Friday, June 5, 2009

The Internal Revenue Service is considering for the first time requiring income tax preparers to be licensed by the federal government as a way to root out fraud and raise compliance with increasingly complex tax law.

IRS Commissioner Douglas Shulman revealed the seismic shift in congressional testimony Thursday. He said erroneous tax returns were such a large problem that the United States could shrink the so-called tax gap - the difference between what the government receives and what it should collect - by making sure the nation’s tax preparers do their job correctly.

“This is nothing less than a transformational shift,” Mr. Shulman told the House Ways and Means subcommittee on oversight. “Everything is on the table.”

Mr. Shulman said he expects to make his recommendations to Treasury Secretary Timothy F. Geithner and President Obama before the end of the year.

The recommendations “could focus on a new model for the regulation of tax return preparers; service and outreach for return preparers; education and training of return preparers; and enforcement related to return preparer misconduct,” the IRS said.

The changes could help the government recover a portion of the estimated $290 billion in uncollected taxes each year, Mr. Shulman said.

More than 350 preparers were convicted of fraud over the past three years, according to IRS records.

Ryan Ellis, tax policy director at the conservative Americans for Tax Reform, doubted that. “If the IRS thinks licensing tax preparers will raise a lot of money, it won’t,” he said.

But Rep. John Lewis, Georgia Democrat and chairman of the oversight subcommittee, complained about “fly-by-night people” who close their businesses after the tax-preparation season ends.

H&R Block Chairman Richard C. Breeden said, “H&R Block strongly supports the IRS initiative announced today by Commissioner Doug Shulman to review comprehensively alternatives for improving the accuracy of tax filings and the ethics and integrity of all who hold themselves out directly or indirectly in providing tax preparation services.”

Paul Cinquemani of the National Association of Tax Professionals (NATP) also expressed some support. “We’re all in favor of raising the bar. If people are operating out there without continuing education, they are on dangerous ground,” he said.

The NATP, which has nearly 20,000 members, favors registration so the IRS will be able to identify problem preparers more easily, but the association would not oppose licensing, Mr. Cinquemani said.

Mr. Shulman reported that 87 percent of taxpayers now use computer software or paid preparers. “Tax preparers and the associated industry can help us increase compliance and strengthen the integrity of the tax system,” he said.

“Tax return preparers help Americans with one of their biggest financial transactions each year,” Mr. Shulman said. “We must ensure that all preparers are ethical, provide good service and are qualified.”

The first step of the process will involve fact finding and receiving input from unlicensed tax preparers and software vendors, as well as from those that are licensed by state and federal authorities, including enrolled agents, lawyers and accountants, the IRS said.

The IRS did not respond to an e-mail asking how much additional tax revenue it expected to collect by regulating tax preparers.

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