Dinesen Tax Greatest Hits: Thoughts on Preparer Regulation

Since it’s a holiday week, I’m re-running popular blog posts from the past. Today, my first post about regulation of tax preparers, from January of this year. Interesting to see how views develop and grow throughout the course of a year.


Originally published January 14, 2012.
I have been asked to give my thoughts on regulation of tax preparers, so here goes!

I agree with the concept of regulation of tax preparers. I just have zero faith the the IRS can successfully oversee it. And I doubt that regulation will change anything for the better.

The IRS is rolling out a new designation — Registered Tax Return Preparer (RTRP). Anyone who prepares a tax return must be a CPA, Enrolled Agent, attorney or RTRP.

This doesn’t sound so bad on the surface. But does this new designation really mean anything? A person can become an RTRP by passing an open-book exam that seems to be based on Publication 17,  for crying out loud. To quote Joe Kristan at the Tax Update Blog:

Considering the exam is an open book exam — which means it measures literacy more than it measures the ability to do tax returns — it also will do little to establish that anyone is “basically knowledgeable and competent in 1040 preparation.”

What’s Going to Change?

I think this is just going to create more government bureaucracy without solving any problems. Will passing the RTRP exam magically make someone a better tax preparer? NO. (Note: the same is true of passing the EA exam, CPA exam or bar exam — it doesn’t mean the person knows how to actually do the job.)

I have met unenrolled preparers who know far more about taxes than me. I have also met unenrolled preparers who claim to deal with a lot of Earned Income Credit returns but who looked puzzled when I mentioned the changes to Form 8867 (true story; the person had never heard of Form 8867).

I have met CPAs who specialize in taxes who are extremely knowledgable. Indeed, I have called CPAs to get advice on how to handle certain complex tax matters. But I have also met CPAs who primarily prepare tax returns but who freely admit that they despise taxes and would rather do audits of financial statements. I have also met CPAs who primarily prepare tax returns but who have somehow never heard of Circular 230.

I have met EAs who are extremely knowledgable. I love going to the quarterly meetings of the Iowa Society of Enrolled Agents and listening to the stories and experiences related by longtime EAs. But even though EAs are directly regulated by the IRS, we have people who have sullied the EA name by brazenly committing tax fraud (such as this EA couple from the Des Moines area).

Will any of this change just because there’s a new designation? No!

As to continuing education, EAs, CPAs and attorneys are all required to take CPE as part of our licensing. Granted, unenrolled preparers don’t have to take CPE — but the good unenrolled preparers do take CPE. The new preparer regulations require 15 hours of CPE each year. Will that really increase quality?

These new requirements will not make the decision-making process easier for consumers. It won’t put unethical or incompetent preparers out of business. If you can flip through Publication 17 you can probably pass the RTRP exam. If you’ve got $63, you can get a PTIN. And you can find cheap outlets for online self-study CPE. None of this seems likely to chase away the incompetent or unethical. If anything, it will chase away the longtime, good, experienced, ethical preparers who would rather just retire than mess with passing a test and getting a PTIN.

If it won’t increase the quality of preparers and it won’t get rid of unethical preparers, then why do it?????

So, What Would Jason Do?

Right now, anyone who prepares a tax return must have an ID number (a PTIN). So the IRS already has a mechanism for tracking who is preparing returns. Under a Jason Regulation Regime, I would say that if a person has a PTIN, they are subject to Circular 230, regardless of what letters they have after their name. Unethical or incompetent preparers can be tracked and weeded out by having a mechanism for revoking their PTIN.

Yes, I understand that the term “incompetent” would need to be carefully defined. But with PTINs, the IRS can see who is making mistakes. Those preparers, whether unenrolled, EA, CPA or attorney, would lose their PTIN if the mistakes happen too often or too egregiously. Thus, all preparers would be behooved to take CPE, stay current, be ethical and be diligent.

Simple and clean. Or at least, simpler and cleaner than trying to implement the RTRP and the rest of this regulation regime.

What are your thoughts?

Further Reading

  • Robert Flach (The Wandering Tax Pro) comes down in favor of preparer regulation in this article.
  • Joe Kristan at the Tax Update Blog shares many of my views, in this article.

Image: cbenjasuwan / FreeDigitalPhotos.net