Blame the Tax Preparer

With tax season nearing an end, tax preparers are finding themselves under increasing pressure, and not only from clients anxious to get their tax refunds.

The Internal Revenue Service has been stepping up its scrutiny of tax preparers as it focuses on them as the key to making sure that taxpayers stay compliant. Last year, the IRS's plans to regulate the tax preparation industry ran aground after a trio of independent tax preparers successfully sued the IRS. A federal judge in Washington, D.C., ruled that the IRS's efforts to require mandatory testing and continuing education of tax preparers exceeded the agency's statutory authority. That decision was subsequently upheld by a federal appeals court this February (see Tax Preparers Defeat IRS in Appeals Court Ruling on Licensing Scheme).

The IRS may end up offering its tax preparer certification program on a voluntary basis, as the IRS's new commissioner, John Koskinen, has suggested, but there haven't yet been any definite moves in that direction.

Congress may be stepping in, though. Next Tuesday, the Senate Finance Committee plans to hold a hearing on the subject of incompetent and unethical tax preparers (see Senate Committee Plans Hearing on Unethical Tax Preparers). The witness list is scheduled to include Koskinen, along with National Taxpayer Advocate Nina Olson, who has frequently called for greater regulation of the tax preparation profession, and H&R Block president and CEO William Cobb,, whose company has also pushed for greater regulation of independent tax preparers. Dan Alban of the Institute for Justice, the libertarian law firm that successfully represented the independent tax preparers in their lawsuit, is also scheduled to testify before Congress, along with consumer advocates.

The Senate has also recently introduced legislation that would double the penalty on tax preparers who fail to do the due diligence checks that are required when clients claim the Earned Income Tax Credit. The legislation, introduced by Senators Patty Murray, D-Wash., Jack Reed, D-R.I., and Sherrod Brown, D-Ohio, aims to expand eligibility for the EITC, especially for childless workers, but the legislation would be paid for by doubling the penalty on tax preparers, who already have a hard time verifying their clients' eligibility for claiming the credit (see Senate Democrats Introduce Tax Cut Bill for Workers). Tax preparers have rightly complained that the EITC due diligence checklists that they are required to complete when filing tax returns that claim the EITC essentially put them in the role of IRS tax examiners, when that role should be performed by IRS employees.

The IRS, for its part, contends that the tax preparers are letting too many taxpayers get away with improper claims for the EITC. With budget cuts crimping the IRS's ability to audit as many individual taxpayers, except by relying on technology that automatically flags suspicious returns for further scrutiny, the IRS is forced to turn to the tax preparation community as its first line of defense against tax fraud. And with the penalties for aiding tax fraud already high, tax practitioners have no choice but to go along or get out of the field.

Meanwhile, increasing numbers of tax returns are self-prepared and self-filed from taxpayers' own home computers. The latest statistics from the IRS show that self-prepared, electronically filed tax returns were up 5.9 percent this tax season compared to last year, to over 33.6 million, while the number of e-filed returns from tax professionals fell 0.9 percent, to over 48.7 million this tax season.

Indeed, the IRS has been encouraging more taxpayers to use free tax software as part of the Free File program that it operates in partnership with tax software developers, and that may help explain the increasing popularity of self-prepared returns. Also, some preparers are hesitant to identify themselves on their clients' returns, especially if they may have been bending the rules on the tax laws, and the taxpayer may file it as self-prepared when they actually got help.

But the IRS will still need to partner with the tax preparer community on a collaborative basis, especially if it wants tax professionals to help their clients comply with the tax laws, as well as the new requirements of laws like the Affordable Care Act. The increasing complexity of the Tax Code also means that many taxpayers have a hard time filling out their taxes correctly, even if they follow all the prompts in the tax prep software they're using. All too frequently, they need the help of competent professionals to make sure they're doing it right and claiming the deductions and tax credits to which they're rightfully entitled. That's where an ethical tax professional can be invaluable.

Do you think the IRS is unfairly punishing the tax preparer community?

Michael Cohn is editor-in-chief of AccountingToday.com.

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