Senate Finance Committee holds hearing on tax return preparer regulations

BY Sam Weber  April 8, 2014 at 6:29 PM EST

As the deadline to file taxes fast approaches, the Senate Finance Committee held a hearing Tuesday about taxpayers, and how to protect them from incompetent tax preparers.

More than 40 million taxpayers use tax preparers who do not have to meet any standard of competency in order to prepare taxes.

In 2011, the IRS tried to implement a mandatory exam and a continuing education requirement for all tax preparers who were not CPAs, attorneys or enrolled agents. But federal courts ruled that the IRS had overstepped its statutory authority. Today, only four states — including Senate Finance Committee Chairman Ron Wyden’s home state of Oregon — have regulations for all tax preparers.

IRS Commissioner John Koskinen urged Congress to grant the IRS authority to regulate all tax preparers, which he testified “will translate into improved overall tax compliance.”

Several of the questions that IRS Commissioner Koskinen faced were related to allegations of the IRS’s targeting of conservative groups. In response to questions about the timing of new 501(c)(4) regulations, Commissioner Koskinen said that he hoped many of the six investigations currently underway would be completed before final regulations were issued.

National Taxpayer Advocate Nina Olson — who represents the voice of the taxpayer inside the IRS — has been pushing for the regulation of tax preparers since 2002.

“Other financial professionals, whose work affects the financial lives of their clients are widely regulated, yet anyone can hang out a shingle as a tax return preparer with no knowledge, no skill, and no experience required.”

James McTigue Jr., Director of Strategic Issues for the Government Accountability Office (GAO), testified about the findings from a new study on paid tax preparers.

At the request of the Senate Finance Committee, the GAO went undercover in February and found that correct returns were prepared by only two out of 19 preparers tested. While the study was limited, the findings were similar to a 2006 GAO report, which found errors in 19 out 19 preparers tested.

William Cobb, President and CEO of H&R Block, said that he supported legislation to regulate tax preparers.

“We want a level playing field,” Cobb told the Committee.

The CEO of the biggest commercial tax preparer in the country welcomed federal regulation and warned that unscrupulous tax preparers were currently operating under the radar by not signing tax returns they prepared, as required by law.

But not everyone agreed with need for additional regulation.

“Congress should not give the IRS additional authority over tax preparers,” testified Dan Alban, an attorney for the Institute for Justice Tax who successfully sued the IRS over the agency’s 2011 regulatory plan.

Alban argued that tax preparers are already regulated by numerous statutory requirements imposing both civil and criminal penalties on bad preparers.

“These tools already provide the IRS with what it needs to identify, track, and penalize the few bad apples.”

Beyond regulating tax preparers, both Chairman Wyden and ranking member Sen. Orrin Hatch of Utah agreed that making the tax code simpler and more straightforward would reduce errors and reliance on paid tax preparers.