The Internal Revenue Service says it will investigate ways to regulate the hundreds of thousands of tax-return preparers currently operating without federal oversight.
While certified public accountants, tax attorneys and enrolled agents must comply with minimum standards for training and registration, many other tax preparers nationwide simply set up business and start working on taxpayers' returns, with no education requirements and no need to register with federal authorities.
Meanwhile, state regulation of preparers varies widely, with only a few states overseeing their operations, the IRS said. The IRS doesn't know how many tax preparers are in business nationwide, though estimates range from 600,000 to 900,000.
"Right now, there is no clear national standard regulation of paid tax-return preparers," said Doug Shulman, the IRS commissioner, in a conference call with reporters. "Virtually anyone can set up a tax-return-preparer business."
More than 80% of U.S. taxpayers hire a tax preparer or use tax-preparation software to do their returns. (See "Get the most from your tax software.")
Tax-prep software makers also may find their practices examined in the IRS review process, which is expected to culminate at the year's end with Shulman making recommendations to President Barack Obama and to the Treasury Department.
"We can't do this kind of review without taking into account the role that software plays in tax preparation," Shulman added, "but the focus of the review is preparers."
Taxpayers at risk
Although the IRS already can go after preparers who engage in fraud and can impose penalties for some other conduct, the tax agency "must ensure that all preparers are ethical, provide good service and are qualified," he said.
In a limited study last year of tax returns completed by unlicensed paid preparers, 17 out of 28 -- or 61% -- were prepared incorrectly, including one that showed a taxpayer owing $4,903 more than he actually did, according to a study by the Treasury Inspector General for Tax Administration, which provides independent oversight of IRS activities.
"This is a critical issue for the nation's taxpayers. When people pay good money, they should not get bad advice," Shulman said.
The IRS review process will involve getting input from a diverse group of people, including preparers and taxpayers. Later this year, the agency will hold a series of public meetings nationwide. Meeting schedules will be posted at the IRS Web site under the "tax professionals" section.
ID numbers coming for all?
"People like me -- attorneys, CPAs, enrolled agents, enrolled actuaries -- are all covered by Circular 230 (.pdf file)," said David Shantz, the San Diego tax practice leader for CBIZ and MHM. "Circular 230 is a large document with all sorts of rules and regulations, and all sorts of punishments they can take in the event they find we do something that lacks ethics or is negligent or fraudulent -- including taking our licenses away and prohibiting us from practicing before the IRS."
These tax professionals are assigned PTINs, or practitioner taxpayer identification numbers. "The IRS can sort all the returns I've prepared and identify every one I've signed by my PTIN," Shantz added, noting that the IRS may eventually require similar ID numbers for all tax preparers.
"All they're going to do, I think, is apply the same standards they have for those who practice before the IRS to anybody who wants to make a buck preparing tax returns."