This policy contains the position of the National Association of Enrolled Agents (NAEA) on the subject of the registration and/or regulation of commercial federal tax return preparers. For purposes of this policy, commercial preparers are those who prepare tax returns for a fee, are not required to possess any knowledge of federal tax law and procedure in order to engage in this activity, and in general are not subject to standards of professional conduct in the performance of their tax return preparation work.
As indicated, consideration of the subject is limited to a national or federal program. Two states (California and Oregon) regulate commercial preparers. Some other state and local jurisdictions, such as Westchester County, New York, also have been examining the issue. It is difficult to know the impact, if any, their deliberations will have on federal policymakers. Further, the globalization of tax services suggests it is important that geographic boundaries not have the potential of establishing barriers to providing tax preparation services.
NAEA is dedicated to the integrity of our nation’s tax system and the role professional conduct and ethics play in preserving that integrity. It therefore is disturbing that there is an increase in taxpayer belief that tax returns will be accepted regardless of the facts reported on them. This growth principally emanates from the declining rate of audits conducted on returns in recent years. It seems that a great number of taxpayers have been lulled into concluding that gaming the system and playing the audit lottery are acceptable behavior. Surveys of taxpayers have found that there is a marked increase in feeling that cheating on tax returns is permissible. Therefore, it seems clear that addressing this concern is needed.
The IRS has begun efforts to turn that around. There have been numerous initiatives by the IRS that focus on tax compliance and enforcement activities to help ensure such compliance. The tax practitioner community has been implicated in the diminishment of compliance. As a result, steps to overcome failure to engage in sound professional conduct by practitioners in performing services for taxpayers also have begun. NAEA supports the IRS endeavors. All who provide tax services must be cognizant of the strong enforcement component of tax compliance. It has the possibility of touching every aspect of tax advice and return preparation.
NAEA finds that commercial return preparers and IRS involvement with them are an enigma in today’s tax practice world. It seems well accepted that there are problems in connection with services performed by commercial preparers, but in many respects those problems are unknown. In large measure, they seem to be the product of anecdotal information and conjecture. Also unknown is the makeup of the industry. The following illustrate these matters.
- There is admitted uncertainty as to the number of commercial preparers. Estimates of upwards of one million have been bandied about. With at least 55% of filed returns in recent years having been prepared by someone other than the taxpayers, it seems safe to conclude the number prepared by commercial preparers was considerable.
- There also is uncertainty about the environments in which they offer their services. A number of them work in a structured setting, such as those affiliated with a return preparation entity or those who are entrepreneurs in the tax business. Others are seasonal tax return preparers who set up shop in January and close down in April – sometimes referred to as “card table jockeys.” Still others are somewhere in the middle. However, there appears to be a dearth of information about the environments, such as the number of preparers affiliated with each of them and the manner in which they operate.
- Even if the numbers and environments were known, the extent of training, if any, many of the commercial preparers have had and the manner in which they keep abreast of the changes in tax laws and procedures would remain unknown.
- Tax return preparer penalties asserted in recent years have not been extensive as a relative matter and, in large measure, have not been collected.
- Attempts to implement recognition procedures in the electronic filing area, i.e. electronic return originators (EROs), have been the subject of criticism due to systemic problems in background checks and the like.
- Many of the problems in the Earned Income Tax Credit (EITC) program have been attributed to paid preparer involvement. Again, there does not seem to be a great deal of empirical data to support a conclusion as to the number of commercial preparers involved in the program and whether or not they do a consistently worse job than other preparers, even though there have been some informative and well-written white papers on the subject.
- The National Taxpayer Advocate recommended in her report to Congress for the year 2002 that a system be established to license commercial return preparers. It was an extremely ambitious program and one that would be expensive to establish and run. The IRS disagreed with the recommendation citing, among other factors, the expense of the program and that the issue is one for states to address rather than the federal government.
The National Taxpayer Advocate’s report to Congress for the year 2003
compromised her earlier report by advocating the establishment of a legislatively-mandated task force to study the uncertainties described above and to make recommendations based on the study.
- The Internal Revenue Service Advisory Council (IRSAC) considered the subject and in November 2003 recommended that a task force be established to study the issues involved. The IRS has not yet responded to the recommendation. This is consistent with similar attempts by advisory committees over the years.
The solutions to the enigma and a course of action do not seem to be easy ones. Hard facts are not available. Attempts to address the issues have not been successful. The IRS in fact may not be interested in the subject at this time. Attempts by former advisory groups to come to grips with commercial preparer issues have met resistance. The IRSAC in 2003 did not endorse a course of action for recommendation to the Commissioner.
NAEA believes that the absence of commercial return preparer oversight results in a discontinuity with respect to tax return preparation that is not in the best interests of the public or the tax system. It is counterproductive not to take measures reducing the harm or possible harm resulting from such discontinuity. The potential benefits derived from taking measures are manifold. They include the following.
- The competence and professionalism of commercial preparers would be enhanced.
- The public would be protected.
- There would be systematic oversight of the return preparation industry.
- Achievement of the IRS electronic filing goals would be accelerated.
- Erroneous EITC claims would be reduced.
- There would be fewer errors on returns prepared by commercial preparers.
- The IRS would be in a position to reallocate resources because of improved return accuracy.
- The identification of disreputable preparers and remedial actions would be expedited.
- There would be enhanced cooperation between the IRS and external stakeholders.
- All of the above would foster greater integrity of the tax system.
As previously stated, these reflect potential benefits. To achieve them, attention should be given the many unknowns and the history of dealing with the subject. The exercise of caution and the exercise of appropriate diligence therefore are indicated. A program established without them runs the risk of failing. This obviously should be avoided.
NAEA subscribes to the belief that ethics are the fabric that holds a profession together. In the tax arena, Congress has identified those who qualify as federally authorized tax practitioners (FATPs), i.e. enrolled agents, attorneys, certified public accountants and enrolled actuaries. All are licensed individuals whose professional practice is circumscribed by codes of professional conduct and continuing education requirements. NAEA, of course, believes that the most meaningful step in overcoming the commercial preparer issues is to have all such preparers attain enrolled agent status.
With the above said, FATPs have dual loyalties. One is to their clients. The other is to the tax system itself. NAEA thinks it safe to conclude that all FATPs share the goal of safeguarding the integrity of our tax system and would be willing to work to make that happen. A possible beginning to assist the IRS in this respect is to form a task force comprised of representatives of the FATP organizations. There could be additional organizations of practitioners whose memberships are not exclusively comprised of FATPs and others interested in the pursuit of the same objective.
The final product should be a program that is clearly understood, easily administered, self-funded, and compatible with services provided by FATPs. Before initiating a project of this nature, it would be helpful, perhaps critical, to have the IRS support of such a task force. NAEA firmly believes that involving stakeholders at the beginning will foster acceptance of any program or lack thereof that may result. It must be emphasized that IRS non-monetary support of a task force, not participation on it, that is contemplated.
Therefore, NAEA recommends the formation of a task force to consider the issues described above and presumably to recommend a program that would provide commercial preparer oversight. NAEA further recommends that the IRS support the establishment of such a task force and provide it information that may be needed for its deliberations. NAEA would be pleased to take the initiative to proceed with this endeavor.
Revised: April 2004