H&R Block Beware!

IRS to Boost Oversight of Paid Tax Preparers



By MARTIN VAUGHAN And MARY PILON

WASHINGTON—The Internal Revenue Service said it intends to regulate the legions of American tax-preparation companies, the first time the agency has sought to oversee these businesses. The move could affect how tax returns are prepared for tens of millions of people.

Under the new rules, employees of chain tax-preparation firms including H&R Block Inc. and Jackson Hewitt Tax Service Inc. will be required to pay a registration fee to the IRS, pass a "competency" exam and have 15 hours of education a year. Previously these employees weren't required to meet federal standards.

The requirements also will apply to hundreds of thousands of independent preparers and mom-and-pop storefronts that offer tax preparation as one of several services. About 60% of U.S. taxpayers use tax preparers, according to the IRS. That number includes certified public accountants, or CPAs, who are already subject to professional standards and aren't covered by the new rules.

The plan will take several years to implement and won't be in effect when taxpayers prepare their 2009 taxes for this April, the IRS said. But starting in 2011, all paid tax preparers will have to register with the IRS and include a unique identification number on any returns they prepare. Preparers will be given three years to pass a competency exam in either individual or small-business taxation.

"This is something that is long overdue," IRS Commissioner Doug Shulman said Monday. Until now, there have been "no national, professional standards for one of largest financial transactions individuals have each year," he said.

The IRS's move comes as Washington has looked to toughen regulatory oversight across the board, particularly in financial markets. Congress has toughened rules applying to credit-card firms. The White House is pushing an overhaul of financial regulation that would cover previously untouched or lightly regulated areas, like derivatives and hedge funds.

Some of the nation's largest tax preparers either welcomed or pushed for the new rules, seeing an advantage in regulations that could weed out some of their smallest competitors.

"We welcome the spotlight," said Kathryn Fulton, senior vice president for government relations at H&R Block, which said its business will be helped by forcing competitors to meet standards the firm already follows. "We think this should apply across the board," she said.

The testing and education requirements will apply to the preparer who actually signs the returns—a potential loophole that could allow chains such as H&R Block to avoid meeting requirements for preparers who work under a supervisor.

Intuit Inc., the maker of TurboTax, was among those lobbying for stricter oversight. Last year, 21 million tax returns were filed with the software, according to Julie Miller, an Intuit spokeswoman. Intuit staffs its hotlines primarily with CPAs and enrolled agents, workers who aren't accountants, but who are tested and certified by the IRS.
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“ This is a classic case of bandaging a scratch on the finger while allowing the severed artery to bleed. How about fixing the tax code so we don't need tax preparers? ”

—Nicholas Micskey

Tax-preparation software isn't covered by the plan unveiled by Monday, but the IRS could move to craft federal standards in this area. Mr. Shulman said the IRS will form a task force to examine the software industry's record on issues from accuracy to taxpayer-data security.

Like CPAs, volunteer tax preparers, such as those that help low-income taxpayers at free clinics, won't be subject to testing or education requirements.

For consumers, the new standards have the potential to raise tax-preparation fees, if tax preparers incur new costs to follow the regulations.

The regulations are primarily aimed at smaller firms, often branding themselves as generic "tax preparers" or "tax consultants." Government auditors, in undercover visits to firms, found high levels of inaccuracies and distortions on returns.

In 2006, the Better Business Bureau received 1,473 complaints against tax preparers, which ranked them 120 out of about 3,800 industry categories. In 2008, the number of tax-preparation complaints jumped to 2,276, ranking the industry 80th. Often, the complaints concerned errors that caused consumers to pay fees to resolve the problem.

"We want to make this into a profession, not just a part-time thing you set up on the kitchen table for six weeks during the tax season," said Frank Degen, an enrolled agent based in Setauket, N.Y. Enrolled agents have also been pushing for higher standards. "The good people have nothing to fear; it's the charlatans that hopefully will be rousted out."

Tom Ochsenschlager, a CPA and vice president at the American Institute of Certified Public Accountants, said the IRS has taken on a huge task in becoming "the consumer protection agency for tax preparers." He added: "Enforcing this is going to be a major undertaking."

Mr. Ochsenschlager worried the new regulations could confuse some consumers, because they aren't as tough as those required to become a CPA.

The IRS's Mr. Shulman said the agency will develop a public database through which consumers will be able to determine whether preparers have registered and passed the exam. The IRS said it also will explore whether to try to combat the growing use of refund-anticipation loans, in which firms offer upfront cash to customers expected to receive an IRS refund.