American Institute of Certified Public Accountants v. Internal Revenue Service  —  A Contrary Perspective

0 Flares Filament.io 0 Flares ×

Last week we discussed the IRS victory in AICPA v IRS. Today we welcome back guest blogger Stu Bassin who offers a different take on the case and critiques the underlying merits of IRS oversight over unenrolled preparers.  Les

The D.C. Circuit’s recent decision in AICPA v. Internal Revenue Service  allowed the Service to continue its voluntary Annual Filing Season Program—a program which grants unlicensed tax return preparers with limited rights to represent taxpayers during audits if they satisfy continuing professional education requirements and pass a competency examination.  In a recent post, Professor Book heralded the decision as a “major victory” for the Service and urged Congress to enact legislation providing the Service with greater authority to regulate unregistered return preparers.  I offer a different perspective.

read more...

First, some background. About ten years ago, the Service responded to concerns that incompetent and unscrupulous tax return preparers were taking advantage of taxpayers and producing a disproportionate number of “problem” tax returns.  It  promulgated rules which required all return preparers who are compensated for preparing returns (e.g., attorneys, accountants, and unlicensed preparers) to qualify for and obtain Preparer Tax Identification Numbers (PTINs).  The regulations required preparers to pass a competency examination and complete required continuing professional education as a condition to obtaining a PTIN, although other provisions of the regulations largely exempted attorneys and CPAs from these requirements.

Unlicensed preparers, concerned that the new requirements would increase their cost of operating and possibly put them out of business, filed suit challenging the Service’s authority to regulate preparers who did nothing more than prepare returns [Personal aside. My father was a part-time unlicensed preparer who provided excellent service to taxpayers and used the fees he earned to pay for his children’s college education.  He gave up his practice when he learned of the additional costs and burdens that the new requirements would impose].  In Loving v. Internal Revenue Service, the D.C. Circuit ruled that the Service did not have statutory authority to regulate preparers whose activities were limited to preparing returns for other taxpayers.  In subsequent years, the Service has sought legislation providing it with authority to regulate these unlicensed preparers, although Congress has not granted the Service the requested regulatory authority.

The Service developed its Annual Filing Season Program in response to Loving, offering unlicensed preparers the opportunity to obtain a certificate of completion and limited rights to represent taxpayers during audits if they completed the continuing education requirements and passed the competency examination.  The program is voluntary—unlicensed preparers can continue to prepare returns without participating in the program–although the Service has made substantial efforts to sell the program to unlicensed preparers.   The most recent data suggests that relatively few of the unlicensed return preparers have elected to participate in the program.

Almost from the outset, the AICPA challenged the legality of the program.  After extensive wrangling over standing issues and two trips to the court of appeals, the D.C. Circuit upheld the validity of the program.  The key to the court’s ruling was its characterization of the program as voluntary and, therefore, not subject to the legal analysis developed in Loving.   This post does not address the legal merits of the ruling, but instead focuses upon the contentions of Professor Book and others that the result should be applauded from a policy perspective and that the experience with the Annual Filing Season Program demonstrates that Congress should grant the Service authority to regulate unlicensed preparers.

My analysis begins by accepting the proposition that policies which protect the public from unethical and incompetent preparers by putting them out of business should be applauded. But, has the voluntary Annual Filing Season Program contributed to that effort?  Less than 15% of the unlicensed preparers volunteered to fulfill the education requirements and take the competency examination required by the program. Presumably, these were primarily the most competent, ethical, and professional unlicensed preparers in the marketplace.  Conversely, the Service’s voluntary program did nothing to prevent the unethical and incompetent (along with the “ghost” preparers who prepare returns but do not sign the return as a paid preparer) from continuing to practice as they have in the past.  Ultimately, the question arises is whether the chronically understaffed Service has obtained a significant improvement in the quality and honesty of the preparer community from the resources it has invested in the voluntary program.

A recent report of the Treasury Inspector General for Tax Administration (TIGTA) provides disturbing evidence that the Service has misdirected its resources. The report began by summarizing the surprisingly wide array of penalties and other tools currently available to the Service to police preparer misconduct.  Notwithstanding these tools, TIGTA found—

  •  More than 1.3 million PTINs have been issued, most without any investigation of whether the applicant had a criminal background, a history of defrauding taxpayers, or any record of identity theft.  Once a PTIN is issued, it is only revoked if the holder is incarcerated or legally enjoined from return preparation.
  • More than 26,000 applicants for PTINs stated on their PTIN applications that they were not in compliance with their tax obligations.  The Service has taken no action to closely monitor the conduct of those preparers.
  • During Processing Year 2016, 72,590 preparers with inactive PTINs filed 2.7 million returns, yet the Service assessed penalties against 215 of these preparers.
  • The Service identified 4200 leads during one quarter relating to “ghost preparers” who prepared returns for compensation, but did not sign the returns.  In prior years, the Return Preparer Office referred an average of less than 65 cases for examination.
  • During calendar years 2012-2015, the Service collected only 15 percent of the penalties assessed against individual return preparers.
  • The Service did not identify a single instance where a return preparer audit was instigated based upon an issue which arose through the Annual Filing Season Program.

Interestingly, most of TIGTA’s recommendations concerned basic steps that the Service should have taken years ago to enforce of existing laws to police dishonest preparers, but had failed to take.

The basic question arising from this data is whether the Service’s Annual Filing Season Program has represented a wise investment of the Service’s scarce resources.  We know that the vast majority of the return preparers in the marketplace are honest and competent, yet the Service’s Annual Filing Season Program focuses on them, burdens them with added paperwork filing requirements, and expends a substantial amount of the Service’s resources in administering a program directed at honest and competent preparers.  The program, however, does not require dishonest and incompetent preparers to participate, take the continuing education courses, or pass the competency examination.  Indeed, it appears that the Service does little to enforce existing laws which could be employed to put dishonest preparers out of business.  More startling, as TIGTA reported, even when the data currently collected by the Service identified preparers filing returns using inactive PTINs or as ghosts, the Service rarely proceeded with investigations or other action against these miscreants.  And, the Service cannot excuse this inaction based upon the lack of resources—the Return Preparer Office alone employs nearly 200 employees. Rather, those resources are being directed toward administering an Annual Filing Season Program focused upon collecting forms from honest preparers.

All of this brings us back to the basic question of whether the Service should be granted more regulatory authority over unregistered preparers.  While Professor Book says it should, I believe that new legislation and expanded regulatory authority is the wrong idea.  All agree that the principal problem is dishonest and incompetent return preparers. The record developed by TIGTA shows that the Service focuses its efforts on collecting forms and data from honest preparers who choose to participate in the Annual Filing Season Program.  It does little, however, to enforce the rules already on the books to police miscreants by investigating preparers it already knows are using inactive PTINs or have their own unpaid tax liabilities. Increasing the Service’s authority to impose additional requirements upon return preparers will not alter the conduct of these wrongdoers.  Unfortunately, it seems that they will continue to flout any new rules (and the existing rules) with little risk that the Service will act against them.

In sum, I believe that giving the Service additional statutory authority to regulate several hundred thousand more unregistered preparers is a bad idea.  Additional regulatory authority will impose substantial compliance burdens and costs upon reputable preparers while devoting more of the Service’s resources to managing even more forms and data relating to honest preparers.  Yet, the Service does not employ the data and legal authority it currently has to identify and weed out wrongdoers.  Expanding its regulatory authority over unregistered preparers will channel more of the Service’s resources into managing regulation of the honest, not using existing law to address misconduct by the disreputable, inept, and unethical. That is hardly good public policy.  Rather, the orientation of the Service and the Congress should be to devoting the Service’s resources to aggressive enforcement of the existing rules against the unethical and incompetent.  That is the better route to removing the bad apples from the system.

Comments

  1. It’s hard to disagree with Stu’s positions that the IRS should adopt TIGTA’s recommendation’s to better use the tools available under existing law against tax return preparers who are not complying with their legal obligations. But I’m not sure that this is inconsistent with what I thought was the stated purpose of the AFSP: to give info to taxpayers that the preparers who completed the program may be more likely to be knowledgeable that unenrolled preparers without CPA, EA, or other recognized credentials. [I take no position on whether that’s a worthwhile use of resources, but I guess in general I’d sooner have taxpayers go to an AFSP-credentialed preparer than to someone with no credentials – not to take anything away from the large number of “uncredentialed” preparers who are at least as conscientious and competent as many Circular 230 practitioners – don’t ask me to do your tax return!] Given enough IRS resources, it might be a good idea to do both.

    I haven’t studied the TIGTA report, so I’m not sure to what extent shifting some of the resources of the RPO to that kind of enforcement would improve compliance. I assume a significant amount of the resources for such an initiative would involve utilizing info on noncompliance derived from the IRS data systems to send the non-complying preparers automated noncompliance notices [like the CP-2000’s that go to taxpayers who apparently haven’t properly reported 3rd party info on their tax returns]. Then there would have to be a program to follow up on these notices to ensure compliance – 2nd tier notices, telephone calls, and ultimately field personnel, just as is required with taxpayers who don’t respond to collection notices. It seems to me that well-thought-out utilization of resources on this kind of initiative would be worthwhile, because of the leveraging effect on compliance when multiple noncompliant returns can be prevented [and enforcement against previously filed noncompliant returns made easier] by shutting down a single “bad” preparer. This is the kind of enforcement program that the Service used to have in the field, with initiatives by local the Return Preparer Coordinators in the Exam function.

    I’m very sympathetic to individuals and organizations that are subjected to more and more regulations by multiple levels of governments. It’s a major reason I decided not to become a sole practitioner when my former law firm “passed away” at age 106 in 2009: The tax law is hard enough to keep up with, without the need to spend big blocks of time and money on regulatory compliance. I have a huge amount of respect for the many CPA’s, EA’s, and other credentialed tax practitioners who have devoted their careers to providing first rate and honest service to taxpayers – and many of them take their own valuable time to also work with the IRS and various practitioner organizations to improve the way the tax system treats taxpayers and legitimate tax return preparers. Right now, given the limited resources available for the IRS to improve the level of compliance by tax return preparers, I’d like to see the Service get the most bang for the buck. Stu may well be right that the AFSP doesn’t accomplish that goal. In a perfect world, I’d like to see the IRS have more AUTHORITY to regulate tax return preparers. Then I’d like to see cost-effective programs implemented to use available resources to leverage that authority in the best possible way.

  2. “[T]he orientation of the Service and the Congress should be to devoting the Service’s resources to aggressive enforcement of the existing rules against the unethical and incompetent.”

    More than three years ago, I addressed the obstacles imposed by IRS’s internal culture against the effective use of its limited resources towards targeting the bad apples:

    https://www.americanthinker.com/blog/2015/01/why_should_he_need_to_even_ask.html

  3. Bob Kamman says

    The primary enforcement tool of IRS regulation of tax preparers is the threat to cut off access to electronic filing. When I ask my clients if they would mind if our meeting were interrupted by an unannounced visit from an IRS agent who wants to peruse my files – which do not separate legal matters from tax matters – they invariably understand why I prepare only paper returns. Sometimes I also mention that preparers don’t transmit data directly to IRS; it goes through third-party software vendors, at least one of which is headquartered offshore. These companies provide assurances that they protect against hackers but don’t offer any financial guarantees. They also have to follow IRS specifications for return-preparation software.

    Will IRS-backed legislation requiring all paid returns to be filed electronically force me to comply or litigate? (Or perhaps like Mr. Bassin’s father, to retire.) That question is always on my mind. For now, the electronic-filing mandate applies only to people who file returns, not to those who prepare them. My clients file their own returns; I can no longer help them by putting the returns in a mailbox.

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Leave a Reply to Kenneth H. Ryesky, Esq. Cancel reply

*