IRS Is Watching Tax Preparers More Closely

Drive around shopping areas in your neighborhood, or run a quick search on the internet, and you'll find out what's made the IRS take some action: Tax preparation services are everywhere. And, not surprisingly, more and more pop up overnight as April 15th (it's the 18th in 2011) approaches each year.

Almost No Control

Only a few states - such as California, Oregon, Maryland and New York - have licensing or registration requirements for paid tax preparers. In all other states, practically anyone can prepare your federal tax return and charge a fee.

In other words, when you walk into one of the popular tax preparation shops like H&R Block or Liberty Tax Service, the person you hire isn't necessarily required to meet any competency requirements or hold any type of license or certification as a tax professional.

That's not saying that these and other companies don't provide good service. Typically, these preparers have taken a company-provided training program. However, there's no government oversight in place to make sure they have the knowledge and expertise to prepare your taxes properly.

New Rules from the IRS

The IRS ran a six-month study on paid tax preparation services. The end result was the creation of several new requirements for paid tax preparers beginning in 2011 - before it's time to file your 2010 tax return. The new rules include:

  • Requiring all paid tax preparers who sign federal tax returns as "preparers" to register with the IRS and get a preparer tax identification number (PTIN)
  • A background check of paid tax preparers to make sure they've filed personal, employment, and business tax federal returns and that they've paid all taxes due on those returns
  • Requiring competency tests for all paid tax return preparers. This doesn't apply, however, to attorneys, certified public accountants (CPAs), and IRS enrolled agents who hold valid licenses
  • Requiring ongoing continuing professional education for all paid tax return preparers (again, except for attorneys, CPAs, and enrolled agents)
  • Making IRS ethical rules applicable to all paid preparers. This way, the IRS is able to suspend or discipline tax return preparers who engage in unethical or disreputable conduct

The IRS didn't just pass new rules and walk away, either. For instance, not long after the new rules were announced:

  • The IRS sent letters to thousands of paid tax return preparers reminding them to be careful in areas where the IRS has seen frequent errors in returns, such as itemized deductions and the Earned Income Tax Credit
  • IRS agents began visiting paid tax preparers to discuss their obligations and responsibilities to prepare accurate tax returns
  • IRS agents began posing as taxpayers and visiting paid tax preparers to make sure they were following the tax laws and preparing accurate returns

Your Return

Remember, even if you pay someone else to prepare your federal tax return, you're legally responsible for any errors or mistakes on that return. As you get ready for the April tax deadline, the IRS has some tips to help you find the right tax preparation service:

  • Be suspicious of a tax preparer who claims he can get you bigger refund than the "other guys"
  • Look for a flat-rate or flat-fee for preparing your return. If a preparer bases her fee on the amount of your refund, she may inflate your refund to increase her fee
  • Has the preparer or company been around for a while? If so, the odds are good you'll have someone to turn to for help if you have problems with the return several months or even years after it's filed
  • Ask about the individual preparer's training and experience. Remember, only attorneys, CPAs, and enrolled agents can represent you before the IRS on any tax matter, including an audit or collection action on any tax return. Other preparers can only represent you for audits of returns they actually prepared

Tax time can be a stressful. That's why many taxpayers hire someone to do their taxes for them. It's important to choose the right preparer, otherwise you may find yourself in the precise legal trouble you were trying to avoid in the first place! The new IRS rules will help, but you also have to take it upon yourself to choose the right tax preparer.

Questions For Your Attorney

  • I prepare tax returns for my friends and in-laws, and they sometimes give me a few dollars for my work. Am I covered by the new IRS rules?
  • Do the new IRS rules apply to tax preparation software?
  • If a paid tax preparer makes mistakes or errors on my return and the IRS fines me, is there any way to get the tax preparer to help pay at least part of the fine?
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