Insurance and financial service professionals who prepare income tax returns for their clients could face increased regulation by the Internal Revenue Service.

Doug Shulman

Doug Shulman, commissioner of the IRS, called proposed new requirements – including three-year registration requirements and the completion of 15 hours of annual continuing education courses – “a monumental shift in the way the IRS will oversee tax preparers.”

The IRS initiatives, announced Jan. 4, will take several years to implement and will not be in effect for the current tax season, IRS officials said.

However, starting this week, the IRS is sending letters to about 10,000 paid tax return preparers nationwide who are among those “with large volumes of specific tax returns where the IRS typically sees frequent errors,” according to an IRS statement. The letters remind preparers to be vigilant in areas where the errors are frequently found, including Schedule C income and expenses, Schedule A deductions, the Earned Income Tax Credit and the First Time Homebuyer Credit. Later this year, IRS revenue agents will visit each tax return preparers who received a letter with additional information and education, IRS officials said.

More investigations planned

The IRS also plans to investigate allegations against those preparing taxes improperly this year. Those investigations could include visits to return preparers by IRS agents posing as a taxpayer, the agency said in a statement. The IRS will work with the U.S. Department of Justice on civil and criminal actions, where appropriate.

Paid tax return preparers have few, if any, requirements, except in California, where rules similar to the proposed federal requirements are in effect. Outside of California, anyone may prepare a federal tax return for anyone else and charge a fee. While some preparers are currently licensed by their states or are enrolled to practice before the IRS, many do not have to meet any government or professionally mandated competency requirements before preparing a federal tax return for a fee, IRS officials said.

The new rules are expected to affect an estimated 1.2 million people who prepare tax returns for a fee in the U.S., including many life insurance and financial service professionals who often prepare their clients’ tax returns, either as a value-added services or to deepen the relationship with the client and his finances.

Ensuring competency

“Our proposals will help ensure taxpayers receive competent, ethical service from qualified professionals and strengthen the integrity of the nation’s tax system. In addition, we are taking immediate action to step up oversight of tax preparers this filing season,” Shulman said in a statement.

More than 80% of American households use the services of either a tax preparer or tax software to complete their annual tax returns, according to the IRS.

“Higher standards for the tax preparer community will significantly enhance protections and service for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term,” the agency’s statement on the changes noted.

As part of its new education and outreach efforts, the IRS is providing tips to taxpayers to ensure they are working with a reputable tax return preparer.

Limited tax compliance checks

While announcing the changes, the IRS issued a 55-page “Return Preparer Review.” The report included the proposal that all paid tax return preparers sign a federal tax return to register with the IRS and obtain a preparer tax identification number (PTIN). Under the proposal, these preparers would be subject to a limited tax compliance check to ensure they have filed federal personal, employment and business tax returns and that the tax due on those returns has been paid, the agency said.

The IRS will require 15 hours of annual continuing professional education, including three hours of federal tax law updates, two hours of tax preparer ethics and 10 hours of federal tax law topics, according to the report.

“Competency tests will be mandated tests for all paid tax return preparers except attorneys, certified public accountants (CPAs) and enrolled agents who are active and in good standing with their respective licensing agencies,” according to the statement on the proposed changes. Later in the proposal, the word “agent” is clarified to include those “who practice before the IRS.”

Annual tax prep coursework

The proposed requirements would apply to licensed insurance agents and financial service professionals, according to IRS officials.

The proposed rules would require ongoing, annual continuing professional education for all paid tax return preparers, except attorneys, CPAs, enrolled agents and others who are already subject to continuing education requirements.

The IRS also wants to extending ethical rules found in Treasury Department Circular 230 – which currently only apply to attorneys, CPAs and enrolled agents who practice before the IRS – to all paid preparers. This expansion would allow the IRS to suspend or otherwise discipline tax return preparers who engage in unethical or disreputable conduct.

The report notes that all paid tax return preparers are subject to civil penalties for actions ranging from knowingly preparing a return that understates the taxpayer’s liability to failing to sign or provide an identification number on a return they prepare. Tax return preparers who demonstrate a pattern of misconduct may be enjoined from preparing further returns, the IRS said.