An original version of this post appeared on the Forbes PT site site on May 18, 2016.
Recently the Senate Finance Committee wrestled with the issue of whether to provide the IRS with authority to regulate return preparers. Congress remained deadlocked on party lines and did nothing. This post is not about what they did or did not do but about the problem of finding the right way to fix the current system. I am not convinced that just giving the IRS the right to impose tests and continuing education requirements creates the correct system but we need to work toward some solution that eliminates the bad preparers in a way not currently possible.
It is old news that the IRS tried to regulate preparers based a post-Civil War era law that the DC Circuit, in the case of Loving v. United States, found did not provide a basis for such regulation. Since losing the case in 2014, the IRS has sought to convince Congress to grant it authority to regulate preparers. The IRS was slow to come to the point of wanted to regulate preparers but seems committed to the idea now. Based on clinic clients for almost a decade, I would like regulation that removes bad preparers from the system and particularly from preparing returns with refundable credits. I am not so concerned about making the preparers take ongoing training courses because I think they will learn what to do and keep up changes if they want to be effective. I am interested in the system for rooting out bad preparers and keeping them away from my clients. The recent case of United States v. Edmond demonstrates how much effort it takes to keep bad preparers from plying their trade.
read more...Under the current system, the IRS cannot regulate preparers before they start preparing returns. We know from the stories and based on general knowledge that except for a handful of states that regulate preparers, essentially anyone can become a return preparer with no test, no minimum education requirement, no criminal record check or any other barrier. The IRS can, however, work with the Department of Justice Tax Division to take bad preparers to court one at a time (sometimes more than one are lumped together from the same practice) and obtain injunctions ordering them to stop preparing or to only prepare returns in a monitored fashion. For at least 15 years the Tax Division has taken these cases very seriously and has brought numerous suits to stop bad preparers. These hand crafted pieces of litigation take great effort by the Tax Division attorneys and the supporting IRS employees. The Edmond case shows even the limitations of this trench warfare against bad preparers.
Stephanie Edmond of Memphis Tennessee ran a tax preparation business under the name The Tax Factory Enterprise. The IRS filed a complaint against her on December 3, 2013, and an “Order and Judgment of Permanent Injunction” was entered on April 17, 2015 – two filing seasons later. I do not know why it took so long in this case but getting an injunction preventing someone from working will rarely come easy. Then the IRS filed an order to show cause why Ms. Edmond should not be held in contempt in July, 2015 and December 2015. The Court held a hearing on January 15, 2016, and issued an injunction against Ms. Edmond and the employees of her firm, then held another hearing and then affirmed the injunction. This is a lot of work to shut down one bad preparer and her operation. If the IRS receives authority to regulate preparers it needs authority to shut down bad preparers without this much effort and yet any alleged bad preparer needs the opportunity to be heard
When the district court entered the first injunction in this case two filing seasons after the case was brought, it did not enjoin Ms. Edmond from preparing returns but rather from preparing bad returns. She was required to hire a monitor within 30 days of that order and send at least 3% (at least may not be the right adjective here though that is the one chosen by the Court) of the returns prepared to the monitor for the monitor to check for accuracy and to file a report with the IRS. She chose a local CPA as the monitor three months later, sent him a total of two returns from the period from April 2015 to December 2015 and failed to pay the monitor. Meanwhile Ms. Edmond contacted a college friend to use the electronic filing number of his tax preparation firm and shifted operations to a new entity , the Tax Firm. Essentially all of the same employees continued to work with Ms. Edmond and none of the returns prepared by The Firm were sent to the monitor.
At the hearing earlier this year the court found that Ms. Edmond’s actions described here coupled with “filing returns with fictitious Schedule C losses and otherwise claiming improper deductions” justified the permanent injunction. She and her colleagues at the Tax Firm or the Tax Factory are now enjoined from preparing returns and ordered to disgorge all fees from the 2016 filing season, the third filing season after the Tax Division brought the injunctive action. Maybe I am a skeptic about these things but I will be surprised if the return preparation fees are sitting around in a bank account just waiting to be disgorged.
In this season of lawn care and nourishment, I find an analogy to what has happened here to trying to pull up individual dandelions instead of putting down a fertilizer that kills them and prohibits growth. Aside from having to pull them up one by one, you invariably do not get the roots so it pops back up before long. I do not find fault with the IRS and the Tax Division from trying to root out the bad preparers one at a time. It is the system they must use. I find fault with the system. We need to find a way to cut off the bad preparers but also to make it possible for good preparers to thrive. This requires care and feeding and protection of the good preparers because they are not offering to taxpayers the wondrous results available at tax preparation sites run by the bad ones. Good preparers do not necessarily need special designations and training but they need support. If Congress gets to the place where it gives the authority to regulate, it needs to look at cases like this one so it can build a system that will work This case shows the dysfunction of the current system but does not necessarily make the point that the system the IRS was preparing to impose would create the needed functionality.
My clients need protection and the terrific volunteers at VITA and AARP sites together with the many honest and dedicated tax professionals are not always there to steer them in the right direction when the time comes to file their returns.
I agree that many/most bad tax preparers could pass any test set up by the IRS, since they probably know the rules (and how to manipulate them) better than most good tax preparers. What these people need is long-term jail sentences (assuming execution would not pass Supreme Court muster).
Stop watering the lawn. Put in drought resistant and native plants. Offer access to free tax preparation software (at grade school understanding)to everyone through the IRS.
I am an accountant-not a CPA, not an EA, just a lowly accountant via bachelor’s degree. I’ve worked for and was trained by good CPA’s. I’ve jumped through the IRS hoops to be an efile provider, for RTRP and now the Annual Filing Season Program. In my opinion, since the states have rules for credentials via CPA certification and the IRS has the EA credential, leave it at that. No one, including individuals, can prepare a tax return for any person/entity unless they are in good standing with their state CPA accreditation or the IRS with their EA accreditation. Will people get mad and threaten to not file if they can’t prepare their own return? Absolutely, but either get serious about this issue or shut up. As long as the IRS allows individuals to file their own return, there will be fraud. All a “tax preparer” has to do is have the individual sign it as self-prepared. More laws and regulations are not going to affect the thieves. It only keeps the honest guys honest. I would be forced to get the EA and/or CPA to continue my business but if that’s what it takes, then so be it. It will be difficult financially and a pain in the rear but at least it would be a definitive solution and I wouldn’t have to deal with the IRS coming up with some other kind of scheme to “regulate” me every other year. They could concentrate on prosecuting fraudulent accredited people.
There is clearly goodness and badness everywhere. Unfortunately unregulated industries like tax preparation attract the dregs of society. Instinctively IMHO to clean this mess up we should simply:
1. Enforce Circular 230 with more gusto. Where are the budget dollars for that?
2. Require higher standards for off the shelf tax prep software so that these peddlers do not try to over reach when defining and chasing their market share
3. Teach about taxation in our public schools – both how to fill out the forms and about how to keep updated with changes in the law.
4. Require that anyone signing a tax return for hire subjects their own personal tax return to an annual examination or review
5. Require minimum competency standards for all practitioners
Let’s not confuse tools with resources. IRS has the tools now to shut down suspect preparers — 100% review of returns they file, or at least those claiming refundable credits above a certain amount. When clients do not get their illicit refunds, word will get out. It doesn’t take much to spot such returns; many of the filters are already in place. But it requires additional staff to heighten scrutiny of the worst offenders. In the Dark Ages of IRS funding, which “Abolish the IRS” members of Congress are going to vote for that?
Compare to immigration. Congress purports to want 10 million aliens deported but appropriates funds for only half a million. Watch what they pay, not what they say.
Federal judges and government lawyers have better things to do than handle civil cases against small fry. That’s the lesson from the Edmond case. Or am I missing something here? What legislation, without funding, could prevent a bad preparer from staying in business with a new front every year? And what could IRS do today with the same funding?
This problem belong to the State’s department of professional regulation. Most if not all have C.P.A. requirements, as well as, plain-old vanilla public accountants. Take the Sate of Iowa for example — their professional accounting laws require “those” preparing any financial records and/or tax returns for compensation to be registered with the Iowa Department of of professional accountancy. CPA and public accountants MUST be registered to do this type of tax business if being paid for it. The problem is that the State of Iowa does NOT enforce their own laws. So lots of people prepare tax returns and neither the state nor the Federal governments try to police it. So there’n is the problem “nobody care” even if you have the written law before you.