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GETTING PERSONAL: IRS Tax Preparer Plan Seen Long Overdue

GETTING PERSONAL: IRS Tax Preparer Plan Seen Long Overdue

Though the IRS proposal will take several years to put into place, and won't take effect for the 2010 filing season, tax advisers are finding a lot to like in it, and very little to criticize.

Tax professionals "have been talking about the need for this for most of the 30 years I've been in business," says Claudia Hill, an enrolled agent who owns Tax Mam Inc. in Cupertino, Calif.

Over the past year, Hill has helped clean up messes left by unscrupulous or incompetent tax preparers. One client was hurt by a certified public accountant who overstated the man's expenses by 10 times. For his part, the CPA said he thought he was doing the man a favor because his records weren't very good, according to Hill.

Right now, rules leave the door wide open for the unlicensed to practice, sometimes unscrupulously. Certainly, taxpayers may be represented before the IRS by CPAs, lawyers or enrolled agents (an elite group of tax preparers that pass IRS-administered exams and are licensed by the agency). But no federal rules govern who may prepare a tax return for someone else.

That gap has allowed a burgeoning industry of independent tax preparers who aren't licensed by the IRS and may have no tax training. For 2007 and 2008, more than 80% of all federal individual income tax returns were prepared by paid tax return preparers or by taxpayers using consumer tax preparation software.

Under the new plan, starting in 2011, all paid tax preparers will have to register with the IRS and include an identification number on any returns they prepare. Preparers will have three years to pass a competency exam in either individual or small business taxation. The exams and new annual continuing education requirements are likely to affect hundreds of thousands of preparers, including employees of firms including H&R Block Inc. (HRB) and Jackson Hewitt Tax Service Inc. (JTX), and small shops that offer tax preparation.

Jackson Hewitt said it has long supported tax preparer standards to promote greater consistency in tax services. The firm continues to "share our viewpoints with the IRS regarding our belief that ethics and fraud training, specific levels of education and monitoring tax preparer activity" and other precautions, are important, said Melissa Connerton, a spokeswoman for the company.

H&R Block spokesman Gene King said the firm applauds the IRS proposal.

Attorneys, CPAs and enrolled agents, on the other hand, will not have to pass the competency tests; rather, they will continue to meet requirements of their licensing authorities.

"Everything makes sense here," says Frank Degen, chair of the government relations committee at the national group that represents enrolled agents. "Sometimes you look for the negative, but in this case, you won't find it."

One of the smartest things about the proposal, he adds, is that it can't get sidetracked in Congress. Rather than relying on lawmakers to enact the proposal, the IRS will put it into play with its own set of rules.

(Arden Dale is a Getting Personal columnist who writes about personal finance; she covers topics including tax and estate planning, retirement, investment strategies, and financial needs of small businesses. She can be reached at 212-416-2234 or by email at arden.dale@dowjones.com.)


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