comments of Francis X. Degen, EA
President, National Association of Enrolled Agents†
before the House Ways and Means Committee
Subcommittee on Oversight
July 20, 2005
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 40,000 enrolled agents (EAs) across the country. EAs are the only practitioners for whom the IRS directly attests competency and ethical behavior. Over the years, NAEA has worked tirelessly to increase the professionalism of its members and the integrity of the tax administration system as a whole.
Based on input from our membership, I suggest to you that the problem we are addressing today has two components—intentionally non-compliant returns attributable to preparer fraud and other non-compliant returns attributable to preparer negligence and incompentency. Both are clearly problematic.
Policymakers should care about preparer fraud and incompetency because they undermine the integrity of our voluntary tax system, create resentment in those who file honest tax returns, and contribute to the $300 billion plus gross tax gap. We share those concerns. Further, as federally licensed enrolled practitioners, EAs find themselves at a disadvantage when competing in the marketplace against the unscrupulous and find that these bad actors sully the reputation of all licensed tax professionals.
In our testimony today, I would like to present a picture of the problems created for the tax system by unlicensed return preparers, who in many instances we have found to be unscrupulous or incompetent, and unfortunately in far too many cases both unscrupulous and incompetent. To help remedy this disturbing situation, the NAEA urges members of this Subcommittee to take legislative action.
While most of the focus for the IRS and policymakers over the last few years has been on large dollar compliance areas such as corporate tax shelters and executive compensation, generally involving licensed practitioners, NAEA members have observed equally disturbing trends in the world of return preparation for ordinary taxpayers, almost always involving unlicensed preparers.
The NAEA is not alone in acknowledging this problem. In her 2003 annual report, the National Taxpayer Advocate noted that over 55 percent of the 130 million individual taxpayers hired a return preparer. The majority of those preparers did not possess a legitimate license demonstrating competency or ethical standards. The result is startling; Ms. Olson noted that 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.
For our members and all preparers who abide by the highest levels of ethical and competency standards in order to live up to the requirements set by federal regulations, the competitive disadvantages of this situation are stark. Time and time again, when our members are surveyed, they relate instances of what we call “preparer shopping” during every tax season. Indeed some taxpayers gather up their tax documents and walk out of a practitioner’s office because someone right down the street has guaranteed them a minimum refund amount: $1,000, $3000 or even higher. Or, the taxpayer wants the preparer to help them create phony business or unreimbursed employee business expenses. Or, incorrectly report expenses or income from rental property. Or, not report “under-the-table” income. The list goes on and on.
Many of our members are aware of specific preparers in their neighborhoods that specialize year-in and year-out in ripping off the Treasury. Many have even complained to the IRS, but because of the lack of resources, the agency appears to focus on practitioners currently regulated under Circular 230. As one of our members commented in regard to this hearing, “People drive in excess of the speed limit until they notice the cop; then they all observe the speed limit for a while, but when the cop leaves the beat, speeds begin to creep back up.” Mr. Chairman, it has been too long since the tax cop has been out circling the neighborhood in his black and white.
While fraud is the focus of this hearing today, preparer error is a major cause of noncompliance. We all know the tax code is too complicated. Unfortunately, too many preparers who are open for business today fail to attain adequate training and education or do not undergo the necessary annual investment in time and money to keep up with the constantly changing tax code. Mr. Chairman, it is important to place negligence and incompetency on an equal footing with intentional fraud when attempting to understand the magnitude of the non compliance problem among unregulated preparers.
What can be done?
Mr. Chairman, we all acknowledge that the tax code is exceedingly complex. Dramatically simplifying the code would likely reduce incidences of noncompliance. However, absent significant simplification, we must deal with the situation as it currently exists.
NAEA strongly endorses the concept of regulating all unenrolled paid return preparers, requiring an initial test for competency, background checks, annual minimum continuing education requirements and compliance with the current Circular 230 ethical standards. Additionally, the Office of Professional Responsibility needs adequate resources to both enforce the rules and promote all preparers covered by Circular 230.
After many months of working with the current regulated groups – the enrolled agents, lawyers and CPAs – in addition to the unenrolled preparers, Senators Bingaman, Grassley and Baucus have developed thoughtful legislation that addresses most of these elements. NAEA has endorsed this legislation as the most comprehensive roadmap to address the problem of unregulated preparer noncompliance. While any legislation can be improved, we would urge the Subcommittee to use this legislation as your base for drafting a House bill. If you choose to start from scratch, though, we would urge you to consider the following principles in developing your legislation.
Principle 1. The legislation should contribute significantly to taxpayer access to competent and ethical tax preparation services
The legislation should require all paid preparers not currently governed by Circular 230 to pass IRS’ initial competency examination testing understanding of basic individual income tax laws and ethical standards. We urge you to avoid a scenario where preparers can fulfill this requirement by taking one of a multitude of different tests created by various outside groups. The public needs to have full confidence that their licensed preparer has passed the initial examination and met all the basic standards established by the Treasury Department. Further, paid preparers should be required to complete annual continuing education and be subject to the ethical standards of Circular 230. These changes will contribute significantly to the use of qualified and ethical individuals preparing returns.
Principle 2. Build on the existing regulatory framework and consolidate enforcement under one entity
Rather then constructing a parallel regulatory framework and enforcement entity for different groups of paid preparers, the legislation should consolidate all persons preparing returns (enrolled agents, lawyers, CPAs, and paid preparers) under the current regulations (Circular 230) and the existing Office of Professional Responsibility. In other words, there should be one ethical code, one set of coordinated exams that would allow for advancement within the profession, and standardized continuing education requirements all administrated under the current regulatory system.
In addition to being cost effective, this consolidation would ensure uniformity of standards and enforcement across all preparers.
Principle 3. Ensure adequate resources for administration, promotion and – most importantly – for enforcement
The legislation should allow OPR to retain all registration fees for administration of the program, including policing all practitioners and preparers under its 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 would go a long way toward discouraging taxpayers from shopping for the “best deal” among preparers and will help shut down many EITC mills across the country.
Additionally, the bill should 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.
Principle 4. Strike a 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 that are authorized to practice before the IRS: EAs, lawyers, and CPAs. Circular 230 is very specific as to how these individuals may advertise and generally present themselves to the public. A new 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.
For example, 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 claiming a government stamp of approval 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.
In closing, Mr. Chairman, we stand ready to work with you in developing legislation to regulate unenrolled paid preparers. As I have said before this Subcommittee at an earlier hearing, most people would be astounded to find out that while their barber or manicurist is licensed, that their preparer may not be. Comparing the downside of a bad hair cut to incorrect tax return, it is time to establish federal standards to ensure basic competency and ethical behavior.
Your own hearing announcement confirmed the large number of taxpayers who use paid preparers. Whether it be due to the complexity of the Internal Revenue Code or to a healthy fear of the IRS or simply a service that the average person doesn’t want to be bothered with, taxpayers do seek professional assistance. It stands to reason that an ethical and competent tax preparer is a taxpayer’s best and lowest cost insurance against IRS problems and the Service’s best and lowest cost assurance of return compliance.
†The National Association of Enrolled Agents (NAEA) is the professional society representing Enrolled Agents (EAs), which number some 40,000 nationwide. Its 11,000 members are licensed by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service (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. They 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 Certified Public Accountants, Enrolled Agents 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 42 states. For additional information about NAEA, please go to our website at www.naea.org.