THE TAX PROFESSIONAL

Subtitle

WE NEED AN INDEPENDENT TAX PREPARER CREDENTIAL

 

As we all know the U.S. District Court shut down the Internal Revenue Service attempt at regulating all “previously unenrolled” paid tax return preparers, and did away with the Registered Tax Return Preparer designation that would eventually be required of all such individuals who wanted to prepare federal tax returns for compensation. The IRS decided not to appeal the decision.

 

Do we really need the IRS to require federal “licensing” of paid tax return preparers?

 

The service already regulates preparers, both those permitted to “practice” before the IRS, like CPAs, attorneys and Enrolled Agents, as well as the “previously unenrolled” preparers who would have become RTRPs, via Circular 230. There have been “preparer penalties” for many years now.

 

Paid preparers are required to sign and enter their “identification number” (originally their Social Security number) on all tax returns that they prepare for a fee. In the late 1990s the IRS created the Preparer Tax Identification Number, or PTIN, as an alternative to the Social Security number to help prevent identity theft. The court case kept in place the requirement for all paid preparers to register with the IRS and receive a PTIN -- so the service has the central registry of paid tax preparers that it needed.

 

I have been preparing 1040s for individuals in all walks of life since February of 1972. Prior to the initiation of the IRS regulation regime, for as long as I have been in the business and the years before, anyone could prepare a federal income tax return for a fee. There were absolutely no requirements. And the federal income tax system has managed to survive for almost 100 years.

 

Basically a tax preparer is someone who assists a taxpayer to prepare a required federal form. The 1040 (or 1040A) is a federal form, not unlike a census form or a federal student financial aid form (albeit more complicated). The taxpayer is responsible for all the information reported on the form -- the preparer provides guidance to the taxpayer on what is required to be reported and how to record it on the return.

 

The IRS argues that their required licensing of paid preparers would reduce tax fraud. This is not true. Regardless of any required licensing program, crooked taxpayers will always find crooked or unethical preparers, “underground” or otherwise, and crooked or unethical preparers will always find willing or naive taxpayers. Licensing and regulation of CPAs did not prevent Enron.

 

There is no real “need” to require federal “licensing” of paid tax return preparers. But there is a problem that needs to be addressed.

 

The problem is that any Tom, Dick or Harriet can hang out a shingle as a “tax preparer,” regardless of education or ability. The situation got worse with the introduction of tax preparation software. Any Tom, Dick or Harriet, with absolutely no training, experience or knowledge, can simply purchase a tax preparation software package and try to pass themselves off as a “tax professional.”

 

Without some kind of accepted certification program the taxpaying public has no way of knowing if a person who says that they are a professional tax preparer has any training or experience in, or actual knowledge of, preparing tax returns (except for individuals who have the initials EA after their name).

 

The answer would be some kind of voluntary “certification program” where a tax preparer could receive a universally accepted professional designation based on testing or credentials and maintained by required annual continuing professional education in federal taxation. The taxpaying public would then know that a preparer possessing this designation has proven basic competence in preparing 1040s and remains current in tax law.

 

The IRS already has such a program that designates preparers as EAs. However, this designation includes the ability to “practice” before the IRS and, as such, the enrollment examination is very extensive and includes issues of taxpayer representation. Many preparers, like myself, are happy just preparing returns and are not interested in taxpayer representation.

 

What is needed is a voluntary lower-level designation related to preparation only – like the Registered Tax Return Preparer (RTRP) designation.  You could look at it like this: The RTRP-like designation is like an undergraduate degree and the EA is like a Master’s.  But the IRS did not go this route.  Instead it created a useless voluntary continuing education Annual Filing Season Program (AFSP) that provides tax preparers with a “Record of Completion” instead of an actual initialed credential or designation.

 

But the IRS is not the best choice to administer a voluntary certification program. In the case of all other professions, like CPAs, attorneys, architects and medical doctors, the maintenance of the professional certification designation is done by an independent industry-based organization such as the American Institute of CPAs, the American Bar Association, the American Institute of Architects, and the American Medical Association.

 

And so for professional tax preparers, any voluntary certification program, which issues a, for example, “Certified Tax Preparer” credential should be administered by an independent industry-based organization like a “National Institute of Certifed Tax Return Preparers.”

 

There have been many attempts at voluntary certification of tax return preparers -- creating a designation for tax preparers (Certified Tax Professional, Chartered Tax Preparer, etc.) -- over the years. But none have been successful because they were offered by individual membership or CPE organizations and were not universally accepted by the industry.  

 

Such an institute would be an independent, nonprofit organization established solely for the purpose of issuing, maintaining and promoting the tax-preparation designation. Its governing board will consist of a representative (perhaps the executive director or board president) of the National Association of Tax Professionals, the National Society of Tax Professionals, the National Society of Accountants, and perhaps the AICPA and/or the American Bar Association, and any other appropriate tax-related membership organization, and at least two independent “previously unenrolled” practicing tax professionals.

 

In order to receive the designation, a candidate must possess a valid PTIN and pass a competency test on federal 1040 tax law. A “grandfathering exemption” from this test would be allowed for:

 

• Tax professionals who have been consistently preparing federal income tax returns on at least a half-time basis (during the traditional tax filing season) for at least five full years and who have successfully completed a total of 48 hours of continuing professional education in federal taxation in the three-year period (36 months) prior to applying for the designation.

 

• Tax professionals who have passed the IRS-sponsored competency test and been designated as an RTRP under the IRS tax return preparer regulation regime.

 

• Tax professionals who have been licensed or certified to prepare income tax returns under a required state program that includes a competency test.

 

• Individuals who have successfully completed a certificate or certification program in federal income taxation offered by an accredited educational institution or a qualified membership organization that includes testing.

 

The “grandfathering period” would last for two or three years following the initiation of the certification program. Tax preparers who want to take advantage of the grandfathering exemption from testing would need to apply for the designation during this period.

 

Participants would need to renew their designation every three years by submitting proof of completion of a total of 48 hours of CPE in federal taxation during the three-year period, with at least fifteen hours each year. The 48 hours must include four hours of “tax updates” per year and one hour of “ethics updates” within the three-year period.

 

Qualified CPE providers would include accredited educational institutions and organizations/companies accepted by the National Registry of CPE Sponsors. The overseeing organization would not need to separately approve CPE providers.

 

CPAs and attorneys would be welcome to apply for voluntary certification under this program as a way to acknowledge and identify their knowledge of and currency in 1040 preparation.

 

With the institution of such a voluntary certification program, taxpayers will be able to identify true “tax professionals” from among the choices they are faced with. More accurate and competent returns will be prepared. And competent, ethical “previously unenrolled” tax preparers will receive the recognition and respect that they deserve. Everyone benefits -- the taxpaying public, the IRS and the tax preparation industry.

 

As an alternative to creating a new organization, which would be a difficult task, and a new credential we can look to the already existing Accreditation Council for Accountancy and Taxation, created and currently administered by the “other” NSA (National Society of Accountants), and its Accredited Tax Preparer (ATP) and Accredited Tax Advisor (ATA) credentials.  The ATP is for basic 1040 preparers and the ATA is for practitioners who handle more sophisticated tax planning issues, including ownership of closely held businesses, qualified retirement plans and complex estates. 

 

An ATA must maintain 72 hours of CPE during each three-year cycle or 24 CPE hours per year, similar to the EA, and an ATA must maintain 90 hours during each three-year cycle or 30 hours per year.  The 72 and 90 hours must include 4 hours of ethics preaching – which is a bit better than the annual 2-hour requirement of the ATSP.  These CPE requirements are in excess of the ATSP 18 hours per year, so these credentials clearly meet the alleged purpose of the ATSP - giving “unenrolled return preparers a way to stay to up-to-date on tax laws and changes”.

 

Preparers with ACAT credentials are exempt from the annual 6 hour federal tax filing season refresher course and corresponding annual test requirement of the AFSP, so the IRS obviously “recognizes” these credentials as being valid “proof” of competence and currency in tax return preparation.

 

The initial competency examination component of the ACAT tax credentials should satisfy National Taxpayer Advocate Nina Olsen.  Her support of the IRS voluntary program was tentative; she felt the program should include an initial competency test requirement.

 

The ACAT would need to sever its direct link to the NSA to become a truly independent organization and add representatives of the other legitimate tax preparer membership organizations to its Board of Trustees and be publicly “recognized” by these other organizations, and the IRS, as “the” voluntary non-“practice” tax preparer credential. 

 

What do you think?