NAEA Submits Comments to Senate Finance Committee

Washington, DC (April 12, 2007)—The National Association of Enrolled Agents (NAEA) today submitted Comments for the Record to the Senate Finance Committee on the increasingly urgent issue of regulation of paid tax return preparers.

“Each year, it seems as if we see more and more news stories about either unscrupulous or simply incompetent tax return preparers,” wrote NAEA. “Some of these paid preparers are overstating deductions or fabricating Schedules C in order to maximize earned income credits. Others are looking the other way when it comes to cash income or even selling financial products – including refund anticipation loans and IRAs – of dubious value.”

NAEA urged the Committee to support tough federal-level reforms that will require all paid preparers to prove competency and to fulfill continuing education requirements in order to keep up with the constantly changing Tax Code. Centralized oversight of all paid preparers should be built on the existing regulatory framework in place for attorneys, CPAs and enrolled agents, in NAEA’s opinion. NAEA recommended that Office of Professional Responsibility (OPR), an organization within IRS that is currently in charge of regulation and enforcement efforts for all of the aforementioned groups, oversee all paid preparers.

One disturbing trend that leads NAEA to conclude that action must soon be taken on this issue is selection of a preparer based upon the promise of a large refund. NAEA members report that clients will sever their relationships with honest preparers in favor of preparers who promise to “pump up” their refunds. Apparently, the demand for an honest and legally prepared tax return in many cases pales in comparison to the lure of outrageous refund guarantees made by dishonest preparers willing to create a return with a fictitious home office or phony business deductions. This kind of illegal action ultimately harms the honest preparer, the taxpayer, the tax administration system and the US Treasury.

In 2005, a bill (S. 832) was introduced that would have required all paid preparers to demonstrate competency through licensure and continuing education and be held to ethical standards, but it failed to become law. In its comments, NAEA stated that such legislation should be reintroduced. The key reasons for NAEA’s unqualified support for the legislation are as follows:

• The bill contributed significantly to taxpayer access to competent and ethical tax preparation services. The legislation would have required all paid preparers to pass an IRS exam testing their understanding of basic tax laws and ethical standards, undergo annual continuing education and be subject to the ethical requirements of Circular 230, a Treasury Department circular that provides rules of practice for tax professionals licensed to practice before the IRS.
  
• The bill built on the existing regulatory framework and consolidated enforcement under one governmental entity. Rather than constructing a parallel regulatory framework and enforcement entity for each distinct category of paid preparers, the legislation would have consolidated all persons preparing returns (attorneys, CPAs, EAs, and other paid preparers) under the current regulations (Circular 230) and the existing Office of Professional Responsibility.
  
• The bill ensured adequate resources for administration, promotion and enforcement. The legislation would have allowed OPR to retain all registration fees for administration of the program, including policing all practitioners and preparers under its jurisdiction. The authorization to retain these fees would have ensured that the office had adequate resources to investigate and penalize unlicensed individuals.
  
• It struck the correct balance for creating a new tax practice credential. Currently, the general public is presented with three options for individuals that are licensed to practice before IRS: attorneys, certified public accountants and enrolled agents. The bill does not seek to create a new credential to establish the presumption of a higher level of authority and competence than offered by the existing categories of licensed preparers; instead, it seeks to ensure that taxpayers will benefit from ethical behavior and at least a minimum level of competence and currency of knowledge from all tax preparers.

NAEA pointed out that raising public awareness of the significance of the various credentials of licensed tax professionals is also critical to protecting taxpayers from unscrupulous and incompetent tax preparers. The public cannot knowledgeably choose a tax preparer without understanding the characteristics of the different categories of hired return preparers and the exams, education and other qualifications required to earn those credentials.

NAEA warned that if federal action is not soon taken, individual states may well step forward and deal with the problem in a piecemeal fashion. The full text of NAEA’s Comments for the Record to the Senate Finance Committee is posted at www.naea.org.

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