IRS Could License Tax Preparers

What can we expect from IRS Commissioner Douglas Shulman’s proposal to set higher standards of conduct for tax preparers?

The IRS announced the plan last Thursday, in conjunction with Shulman’s testimony before a House subcommittee about the IRS’s operations and proposed budget (see IRS Plans to Step Up Tax Preparer Regulation). The IRS is desperate to close the estimated $290 billion tax gap, especially as the deficit widens to astronomical levels.

Too many preparers are apparently helping their clients evade their share of taxes, or at least the IRS believes that to be the case. It’s true that the Justice Department and the IRS have found plenty of instances of tax preparers exaggerating their clients’s earned income tax credits, fuel tax credits, medical expenses, charitable contributions, and the like. A quick look at the press release page from the Justice Department’s Tax Division will bear that out.

The problem is particularly acute amongst unenrolled tax preparers. “In most states, anyone can charge to prepare tax returns regardless of training, education, skill, licensing or regulation,” Shulman said, according to the Associated Press.

Chances are that CPAs, enrolled agents and tax attorneys won’t take as big a hit from the stepped-up enforcement effort, as they already face significant regulatory requirements, particularly Circular 230. Plus the IRS plans to meet with “constituent groups,” which no doubt include the American Institute of CPAs and the National Association of Tax Professionals, before it moves ahead with any concrete proposals.

The IRS also says it wants to hear from unlicensed tax preparers and consumer groups, as well as tax software vendors. Shulman indicated the software vendors aren’t likely to see much increased regulation. They already work closely with the IRS to try to get their software right. Indeed, last time I checked, I didn’t see any tax tip pop up in the midst of preparing my return suggesting that I move some income to an account in the Cayman Islands.

Shulman plans to submit his recommendations to the Treasury Secretary and President Obama by the end of the year. How tough the regulations will be may well depend on any pushback he gets from the tax preparer community. It’s uncertain how much the big accounting firms and accounting associations will resist the changes. The Treasury Department has already made it clear that it wants to close loopholes in foreign tax reporting, make tax haven countries like Switzerland cooperate more in tax compliance, and put a stop to so-called “abusive” tax shelters with colorful acronyms like LILO, SILO, DAT, and Son of BOSS.

Meet the new boss. Same as the old boss: the IRS.