Few states regulate tax preparers
Ohio may require preparers to register, set standards.
A consumer group is trying to get Ohio’s legislature to approve requirements for tax preparers,
Only four states require testing and continuing education for hundreds of thousands of independent tax preparers who make a living deciphering the nearly 74,000-page U.S. tax code for many Americans.
After a federal appeals court threw out proposed IRS rules regulating tax preparers, the Wild West of the tax preparation industry will continue for another tax season. In its Feb. 11 ruling, the U.S. Court of Appeals for the District of Columbia said the IRS was not authorized to write the proposed regulations, asserting that power was reserved for Congress and the president.
Certified accountants who do taxes for clients are regulated, as are lawyers and tax specialists called “enrolled agents,” who must pass a test and be recertified periodically by the IRS. But many of the small, independent tax preparers are subject to no standards at all. They simply hang out a shingle and fill out tax forms for clients.
Consumer groups note that independent preparers are less regulated than hair stylists, who are required to be licensed in all states and the District of Columbia. Estimates of how many unregulated tax preparers exist vary widely, since they are not required to register anywhere. The Institute for Justice, which successfully fought the proposed IRS regulations in court, estimates that more than 350,000 small independent tax preparers would have been affected by the regulations.
All told, up to 1.2 million tax preparers make a living deciphering the labyrinth U.S. tax code for taxpayers. The IRS reported 63 percent of all returns were done by tax preparers in 2013 and estimates are that about half were filed by unregulated preparers.
Things that have gone wrong in returns filed by some
tax preparers range from errors that might cost taxpayers part of their refunds or result in a taxpayer having to pay restoration and penalties for illegal deductions, to deliberate fraud cases where preparers consciously misstate refunds or deductions to clients and pocket part of the money, according to consumer groups.
Robert Kerr, senior director of government relations for the National Association of Enrolled Agents, said in “most states, you have higher requirements to be a barber than a tax preparer. The downside of a bad haircut pales in comparison to a bad tax preparer. In the meantime it is the Wild West — there are no cops on the beat.”
In four states, there are requirements for independent tax preparers who are not CPAs, “enrolled agents,” attorneys or certain types of banking officials:
-In California, prospective tax preparers must take a 60hour course, purchase a $5,000 tax preparer bond, apply to the state California State Education Council and pay a $25 fee.
-In Oregon, the requirements are a little stiffer, requiring a high school diploma or GED certificate, 80 hours of tax law education, and passing an examination with at least a 75 percent grade.
-Maryland’s requirements mirror Oregon’s, except the registration fee is $100 for two years.
-New York’s program is similar to the others, with the wrinkle that anyone who is delinquent in child support payments is denied a tax preparer’s license.
In 46 states, including Ohio, there are no such regulations.
A consumer group effort is underway in Ohio to get the legislature to approve requirements for tax preparers. David Rothstein, director of public affairs for the Neighborhood Housing Services of Greater Cleveland, said he is working with Republicans and Democrats in the legislature to “try to get them to put forward regulations that would require preparers to be registered in the state of Ohio. It would require a certain level of competency and certain disclosures.”
“It wouldn’t be that burdensome,” Rothstein said. “Now, the floor is extremely low — because there really isn’t one.” He said recertification is important because tax laws, both state and federal, change every year and keeping up with new laws is critical.
But Elmer Kilian, an 80-yearold independent tax preparer who hangs a wooden sign outside his home in Eagle, Wis., every tax season, said the certifications wouldn’t help much and would be costly for small operators. He said it wouldn’t cut down on fraud because “we’re responsible for the taxes listed on the forms, but it’s the taxpayer who is responsible for the numbers on the forms. The preparer just puts them in where they are supposed to go.” He told Accounting Today that he does his returns by hand and charges only $30 to $40 for an individual client.
Kilian said he does not object to training in principle, but was upset that the initial IRS rule exempted CPAs and attorneys. He said big tax firms like H&R Block and Jackson Hewitt would have no problem meeting the requirements because they already have systems in place to train their employees. But independents don’t, he said.
“I do individual forms, and small businesses with income of less than half a million,” he said. “When you get over half a million, you need more expertise.”
Horror stories are legion. In a case disclosed last month, NBA basketball star Kevin Durant of the Oklahoma City Thunder is suing his tax preparer for taking invalid deductions. The lawsuit says Durant’s accountant deducted expenses for Durant’s personal travel and personal chef. That is not allowed because it is a “personal” expense, not a business expense, under IRS law.
Durant faces the possibility of having to pay back taxes and penalties and is suing his tax man, Joel Lynn Elliott, for $600,000. Messages left at Elliott’s office were not returned.