Congress Must Allow the IRS to Set Standards for Tax Preparers

A proposal to change the rules for practitioners appearing before the IRS underscores the need for Congress to permit the Treasury Department to implement minimum standards for tax professionals.

Proposed regulations issued Dec. 20 would revise Circular 230, the regulations governing practice before the IRS. The proposed rules attempt to address issues that have been ambiguous or obsolete for more than a decade and would affect enrolled agents, attorneys, certified public accountants, and enrolled actuaries.

If finalized, Circular 230 would change in various ways to account for several court rulings, including Loving v. IRS and Ridgely v. Lew, both from 2014, and clarify many areas to incorporate technology and reflect current practices. Specifically, the regulations would:

• Remove the parts of Circular 230 related to registered tax return preparers and eliminate all traces of tax return preparation to reflect the courts’ narrow interpretation of IRS authority under Circular 230
• Delete any reference to duties and restrictions on fees, yet broadly define contingent fees as disreputable conduct
• Incorporate new provisions that better align Circular 230 with the current practice environment, such as requiring practitioners to maintain technological competency as part of their practice before the IRS
• Clarify some provisions, such as confirming that the Office of Professional Responsibility retains jurisdiction over suspended or disbarred practitioners, while revising or eliminating out-of-date provisions
• Provide rules related to appraisers, including the standards for disqualification

The primary concern for enrolled agents is Section 10.7 and its proposed changes to limited practice. It would allow non-credentialed tax preparers to “represent a client before revenue agents, customer service representatives, or similar officers and employees of the Internal Revenue Service, including Taxpayer Advocate Service.”

This sweeping expansion strays far from the current Circular 230 provisions. Rev. Proc. 81-38 allows unlicensed tax preparers to represent a client in an audit of a tax return they prepared, and specifically requires that representation to occur only in an IRS office exam—not in a field audit or correspondence exam.

Another concern for the entire industry is the change to the current due diligence requirements. In the IRS’s desire to remove tax preparation from these rules, this change could be an invitation to play the “audit lottery” and encourage preparers to account for the likelihood when determining whether to include a questionable position on a tax return.

Instead of clarifying and bringing principles-based guidance on contingent fee arrangements, the proposed rules remove the entire section on fees and places a broad prohibition, terming most contingent fees as “disreputable behavior.” Many in the practitioner community feel the move may still be an overreach, based on Ridgely.

The proposed regulations show the acute need for Congress to give the Treasury and IRS standard-setting authority. This has been the case since the Loving decision. The IRS is unable to provide basic oversight for most tax professionals, making prior rules ineffectual considering the courts’ rulings.

On issues such as contingent fees, what constitutes as practicing before the IRS has further stymied the agency. In the proposed rule, the Treasury and IRS seek to clean up outdated rules and find efficient approaches to oversight on issues such as contingent fees. But due to the IRS’s lack of statutory authority, the proposed rules fail to address many of the pressing obstacles that our tax administration system continues to face.

One of the largest challenges facing tax preparation today is the many unqualified and unscrupulous tax preparers that operate within our system with no oversight. Anyone can be a paid federal tax return preparer because the IRS lacks the authority to set and enforce basic minimum standards.

To make a real and lasting impact on the tax preparation industry, Congress should allow the Treasury and IRS to require minimum standards, including a continuing education mandate and a background check, for all tax preparers. While we appreciate the changes that the proposed regulations implement, the lack of oversight within our industry leaves taxpayers more vulnerable and exposed to potential tax deficiencies, penalties, lost refunds, or other unnecessary tax issues.

Authorizing minimum standards for paid tax return preparers would protect taxpayers from incompetent preparers and strengthen the legitimacy and professionalism of the tax preparation industry.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jennifer MacMillan writes and teaches ethics courses for enrolled agents and serves on the National Association of Enrolled Agents (NAEA) board of directors.

Write for Us: Author Guidelines