Taxpayer advocate targets tax return preparers

National Taxpayer Advocate Erin M. Collins has released the “2021 Purple Book” containing recommendations for legislative fixes to the federal tax system (National Taxpayer Advocate 2021 Purple Book; Compilation of Legislative Recommendations to Strengthen Taxpayer Rights and Improve Tax Administration). Among the recommendations:

Congress should authorize the IRS to establish minimum competency standards for federal tax return preparers.

Federal law currently imposes no competency or licensing requirements on paid tax return preparers. Credentialed individuals—attorneys, CPAs, and EAs—are generally required to pass competency exams and take continuing education courses. Volunteers who prepare returns through the Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs must also pass competency tests.

However, the Taxpayer Advocate charges that the vast majority of paid preparers are non-credentialed and are not required to pass competency tests or take courses in tax return preparation. And that, according to the Advocate, results in inaccurate returns.

The Purple Book cites studies that illustrate the extent of inaccurate tax return preparation. For example, General Accounting Office (GAO) auditors posing as taxpayers made 19 visits to national tax return preparation chains using two fact patterns for the returns they wanted prepared. In 17 of 19 cases, the GAO found that the preparers computed the wrong refund amounts with variations of several thousand dollars.

In 2011, the IRS implemented a program generally requiring preparers to register with the IRS, take a competency exam, and take continuing education courses. The authority for the program was based on the premise that tax return preparation constituted “practice” before the IRS that could be regulated. The program was short lived, however, and was shut down after just two years when a U.S. district court ruled that “mere” tax return preparation is not “practice” before the IRS. Since that time, the IRS has operated a voluntary Annual Filing Season Program for non-credentialed preparers. Under the program, participating providers must meet specific requirements, including continuing education, in return for which they receive a “Record of Completion” and are listed in a directory on irs.gov for taxpayers to use in locating qualified tax return preparers. However, the Taxpayer Advocate charges that the voluntary program is less rigorous than the 2011 program—and most non-credentialed preparers do not participate.

Bottom line. According to the National Taxpayer Advocate, “To protect the public, federal and state laws generally require lawyers, doctors, securities dealers, financial planners, actuaries, appraisers, contractors, motor vehicle operators, and even barbers and beauticians to obtain licenses or certifications, and in most cases pass competency tests. Taxpayers and the tax system would benefit from requiring tax return preparers to pass minimum competency tests.”

Authorize the IRS to establish minimum standards for tax return preparers.

Most taxpayers hire tax return preparers to complete their returns, and visits to preparers by GAO and Treasury Inspector General for Tax Administration auditors posing as taxpayers, as well as IRS compliance studies, have found preparers make significant errors that harm taxpayers and reduce tax compliance. Nearly 10 years ago, the IRS sought to implement minimum preparer standards, including requiring otherwise non-credentialed preparers to pass a basic competency test, but a federal court concluded the IRS could not do so without statutory authorization. Taxpayer Advocate Service recommends Congress provide that authorization.

National Taxpayer Advocate 2021 Purple Book; Compilation of Legislative Recommendations to Strengthen Taxpayer Rights and Improve Tax Administration