Readers are probably thinking, "wait, the title and the picture don't match!" Welcome to my world.
The Internal Revenue Service recently began reminding almost 700,000 federal tax return preparers that they must renew their Preparer Tax Identification Number (PTIN) for 2015. All current PTINs expire on December 31, 2014.
Obtaining a PTIN, with some limitations, is the IRS equivalent of getting a fishing license. With a PTIN, an individual has permission to prepare, for a fee, individual income tax returns. Just as with a fishing license, no experience is required. An applicant may not even know what a fish is, no less how to go about catching one, nor for that matter, what a tax return is, much less how to prepare one.
As an aside, each of the fifty states has its own tax preparation licensure requirements.
A few years ago, the IRS, rightfully so in my view, made an effort to corral the tax prep industry. That effort was nixed by a Federal Judge.
In May 2011, the IRS for the first time began regulating those who prepare and file tax returns for compensation by issuing regulations making unenrolled return preparers (i.e., return preparers who are not CPAs, attorneys, or enrolled agents) subject to Circular 230. All unregistered return preparers had to pass a qualifying exam, pay an annual fee, and complete mandated continuing education courses each year.
Three independent tax return preparers filed suit in federal court, arguing that the IRS did not have the legal authority to regulate their preparation of tax returns. They complained that they would have to raise prices and would lose customers if forced to comply with the IRS’s requirements. They sought injunctive and declaratory relief and moved for summary judgment.
The U.S. District Court for the District of Columbia ruled that the statutory language unambiguously forecloses the IRS’s return preparer regulation program and granted a declaratory judgment that the IRS “lacks statutory authority to promulgate or enforce the new regulatory scheme for ‘registered tax return preparers’ brought under Circular 230” The court also granted permanent injunctive relief, enjoining the IRS from enforcing its registration scheme against unenrolled preparers.
OK. I am the first to agree that the IRS has too much authority. Way too much! But I have seen our tax code. And I have seen returns prepared by those not well versed in its nuances. Both can get ugly.
To paraphrase Tod’s line from the movie Parenthood, ‘You know, Mrs. Buckman, you need a license to buy a dog, or drive a car. Hell, you need a license to catch a fish! But they'll let any foolish butt-head prepare income tax returns!’
Almost every national tax preparation firm offers a “free review” of prior year returns. They suggest that they almost universally discover errors leading to an increased refund for the taxpayer. They know they can do so because the percentage of returns that contain a material mistake is extraordinarily high. Funny thing is, I have only rarely reviewed a return that I would not have prepared differently, regardless of the original preparer.
Lest I be accused of denigrating those large multi-franchise tax return preparation companies, let me be the first to say they work diligently to prepare accurate returns for their customers. It does seem odd, however, when, like these past few weeks for instance, you can drive by this or that shopping center or strip mall and see a sign advertising a “tax preparation” class. Care to guess what these "students" will be doing come January?
I have been involved with taxes for almost the entirety of my professional career. Yet I still acknowledge that the tax code holds great mystery to me. How can it be, then, that a novice can attend a two or three week course and have any clue what they are doing? I guess they must be much, much more intelligent than this old fool.
Many, many years ago (I think A Lincoln might still have been the President), I worked for a major national tax preparation service reviewing completed returns. Unlike many of those who just recently completed their two week annual tax course, I was essentially hidden from view in a back room with stacks of already completed returns together with original taxpayer documentation.
It was my responsibility to make sure that Box 1 of Form W-2 was properly included on Line 7 of Form 1040. I had to verify that all of the amounts reported on various and sundry Forms 1099 were properly included under Interest or Dividend Income, or listed under Other Income (let’s leave aside Forms 1099 MISC received for Non-employee Compensation to keep this post under 100 pages). Etc., etc., etc. Finally, I made certain that all instances of 1 + 1 = 2.
I did not feel then, nor do I believe now, that I could conduct a meaningful review of a tax return, possibly identifying any material errors, using this methodology although I felt it was appropriate as a quality control step. At my first opportunity, I told the regional manager as such. When asked why I felt that way, I responded using the same gesture later employed by Robert De Niro, playing the part of Jack Byrnes in Meet the Parents. Whenever he wanted to intimidate his soon to be son-in-law, Greg, played by Ben Stiller, he would point at his eyes with his pointer and middle fingers, and then back at Greg, signifying he would be watching him.
Pointing back and forth from my eyes to those of the regional manager, I suggested that, unless I was eyeball to eyeball with the taxpayer, I could verify that the return was accurate, but I could not determine if it was correct. Suffice it to say we agreed to disagree.
Americans are faced with a problem. That problem is the burden placed on each of us by the insanity titled the Internal Revenue Code. The incomprehensible complexity of our tax code was once aptly described by former Treasury Secretary Paul O'Neill. He said,
"Our tax code is so complicated we've made it nearly impossible for even the Internal Revenue Service to understand.”
For average taxpayers, there is just no way that they can understand what the code requires or allows, no more than they can grasp how it truly affects them.
In some respects, this may not be a big problem. First, taxpayers have an array of “free” on-line tax preparation software options available. Second, the IRS offers free tax preparation assistance through the Volunteer Income Tax Assistance (VITA) program and the Tax Counseling for the Elderly (TCE) program. Finally, a variety of tax preparation software programs can be purchased.
Nonetheless, each of the above options comes with limitations or restrictions. Most on-line programs carry income limits. Buying software requires a compatible computer system. VITA only offers free tax help to those who generally make $53,000 or less, or those with disabilities, elderly taxpayers, or those with limited English ability who need assistance in preparing their returns. TCE offers free tax help for taxpayers who are 60 years of age and older, specializing in questions about pensions and retirement-related issues unique to seniors.
Regardless, use of any of these various options comes with some risk. Most tax software programs, whether on-line or purchased and installed, include an interview. The idea is that, by completing the interview, the software will guide the taxpayer to successful completion of an accurate return.
But if a taxpayer doesn't understand the code, what is required, what is allowable and what is not, how can they appropriately answer a software based interview? Yet many Americans continue to do so knowing little of the tax code or worse, understanding none of its real impact. Contrary to the familiar expression, what we do not know can hurt us.
Let me see if I get this right. According to the Treasury Secretary, the IRS does not understand the code while evidence suggests taxpayers do not trust their knowledge of our tax laws.
As a result of this dilemma created by the dearth of understanding of our complex tax system, the tax preparer industry has grown by leaps and bounds, filling the void. Taxpayers can have their returns prepared by a professional. But just what is the level of knowledge of tax preparers? How do we know?
As a tax professional, I believe strongly that implementing some reasonable method to ensure those who prepare returns are at least minimally qualified to do so is appropriate.
But that is not the problem. If the dike is crumbling, sticking one's finger in one of the many holes appearing will not stop the coming flood.
The real problem is the code itself. We should not have a tax system so complex that 2 of every 3 Americans hire someone to prepare their returns. We should not have a system that generates over one hundred million notices a year, producing more than thirty million penalties, resulting in four million levies and a like number of tax liens.
That is simply wrong. Expensive and wrong! But the intent of this blog isn’t to discuss the drain on our economy caused by our tax system. The intent is to highlight the problem of unqualified or unprepared preparers.
If we focus on that statement, however, we are treating a symptom rather than the problem. Our country is faced with COPD and we are giving out free samples of cough syrup.
Make no mistake. The true intent of this post is to point at the real fly in the ointment, the Internal Revenue Code.
CLOSED! GONE FLY FISHING!