Should Tax Preparers Be Licensed?

Pros and cons of Regulating Tax preparers

Should Tax Preparers Be Licensed?
March 24, 2016

Your plumber, electrician, and even your barber/hairstylist must have a license to practice. Shouldn't you expect your tax preparer to be licensed as well?

The IRS agrees, and has tried for years to gain the authority to do so. The 2012 court case Loving v. Commissioner ruled that the IRS had no such rights, so they are now seeking the authority through legislation.

The Tax Return Preparer Competency Act would establish requirements to be a licensed tax preparer, including a basic competency test and a background check. To retain their license, preparers would have to take approximately fifteen hours of annual classes to stay up to date on tax laws.

Aren't credentials required to fill out tax forms already? Indeed they are. Anyone who prepares a federal tax return for others must have a Preparer Tax Identification Number (PTIN) from the IRS. However, there is no minimum standard attached to acquiring a PTIN. Holders of a PTIN can fall into one of five categories:

  • Enrolled Agents – The highest level of tax specialist, enrolled agents must take a comprehensive exam that addresses both individual and business tax issues to achieve this status. They must also successfully complete 72 hours of continuing education courses every three years.

  • Certified Public Accountants (CPAs) – CPAs are licensed by state accountancy boards and must complete continuing education programs to maintain their CPA license — but there is no requirement that a CPA be knowledgeable in tax laws. CPAs vary broadly in their expertise.
  • Attorneys – Similar to CPAs, attorneys are licensed by state organizations to practice but there is no guarantee about their level of tax expertise.

  • Supervised Preparers – Supervised preparers have some experience in the field of tax preparation but do not hold one of the above titles. The IRS has a voluntary program to encourage supervised preparers to take continuing education courses. Upon completing the course, the IRS issues them with a Record of Completion, valid for a specific tax year.

  • Non-1040 Preparers – Preparers in this category can only prepare Forms 1040-PR, 1040-SS, or simpler versions such as 1040-EZ. Starting in 2016, non-1040 preparers will have no rights of representation with the IRS. In essence, you are on your own.

Enrolled agents, CPAs, and attorneys have unlimited IRS practice rights and can represent clients for any tax issue. The other categories have limited practice rights, and can only represent those whose returns they have prepared. They also cannot handle collection or appeal issues. However, while all of these categories have PTINs, none of them requires a background check.

The IRS has a searchable directory of tax preparers with the upper three classifications, as well as any other preparer who was issued a Record of Completion for continuing education courses. The proposed legislation would create a similar public directory for licensed tax preparers.

With these classifications and restrictions, why is licensing even necessary? Aside from enrolled agent status, the IRS cannot vouch for the degree of tax competency of any preparers. Proponents of licensing argue that this would end substandard and fly-by-night tax preparers who take advantage of less sophisticated taxpayers. Opponents argue that licensing will drive away perfectly competent but less expensive preparers and raise the cost of tax preparation. Both have valid points. Forbes suggests that the already-credentialed categories may get some form of a pass, which could exclude perfectly competent tax preparers while allowing filing privileges to attorneys and CPAs with no tax experience.

A proper licensing program could benefit both taxpayers and the IRS. The question is: will Congress create one?

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