Tax pro regs on the way

Wednesday Jan. 6, 2010
Posted 11 a.m. EDT

What better way to start a brand new tax filing season than with a tax horror story?

From 2001 through 2005, Zully M. Cordoba ran a tax return preparation business, first from her Hialeah, Fla., home and then from a storefront in a local mall. For just $10, Cordoba would review folks' original income tax returns. In most cases, those reviews resulted in Cordoba filing amended returns and claiming deductions that had been overlooked. Of course, since she was able to get them more money, Cordoba got 10 percent of these newly found refunds.

The only problem was that those refiled returns were false. Cordoba is now spending a couple of years in a federal prison.

That's just the sort of abuse that the IRS is looking to stop before it can get started via regulation of paid tax preparers.

After six months of hearings, comments and study, Commissioner Douglas Shulman released the agency's Return Preparer Review this week. It outlines procedures the IRS hopes will derail not only criminal enterprises like Cordoba's, but will also reduce the number of incompetent paid tax preparers whose mistakes end up costing Uncle Sam and taxpayers.

And the potential for such costs is great. The IRS says that most of us rely on paid preparers for help in filing our returns. In 2007 and 2008, approximately 87 million federal individual income tax returns were prepared by someone else for a fee.

A goodly number of the estimated 900,000 to 1.2 million paid preparers are, of course, attorneys, certified public accountants and enrolled agents who are trained and licensed. But overall, there is no national tax pro standard. Basically, anyone can hang out a shingle and collect a fee for preparing tax returns.

Such wanton tax preparations will stop in 2011. That year, the IRS will begin phasing in a series of regulations on anyone who collects money for completing others' tax returns. They include:

  • Registration: All paid tax return preparers will have to register with the IRS and receive a tax identification number. The IRS plans to eventually make this registered preparer database available online
  • Competency testing: Initially, the exams will be in the basic individual 1040 and Schedule C areas, with a test on business tax rules to be added later.
  • Continuing education: Preparers will be required to complete 15 hours of annual continuing professional education covering federal tax law updates and ethics.

Attorneys, CPAs and enrolled agents will be exempt from the new testing and continuing education requirements since they already must meet certain standards and earn continuing education credits per their professional organizations or licensing agencies.

And the ethical standards that those pros must follow now will apply to all preparers.

Regulation pros, cons: I'm not naïve enough to think the new requirements will solve all problems related to unregulated tax preparers. It should, however, help get rid of the most egregious instances of incompetent or malicious preparers.

Of course, the downside is that hiring a tax pro is likely to cost more. The newly regulated preparers will pass along the costs of registration and training to their clients. Plus, since there likely will be fewer preparers and those who remain in business will be able to charge more.

Still, I commend the IRS for taking this step. And any additional upfront expenses should be less than what a taxpayer might have to pay to clean up the tax mess left by an inept or criminal tax preparer.

Check yourself: Until the IRS gets its new regs in place, the burden remains on you to make sure your tax pro is up to snuff.

Your first step is to determine which type of pro is best for your personal tax situation. Then you need to thoroughly check out that preparer.

Ancillary tax prep products: In addition to looking at ways to police tax preparers, the IRS report also touched on a touchy subject: refund products, typically refund-related loans.

The IRS won't let companies that participate in its Free File program mention refund anticipation loans, or RALs, on that site. Consumer advocates have long pushed for the IRS to get tougher when it comes to such loans offered at commercial preparation offices and Web sites. Now the IRS says it will investigate what further actions it might take.

In the Return Preparer Review, the IRS says it will create a working group to review tax refund advances. Every year these early-filing enticements, usually advertised as RALs or paystub loans, end up costing recipients whose official refunds turn out to be less than what was estimated when the loans were made.

In most cases a little patience and electronic filing will get you your refund almost as soon as one of these loans.

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