Wow! IRS Comm'r Rettig Estimates Annual Tax Gap at $1 Trillion!

Today (April 13, 2021) the Senate Finance Committee held a hearing on The 2021 Filing Season and 21st Century IRS.  The sole witness was IRS Commissioner Charles Rettig. 

There are three takeaways I want to share:

1. The IRS is Overburdened! I encourage you to at least skim Commissioner Rettig's written testimony. He lays out numerous challenges that that IRS has faced for years and even more due to COVID-19 tax law changes. Consider the three rounds of Economic Impact Payments they had to issue while sheltering in place (each round went to about 160 million individuals), new tax forms for employers to get new refundable payroll tax credits, the need to issue guidance quickly because most changes were almost immediately effective, and the American Rescue Plan enacted March 11 included two changes to 2020 forms millions of which had already been filed!

The IRS is overburdened with a declining workforce due to lots of retirements and problems of funding cuts and dealing with decades old technology.  And the reality is that we all need more from them. We need more audits and we need more guidance. 

Congress needs to increase funding for the IRS - this will be significant revenue raiser (more on that in my #3 below).

2. The IRS and Some Lawmakers Want to Regulate Return Preparers - This is not new as the IRS implemented a system in 2010 that was then found beyond statutory authority. President Trump's budgets included the need to regulate return preparers. This topic seems to have bipartisan support. In response to a question from SFC member Senator Cardin, Commissioner Rettig said "we absolutely need the ability to regulate paid tax preparers" particularly those serving underserved taxpayers. He noted that paid preparers tend to make more mistakes with the EITC than occurs on self-prepared returns! He also noted that most preparers are "amazing" but there are some that the IRS needs to after in a more efficient manner that could occur with regulation. I assume he means through testing and annual continuing education in order to be allowed to obtain a PTIN.

3. Commissioner Rettig Estimates that Annual Tax Gap is About $1 Trillion Per Year! IRS data on its tax gap website is based on 2011 and way out of date. It estimates the net annual tax gap at about $381 billion. That is a lot of money (more than we brought in even from the pre-TCJA corporate income tax). When SFC Chairman Senator Wyden asked Comm'r Rettig what his personal opinion was on the actual size of the tax gap, the reply "it would not be outlandish that the annual tax gap could approach or possibly exceed $1 trillion per year".  WOW!!!

I say "wow" (and we all should) because our annual tax revenues collected are about $3.1 trillion. President Biden's American Jobs Plan is estimated to cost $2.7 trillion over 8 years (see Committee for a Responsible Federal Budget estimate). And many question how we'll pay for that plan. Let's collect even half of what is owed as represented by the tax gap and we can also pay down the federal debt! [hear Comm'r Rettig's tax gap estimate at about 43 minutes into the hearing video]

There are many things that can be done to reduce the tax gap. Here are a few of them:

• Hire more revenue agents at the IRS.
• Provide adequate training to those hired (like it was back in the 1980s when I worked there - months of training in the classroom and in the field provided by a well-prepared education office).
• Expand information reporting and lower the filing thresholds. And, make it easy to file these forms using online portals. Also, provide an incentive for non-business payors (such as households) to file these forms.
• Allow voluntary withholding on non-employee compensation and mandate it for non-filers.
• Work with states to include tax education in high school so more people understand their taxes and the obligation to pay them.
• Let's get 21st century technology and practices into the IRS! Too many aspects of the entire compliance process are still using 20th century technologies and thinking. This is something we all need to focus on, not just the IRS. I said this at a 2013 hearing of the Senate Small Business Committee - Filing should be as simple as ordering from Amazon!

What do you think?

Tax Technology Scams

Technology has made tax compliance a lot simpler and more efficient. I believe at some point, tax compliance and payment will be a  just-in-time activity we can easily do from our smart phone or watch.

But, computer systems and networks need to be extremely secure due to the highly sensitive data and the thieves who work 24/7 to get the data. Just this week, the IRS alerted tax professionals of thieves and scammers trying to get control of practitioner computers to avail themselves of client tax data.

This is not the first warning from the IRS. A few times during 2016 the IRS warned tax professionals of scams aimed at obtaining their PTIN and client data. As part of the Security Summit, the IRS launched a campaign called – Protect Your Client: Protect Yourself, to bring greater awareness of threats and how to avoid them. One such scam involves thieves taking control of the practitioner’s computer and thus being able to obtain data from it.

The IRS encourages practitioners to review the security settings on their computers. In a 9/2/16 press release (IR-2016-119), the IRS recommends:

“In addition to activating security measures for tax software products, IRS urges all tax preparers to take the following steps:

• Run a security “deep scan” to search for viruses and malware;
•  Strengthen passwords for both computer access and software access; make sure your password is a minimum of eight digits (more is better) with a mix of numbers, letters and special characters and change them often;
• Be alert for phishing scams: do not click on links or open attachments from unknown senders;
• Educate all staff members about the dangers of phishing scams in the form of emails, texts and calls;
• Review any software that your employees use to remotely access your network and/or your IT support vendor uses to remotely troubleshoot technical problems and support your systems. Remote access software is a potential target for bad actors to gain entry and take control of a machine.

In addition, the IRS recently issued instructions to tax professionals on how to monitor their PTIN activity.”

It's challenging enough for tax practitioners to work with the tax law and keep up to date with it. They also need to have a good foundation in technology and keep up to date to understand how to keep e-data secure and have appropriate technology set up for their tax practice.

What do you think?

PTIN News

A PTIN is a Preparer Tax Identification Number. Paid preparers of most federal returns must have one and include it on the return along with their signature in order to avoid penalties. The IRS can use the PTIN to track returns prepared by particular individuals (years ago they had to use the preparer's SSN). PTINs are part of a system rolled out in 2010 where the IRS planned to regulate all preparers of individual returns and a few others. The system was found contrary to Section 330 of Title 31. Basically, the IRS can't regulate preparers who do not represent clients before the IRS and preparing a return is not considered representation before the IRS. [IRS categories of preparers - here]

Recent news:

1. The annual fee to obtain or renew a PTIN has been reduced from $50 to $33 starting on September 9, 2016. This likely presents the fact that the IRS doesn't need as much money if it won't be regulating about half of preparers - the roughly 350,000 preparers who are not an attorney, Enrolled Agent or CPA.  [TD 9781 (8/10/16) + IRS preparer stats]
2. Preparers need to protect their PTIN. On August 11, the IRS alerted people of phishing schemes where someone pretending to be from a tax software company, aiming to get the preparer's PTIN. [IR-2016-103]

More work is needed by the IRS and Congress to get all paid return preparers subject to rules of conduct (beyond penalty provisions of the law). I think that is what most taxpayers expect. The law is complex, even for Form 1040EZ. Preparers need to keep up to date with changes (there were over 120 statutory changes in 2015!).   How this is to be done remains a topic of discussion.

What do you think?

Filing 2015 tax returns - help for practitioners

Every year out federal tax system becomes more complicated. This is due to both law changes and more complicated transactions that many individuals get involved in such as multistate or international investments and sharing economy activities.

Law changes have a range of effective dates. For example, the 130+ tax changes included in Public Law 114-113 (12/18/15) includes changes effective for 2015, some for tax years beginning after 12/31/15 and a few later than that. Also, for many, the IRS will need to provide guidance to help us fully implement the rules.

I see the AICPA has a lot of resources (once again) for practitioners (some for members only) - Ten Resources for Tax Season. There are a lot of helpful items including assisting victims of identity theft, rates, IRS hotline numbers and more.

What tips do you have?

Tax Outlook for 2015

I've got a short (1 page) article in the CPELink Spring/Summer 2015 magazine on my take on the tax outlook for 2015. I note three items to watch - ACA, preparer regulation and tax reform. I have a brief summary below. For the full page article - click here and go to page 9.

1. Affordable Care Act (ACA) – By late June, we should have the U.S. Supreme Court’s decision in King v. Burwell, 759 F.3d 358 (4^th Cir. 2014), on whether individuals obtaining coverage through the federal Exchange (because their state did not create its own Exchange), are entitled to the PTC they likely have been receiving since January 2014. If the government loses this case, millions of individuals will likely terminate their coverage as it is unaffordable without the PTC subsidy. Or, perhaps Congress will step in with a remedy. 
2. Preparer Regulation – At the start of the 114^th Congress in January 2015, Senator Wyden introduced The Taxpayer Protection andPreparer Proficiency Act of 2015 (S. 137) to give the IRS authority to regulate preparers by having them “demonstrate competency to advise and assist persons in preparing tax return, claims for refund, and associated documents.
3. Tax Reform – In the last few days of the 113rd Congress, key outgoing and incoming tax committee leaders indicated that tax reform discussions would continue.  House Ways and Means Committee Chair Dave Camp formally introduced his tax reform proposal as H.R. 1. He had introduced it for discussion in February 2014, but formally introducing it as a bill means it easily lives on forever, even though Congressman Camp retired at the end of 2014.  The fate of the 51 provisions that expired at the end of 2014 will likely be tied up as part of tax reform.  If nothing happens by early December 2015, we are likely to see a repeat of December 2014 with most items extended retroactively for one year (back to 1/1/15).

Again - for a few more details - go to page 9 of the magazine.

What do you think? What does your tax outlook list for 2015 look like?

Need for greater tax literacy and regulation of preparers

I was shocked by the March 13, 2015 IRS release warning individuals to chose their tax professional carefully. The IRS found that some "unscrupulous preparers" instructed their clients to make individual shared responsibility payment directly to the preparer! That is stealing!

I fault the clients, preparers and the complex system.

The IRS has tried to regulate all return preparers but been held up by a need for a statute change that Congress will have to address (see quick summary from IRS on this).  Of course, truly unscrupulous people will still find a way around the law.

So, more is needed to educate individuals about the tax system so they better understand what is reasonable and what is not reasonable. This should be part of a high school civics class. Also, individuals should be penalized if they pay someone to preparer their return and that person does not sign their return and list their PTIN.  I've mentioned this before and some people thought I was being too harsh. But, the IRS can't find all scammers and people are responsible for the return they file. Knowing they will get penalized by going to an unscrupulous preparer (one who will take the client's money but not sign the return), perhaps we'd see fewer unscrupulous preparers.

And, some of this issue relates to the individual shared responsibility payment.  It is owed for any month, starting in 2014, that an individual does not have health insurance and doesn't meet an exemption.  I think it is reasonable that many people would not think that is a tax return item (but not sure why they think then that the payment goes directly to their return preparer).

What do you think?

Directory of preparers and Annual Filing Season Program (AFSP)

Source: 2014 National Taxpayer Advocate report

Remember back in 2010, the IRS rolled out its plan to regulate all return preparers. Those who were not a CPA, attorney, Enrolled Agent or non-signing/supervised preparer would have to pass a test and complete continuing education from IRS approved providers. That plan though was shot down in the DC Circuit in the Loving decision (click here for IRS response). The IRS even had to reinstate some practitioners it had previously suspended from practice because these individuals were only preparing returns (they were not otherwise representing taxpayers before the IRS).

The court found that Title 31 of the US Code, Section 330, did not give IRS authority to regulate preparers who did not "represent" taxpayers before the IRS. So, one solution would be for Congress to modify Section 330. There are proposals, but no action yet. In fact, Senator Wyden introduced a proposal in January 2015 - the Taxpayer Protection and Preparer Proficiency Act of 2015 (S. 137).

Soon after the loss in Loving, the IRS announced a voluntary system called the Annual Filing Season Program.  Individuals need 18 hours of continuing education from IRS approved providers including 6 hours of tax updates that include items specified by the IRS. The 6 hours must include passing a 100 question exam created by the provider. Individuals who passed the Registered Tax Return Preparer (RTRP) exam before the IRS had to shut it down, as well as preparers regulated by California, Maryland or Oregon, were exempt from the exam and 6-hour refresher course, but had to complete 15 hours of continuing education from IRS approved providers, to obtain the AFSP.

What are the benefits of obtaining the AFSP Record of Completion?  The IRS will include you in a searchable database, just released 2/5/15 (it also lists CPAs, attorneys and Enrolled Agents who have a PTIN). The IRS will also promote this designation to the public (along with other designations). The AFSP folks must also agree to be subject to Circular 230 which also enables them to represent clients before the IRS in an examination if they prepared the return (they may not represent a client in a collections or appeals matters) (click here for more details).

Well, how many preparers signed up for the AFSP?  Per recently released IRS stats, 42,179!  That's a lot, but the total population of preparers who are not CPAs, attorneys, or Enrolled Agents is just over 300,000 (so about 14% signed up).

I used the database to see that within 5 miles of my home, there are this many individuals with a PTIN:

• 170 AFSPs (a few are also Enrolled Agents)
  
• 882 CPAs (likely because I'm within 5 miles of downtown San Jose)
  
• 108 attorneys
  
• 353 Enrolled Agents

The database doesn't link me to the preparer. A web search is needed to find the person (or perhaps they are in the phonebook!).

Is this voluntary system a good idea?  Well, 18 hours of continuing education including 6 hours on new law, is a good idea. In comparison, California CPAs need to have 80 hours every two years. It is not unusual to find tax update courses that are 8 to 16 hours long. I co-teach such a course for CalCPA (16 hours) and we can't delve too deeply into everything in that time allotment, so 6 hours is a bit short. Also, agreeing to be subject to the rules of conduct under Circular 230 is a good thing. It means that these preparers are not worried about being subject to extra rules of competence, due diligence and more.

I think the IRS should be allowed to do more. The tax law becomes more complex every year. This current filing season (for 2014 returns) will be one of the more complex due to individuals dealing with two new complex Affordable Care Act provisions (the Premium Tax Credit and the Individual Shared Responsibility Payment). Individuals should have some level of assurance that the person they hire to prepare their return knows something about the tax law, compliance and current issues and rules.

What do you think?

Additional links from the IRS:

IR-2014-75, June 26, 2014 -- New IRS Filing Season Program Unveiled for Tax Return Preparers

FS-2014-8, IRS Unveils Filing Season Program for Tax Return Preparers, Answers Frequently Asked Questions

Revenue Procedure 2014-42

More from Professor Nellen:

• http://www.21stcenturytaxation.com/Federal.html#Compliance

 

 

 

IRS Voluntary Preparer Regulation System - Worthwhile? Legal?

This is a long post.  I'll summarize and make some comments about new program IRS released in late June called the Annual Filing Season Program. This is in response to the IRS loss in the Loving decision (see links below). I'm not convinced it will be worthwhile for the IRS.  Certainly, preparers who are the ones IRS is concerned about - who intentionally make errors or who are not sufficiently knowledgeable about tax rules to properly prepare returns, are unlikely to step forward to take the continuing education and a 100-question test.  Here goes ...

In April 2014, the IRS suggested to its registered CE providers that it was considering a voluntary certification program called an Annual Filing Season Certification (AFSC). It would involve completing 15 hours of CE annually through an IRS-approved CE provider. Unenrolled preparers would need to be sure the 15 hours included three hours of a filing season refresher course with a comprehension test. A “confidential” memo was sent to IRS CE providers with more details on 5/8/14 (and later). Details were apparently also shared with practitioner organizations because the AICPA and NAEA both submitted comments to the IRS expressing concerns with such a voluntary program and urging the IRS not to pursue it. Note: The program rolled out in June 2014 is slightly different than first described by the IRS in April 2014.  

The program, called the Annual Filing Season Program, was announced June 26, 2014 (IR-2014-75). Per the IRS release of 6/30/14: “Revenue Procedure 2014-42 provides guidance regarding a new, voluntary Annual Filing Season Program designed to encourage tax return preparers who are not attorneys, certified public accountants (CPAs), or enrolled agents (EAs) to complete continuing education courses for the purpose of increasing their knowledge of the law relevant to federal tax returns.  In addition, this revenue procedure modifies and supersedes Revenue Procedure 81-38, 1981-2 C.B. 592, regarding limited practice before the IRS by individuals who are not attorneys, CPAs, or EAs.”

More - According to IRS Fact Sheet 2014-8 (June 2014), IR-2014-75 (6/26/14), website information and Rev. Proc. 2014-42, "the Annual Filing Season Program is a voluntary program designed to encourage tax return preparers to participate in continuing education (CE) courses." Unenrolled preparers who take the appropriate CE courses from IRS CE Providers and pass a 100-question test prepared by the CE provider, will receive "an Annual Filing Season Program – Record of Completion." The IRS believes that this designation (which is not a "certificate") will be "recognizable record of completion that they can show to their clients."  

New Database - Along with the AFSP, the IRS will roll out a public, searchable and sortable database by January 2015. The database will include the name, city, state and zip code of preparers who either have the ROC, are enrolled or who meet the alternative requirements (see below).

How To Receive the AFSP-ROC - the unenrolled preparer must:

•  Obtain 18 hours of CE from an IRS CE provider (6-hour Annual Federal Tax Refresher (AFTR) course on filing season issues and tax law updates, 10 hours federal tax topics and 2 hours ethics). The course must follow the IRS topic outline available at its website and include a 100-question exam prepared by the CE provider. Per the IRS test parameters, the exam must be 3 hours long, made up of multiple choice and T/F questions, and have a passing score of 70%. If the preparer does not pass, the CE provider can determine if the course must be retaken or just the test. The CE Provider only informs the IRS of preparers who take the requisite course and pass the exam. A list of all CE providers registered with the IRS and whether they offer the refresher course is available at the IRS website.


• For 2014, the hours are prorated due to the late rollout of the program. For 2014, all that is needed is the 6-hour AFTR course, 3 hours of federal tax topics and 2 hours of ethics.


• Alternatively, some unenrolled preparers will be able to obtain the ROC without taking the refresher course or passing the exam. Per the IRS:  "Some unenrolled preparers are exempt from the AFTR course requirement because of their completion of other recognized state or national competency tests. These exempt groups are still required to meet other program requirements, including 15 CE credits (10 Federal Tax Law, 3 Federal Tax Law Updates, and 2 Ethics)."Return preparers who can obtain the AFTR – Record of Completion without taking the AFTR course are:

·         Anyone who passed the Registered Tax Return Preparer test administered by the IRS between November 2011 and January 2013.

·         Established state-based return preparer program participants currently with testing requirements: Return preparers who are active members of the Oregon Board of Tax Practitioners and/or the California Tax Education Council (CTEC).

·         SEE Part I Test-Passers: Tax practitioners who have passed the Special Enrollment Exam Part I within the past two years as of the first day of the upcoming filing season.

·         VITA volunteers: Quality reviewers and instructors with active PTINs.

·         Other accredited tax-focused credential-holders: The Accreditation Council for Accountancy and Taxation’s Accredited Business Accountant/Advisor (ABA) and Accredited Tax Preparer (ATP) programs."

The IRS does not charge for the AFTR or listing in the database (apparently all paid for through the PTIN fees the IRS collects). Generally, the IRS-approved CE Providers do charge for their courses (the providers are charged a fee of $419 per year by the IRS, as in prior years).

The IRS can tell from CE Provider data input into the IRS website when a preparer has satisfied the requirements to get a certificate. For preparers meeting an alternative approach to obtain the ROC, the IRS will obtain data from its data (such as who passed the RTRP exam) or the state (such as California CTEC information). 

 "Solicitation restrictions. A tax return preparer who receives a Record of Completion may not use the term “certified,” “enrolled,” or “licensed” to describe this designation or in any way imply an employer/employee relationship with the IRS or make representations that the IRS has endorsed the tax return preparer. A tax return preparer who receives a Record of Completion for a calendar year may represent that the tax return preparer holds a valid Annual Filing Season Program Record of Completion for that calendar year and that he or she has complied with the IRS requirements for receiving the Record of Completion." [Rev. Proc. 2014-42]

Relevance of the ROC Beyond Listing in the IRS Public Database - Once the IRS knows a person is eligible for the ROC, it will send an email to the preparer with instructions on how to complete the process. The preparer will need to log into their PTIN account. One of the questions they will be asked by the IRS is whether they agree to be subject "to specific practice obligations outlined in Subpart B and section 10.51 of Treasury Department Circular No. 230." The preparer must also renew their PTIN. It can take up to 4 weeks for the IRS to issue the ROC and list the preparer in the database (Directory of Federal Tax Return Preparers with Credentials and Select Qualifications).

The preparer must complete their requirements for the ROC by the end of the year (for example, by 12/31/14 for the 2015 filing season ROC).

Beyond the 2015 Filing Season - "beginning in 2016, only AFSP participants who obtain a Record of Completion will have those limited representation rights before the IRS for clients whose returns they prepared and signed. PTIN holders without an AFSP - Record of Completion or without other professional credentials will not be able to represent clients before the IRS in any matters." Thus, if an unenrolled preparer does not have an ROC, they will only be able to prepare returns.

In addition, Rev. Proc. 2014-42 states that it modifies and supersedes Rev. Proc. 81-38 with respect to returns and refund claims prepared and signed after 2015. This also signifies that unenrolled preparers will have very limited rights (to only prepare returns). The purpose of Rev. Proc. 81-38 is "to prescribe the standards of conduct, the scope of authority, and the circumstances and conditions under which an individual preparer of tax returns may exercise, without enrollment, the privilege of limited practice as a taxpayer's representative before the Internal Revenue Service, pursuant to section 10.7(a)(7) of Treasury Department Circular No. 230, [1966-2 C.B. 1171] (31 CFR Part 10)."

Future Plans - the IRS states that its priority is a legislative change (to 31 USC 330) to require all paid preparers to meet testing and CE requirements. Per the IRS, "until legislation is enacted, we still have a responsibility to taxpayers and to our tax system to keep moving forward with our efforts to improve service to taxpayers."

More Details - see to IRS Fact Sheet 2014-8 (June 2014), IR-2014-75 (6/26/14), website information and Rev. Proc. 2014-42 for further details including who is ineligible for the ROC (such as someone disbarred from practice under Circular 230).  The revenue procedure is the binding, comprehensive guidance on the AFSP-ROC.

 Observations: This IRS program is more than just helping and encouraging unenrolled preparers to get some continuing education. The repeal of Rev. Proc. 81-38 after 2015 and the obligation of agreeing to be subject to Circular 230 to obtain an AFSP-ROC, seems to be an end-run around the Loving decision (No. 13-5061 (D.C. Cir. 2/11/14), aff’g No. 1:12-cv-00385 (D.D.C. 1/18/13)). (For more on the Loving decision, see Nellen, "Regulating all return preparers: Back to the drawing board," AICPA Tax Insider, 3/13/14.)  No where in all of the information released about the AFSP-ROC is the word "certificate" used. Likely, the IRS did not want to indicate in anyway that those with the ROC are "certified" in any way. Note that the IRS does not create or grade the 100-question test; that is handled by the CE provider.

Queries: Will many eligible preparers sign up for the refresher course, test and additional CE?  Is a listing in the database enough?  Apparently, the IRS will have a public awareness campaign on all of this. Will the public understand the differences among designations? Will this new voluntary program help improve compliance or will it only reach those who are already keeping up to date and operating such as to avoid penalties?

Reaction of Enrolled Practitioners (AICPA and NAEA)
  Initial reaction:

1. Summary of the NAEA position was reporting in Accounting Today, 6/1/14, “NAEA ‘Troubled’ Over Certification Proposal,” by Stimpson. The NAEA also submitted testimony for the record for the April 8, 2014 Senate Finance Committee hearing on Protecting Taxpayers from Incompetent and Unethical Return Preparers. In this testimony, the NAEA stated: “In the interest of long run stability, NAEA believes taxpayers and the tax administration system are best protected by national standards for all paid return preparers and oversight of the entire community.”


2. In a letter to the IRS dated 5/21/14, the AICPA stated: “As a practical matter, any voluntary regime constructed would still not address the problems with unethical and fraudulent tax return preparers.  Finally, we are concerned that that the IRS is rapidly moving forward without widely disseminating the proposal or seeking public comments.” The AICPA also noted that the certification would create confusion in the marketplace. In addition, the AICPA noted that the IRS should move actively pursue the penalties it has authority to administer such as under Sections 6694 and 6695.


3. On June 24, 2014, the AICPA sent a more comprehensive, 14-page letter from its top leadership to Commissioner Koskinen.  Per the AICPA: “We have repeatedly expressed to you and your colleagues that our members have very significant concerns regarding a voluntary certification program and urged the IRS to have a formal comment period to obtain and consider the public’s views prior to moving forward.” The AICPA laid out four key reasons why the IRS voluntary program should not be pursued.

                                                              i.      The IRS has no statutory authority to implement a voluntary registration program. It is not enough that there is no statute expressly prohibiting the program, there must be authority for it.

                                                            ii.      The program will be viewed as “an end-run” around the Loving decision where the court held the IRS has no authority to regulate all tax return preparers under 31 USC 330. The IRS notes that the IRS proposed program is voluntary rather than the mandatory one challenged in the Loving decision. “But in reality tax return preparers would face an overwhelming, compelled incentive to participate in the IRS’s credentialing program, meaning that the proposed program will be de facto mandatory. In the wake of Loving, that is impermissible.”

                                                          iii.      The IRS did not follow the Administrative Procedure Act (APA) in rolling out the new program. Per the AICPA, “because this program would be de facto mandatory, it is for practical purposes a binding rule that must be issued pursuant to notice and comment.” The AICPA also notes that approval of OMB is needed in order to gather personal information from preparers. “And because the proposed program is likely a “significant regulatory action,” the IRS will be required to comply with Executive Order 12,866” requiring a cost-benefit analysis.

                                                          iv.      The proposal “is arbitrary and capricious because it fails to address the problems presented by unethical tax return preparers who defraud their clients, runs counter to evidence presented to the IRS, and will create market confusion.”

AICPA Files Lawsuit Against IRS - On 7/15/14, the AICPA filed a lawsuit against the IRS in District Court in DC. The AICPA had sent letters to the IRS prior to the release of the voluntary registration system urging that they rethink the plan and get public input (see information above). When it was rolled out anyway, the AICPA filed the suit.  The AICPA press release announcing the suit states: "By implementing a purportedly “voluntary” program that is mandatory in effect, the rule is an end-run around Loving v. IRS, a federal court ruling which struck down the IRS’s earlier attempt to regulate tax return preparers. The IRS simply does not have the authority to proceed with the new rule. By doubling the number of categories of tax return preparers to eight, the rule will also confuse consumers. Worse yet, the new rule will do nothing to address the problem of unethical or fraudulent tax return preparers – which should be a top priority."

What do you think?  Will this system be worth the expense?  Will the IRS face the same issue it lost in the Loving decision (here, de facto regulation of all return preparers)?  What does the public think/want?

Brick wall hit by IRS in its efforts to regulate all return preparers

In February 2014, the IRS lost its appeal in the Loving decision. This means that the IRS needs to end its efforts to regulate about 350,000 tax return preparers who are not attorneys, CPAs or Enrolled Agents.  So, no testing or continuing education requirement for this large group of preparers.

I have a short article in the AICPA Tax Insider (3/13/14) with more details and possible next steps for the IRS. There are also links to the case and related documents. see Regulating all return preparers: Back to the drawing board.

President Obama's recent budget proposal supports a statutory change to let the IRS resume the program it rolled out in 2010 to regulate all return preparers (see FY2015 Greenbook, page 244). Other proposals exist as well (see links in the article).

What do you think? Should the IRS be allowed to resume its broader regulation program? 

Can IRS Regulate All Return Preparers?

That's the question that was before the Circuit Court of Appeals in DC a few weeks ago in the IRS appeal of the Loving decision. I think both parties made some good arguments for why the 1884 law the IRS used to expand its regulatory reach is and is not suitable or intended for the broader reach.  A lot has changed in the tax preparation world since 1884!  I'm guessing that the preparers will win again on appeal, but that Congress will enact legislation to make it clear the IRS and Treasury have authority to regulate all paid preparers of federal tax returns.

I've got a short article in today's AICPA Tax Insider with more details (and links) on what is going on - I hope you'll take a look and post a comment here on what you think about these events.  Thank you.

Regulating Tax Return Preparers - Current Developments

The program started by IRS in 2009 to regulate all paid preparers of Form 1040 has been moving along at what seems like a comendable pace given that this involves almost 720,000 individuals! The IRS has had to issue new regulations defining paid preparer for this purpose, create a system to issue and annually renew a PTIN to preparers, and create and define a new category of preparers - Registered Tax Return Preparers (RTRP).

This is a big project and one long overdue.  The old system provided rules of conduct that only applied to attorneys, CPAs and Enrolled Agents (people who take a 3-day test administered by the IRS). The majority of preparers did not fall into these categories so were not subject to the IRS rules of conduct (but were subject to the same preparer penalties as other preparers).  So the old system applied rules of conduct to a group - attorneys and CPAs, already subject to many rules of conduct most notably the rules of their licensing body!

The new system is perhaps not perfect, but makes sense given the complexity of the federal tax system, the growing number of individuals who use a paid preparer, and the hopefully reduced tax gap that may result by broader attention to all preparers by the IRS and a requirement of testing for RTRPs and continuing education (15 hours per year).

For more on the current categories of return preparers and what each can do - see this chart (prepared by me).  For differences between the EA and RTRP tests, see this IRS table.  For a 6/5/12 news release from IRS marking the 3rd anniversary of the program - click here.

The IRS has a table of how many preparers fall into each category.  It is a few months out of date, but it indicates, at least as of June 1, 2012, that there are 300,000 preparers who still need to take and pass the RTRP exam.  The IRS has said that by 12/31/13 preparers of forms 1040 who are not attorneys, CPAs, EAs or supervised-non-signing preparers must pass the RTRP test in order to maintain their PTIN (which is needed to prepare a 1040 and several other types of returns, for compensation).

The IRS data shows that of the almost 720,000 PTIN holders, 4,893 have become RTRPs because they have taken and passed the test and 338,127 still need to take and pass the test - by the end of 2013!  That's a lot of people taking tests in the next 14 months!

A few additional items I find interesting:

• The National Association of Enrolled Agents (NAEA) notes on their website that not only are they the only preparers that take a tax test, they also have unlimited practice rights.  I believe they are highlighting this to distinguish themselves from RTRPs.  That seems like a good idea.  
• The NAEA sent a letter to the IRS Director of Practice on 8/15/12 asking that the IRS not extend the 12/31/13 deadline to pass the RTRP test for those preparers who need to do that. Per the NAEA in the letter: “None of us need be psychic to see last minute requests to extend the test-taking deadline lie ahead and in fact we’d be shocked if the RPO did not receive them. In anticipation of these requests, we ask you to stand firm and adhere to your original December 31, 2013 deadline, a schedule it would be difficult to argue was unduly hasty.”'
• The IRS reports an increase in the number of individuals taking the EA exam. Per the IRS 8/24/12 e-news for tax professionals, 6,463 EA tests were administered between May and June 2012 which is a 73% increase compared to 2011. The number of EA appointments in the same time period was 47% higher than for 2011.  Apparently, some preparers are realizing that if they have to take a test, why not take the longer one that also gives them more practice rights before the IRS. I'm not surprised to see this. I expect it will continue over the next few years
• The Treasury Inspector General (TIGTA) released a report in July of their study of the IRS program to "audit" some paid preparers.  This is also known as the 10,000 letters campaign (or 21,000) letters.  The summary of the report includes: "TIGTA evaluated the methodology used to select paid preparers and determined that those visited may not have benefited the most from an educational visit. Based on survey responses by the preparers, several paid preparers remarked that the use of IRS resources to visit their office was wasteful because their continuing professional education requirements were much more extensive than the information presented by the revenue agents.... TIGTA recommended that the IRS ensure that the RPVP uses data-driven selection criteria to specifically identify paid preparers who filed tax returns with errors to make certain the most egregious paid preparers are receiving educational and enforcement visitations."  [For more on this program, see my links here. I have copies of the IRS materials because I found that they were later removed from the IRS website.]
• With so many thousands of preparers needing to prepare for the RTRP exam and take continuing education courses, there are many more providers and courses.  If you are a preparer or CPA or attorney (not all CPAs and attorneys have to have a PTIN because not all prepare tax returns or a substantial portion of any tax return), you're likely getting more email and flyers about these opportunities. And it looks to me like pricing is dropping - supply and demand!
• Finally - the IRS will sell people a copy of the PTIN data for $35!  This might be a good business venture for interested folks, although you might be too late.  A few websites have sprung up with the data. Apparently, some will update or expand a preparer's information for a fee. The IRS says it will eventually have a database online as well.  That makes sense because for the PTIN program to work, taxpayers need to be able to easily verify if their preparer has a valid PTIN.

Queries:

• How does the public find out about the difference between attorneys, CPAs, EAs and RTRPs?  
• How does the public even know that if they pay someone to prepare their 1040, they need to have a PTIN and what it means to have a PTIN?
• Will the system work?  Will the results desired by the IRS be achieved?

What do you think?

More on regulating tax return preparers

I posted a few days ago about a good number of recent developments in the IRS program to regulate paid tax return preparers (6/10/11). Since then, a few more developments:

• The IRS Return Preparer Office launched a Facebook site - here.
• Email was sent to some number of preparers today asking them to take about 30 minutes to complete a survey by June 22. "The purpose of this job analysis study is to identify the tasks performed by tax return preparers and the knowledge/skills required to perform these tasks. The results of the study will be used by Prometric to create Test Specifications for the return preparer examination."

The survey sounds like a good way to gain a sense of what a return preparer should know and have access to. Questions include what research tools and authorities are used, what software tools are used, the importance of a variety knowing a variety of rules and forms to calculate taxable income and tax liability.

The exam would be way too long and probably no one would pass it closed book and closed to accessing a commercial tax research tool/database such as RIA Checkpoint. So, should the exams just test very basic items such as filing status, personal and dependency exemptions, asset basis and transfers, Schedule C items, reporting information from pass-through entities, passive activity loss limitations? Which credits?

Or, should it provide takers with access to the Internal Revenue Code, regulations, IRS rulings and court cases (in a searchable database) and ask a range of questions to see what they know and how they do researching the law? I'd suggest the later as that is the key skill needed today. Taxpayers at all levels of income can have a variety of complex matters.

Also, the IRS program is focused on preparing returns. Today, people using a preparer likely are not spending their own time figuring out if they are able to use or should be using a variety of rules that exist for planning purposes, such as the numerous provisions for higher education and retirement plan savings. How much should preparers know about this aspect of the tax law?

Did you take the survey? If yes, your reaction? Other comments?