For the past couple of years the IRS has taken steps to implement an oversight process designed to ensure the competency of tax practitioners to assure greater accuracy in the preparation of individual tax returns. The IRS based its authority to implement the program on a law enacted in 1884 that allows the agency to regulate “representatives” who “practice” before it gave them legal grounds to implement the program and circumvent the legislative process.
In introducing the new regulation for tax preparers, the stated IRS’ main objective was to improve tax compliance by root-out unqualified tax preparers and unscrupulous practitioners proven to have committed a number of violations ranging from filing fraudulent claims to cheating their clients.
However, a recent court decision has ruled that whereas the referred law gives the IRS the authority to regulate lawyers, Enrolled Agents, CPAs and other professionals who represent clients in “cases” before the IRS, that authority is not extensive to individual tax preparers. In effect, the judge ruled that the IRS has no legal basis for imposing on tax preparers the requirement to be tested for competency and maintain a Preparer Tax Identification Number (PTIN) in order to file federal tax returns.
The ruling affected all three aspects of the IRS tax preparer regulation program, namely requirements for testing, continuing education and RTRP registration, but does not affect the Preparer Tax Identification Number, or PTIN, required for registration. That is because the PTIN is covered in a regulation under a separate statutory authority. However, the court ruling circumvents the IRS from making issuance of the PTIN conditional on acquiring the RTRP credential, first.
The court decision has met with mixed reviews. Some industry advocates believe that the IRS should stop the tax preparer regulations process until it can legally enforce it. On the other hand a considerable number of preparers weight in supporting competency testing and continuing professional education as critical in establishing and/or elevating the quality of returns filed by tax preparers to insure adequate service and possible representation of taxpayers.
For some, the IRS oversight seems to be a way of instilling professional pride and they feel that the Registered Tax Return Preparer title would add prestige to the profession as a mark of someone who has met required qualification and standard of conduct. They favor continuing with the testing even if on a voluntary basis.
For others, the professional standards foreseen in the proposed regulations are no big deal and cite the need for oversight and education to stem misrepresentation and outright fraud by unqualified or unscrupulous tax practitioners.
The IRS has responded to the Court’s decision by announcing on January 22 that it is working with the Department of Justice and is confident that it is indeed within the scope of its authority to administer the program it has established to regulate the work of individual tax preparers. The IRS states in the same announcement that it is currently considering how to best address the court’s order and it will take further action shortly.
In the midst of uncertainty about the final outcome of the litigation now underway, it might not be a bad idea for tax preparers to continue to prepare themselves as if they had to take the test at some point in near future. If the courts final decision is in favor of the plaintiffs in the case against the IRS, studying the material would help tax preparers gain in knowledge, thereby rendering them more capable to better serve their clients. If the decision is overturned in favor of the IRS, those who continued to study will be ready to test in the short term and with good possibilities of passing the test and obtaining their RTRP credentials.