Chuck McCabe Comments on Tax Preparer Performance Standards

IRS Public Forum on Tax Preparer Standards Ronald Reagan Building, Washington, DC

9:00 a.m. July 30, 2009
Input by Charles E. McCabe
Chairman, National Alliance of Tax Business Owners
President & CEO, Peoples Income Tax, Inc. and The Income Tax School

I attended this Public Forum as an observer and I am writing to provide my input on the subjects discussed and the comments made by the two sets of panelists representing Taxpayers and Tax Preparers.

Before I relay the issues and concerns that were discussed by the panelists and provide my input, I would like to provide the following comments to stress the importance of tax practice management:

The tax preparer community can assist in increasing taxpayer compliance by operating their tax practices and tax businesses in a professional, efficient and responsible manner.

Independent tax business owners, especially those who employ others and are not sole practitioners, should develop best practices that address the current tax business environment and adopt proven best practices that have evolved in the tax industry over the years. Tax businesses should be operated in a systematic manner drawing upon written policies and procedures to ensure consistent quality of service and correct tax preparation. Best practices should be employed in recruiting and training tax preparers in correct tax preparation, use of tax software, and in tax office policies & procedures, including client service. Policy & Procedure Manuals, which would provide the basis for training and tax office operations, should include sections on correct tax preparation, quality control (e.g., requirement for all tax returns to be checked and the use of secret shoppers), IRS Due Diligence (detecting and preventing fraud), client data confidentiality, e-filing and client & IRS problem resolution. State-of-the-art technology should also be employed to ensure efficiency, accuracy and security. By operating under a sound business model and employing proven best practices, independent tax businesses and sole tax practitioners will assist the IRS in increasing taxpayer compliance.

The remainder of my input is in response to the IRS request for input on how to increase taxpayer compliance and ensure that tax return preparers meet both uniform and high ethical standards of conduct. I have included my opinions on recommendations and observations of the panelists on July 30, 2009 at the Public Forum.

Tax Preparer Identification: There seemed to be consensus that the first step in regulation is to identify all tax preparers and register them. I agree.

Considering Different Types of Tax Preparers: The suggestion was made to not create a “one size fits all” standard of competency. However, having multiple standards would not be practical. I propose two sets of standards for: (1) individual tax returns, and (2) non-individual tax returns, with an examination for each. Tax preparers could opt to document competence in either one or both. It was also noted that tax preparers should only handle tax returns that they are qualified to prepare based on their level of tax knowledge.

Testing vs. Education to Document Basic Competence: It was suggested that testing is a better indicator of competence than education, which does not confirm competency. Clearly a certain level of tax knowledge is necessary for a tax preparer to be competent. Such knowledge could be documented through testing. However, sources of quality education must be available for new tax preparers to gain the necessary basic tax knowledge, and continuing professional education in advanced subjects, and annual updates in tax law changes must be
required. Education programs should include exams to confirm understanding of the subject matter. States that impose income tax should also require education and training in the state’s tax laws, and education in state tax return preparation should also be available.

Source of Education and Training: It was suggested that IRS VITA volunteer preparer training could be expanded to provide training for paid tax preparers. While it is appropriate and necessary for the IRS to provide free training for volunteer tax preparers, outsourcing the development and annual updating of VITA curriculum could be more cost-effective. There is no need for the IRS to incur the cost of developing and annually updating such education and training at the expense of taxpayers. Paid tax preparers, like other professionals, should bear
the cost of their own education and training. Adequate quality basic and advanced education and training for paid preparers are available from numerous providers. As suggested by Larry Gray representing NATP, the IRS should require that all tax preparers, after documenting basic competency, complete annual prescribed Continuing Professional Education (CPE) that meets the standards of the National Association of State Boards of Accountancy (NASBA).

Note: My company operates The Income Tax School (ITS), which is a private career school certified by the State Council of Higher Education for Virginia (SCHEV). We are also a sponsor of CPE required for CPAs and Continuing Education (CE) required by the IRS Director of Practice for EAs and by the Certified Financial Planning Board of Standards for CFPs. ITS is also a sponsor of the Qualifying Course required by the California Tax Education Council and the Basic Course required by The Oregon Board of Tax Practitioners for tax preparers to practice on those states.

Exemptions from Exam: The representative of professional associations of CPAs, Attorneys and Enrolled Agents all felt that these professionals (their members) should be exempt from the Basic Competency exam requirement because they are already held to professional standards by their respective oversight agencies. I agree that EAs should be exempt because they have documented competency. Attorneys should also be exempt because their license to practice requires that they maintain current knowledge in the area(s) of law in which they practice. Also, relatively few lawyers prepare individual and small business income tax returns. However, I do not agree that CPAs should be exempt. Tax is law, not accounting, and CPAs do not learn how to prepare income tax returns in accounting school. Yet about 60% of all CPAs prepare tax returns. For CPAs to have the knowledge to competently prepare tax returns, they must be educated in tax preparation. CPA tax preparers should be required to document their tax knowledge and to continue their professional tax education annually.

Grandfathering: Suggestions were made that waivers for the requirement to take an IRS basic competency exam be granted to tax preparers who have been determined by the Service to have documented equivalent tax knowledge. Examples of such documentation for consideration (in addition to the EA designation) would include: (1) licenses issued to tax preparers in California, Oregon, Maryland and other states that regulate tax preparers., (2) tax professional designations such as the Accredited Tax Preparer (ATP) and Accredited Tax Consultant (ATC) awarded by the Accreditation Council for Accountancy and Taxation (ACAT) and AARP VITA Tax Aide and VITA volunteer preparer certifications. I agree. Criteria for a designation to qualify for grandfathering and an application process should be established by the IRS. There seemed to be consensus that experience in tax preparation should not be considered a qualification to obtain an examination waiver.

License as a Credential: A comment was made that a license to practice should not be represented by tax preparers to be a professional credential or an endorsement by the IRS. However, the public must be made aware of which tax preparers are licensed.

Funding: It was noted that considerable resources would be required to develop and implement regulation of tax preparers, but benefits outweigh the cost to the Service. Fees to paid tax preparers should not be excessive.

Implementation Timetable: It was suggested that it may be necessary to phase in any tax preparer licensing requirement over a period of several years. I think licensing of unenrolled preparers of individual returns should be implemented during the first year and all others during the second year.

Underground Tax Preparers: It was noted that many tax returns are prepared by unqualified preparers (including friends and relatives of taxpayers) who use inexpensive consumer tax software packages to prepare multiple tax returns. The suggestion was made to require consumer tax software providers to limit the number of returns than can be prepared by their software packages. It was also suggested to better educate tax preparers in the risks of having a tax returns prepared by an unlicensed tax preparer. Many taxpayers do not realize that they are personally responsible for the all information on their tax returns.

Fast Refund Bank Products / Fraud: Jean Ann fox of the Consumer Federation of America described her concerns about Refund Anticipation Loans (RALs) and Refund Anticipation Check (RACs). In 2007 some 8.2 million RALs resulted in $832 million in RAL fees and some 16.8 million RACs cost each taxpayer an average of $30 extra in fees. She asserted that because the RAL and RAC enables tax preparers to be paid their fees from taxpayers’ refund money, the products provide a financial incentive for tax preparers to inflate refunds. She also said RALs RACs facilitate fraud by preparers who receive money quickly from inflated refunds and then are nowhere to be found when the returns are audited, leaving the taxpayers who are ultimately responsible to deal with the IRS and state tax departments. It was noted that the majority of such fraud is attributable to Earned Income Credit and self employment income (Schedule C) for low-income unsophisticated taxpayers. Many low income taxpayers have income from self-employment (Schedule C). Failure to include taxable income from cancelled debt occurs frequently and should be a routine question asked by all tax preparers.

RALs and RACs no doubt provide opportunity and incentives for unscrupulous tax preparers to commit fraud. However, many tax preparers, including my company, provide those products to clients because if we didn’t the clients would go elsewhere for tax preparation services. In addition, many would not have the money to pay to have their taxes prepared professionally. For several years we have offered inexpensive alternatives to RALs and RACs even though we realize less revenue by doing so. For the past 2 years we offered RAL and RAC clients the option of having their refunds deposited to a Skylight stored value credit card for a fee of $25. They are provided with SunTrust bank checks in addition to the credit card to which their tax refund is direct deposited. They can obtain their entire refund by using one of the checks at a SunTrust bank and pay no check cashing fee. Or they can use the stored value card link a check card to pay bills and withdraw money from an ATM machine. They can even have their paychecks deposited to the card and use it like a bank, since many of these clients do not qualify for a bank account. We have also arranged for our RAL and RAC clients to cash their checks at a SunTrust bank for a fee of $15 to avoid expensive check cashing center fees. We would be happy to see the RAL and RAC eliminated. But we still believe there would be a need for the equivalent of the Skylight card, and the fee for that would likely come down to $10-$15 and eliminate check cashing fees.

I see the lack of action by the IRS CID to pursue smaller incidents of preparer fraud as a major problem. The excuse for inaction is limited resources, but the situation is unacceptable. If the US criminal Justice system ignored minor crimes, we would have lawlessness, which is what we have in the tax preparation industry. Legitimate preparers are frustrated when turning in fraudulent preparers to IRS only to see no action taken.

Tax Software: It was noted that interview-based tax software facilitates the operation of tax businesses that employ tax preparers who lack adequate tax knowledge. Tax software is not a substitute for tax knowledge. People who are taught tax preparation using tax software do not learn what the software does automatically. This is why quality tax preparer training requires that students learn to prepare tax returns by hand and they are not introduced to tax software until after they learn to correctly prepare all schedules, statements and all types of tax returns they will encounter manually.

Ethics: Integrity as well as competency of tax preparers must be addressed. Tax preparers should be subject to a code of ethics. Circular 230 may be a higher level of standards than necessary but can provide the critical elements of a code of ethics for unenrolled preparers. Tax preparers should undergo some type of background check and an initial and periodic review of their own tax returns. Current filing should be a requirement.

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