AICPA Suggests Refining Tax Return Preparer Registration Proposal 


    July 13, 2004

    The Honorable Charles E. Grassley
    Chairman
    Senate Finance Committee
    219 Senate Dirksen Office Building
    Washington, D.C.20515
    Fax: 202-228-0554

    The Honorable Max Baucus
    Ranking Minority Member
    Senate Finance Committee
    219 Senate Dirksen Office Building
    Washington, D.C.20515
    Fax: 202-228-0554

    The Honorable William M. Thomas
    Chairman
    House Ways and Means Committee
    1102 Longworth House Office Building
    Washington, D.C.20515
    Fax: 202-225-2610

    The Honorable Charles B. Rangel
    Ranking Minority Member
    House Ways and Means Committee
    1102 Longworth House Office Building
    Washington, D.C.20515
    Fax:  202-225-1284

    Re: Registration of Federal Income Tax Return Preparers and Refund Anticipation Loan Providers

    Dear Chairmen and Ranking Members:

    The American Institute of Certified Public Accountants is pleased to provide comments on the proposal involving the registration of "federal income tax return preparers and refund anticipation loan providers;" specifically, section 141 of S. 882, the Tax Administration and Good Government Act, which passed the Senate on May 19, 2004.

    The AICPA strongly supports the implementation of high professional standards for tax practitioners, as reflected by the AICPA's Code of Professional Conduct and our Statements on Standards for Tax Services. For this reason, we support the concept of the regulation of all tax preparers. We would like to take this opportunity to bring some public policy and drafting concerns about the registration proposal to your attention.

    Addressing EITC and Refund Anticipation Loan Problems

    It is apparent that the registration proposal is a partial response to (1) the high error rate associated with Earned Income Tax Credit (EITC) claims and (2) consumer protection concerns with refund anticipation loans.

    Congress and the IRS are rightly concerned with the high error rate associated with EITC claims and with the proliferation of high-interest, short-term refund anticipation loans. The AICPA believes that direct approaches will better resolve these enforcement and consumer protection issues and result in more tangible increases in compliance levels than a preparer registration process alone might yield.

    We recommend enacting legislation that directly attacks the fraud, negligence, and abuses committed by some preparers with respect to EITC claims. We also strongly urge Congress to enact legislation that further restricts, or out-right prohibits, the use and availability of refund anticipation loans.

    The Bill's Public Awareness Campaign

    One important priority of the Service during the 2004 tax filing season was the implementation of a publicity campaign about how taxpayers should choose a competent tax preparer. This publicity campaign resulted in wide coverage by U.S. newspapers and media outlets. We are strongly supportive of this recent publicity campaign and find it conceptually consistent with the goals of the public information and consumer education campaign required by the preparer registration initiative of S. 882.

    Any effective public relations campaign should be centered on promoting enforcement and education, and not on the promotion and "branding" of a new tax professional, referred to as "federal income tax preparers" under the legislation.

    As currently drafted, the proposal focuses the public relations campaign on the matter of educating the public about this new classification of federal tax preparers to the potential detriment of other tax professionals like CPAs, enrolled agents, and attorneys. Such a public relations campaign would likely confuse the public about who is a qualified tax professional, particularly with respect to the enrolled community and other licensed individuals under Circular 230 who have qualified for their profession based on a difficult competency examination—unlike the much less rigorous examination apparently envisioned by the legislation.  

    The proposal also requires the IRS to maintain a public list (in print and electronic media, including Internet based) of "Federal income tax return preparers." We have concerns that maintenance of this type of public list, while laudatory, is one of those types of initiatives that may be seen as competing with current IRS programs and initiatives. For example, Congress has requested for the IRS to implement strategies designed to increase the electronic filing of tax returns. The IRS currently maintains a public list of companies or organizations that offer free tax filing and e-filing services for low-income persons; and another list of tax professionals who have been accepted into the electronic filing program, whom the IRS calls "Authorized IRS e-file Providers" or Electronic Return Originators (EROs).

    We fear that the creation of an additional list of tax professionals, like the one called for by S. 882, may actually end up confusing the public or even diluting the IRS's current message and goals surrounding the promotion of e-filing.

    Congress should conduct a review of the current Electronic Return Originator application process, and how the ERO process might overlap or duplicate even a "limited" registration process for tax return preparers. Under the current ERO application process, IRS conducts a background check of all principals and responsible officials affiliated with a tax return preparer's firm. This background check includes: (1) an FBI criminal background review; (2) a credit history check; and (3) an IRS records check with respect to the preparer and the firm's adherence to tax return and tax payment compliance requirements, including a review of any prior non-compliance under the IRS e-file program.

    After conducting this type of review of the ERO application process, Congress and the IRS might find it more beneficial (on a budgetary or resource allocation basis) to find ways to utilize or expand the current ERO public list of practitioners without the need to create a new, but separate list of professionals as envisioned by section 141 of S. 882.

    Administrative and Budgetary Considerations

    In addition to the implementing regulations required by the registration proposal, a whole new sub-processing unit within the IRS would be required to handle the registration and examination procedures envisioned by the legislation. This would place significant budgetary demands on the IRS; and thereby place the Service in the unenviable position of having to allocate its fixed annual budget among a number of competing, but important priorities.

    For example, the proposal requires the IRS to develop a series of examinations to test the technical knowledge of each applicant for registration. The Office of Professional Responsibility (OPR) currently develops the test for prospective Enrolled Agents, called the Special Enrollment Examination; and thus, OPR would be the logical office within the IRS to develop the examination envisioned by the legislation for preparer registration. It is our understanding that, based on an analysis of OPR's current budgetary and strategic priorities, OPR is studying ways to "outsource" the development of the Special Enrollment Examination to a private contractor. We are concerned the placement of this additional responsibility on OPR, i.e., the development of an examination for unenrolled preparers, will only further stretch the scarce budgetary resources allocated to OPR.

    Technical Drafting Issues

    As currently drafted, the registration proposal raises some technical concerns:

    1. $500 Preparer Penalty. Proposed IRC section 6695(h) states that any "non-registered person" who preparers a tax return for another taxpayer shall be subject to a $500-per-return penalty. Read literally, this imposes the penalty on all those exempted from registration under proposed IRC section 7530(g)(2) - including CPAs, attorneys, and enrolled agents, as well as anyone who prepares less than 5 returns or who prepares a return without compensation.
    2. Effective Date. The proposal envisions that the IRS will promulgate regulations regarding the preparer registration procedures. Therefore, we recommend that registration provision be made effective upon the issuance of final regulations —as opposed to the date of enactment as currently provided for under the legislation.
    3. 5 Return Threshold for Registration. The legislation creates a new Internal Revenue Code section 7530(g)(1) which states "The term 'Federal income tax return preparer' means any individual who …prepares not less than 5 returns …or claims for refund …per taxable year." Instead of tying this registration threshold to a preparer's taxable year, we recommend that the threshold be based on the number of returns prepared in a calendar year.

    *****

    We would be pleased to discuss the content of these comments with you or a member of your staff at any time. If you have any questions, please contact me at (202) 414-1705; Mark VanDeveer, Chair of our IRS Practice and Procedures Committee at (757) 422-4470; or Benson S. Goldstein, AICPA Technical Manager, at (202) 434-9279.

    Sincerely,

    Robert A. Zarzar
    Chair
    Tax Executive Committee




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