March 17, 2014

Remember our piece about shady tax preparers, and how it’s up to you to avoid them? This holds true, especially since the IRS has no authority to regulate them.

Millions of people rely on approximately 700,000 paid tax preparers to complete and file their federal and state income tax returns each year. According to the Government Accountability Office, paid tax preparers file 60 percent of all federal income tax returns annually. But  in a 2006 study, the GAO found significant errors in 17 of 19 tax returns prepared by paid tax preparers. Disreputable tax preparers even went so far as to file false and fraudulent tax returns on behalf of unwitting clients in an attempt to boost their fees.

Regulatory Requirements for Paid Tax Preparers

In response to this alarming situation, the Internal Revenue Service developed strict testing and maintenance regulations for paid tax preparers in an attempt to curb fraud and impose a consistent level of performance. However, a court ruling first decided in January 2014 and upheld by a federal appeals court in February 2014 declared that the IRS had overstepped its authority. As a result, much of IRS program of regulations has been set aside, at least for the time being, leaving taxpayers largely on their own in determining whether paid preparers are reputable or competent.

In its bid to protect taxpayers from ruthless paid tax preparers, the IRS relied on an 1884 law empowering it to “regulate the practice of representatives of persons before the Department of Treasury,” to establish a program that included the registration, regulation, testing and continuing education for paid tax preparers across the United States. Under the new system all paid tax preparers who wished to prepare federal income tax returns would be required to obtain a Preparer Tax Identification Number (PTIN), earn a passing grade on a qualifying exam, complete 15 hours of continuing education courses each year along with paying an annual fee. The program was set to take effect in 2014.

Loving vs. IRS Happened

As might be expected, paid tax preparers took exception to the new regulations. Before the IRS could implement its tough new requirements, Sabina Loving, an independent tax preparer in Chicago, along with the Institute for Justice, an Arlington, Virginia based libertarian activist group, filed a complaint with the District Court for the District of Columbia seeking an injunction against the regulations.  According to Loving and the Institute for Justice, consumers – not the IRS – should have the final say in choosing who prepares their tax returns. And, with the regulations in place, many thousands of paid tax preparers would be forced to undergo time-consuming and expensive training – or go out of business.

In January 2014, the court ruled in favor of the plaintiffs. In February 2014, the federal appeals court for the District of Columbia upheld the ruling of the lower court. The court decisions claimed that the 1884 law was not intended to interpret the mere preparation of tax returns as making a case before the Treasury. While the judges were sympathetic with the intent behind the IRS programs, they insisted that such sweeping changes would have to be approved by Congress and signed into law by the President of the United States. The court later amended its ruling to state that that the requirement for the PTIN was not affected by its findings, so the IRS reinstated its requiring for paid tax preparers to obtain them. Meanwhile, the IRS insists that consumers have the right to be protected from incompetent or dishonest tax preparers, and is weighing whether to file a further appeal of the courts’ decisions.

Enrolled Agents Weren’t Affected

The court also stated that the ruling did not affect the IRS program for enrolled agents, which is a voluntary rather than a compulsory program. The enrolled agents program includes all the elements of the program struck down by the district and appeals courts. The advantage of attaining and maintaining enrolled agent status is that enrolled agents, like certified public accountants and tax attorneys, have unrestricted privileges to represent taxpayers before the IRS. Paid tax preparers who have not achieved enrolled agent status and who are not tax lawyers or CPAs do not share these privileges.

Choose Your Tax Preparer Carefully

Unless you were consciously collaborating in filing a false tax return, it is highly unlikely that you would face criminal charges due to the bad acts of a rogue paid tax preparer. You would likely still be on the hook for any adverse financial consequences caused by his or her actions, which could result in fines and penalties of hundreds, if not thousands of dollars. Therefore you should practice due diligence in checking out the credentials of any paid preparer you are considering to file your tax returns. The old truism “if it sounds too good to be true, it probably is” definitely applies to tax preparers who promise deductions and credits that stretch the bonds of credibility or larger-than-expected tax returns. To avoid such problems, stick with tax preparers with verified credentials or with tax assistance services that have a good reputation and track record.