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Tax preparer regulation among ETAAC’s 12 recommendations

Taxes computer keyboard

The Internal Revenue Service’s long-standing goal of regulating noncredentialed tax preparers got some support from the Electronic Tax Administration Advisory Committee’s (ETAAC) 2024 annual report.

Such oversight is one of a dozen recommendations in the latest ETAAC document, released June 26. It is one of three suggestions the panel directed to Congress; the remaining nine ETAAC recommendations are for the IRS.

ETAAC goals: ETAAC is a volunteer panel established by Congress in 1988 to provide public input into the development and implementation of the IRS organizational strategy for, as the name says, electronic tax administration.

To that end, ETAAC researches, analyzes, considers, and makes recommendations on a wide range of electronic tax administration issues, such as taxpayer experience, identity theft, and refund fraud. ETAAC also contributes to the development of the IRS strategic plan.

The recommendations in this latest ETAAC report, according to its preface, “are built on the premise of developing and implementing a tax system that better meets the needs of American Taxpayers. … This report is written to align with the IRS mission and proposes actionable recommendations that align with the Inflation Reduction Act (IRA) Strategic Operating Plan.”

Voluntary preparer participation: Accurate, reliable help for taxpayers in their quest to meet tax compliance responsibilities is a key concern of filers, the IRS, and the legislators who create the tax laws.

Mandatory standards for tax preparers is a perennial recommendation of not only the IRS, but also the National Taxpayer Advocate, some member of Congress, and several tax-affiliated professional associations. However, independent tax preparers have successfully stalled the effort.

Currently, the IRS offers the Annual Filing Season Program, a voluntary education effort through which noncredentialed tax return preparers. These are tax preparers who do not meet other professional standards, such as the oversight provide attorneys, Certified Public Accountants (CPAs), and Enrolled Agents.

The noncredentialed tax pros who meet the AFS benchmarks are included in a public return preparers database on the agency’s website.

The AFS program was instituted after legal challenges to the IRS’ 2011 Registered Tax Return Preparer Program, or RTRP. The system would have required registration, testing and continuing education for tax professionals, but a legal challenge by a group of independent tax preparers invalidated the RTRP in 2013.

The U.S. Court of Appeals for the District of Columbia three-judge panel ruled back then that the IRS lacked the statutory authority to regulate preparers. It left in place the IRS requirement, still in effect, that paid preparers obtain a Preparer Tax Identification Number, or PTIN.

Several legislative attempts to provide the IRS with the legal authority to regulate tax professionals have been introduced on Capitol Hill over the years. None has made it into law.

ETAAC says Congress needs to that job done.

Regulation would protect taxpayers: Specifically, ETAAC report’s first legislative opportunity would “Authorize the IRS to regulate noncredentialed tax return preparers to prevent harm to taxpayers and the tax system.”

Now, anyone can hang out a shingle and get paid to prepare others’ tax returns. That lack of a federal education, certification, or training requirement creates an opportunity for individuals without the requisite knowledge or skill to offer fee-based preparation services.

ETAAC says that lack of oversight too often leads to unqualified individuals providing inaccurate, low quality, out-of-compliance tax advice and preparation to unsuspecting taxpayers.

“The IRS and Taxpayer Advocate have unimpeachably presented statistics demonstrating that non-credentialed tax return preparers are responsible for a disproportionate share of erroneous returns,” according to the ETAAC report.

The lack of mandatory tax preparer standards also is costly to Uncle Sam. The report points to recent Earned Income Tax Credit (EITC) data:

About a third of the total amount of EITC payments for 2023 were erroneous. Applying the 94 percent error rate of EITC returns prepared by non-credentialed preparers equates to more than $20 billion in erroneous EITC payments. There is undoubtedly harm to the federal treasury caused by the failure to regulate and educate non-credentialed preparers.

VITA and TCE template: ETAAC notes that the IRS already has “well-developed and well-functioning programs for educating tax return preparers.”

The reference is to the IRS’ Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs, through which tens of thousands of volunteer tax return preparers have been trained to help taxpayers during filing season.

VITA/TCE tax return preparers receive tax law training and must pass a competency exam.

“In stark contrast to the error rates of non-credentialed preparers, returns prepared by VITA/TCE volunteers are overwhelmingly free of errors or exceptions that could delay processing or receipt of refunds owed to taxpayers,” according to the report.

One Congress gives the IRS the authority to regulate non-credentialed tax return preparers, ETAAC says that task could be replicated from VITA and TCE framework.

“Implementing such a program would undoubtedly pay for itself and serve to protect the federal fisc,” says the report.

Other 11 recommendations: In addition to the tax preparer regulation recommendation, the 2024 ETAAC report has 11 other suggestions.

The full dozen are listed below, with the 1-9 tasks for the IRS, and 10-12 for Congressional consideration.

  1. Enable Application Programming Interface (API) access to taxpayer information to disrupt scams, and to promote modernization, accuracy, security, and efficiency in the taxpayer experience.
  2. Remove barriers to electronic filing while enhancing security by developing an alternative to the Self-Select PIN process with a more secure IRS e-file PIN.
  3. Promote greater information sharing with states and industry partners of homogenized tax data, metrics, year-over-year metrics, and seasonal information.
  4. Conduct a cost/benefit analysis of free tax filing services for individual tax return preparation to expand and optimize access to underserved taxpayer groups using data.
  5. Implement standardized validation rules of user provided data to enhance the accuracy and integrity of the data received by the IRS.
  6. Enable tax professionals with proper authorization (i.e., Forms 8821, 8655, 2848) to access taxpayer information online.
  7. Enable third-party authorization forms (8655, 8821, 2848, etc.) to be submitted and verified online.
  8. Facilitate electronic filing for certain low volume information returns and other non-cyclical filings.
  9. Create a sunset project plan for the Filing Information Returns Electronically (FIRE) and Affordable Care Act Information Returns (AIR) systems to be integrated into the Information Returns Intake System (IRIS) to reduce taxpayer burden.
  10. Increase funding for the Office of the Taxpayer Advocate Service (TAS).
  11. Provide statutory authority to the IRS to regulate noncredentialed tax return preparers to standardize knowledge, ability, and data security in the tax system.
  12. Support good tax administration.

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