Regulating Tax Preparers Would Benefit Taxpayers and the IRS

Regulating tax return preparers would protect taxpayers, maintain a standard for tax preparation, and simplify the IRS’s tax administration. While there are plenty of “mom and pop” tax preparers doing a fine job of helping their neighbors and friends file their tax returns, the lack of any federal oversight or basic education requirements creates opportunities for bad actors.

Taxpayers typically think of their tax returns once a year—usually leading up to the April 15 deadline. Because of the tax code’s complexity, most individual and business taxpayers turn to a preparer to meet their filing obligation.

But taxpayers may not consider federal oversight when they turn over their most sensitive and detailed financial data to a preparer without a second thought. Dishonest and incompetent tax preparers rely on a lack of regulation in this area to continue operating without fear or consequence.

Professional organizations such as the American Institute of CPAs and the National Association of Tax Professionals have supported giving the IRS limited authority to regulate paid tax preparers. This is because tax returns from unregulated ones account for more than half of all tax filings.

These returns have error rates higher than those prepared by regulated preparers such as CPAs or enrolled gents. National Taxpayer Advocate Erin Collins noted this March that “taxpayers are harmed when incompetent tax return preparers make errors that cause them to pay too much tax, deprive them of receiving certain tax benefits, or subject them to IRS tax adjustments and penalties for understating their tax.”

Prior to 2013, any individual who was paid to prepare or assist with the preparation of all or substantially all of a tax return or claim for refund were required to have a preparer tax identification number, or PTIN—a requirement still in effect.

The IRS Registered Tax Return Preparer Program also required tax preparers to pass a basic Form 1040 competency test, complete 15 hours of annual continuing education, pass a compliance and background check, comply with ethical standards of Circular 230, and understand that they had limited practice rights before the IRS.

When Loving v. IRS challenged whether the Department of the Treasury had the authority to regulate all tax return preparers in 2013, the court held that the IRS has limited rights to regulate professional preparers when defending a position taken in a return after the return is filed. The IRS doesn’t have the authority to regulate conduct of non-professional preparers.

As a result, the RTRP program was dismantled, and the tax preparer community has been in limbo for over a decade. For taxpayers, this means that any person off the street can prepare a return for a fee. There are no longer any barriers to entry to becoming a return preparer.

A lack of regulation has likely contributed to the rampant fraud in the employee retention credit program. CPAs, enrolled agents, and hard-working tax professionals were quick to point out the dangers of taxpayers using unscrupulous third-party ERC vendors—such as aggressive credit mills or non-credentialed tax preparers—to apply for the tax credit.

We now know that these aggressive credit mills have taken advantage of many small businesses, costing the government hundreds of billions in taxpayer dollars. ERC fraud is an important reminder of why the concept of regulating paid tax preparers is critical.

Deputy Secretary Adewale Adeyemo said as much in September 2023, when he wrote to the leaders of the Senate Finance Committee to highlight the problem of ERC fraud and request that Congress advance a proposal to give the IRS authority to regulate paid preparers.

Providing the IRS with carefully considered and limited oversight of tax return preparers without creating additional challenges for honest, registered preparers, or unmanageable barriers to entry for unenrolled preparers who want to become credentialed would help improve return accuracy, protect taxpayers from unscrupulous preparers and reduce the IRS’s burden.

The IRS should have limited, carefully considered authority to ensure that paid tax preparers adhere to ethical standards and that the IRS has the tools it needs to conduct appropriate oversight. There should be a fair, effective, and not overly burdensome regulation based on the Guiding Principles of Good Tax Policy.

This would ensure a minimum amount of applicable education each year, including ethics. Such a regulation would enhance the integrity of the tax system and protect taxpayers and the profession. This is the foundation for maintaining taxpayer confidence.

An advisory committee made up of public tax officials and tax software representatives just last month urged Congress to authorize the IRS to regulate tax return preparers. There is a bipartisan path forward for Congress on this issue. One consumer protection method supported by a diverse range of external stakeholders gives the IRS the authority to require a basic understanding of completing an individual income tax return.

Allowing the IRS to revoke an incompetent or fraudulent preparer’s PTIN, which would disallow the preparer from preparing tax returns for income, is another option. A study on the IRS exchange of information with various state taxing authorities also could help track and eliminate fraudulent preparers.

It’s time for the IRS to have limited authority to regulate tax return preparers. Congress should take meaningful, bipartisan steps to address this issue.

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

Melanie Lauridsen is vice president of tax policy and advocacy for the American Institute of Certified Public Accountants.

Scott Artman is CEO of the National Association of Tax Professionals, overseeing policies, programs, and strategic initiatives.

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