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Tuesday, March 15, 2011

The Competent Tax Return Preparer

I've been intrigued by a few aspects of the new IRS system to regulate all paid return preparers. In particular, what types of questions are they going to ask of preparers who are not CPAs, attorneys or Enrolled Agents (that is, they are not exempt from testing)? It would seem that the tests should be shorter and/or simpler than the tests (otherwise, why not make everyone become an EA)?

In the famous "10,000 letters" campaign the IRS started in the 2010 filing season - where they mail letters to some preparers reminding them of how to fulfil their preparer obligations and let them know they may get a visit from the IRS, the IRS says preparers should know substantive law. Yet, in describing the tests they just give the form numbers to be covered. So, do they expect that all preparers have access to the Internal Revenue Code and other primary authority and how to use it? Or is use of IRS publications and form instructions sufficient?

I've got a short article on this topic in the 3/10/11 AICPA Tax Insider - here. I hope you take a look and post here your ideas about the testing. Here a few of the questions I suggest they ask:

  • How did you prepare to become a tax-return preparer?
  • How do you find answers to tax questions?
  • How do you access substantive law?
  • What tax-preparation software do you use? If none, explain why.
  • What is the review process for the returns you prepare?

What do you think?

1 comment:

Evelyn Tan said...

My idea about the testing to determine if someone qualifies to meet the definition of a tax-return preparer is leaning more toward the questions that most probably would be applicable for the tax-return preparer when preparing tax returns for taxpayers. I agree with the proposed questions that you suggest that IRS should ask in the test; however, I think to be a tax-return preparer, one has to also have a good understanding about the principle of tax laws. Since the tax laws always changes, especially for the past years, it is very important for tax-return preparers not only to know the current tax laws, but also to understand the “idea” behind that laws. I think if tax-preparers understand the basic concept of tax laws, it will be easier for them to adjust for any changes in tax laws.

My suggestion of questions that they should ask:
1. What is your thought process in interpreting tax law?
2. What kind of source do you use in answering tax questions?
3. What kind of knowledge that tax-return preparers need to know in order to assist taxpayer in the tax return preparation?
4. What are resources that you use if you encounter challenging or difficult questions that you have never encountered before?

In terms of technical questions, I also agree with your article that states “…they must also consider tying tests not just to the type of taxpayer (such as 1040), but also to the difficulty range of the returns.” My question is why do taxpayers need tax-return preparer to prepare their tax returns if they can do it by themselves through tax-return preparation software like TurboTax, H&R Block, etc.? That kind of software also gives the taxpayers step by step instruction in how to prepare tax returns. Some websites also give a basic instruction how to be a tax preparer. For example this website: gives the reader 7 steps instruction in how to learn tax preparation. Therefore, IRS must also consider in mixing up the testing questions, not only for the simple tax problems, but also for complicated ones.