[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
THE IMPLEMENTATION OF THE IRS PAID TAX RETURN PREPARER PROGRAM
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
JULY 28, 2011
__________
Serial No. 112-OS7
__________
Printed for the use of the Committee on Ways and Means
_____
U.S. GOVERNMENT PRINTING OFFICE
70-890 WASHINGTON : 2011
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON OVERSIGHT
CHARLES W. BOUSTANY, JR., Louisiana
DIANE BLACK, Tennessee JOHN LEWIS, Georgia
JIM GERLACH, Pennslyvannia XAVIER BECERRA, California
VERN BUCHANAN, Florida RON KIND, Wisconsin
AARON SCHOCK, Illinois JIM MCDERMOTT, Washington
LYNN JENKINS, Kansas
KENNY MARCHANT, New York
Jon Traub, Staff Director
Janice Mays, Minority Staff Director
C O N T E N T S
__________
Page
Advisory of July 28, 2011, announcing the hearing................ 2
WITNESSES
PANEL 1
David Williams, Director, IRS Return Preparer Office, Internal
Revenue Service, Washington, D.C. Testimony.................... 5
Jim White Director, Strategic Issues, Government Accountability
Office, Washington, D.C. Testimony............................. 16
__________
PANEL 2:
Kathy Pickering Vice President--Government Relations and
Executive Director of the Tax Institute, H&R Block, Kansas
City, MO Testimony............................................. 43
Patricia Thompson Chair, AICPA Tax Executive Committee, American
Institute of Certified Public Accountants, Washington, D.C.
Testimony...................................................... 51
Paul Cinquemani Director of Member Services, Business Development
and Government Relations, National Association of Tax
Professionals, Appleton, WI Testimony.......................... 58
Lonnie Gary EA, USTCP Chair, National Association of Enrolled
Agents Government Relations Committee, Washington, D.C.
Testimony...................................................... 69
David Rothstein Researcher, Policy Matters Ohio, Research Fellow,
The New America Foundation, Cleveland, OH Testimony............ 74
THE IMPLEMENTATION OF THE IRS PAID TAX RETURN PREPARER PROGRAM
----------
THURSDAY, JULY 28, 2011
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The subcommittee met, pursuant to notice, at 9:32 a.m., in
Room 1100, Longworth House Office Building, the Honorable
Charles Boustany [chairman of the subcommittee] presiding.
[The advisory of the hearing follows:]
HEARING ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
Boustany Announces Hearing on New IRS Paid Tax Return Preparer Program
Thursday, July 28, 2011
Congressman Charles W. Boustany, Jr., MD, (R-LA), Chairman of the
Subcommittee on Oversight of the Committee on Ways and Means, today
announced the Subcommittee will hold a hearing on the new IRS paid tax
return preparer program. The hearing will take place on Thursday, July
28, 2011, in Room 1100 of the Longworth House Office Building,
beginning at 9:30 A.M.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only. However,
any individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Committee and for
inclusion in the printed record of the hearing. A list of invited
witnesses will follow.
BACKGROUND:
Approximately sixty percent of taxpayers pay a professional to
prepare their Federal income tax returns. The Government Accountability
Office (``GAO'') has long noted the impact of these preparers on tax
compliance and the need for stronger oversight of the tax preparer
community. Among GAO's concerns are errors by tax return preparers that
affect improper payments, including an estimated $106 billion in
improper refundable tax credits in recent years.
In response to these and other concerns, the IRS initiated a tax
return preparer initiative to stop erroneous returns at the source,
rather than through the laborious and expensive audit process. The
program has created a new category of paid return preparer: the
``registered'' tax return preparer.
As of January 1, 2011, anyone who is paid to prepare ``all or a
substantial portion'' of a tax return is required to obtain a Paid-
Preparer Tax Identification Number (``PTIN''). These registered tax
return preparers will be subject to several requirements, including
registration, competency testing, background checks, continuing
professional education, and certain ethical standards. To date,
approximately 717,000 individuals have received PTINs. PTINs issued to
individuals who are not attorneys, certified public accountants, or
enrolled agents, will only be valid until 2013, when the preparers must
meet the additional requirements.
In January 2010, the IRS estimated that the program would take
three years to be fully implemented and to show results in reducing
improper payments to the clients of these preparers. However, a year
and a half later, GAO has urged the IRS to provide measurable
performance goals and better communicate with tax practitioners
regarding the new requirements.
In announcing the hearing, Chairman Boustany said, ``This hearing
is a continuation of the Subcommittee's oversight of the IRS and the
alarming rates of tax noncompliance. With so many Americans relying on
paid professionals to prepare their returns, it is critical that we
better understand what the IRS is doing and what impact the new
regulations will have on taxpayers, paid tax return preparers, and tax
compliance.''
FOCUS OF THE HEARING:
The hearing will focus on reviewing the new requirements on paid
return preparers, assessing progress made by the IRS in preparing and
implementing a program work plan, and understanding how this will
ultimately impact the tax return preparer community and taxpayers.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Please Note: Any person(s) and/or organization(s) wishing to submit
for the hearing record must follow the appropriate link on the hearing
page of the Committee website and complete the informational forms.
From the Committee homepage, http://waysandmeans.house.gov, select
``Hearings.'' Select the hearing for which you would like to submit,
and click on the link entitled, ``Click here to provide a submission
for the record.'' Once you have followed the online instructions,
submit all requested information. ATTACH your submission as a Word
document, in compliance with the formatting requirements listed below,
by the close of business on Tuesday, August 11 2011. Finally, please
note that due to the change in House mail policy, the U.S. Capitol
Police will refuse sealed-package deliveries to all House Office
Buildings. For questions, or if you encounter technical problems,
please call (202) 225-1721 or (202) 225-3625.
FORMATTING REQUIREMENTS:
The Committee relies on electronic submissions for printing the
official hearing record. As always, submissions will be included in the
record according to the discretion of the Committee. The Committee will
not alter the content of your submission, but we reserve the right to
format it according to our guidelines. Any submission provided to the
Committee by a witness, any supplementary materials submitted for the
printed record, and any written comments in response to a request for
written comments must conform to the guidelines listed below. Any
submission or supplementary item not in compliance with these
guidelines will not be printed, but will be maintained in the Committee
files for review and use by the Committee.
1. All submissions and supplementary materials must be provided in
Word format and MUST NOT exceed a total of 10 pages, including
attachments. Witnesses and submitters are advised that the Committee
relies on electronic submissions for printing the official hearing
record.
2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
these specifications will be maintained in the Committee files for
review and use by the Committee.
3. All submissions must include a list of all clients, persons,
and/or organizations on whose behalf the witness appears. A
supplemental sheet must accompany each submission listing the name,
company, address, telephone, and fax numbers of each witness.
The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.
Note: All Committee advisories and news releases are available on
the World Wide Web at http://www.waysandmeans.house.gov/.
Chairman BOUSTANY. Good morning, everyone, and welcome to
this morning's Oversight Subcommittee hearing on the IRS paid
tax return preparer program.
In recent years the increasing complexity of the Internal
Revenue Code has led more and more Americans to rely on paid
tax return preparers to fulfill their tax return filing
obligations. Paid tax return preparers prepared an estimated 60
percent of all federal returns filed. In fact, at a
subcommittee hearing earlier this year, even the commissioner
of the IRS testified that he relies on a paid return preparer.
Paid tax return preparers serve an important role in tax
administration, and are often a taxpayer's only source of
advice on their income taxes. GAO has monitored this trend, and
issued reports detailing the need for increased oversight on
the rapidly growing tax return preparer community.
The results of these reviews are somewhat disheartening.
GAO has found that nearly all tax returns that were prepared
during its review contained mistakes. Not all mistakes were
intentional, but they all contribute to erroneous returns that
have cost taxpayers billions of dollars. For example, errors
related to refundable tax credits, if you look at all of them,
have led to an estimated $106 billion in improper payments over
the last decade.
In 2010, the IRS launched a paid return preparer
initiative, which it hopes will stop abusive returns at the
source, rather than through lengthy and expensive audit
processes. Under this new oversight regime, return preparers
must register with the IRS, pay an application fee, and will be
assigned a unique identification number. The IRS also plans to
impose mandatory minimum competency testing, continuing
education requirements, background and tax checks, and certain
ethical standards.
The IRS believes this program will improve preparer
competence and service to taxpayers, and result in greater tax
compliance. This morning's hearing will focus on how this
program is coming together, and how it might affect both
taxpayers and the return preparer community.
This initiative enjoys broad-based support, but there are
some lingering concerns and questions that remain unanswered.
Much of the program will not be in place until 2013, so we will
not know its full impact for some time. However, it does remain
unclear how the initiative will ultimately impact tax
compliance. A recent report issued by GAO raised concerns
regarding the program's future effectiveness.
We do not yet know the full cost and compliance burdens the
new program will place on return preparers, or whether the
requirements will yield the intended benefits. Indeed, the new
requirements will cost tax return preparers an estimated $51
million to $77 million annually in registration fees alone.
This does not include the additional cost associated with
taking the competency examination and continuing education.
It is also necessary that the IRS conduct outreach to
ensure that return preparers and taxpayers alike know and
understand the new requirements. Without an effective public
education campaign and enforcement plan, some argue that little
progress is being made at reaching preparers that pose the
greatest compliance risk. And we do understand there are
challenges with that, but this will be one issue we can
examine.
This is a critical issue for tax administration, and it is
important that Congress understand the new requirements and
continues its oversight to judge whether the new program
improves tax compliance. Tax payers, paid preparers, and the
IRS are best served if this initiative is successful.
Before I yield to Ranking Member Lewis, I ask unanimous
consent that all Members' written statements be included in the
record.
[No response.]
Chairman BOUSTANY. Without objection, so ordered. And now I
turn to the ranking member, Mr. Lewis, for his opening
statement.
Mr. LEWIS. Thank you, Chairman Boustany, for holding this
hearing. The regulation of paid tax return preparers is an
important topic, important for taxpayers and important for tax
compliance. I want to commend the Internal Revenue Service for
its leadership in this area, and am pleased with the overall
strategy of the agency and its time line for phasing in the new
requirements.
I am also pleased that many in the paid preparer community
support the program. We have all heard too many stories of fly-
by-night tax preparers who take advantage of low-income and
middle-income taxpayers. I have long believed that regulating
tax preparers will protect taxpayers by making sure persons who
are paid to prepare returns are knowledgeable and trustworthy.
I also believe that regulating tax preparers will enhanced
tax compliance. The new requirements will allow the IRS to
provide more oversight of preparers. This will allow the agents
to detect patterns of fraud or simple errors, and take steps to
remedy the problems and protect taxpayers.
In closing, I want to thank our witnesses for being here
today. I look forward to your testimony and any recommendations
you may have for protecting taxpayers and educating them about
this necessary program.
Thank you very much, Mr. Chairman.
Chairman BOUSTANY. I thank the gentleman for his statement.
We will now turn to our first panel of witnesses. I want to
welcome Mr. David Williams, who is director of the IRS Return
Preparer Office, and Mr. Jim White, who is director of
strategic issues with the Government Accountability Office. I
want to thank both of you for being here today, and for the
work you are doing on this. You will each have five minutes to
present your testimony, with your full written testimony
submitted for the record.
Mr. Williams, I know you have done a lot of work on this,
and we appreciate you being here, and look forward to your
testimony. I do know that this is a big priority for
Commissioner Shulman.
And so, you may proceed, sir.
STATEMENT OF DAVID WILLIAMS, DIRECTOR, IRS RETURN PREPARER
OFFICE, INTERNAL REVENUE SERVICE, WASHINGTON, D.C.
Mr. WILLIAMS. Thank you, Mr. Chairman, Ranking Member
Lewis, and Members of the Subcommittee. We really appreciate
the opportunity to testify on the IRS's tax return preparer
program, which we think is one of the most important
initiatives that the IRS has undertaken in recent memory.
For decades, most taxpayers prepared their own returns.
However, over the past 20 to 30 years, the reality of tax
filing in this country has changed dramatically. Today, more
than 8 out of 10 taxpayers use a preparer or tax software.
There are a number of positives in this growing trend. One
of the most important is that qualified return preparers can
help taxpayers file accurate and timely returns from the start.
Working with the taxpayer, they can prevent inadvertent errors,
which can save both taxpayers and the IRS precious time and
resources, and keep taxpayers' interactions with the IRS to a
minimum, which I think many taxpayers will prefer.
I want to stress that the IRS sees the professional return
preparer community as a strong ally in our efforts to boost
overall service and compliance. This program is all about
inclusion and leveraging the return preparer community as a
partner.
Many people are surprised to discover that, despite the
fact that paying taxes is one of the largest financial
transactions that the average American family has each year,
there have been no basic competency requirements, and little
oversight for paid tax return preparers who are not attorneys,
enrolled agents, or certified public accountants. Practically
anyone can prepare a federal tax return for any other person
for a fee.
Through the return preparer program, the IRS wants to
strengthen its partnerships with tax practitioners, tax return
preparers, and other third parties to ensure effective tax
administration. In addition, we want to ensure all of these
participants have a minimal level of competency, and adhere to
professional standards.
In implementing the tax return preparer program, we have
worked closely with stakeholders every step of the way, and we
plan to continue this practice, going forward. At each stage of
the process, from the initial review, which included three
public hearings and about which we received more than 500
public comments, to the implementation of subsequent
requirements which we have discussed with hundreds of
stakeholders in meetings and public sessions, we have been
committed to engaging with our stakeholders, listening to their
concerns and suggestions, and making appropriate changes to our
plans, in light of their feedback.
Supporting this approach is the staged implementation
process we have adopted. In September of 2010 the IRS launched
phase one by issuing regulations requiring paid return
preparers to register with the IRS, and to obtain a preparer
tax identification number or PTIN. As a result of our wide-
ranging outreach and education program, we have registered over
717,000 return preparers to date. More than an identification
number, the PTIN registration process gives the IRS an
important and better line of sight into the return preparer
community than we have ever had before. We can leverage that
information to help better analyze trends, spot anomalies, and
potentially detect fraud.
The PTIN process will also help the IRS build, in several
years, a publicly-accessible database of those registered. This
is an extremely important tool for consumers, as they will be
able to search that database to ensure that their preparer is
registered. And it will make it easier for everyone to find and
track return preparers.
As described in my written testimony, the next phase of the
program involves background checks, competency testing, and the
annual completion of 15 hours of continuing education for many
paid return preparers. We will begin rolling out parts of the
program later this year, and on into 2012. As I mentioned
above, we are seeking public input as we conduct this
implementation. In fact, we have issued formal requests for
public comment on both testing and continuing education. We
have received hundreds of responses that will help guide our
plans.
Mr. Chairman, in conclusion, the tax return preparer
program strengthens the IRS's partnerships with tax
practitioners who are already registered and regulated and
tested, while ensuring that all return preparers are serving
the American public well. This is a point of leverage where the
IRS can maximize the use of our resources, while tapping into
the experience, specialized knowledge, infrastructure,
technology, and activities of other players in the tax system,
and make them an integral part of our service and compliance
strategies.
[The prepared statement of Mr. Williams follows:]
Chairman BOUSTANY. Thank you, Mr. Williams.
Mr. White, you may proceed.
STATEMENT OF JIM WHITE, DIRECTOR, STRATEGIC ISSUES, GOVERNMENT
ACCOUNTABILITY OFFICE, WASHINGTON, D.C.
Mr. WHITE. Thank you, Mr. Chairman, Ranking Member Lewis,
and Members of the Subcommittee. I am pleased to be here to
discuss paid preparer regulation, and how it might improve our
tax system.
As you stated, Mr. Chairman, paid preparers are one of the
cornerstones of tax administration in this country. They
prepare 60 percent of returns. Many taxpayers no longer
interact directly with IRS, they turn to preparers for answers
to questions and assistance filing. Today I will discuss IRS's
implementation of paid preparer regulation, and how IRS might
leverage it to improve service to taxpayers and the accuracy of
their returns.
But first, some background on paid preparer performance. In
2002, we found that as many as 2.2 million individual taxpayers
likely overpaid their taxes by about $1 billion by not
itemizing their deductions. About half making this mistake used
a paid preparer. While it is hard to know whether the taxpayer
or the preparer was responsible, it raised questions about
preparer performance.
In 2006 we went undercover and had 19 tax returns prepared
for a hypothetic plumber and working mother. All 19 had errors:
two had our hypothetical taxpayers overpaying by about $1,500;
and five of them underpaying by almost $2,000 each.
In 2008 we studied Oregon, one of 2 states to regulate paid
preparers. While we could not provide causation, returns
prepared by Oregon preparers were more accurate than the
national average.
In 2009 IRS recommended registration of paid preparers,
competency testing, and continuing education, and holding all
preparers to standards of practice.
Now, I will discuss IRS's implementation of the
recommendations. This year, IRS required that all paid
preparers register and get a preparer tax ID number, or PTIN.
Even this seemingly modest step has benefits. It will give IRS
a more accurate count of the number of paid preparers. As of
this month, as Mr. Williams just said, IRS says 717,000 paid
preparers have registered. IRS has a proposed time line for the
other new requirements. Next is competency testing. It will
start later this year, with current preparers having until the
end of 2013 to pass the test.
Initially, IRS is using a soft touch to enforce the new
requirements, encouraging preparers to register with outreach
and education. This month, the IRS began notifying about
100,000 paid preparers who signed tax returns but did not use a
PTIN about how to get a PTIN. IRS is planning to get tougher on
preparers who do not comply. For example, IRS said it will send
letters to taxpayers whose returns were not signed by the
apparent preparer. The letter will explain how to file a
complaint about unregistered preparers, and choose a preparer
who is complying.
Now I want to discuss the ultimate goal of preparer
regulation. The goal is to leverage the paid preparer community
to: first, help taxpayers file more accurate tax returns, so
taxpayers neither underpay nor overpay their taxes; and second,
to reduce the burden on taxpayers by reducing confusion, and
facilitating filing.
To leverage the paid preparer community, several actions by
IRS are necessary. One is research. We have consistently
stressed the importance of IRS conducting research to identify
areas of non-compliance, and test strategies for improving
compliance. The idea is to have a continual feedback loop,
where IRS learns about what is effective or not, modifies its
approach accordingly, does more research, and so on. To its
credit, IRS has just such a framework in mind for paid preparer
regulation. It includes developing a comprehensive database on
preparers, and the tax returns they prepare, and then analyzing
it to develop and test strategies for improving the accuracy of
returns.
Likewise, IRS wants to measure the effects of the new
strategy--of the new testing and continuing education
requirements on tax return accuracy. However, as of our March
report, IRS had not documented its research and assessment
framework. This matters, because one of the other actions
necessary to successfully leverage paid preparer regulation is
buy-in from preparers. Without a documented framework, it is
not easy for preparers who bear the cost of the regulations to
tell what they are supposed to be buying into. Some members and
officials of paid preparer organizations told us the new
requirements will only be worthwhile if they result in improved
compliance. In our report we recommended that IRS document its
framework, and IRS agreed.
I will close by noting the potential for paid preparer
regulation to be part of a fundamental rethinking of IRS's
approach to assisting taxpayers and ensuring compliance.
Combined with other efforts such as systems modernization, more
pre-refund compliance checks, and innovative uses of
information returns, paid preparer regulation could help
improve taxpayer compliance, while reducing both the compliance
burden on taxpayers and IRS's costs.
That concludes my statement, and I would be happy to answer
questions.
[The prepared statement of Mr. White follows:]
Chairman BOUSTANY. Thank you, Mr. White. Mr. Williams, when
you were designing the paid preparer program, did you look at
any existing programs? We are aware that Oregon--and I think
Mr. White referenced the Oregon program and improved results in
California, as a result of their plan. There are companies that
have worked in this area, and have fairly extensive plans.
Can you describe to what extent you looked at these
existing plans?
Mr. WILLIAMS. Yes, Mr. Chairman, we did. And, in fact, we
conducted a six-month review of not only what was going on in
states, we did a small look at other countries.
We had three sets of national hearings, which--we heard
specifically from Oregon and California. We heard from tax
practitioners, big companies, small companies. We talked to
consumer groups. We sought public comment, we got over 500
public comments that gave us insights into the way in which
other states had done it, what had worked, what had not. And we
built and designed the program, based on that input and
feedback.
Chairman BOUSTANY. Thank you. Did you consider, or give any
consideration to certifying some of these programs? In other
words, instead of having one plan coming out of your office
here in Washington, saying, ``Okay, well, Oregon plan works
pretty well,'' or take, for instance a company like H&R Block,
which has a very extensive education program and competency
testing. I think there are some differences, from what I
understand, in the way they do background checks.
But was there any consideration over at IRS given to
certifying those existing programs, to avoid some duplication
and perhaps added cost?
Mr. WILLIAMS. Interestingly, we did talk both to H&R Block,
we did talk to the folks from Oregon, and others. I have
probably had requests for 15 to 20 different, as you called
them, certifications.
And as I started to accrue each and every one of them, I
realized that we would end up with a patchwork system, where
some people would be covered under one standard, and others
would be covered under another. And our concern was that there
could be consumer confusion, as a result of trying to
understand which certification mattered. And tax professionals
might, as well.
We have talked to both the folks you've mentioned, as well
as others, and suggested that we will work with them to ensure
that the standards and the minimal competency testing on which
we are working is a framework on which they can build. So, to
the extent that they are developing their own testing, the
federal standard would be the base upon which they could build
additional changes, going forward.
Chairman BOUSTANY. I thank you. Mr. White, can you tell us
more about how GAO conducted the study, where you referenced
the errors that were found? And were they in favor of the tax
preparer or the taxpayer? Give us a little more detail on that.
Mr. WHITE. It was--as I said, we created hypothetical
taxpayers. We have got a group in our office that can go under
cover. And so they represented these taxpayers. One, as I said,
was a plumber. The plumber had wage income working for another
plumbing contractor, and then also worked some on his own, and
so had self-employment income. We reported all of that to the
preparers.
Our other case was a hypothetical working mother. She had
two kids, she had a job, some wage income from that. But she
was fairly low-income, and eligible for the earned income
credit. We laid out all the facts to the preparers. We picked
19. They were from various large chains. And, as I said, in all
19 cases there were some mistakes. In a number of those cases
the mistakes were substantial. Some favored the government,
some favored the taxpayer. They were--so the underpayments were
as large as $2,000. The overpayments, in 2 different cases,
were over $1,500.
Chairman BOUSTANY. Thank you. For both of you, one final
question that I have. Two of the most problematic types of paid
preparers are ghost preparers--those who are paid to prepare
returns, but do not indicate so on the return, itself--and then
also what have been called fly-by-night preparers, who may open
up shop for a month out of the year, and then they're gone once
the questions arise about the return or the taxpayers audited.
I know it is early in the process, and this is a
preliminary hearing to sort of gauge how things are going, and
we are going to have to do more to benchmark success. Can both
of you give us some indication of how we are going to address
those two problems?
Mr. WHITE. One key, Mr. Chairman, is an ongoing process of
research. You are absolutely correct. Right now the service
does not have a complete picture of how they can leverage paid
preparers to improve service to taxpayers and compliance by
taxpayers by working through preparers. And it's not a bad
thing that they don't have a plan right now for that.
What they need to do is what they have said they are going
to be doing, putting together a comprehensive database that
will include information about preparers, combine that with
information about the tax return those preparers prepare. And
that is one vehicle. There are others, as well.
But they need to learn from this sort of data about what
the nature of the problem is, develop some strategies, and then
collect data, monitor the effectiveness of those strategies,
and modify the strategies as they learn more about what is
working and what is not working. There are going to be some
surprises going forward on this, and so it is going to be a
continual process of learning and adjusting.
And it is going to cost some money. It is going to require
an investment in this research that I am talking about.
Chairman BOUSTANY. The two states I referenced earlier,
that both of you have referenced as well, California and
Oregon, is there some experience there that we can learn from?
Mr. WHITE. Well, yes, there is. In the case of Oregon, we
looked at Oregon, and it was a challenge to determine exactly
what the impact of the Oregon regulatory process was on
taxpayer compliance, precisely because Oregon, early on, had
not collected good baseline data for comparison.
And so, what we are looking for the Service to be doing,
for IRS to be doing now, is collecting better baseline data.
That is part of why we think it is important to document the
framework they are using, so that the research community has an
idea, and can contribute to thinking about the sort of analysis
of the program that needs to be done, and that then tells you
what kind of data needs to be collected now, so that you will
be ready to do that analysis.
Chairman BOUSTANY. I thank you. Mr. Williams, do you want
to add----
Mr. WILLIAMS. If I could follow up on that just a little,
because that is exactly where we are going with it. We are not
jumping to conclusions about the quickest and easiest way to
deal with problematic preparers.
You identified two categories. The first, ghost preparers--
in other words, folks who do the returns, but hand them back to
the client, and the client signs, saying they did it
themselves, those are probably going to be the most
challenging.
We are actually testing, this filing season, some
statistical methods for identifying those preparers. Now, we
may not be able to identify exactly who prepared the return,
but we may be able to identify returns that look like they were
done by preparers, in which case we are looking at, again,
testing strategies to communicate with the taxpayers who had
their returns done by these folks, to say, ``Hey, did you know
your preparer isn't registered, doesn't follow the system,'' to
see if we can tease out the folks that are in that ghost
preparer category.
I think there is a broader thing to remember, though, in
that as we move through this, and we are doing it in a measured
way, there are a lot of professionals out there in their small
businesses who are struggling to make sure that they understand
what we are requiring them to do, and their requirements. And
we need to be very sensitive to them, as we move into the field
of trying to enforce and get the compliance dead on.
And so, that is why following GAO's recommendation, what we
have been planning, we are going to do tests to figure out what
works and what is most effective and most cost effective to
address those issues.
Chairman BOUSTANY. I thank you. And now I turn to the
ranking member of the committee, Mr. Lewis.
Mr. LEWIS. Thank you very much, Mr. Chairman. Mr. Williams,
I am concerned that the taxpayers we are trying to protect may
not know about the new requirements. How will the IRS educate
these taxpayers?
Mr. WILLIAMS. Mr. Lewis, that is an excellent point. And in
fact, at this point, most taxpayers do not know what we are
doing, for a very specific reason. At this point, all that we
have done is made sure that people who are preparing returns
have a number. And that doesn't help taxpayers understand very
much about who they are going to. What we are trying to do is
get the preparers in the system first, make sure they have
taken the competency exams we have talked about, and are doing
the continuing education.
And we intend, as more preparers actually do that, to
launch a nationwide campaign to educate taxpayers about who is
available, what it means to be a registered tax return
preparer, and to understand that they need to go to someone who
is either a registered preparer, a CPA, an attorney, or an
enrolled agent to support them, and ensure that they get their
taxes done right.
It is just that today we are just starting the program, and
I don't want taxpayers to be looking for more than is there,
because it is not there yet.
Mr. LEWIS. Mr. Williams, GAO has said that a database of
paid preparers would be available in 2014. Why will it take
three years?
Mr. WILLIAMS. It is--it will take until the end of 2013 or
2014 before we make that available, and here is why. We have
about 700,000-plus people who have just registered with us.
Many of them are CPAs and attorneys and enrolled agents, but
somewhere between 400,000 and 500,000 of them are unenrolled
preparers who are going to have to take that test and go
through the background checks and so on. We want to give them
time to do it. These are small businesses, these are people who
may have been in practice for a number of years.
I don't know about you, but most people sort of remember
the last time they had to take a big test. And we are very
concerned that there is anxiety about test-taking, and we want
to give them a chance to take that test, to prepare for it, and
give them some time.
So, for the next two years, they will have the flexibility
to take the test and repeat it, if necessary. We are going to
work with the community to make sure that they have educational
opportunities and give them some time before we start
publicizing and pushing the full database. We want to get them
into the database first.
Mr. LEWIS. All right. Mr. Williams, a witness on the next
panel recommends that the IRS establish a central telephone
number and database for complaints. What are your thoughts on
this recommendation?
Mr. WILLIAMS. Actually, we are doing that now. We are
developing what I will call a referral process. I go to forums
around the country and talk to thousands of tax preparers. I
was just at one yesterday in Dallas. And they will come up to
me and say, you know, ``I know this person down the street who
is working out of his garage,'' or, ``I am cleaning up after--
he does returns, and then the clients have problems.''
So what we are developing to capture that is a system of
collecting that information, putting it in a central place, and
actually starting to build a process to identify and address
each of those concerns directly, because we think it is
important. Those are one of our best sources of referrals, and
that is a good place to start, if there are problems.
Mr. LEWIS. Yes, thank you very much. Now, Mr. White, how
would you grade the IRS on the preparer plan or strategy so
far?
Mr. WHITE. What we have said in our report is that they
have done a pretty good job implementing this so far. We had
one recommendation, and that was that they actually document
this framework. And I call it a framework, rather than a
detailed plan right now, because this framework is going to
evolve over time.
But we think it is important that that be documented,
because one of the keys to success of this whole effort is paid
preparer buy-in. IRS is looking to work with paid preparers to
help taxpayers get better assistance than they've gotten in the
past, and to file more accurate tax returns. So it is a matter
of working with them, enlisting their help in this. That is the
ultimate goal of this.
Mr. LEWIS. Mr. White, your testimony noted that the IRS
planned to make available a database of paid preparers in 2014.
This seems so far away. Is this a reasonable time line?
Mr. WHITE. I think the way Mr. Williams described it is
reasonable. I guess what I would add to that is one thing--
since this database is going to be available to the public, and
the intent is it be used by the public to find preparers who
are registered, it is very important that it be user friendly.
And so, I think testing the database, testing how the
access to the database works, monitoring the way it is used,
once it is set up, to determine whether, in fact, it is user
friendly, is as user friendly as it could be.
Mr. LEWIS. Thank you very much. Thank you, Mr. Chairman.
Chairman BOUSTANY. I thank the gentleman. Ms. Jenkins, you
are recognized.
Ms. JENKINS. Thank you, Mr. Chairman. Thank you for being
here.
In your written testimony, Mr. Williams, you stated that
the IRS sent out more than 10,000 letters to tax preparers with
completed returns containing common errors. The letter included
an enclosure that reminded them of their responsibility to
prepare accurate returns. The IRS also personally visited 2,500
of the preparers who had received the letter.
First of all, can you share with us what some of the common
errors were that you found on the tax return? Secondly, has the
IRS set any benchmarks for improvement regarding those common
errors that were currently found? And then, finally, what sort
of expectations might you have for this program to accomplish
in regards to these types of common errors?
Mr. WILLIAMS. Sure. So, a couple things. First of all the
most common error, and the one on which we focus a great deal
of our effort, is the earned income credit. As you've heard
probably in other hearings, and mentioned earlier, there is a
large, erroneous payment problem with the earned income tax
credit. And it is the result of a variety of things. It is
people, taxpayers themselves, who don't understand the rules
and are not sure how to prepare, or their preparers, to do
this. It is a result of preparers not understanding the rules,
and not being precise in following the requirements.
And so, much of what we see is an erroneous claim for the
earned income credit. And so one of the targets, in terms of
identifying preparers and those that we sent letters to, is
exactly that kind of error, refundable credits, in particular.
In terms of establishing benchmarks, the initial two years
of doing those visits showed us that--we are building some data
that tells us how well those preparers are doing. We are
actually following them in subsequent years, to see how well
they do with regard to the accuracy of the returns they prepare
in the future. I think we are going to learn from that, whether
there are better ways of identifying problematic kinds of
returns.
And you mentioned the visits, as well. Those visits take
time. They can be intrusive. And my objective, using the data
that we are going to get from the return preparer initiative,
is to make sure that we are not visiting someone if a letter
that reminds them they need to pay more attention to a
particular area is sufficient to get them to improve their
compliance.
In other words, we need to figure out the best way to
encourage preparers to comply before we start knocking on their
doors and doing some of the other more intrusive things that we
can do to get their attention.
Ms. JENKINS. Okay. One of my concerns with the
implementation of this return preparer initiative are the
compliance and administrative costs. And, as our chairman
mentioned in his opening statements, according to the GAO, the
new requirements are estimated at cost per payer as 51 to 77
million, annually, in registration fees alone, and that didn't
include, as he mentioned, the cost of compliance and the
testing and the ongoing education requirements. That ranges
from $20 to $300 per course.
According to the March 2011 GAO report, the IRS is planning
to conduct a first review of the PTIN registration user fee in
the summer of 2012.
So, for Mr. Williams, have you made any progress on the
review, and can you share any results? Do you anticipate that
you will be able to lower these costs? And what is your
reasoning for requiring registration on an annual basis, rather
than, perhaps, on an every-three-year.
Mr. WILLIAMS. We have begun the review. We haven't
finalized it. We are basically entering the first half of our
second year in the program. I think it is premature to tell you
that I can lower the fee. I can also tell you, though, that is
our objective. We are very sensitive to imposing costs on small
businesses.
The one thing to keep in mind, the PTIN designation in all
of this actually attaches to the individual, not the business.
So it becomes a credential that he or she may carry with him or
her wherever they go. Our objective in all of this is to ensure
that the program is funded at an appropriate level through the
user fee.
And I talk to preparers about this, because it means
something that I don't think they have thought about, which is
we owe them something for this service. We owe them service, we
owe them a level playing field. So your discussion about
compliance, I think is very important. When I talk to the small
businesses who are doing preparer work, their concerns are that
they have got competitors down the street from them who are not
following the rules, who are preparing poor returns, hurting
taxpayers, and that they are not on a level playing field.
And so, one of our objectives with that user fee is to
figure out the most cost-effective way to improve compliance
with people who are either not complying with the rules, or
among those who are, but are really not paying attention,
figuring out cost-effective ways to get them to do better in
their practice. And that is part of the experimentation and
research that Mr. White was talking about, figuring out whether
there is a way. I will give you one example.
The continuing education requirement does impose some cost
on preparers, but I can also see a scenario where one of the
ways in which we might improve people's compliance--in other
words, the accuracy of their returns--is saying, ``Hey, we have
taken a look at some of your returns. You are having a problem
in this area. Some of your continuing education should be
directed to this kind of thing,'' so we don't have to impose
penalties on those folks. We need to be looking at ways of
getting them the right education to improve their service to
the taxpayer.
Ms. JENKINS. Okay, thank you. I yield back. Thank you, Mr.
Chairman.
Chairman BOUSTANY. Thank you. I know, Mr. Becerra, you have
had an interest in this issue for quite a while, and you are
recognized for questioning.
Mr. BECERRA. Thank you, Mr. Chairman, and thank you for
holding this hearing. I appreciate that very much. It is a
follow-up on some good work that has been done in the past. And
I would like to begin my five minutes by first recognizing and
commending Commissioner Shulman and all the folks at the IRS,
the professionals at the IRS. I also want to commend the folks
at GAO who have made it possible for the IRS to work with you
to try to figure out how to best navigate this.
I think this was long overdue, but I appreciate the way
that you have handled this, more than anything else because it
seems like most of the paid tax preparer community is on board,
which is not typically the case when it comes to wanting to
deal with the IRS. And so I think you are doing something very
good here, and not just good, but right. And I hope that you
continue moving methodically but with all due speed, so that we
can implement regulations that most Americans would say they
wish they had in place--or we had had in place for quite some
time.
I can't tell you how many Americans have come up to me in
the past and said, ``You know how much money I lost because I
went to this guy, and he said he could prepare my returns, and
I was going to get X amount of money back, and I was really
happy, low and behold, then the IRS starts auditing me?'' It
just goes on and on. And these are folks who are middle class,
modest-income families for whom a $500 bill to have these forms
prepared was significant, but then to have the IRS breathing
down their neck because they didn't do it right, is even worse.
So, thank you very much for what you are doing.
Mr. White, let me begin by asking a couple questions. I
believe the IRS had initially estimated that there would be
somewhere between 900,000 to 1.2 million paid tax preparers in
this universe of folks who did tax returns. So far we have
gotten over 700,000 preparers who have come forward and
registered. Is it your belief that there is still a universe, a
significant universe of people out there, who are performing
tax preparer services for money, who have not yet come forward
to register?
Mr. WHITE. Yes, there are. I don't know how many. One of
the problems in this area, before this regulatory effort
started, was IRS did not have a count of the number of paid
preparers out there. They simply didn't know. People didn't
have to use a unique identifying number when they signed a tax
return. They could use a variety of numbers.
So, this gives them more information about the preparer
community than ever in the past. And it is not just the number
that is important; it is really information about the types of
preparers, how they comply, how they fill out returns, the
accuracy of those returns. Part of the vision for the future
here, I think, is getting to a point where IRS, almost in real
time, by analyzing the data coming in, would be able to
identify preparers that are preparing inaccurate returns,
communicate with them during the filing season, and get the
errors fixed, so that more taxpayers don't run into the sorts
of problems you have identified.
Because you are exactly right. If you underpay your taxes,
IRS is going to come after you and charge you penalties, and
you are in worse shape.
Mr. BECERRA. Yes. And so, what we want any American
taxpayer or any consumer who is watching or listening to this
hearing to understand is that not every person who professes to
be a preparer of tax returns with the talent and the experience
to do it has yet come forward to the IRS to identify
themselves.
And so, as Mr. Williams identified them as ghost tax
preparers, I would call them black marketeer tax preparers,
because they have now had a chance to come forward as many of
those professionals--and I applaud each and every one of those
700,000-plus professionals who have stepped forward and
registered, because essentially what they are saying is, ``I am
willing to live by this new regime, to make sure that consumers
understand that I came forward before the IRS to tell them I am
going to hold myself out as someone who can prepare your
returns and deserve to be paid to do this.''
And so, for all the 700,000-plus who come forward, I hope
we can continue to move diligently to get the other folks who
want to participate and maybe are not totally familiar with
this, or maybe made a mistake or omission when they first tried
to register and that is why they are not yet incorporated into
this.
I hope we also do some work, as was based on the questions
that were asked earlier by the chairman and the ranking member,
on educating the consumers so that they understand what is
going on here. We are trying to help them be able to be better
shoppers of those who are going to give them a professional
service.
I often cite the case of notary publics. I am from Los
Angeles. There are lots of immigrants in LA. In a lot of
countries, a notary public is tantamount to an attorney. And so
they can perform some of the same services that attorneys do in
their home countries. They come here, they see these notary
publics, they hold themselves out as being able to provide
legal services. They pay these notary publics a ton of money.
Before you know it, these individuals find out that these
notaries couldn't do anything for them, but they are out
thousands of dollars.
That notary public scam that goes on by that small universe
of fraudulent notary publics should not be what we find happens
here with paid preparers. We have had a lot of good paid
preparers who have come forward. And they, as professionals,
deserve to know that we, as the Federal Government, the IRS,
will move forward diligently to make sure that we respect those
who came forward as professionals, and bring in as many as we
can as quickly as possible who want to be professionals, but
then go after with a vengeance those who are the black market
preparers.
Mr. Chairman, thank you for the time.
Chairman BOUSTANY. I thank the gentleman. Mr. Paulsen, you
are recognized.
Mr. PAULSEN. Thank you Mr. Chairman, also, for holding the
hearing.
I want to follow up a little bit on that line of
questioning, just to ask Mr. Williams, you know, will taxpayers
be able to look up a particular PTIN holder's history? I mean
is that something a taxpayer is going to be able to look up
themselves?
For example, let's say that Return Preparer A has been
fired from H&R Block or some company for stealing taxpayer
information, or something similarly egregious. Does the
employer have a duty at that point to inform the IRS? Or will
the IRS do anything about it? And will taxpayers be able to
find out that information from an accessibility standpoint?
Mr. WILLIAMS. Mr. Paulsen, we will make available through
this database the information that we can make public about
preparers that we possess. And, by the way, when I talk about
this database, it will include the registered return preparers
we are talking about here. But we also intend to list CPAs,
attorneys, and enrolled agents who want to be part of that, and
we are going to work very closely with those communities, to
make sure that taxpayers understand the differences among them.
What we will not have access to--and I am not sure that we
could legally put on the database--would be information about
disputes between an employee and an employer. That would not be
something that we would know about.
What we would know about, though, is if there were problems
with the tax preparer's work, and if that preparer had been
disciplined. And if that preparer had been disciplined in an
ethical sense, under the office of professional responsibility
which oversees ethical practice, that is public information. It
occurs today with regard to CPAs, attorneys, and enrolled
agents. We actually publish that. And that information would
appear on the database, as well.
Mr. PAULSEN. Okay. And then, in terms of the accessibility
of the information and making it available to the public, it is
my understanding--and I don't think we covered this yet, Mr.
Chairman--but the IRS plans to have information on those that
have registered for the PTINs available online later this year.
Can you give us some more specifics?
Mr. WILLIAMS. Not later this year.
Mr. PAULSEN. So is that going to 2014?
Mr. WILLIAMS. That is going to be the one that we will
deploy toward the end of 2013.
Mr. PAULSEN. Okay.
Mr. WILLIAMS. We will have a full registry you can look up.
Mr. PAULSEN. Can you give us some more specifics on what
will be on that website? For example, is it going to list just
the name, the business, the address, the--and the profession,
whether a CPA, they're an attorney, they're an enrolled agent?
Mr. WILLIAMS. You just covered most of what is going to be
on the database.
Mr. PAULSEN. Okay.
Mr. WILLIAMS. In other words, the name, the contact
information that they want us to provide, the credential that
they have received, and we will also spend some time on that
database having an explanation of what it means to be a
registered return preparer, a CPA, an enrolled agent, or an
attorney, so that folks understand the distinctions.
If there has been a disciplinary proceeding that is public,
that will also be noted on the database. So it will be a place
where you could look up someone in your area, if you wanted, so
you will be able to search it by geography, for example, or you
may want to search by credential. It isn't going to provide
intimate details about the preparer's practice, but basically
that they have been admitted, and here is how you can contact
them.
Mr. PAULSEN. So you anticipate a search function, as you
mentioned?
Mr. WILLIAMS. Absolutely.
Mr. PAULSEN. Okay. And you wouldn't need the name of the
return preparer to run a search? You could search it by
geography?
Mr. WILLIAMS. That is right. If you had just moved to
someplace and you wanted to figure out, ``I need someone to
prepare my taxes,'' you could look at somebody in that
jurisdiction, or even that zip code, for example.
Mr. PAULSEN. Okay. And, Mr. White, let me ask this, because
I think the subcommittee in the past has explored the Tax
Code's growing complexity. And certainly the full committee has
brought up this subject, as well, in terms of the complexity
and fairness, simplicity.
But the Taxpayer's Advocate has testified before the
committee just that there have been something like 4,400-plus
tax law changes, just in the last 10 years alone, and Americans
spent an estimated $163 billion trying to comply with the Tax
Code. Would you agree that the code's complexity, overall, is
what is playing a role in some of the problems that the paid
return preparer program is designed to address in the first
place?
Mr. WHITE. Yes. That is a point we have made repeatedly,
the complexity of the Tax Code, and particularly changes to the
Tax Code. When there is a new provision, that is something that
taxpayers then have to relearn, and preparers have to relearn.
But it confuses people about what their tax obligations
are, and that can lead to unintentional non-compliance.
Complexity can also help hide intentional non-compliance,
because it is harder to find, with the Tax Code and tax forms
being as complex as they are.
Mr. PAULSEN. Well, Mr. Chairman, I think this just goes to
the heart of the discussion we are having today is, you know,
we will often, I think, have a review of some of these new
layers of programs that get added on.
But hopefully the committee is going to further address the
complexity issue, so that individuals that end up relying on
paid preparers or tax preparing software won't have to do that,
and we can make it a lot simpler and a lot more confident, and
then people won't have to worry about the black marketeers or
the ghost writers, et cetera.
So, with that, I yield back.
Chairman BOUSTANY. I thank the gentleman. We--as you know,
we are doing tax reform. And the complexity of the code is a
huge issue. And, as the IRS comes to us for more resources and
the complexity grows, at some point we have to reach a balance
on all this.
Mr. Marchant, you are recognized.
Mr. MARCHANT. Thank you, Mr. Chairman. One of my large
concerns has been in the past that we have had testimony before
the committee that in the last few years alone $106 billion has
been refunded to taxpayers, and they were refunded and they
were improper refunds. Money was claimed, it was returned. We
have heard that a big amount of those mistakes were done by tax
preparers. And many of the false claims were actually, in my
belief, instigated by the preparer, and not the taxpayer.
Is there--has there been any kind of a database developed
where you are looking at chronic--where you are looking at
people that have been--let's take the earned income tax credit.
Are you tracing back farther than just the person who was
affected by the return, and are you aware, in the case of
fraud, where you are going after the taxpayer for fraud, is
there a further step being taken? Are you aware of who the
preparer is?
Mr. WILLIAMS. In fact, yes. We actually have a whole
program. We were talking earlier about the letters and the
visits that we have been doing for the preparer community. And
part of that has actually been driven by our experience at
identifying the preparers that are perpetuating bad earned
income credit returns.
We literally will identify a set of people--taxpayers who
have filed returns that are erroneous. And then you look at
them, and you realize they were all done by the same preparer.
Or, in the case of ghost preparers, as we have been talking
about earlier, no one has signed the return, but there are
enough patterns in them that suggest they were all done by the
same person. And so we actually will, at that point, try and
zero in on that preparer, and actually address the fraud that
they are perpetuating.
That has been going on for a couple of years. But I think
with this program we will have a lot more information to figure
out who is doing what, how much they are doing, and where they
are, and be better at effectuating compliance to help ratchet
down on those erroneous payments you were talking about.
Mr. MARCHANT. Is the $50 fine--is that the maximum fine for
anyone that is caught----
Mr. WILLIAMS. No. No, no, no. First of all, the fine is
levied by returns. So it adds up over time. It is interesting
you had mentioned the penalty issue, because we are looking at
penalties across the board. We don't think that is the first
solution to every problem. But in cases like this, the National
Taxpayer Advocate has recommended more significant penalties
with regard to these kinds of erroneous fraudulent claims, and
we are actually considering that, as well.
Mr. MARCHANT. And have you had discussions with--I am sure
there are some--have you had any discussions about possible
criminal penalties, or charges? And have there ever been
criminal penalties or charges brought against a preparer----
Mr. WILLIAMS. Absolutely.
Mr. MARCHANT [continuing]. That has an operation going?
Mr. WILLIAMS. Absolutely. The Criminal Investigations
division at the IRS actually does investigate and put together
cases that are presented to the Department of Justice. And we
do shut down preparers, through the criminal process, for
perpetuating fraud.
Mr. MARCHANT. I would suggest to you that those may have
been too low-profile, and in some instances a higher-profile
case that the media might pick up in certain areas--Congressman
Becerra and I have many of the same concerns. I have many ghost
operations in my district, people that are literally going out
and grabbing people off the sidewalk and say, ``Hey, do you
know I can get you this much money? Sign here.'' They give half
of it back, and these are criminal operations.
And--but I don't know that I have ever picked up the Dallas
Morning News and read that someone was being prosecuted. So I
would just suggest to you that if you get a case like that, it
might be helpful to incorporate the media into getting the word
out among these preparers that there is a penalty to pay for
this.
And I appreciate your efforts in this kind of enforcement.
Thank you.
Mr. WILLIAMS. Thanks.
Chairman BOUSTANY. I thank the gentleman. Mr. Reed, you are
recognized for questioning.
Mr. REED. Thank you, Mr. Chairman. Thank you for the
testimony today, to the witnesses.
I come from a district in New York. A lot of people think
New York is a big city all the way across the state, but the
part of my district--my part of New York is a rural area. We
are a agricultural-based, high-tech-centered area. But a lot of
rural space there.
So, I am interested in your thoughts from either of you as
to how to address the logistics of complying with the testing
and the locations, the physical location. How are we going to
address the rural areas to make sure that this requirement is
not an excessive burden on them?
Mr. WILLIAMS. Yes, that is actually a great question,
because it has been one of our concerns. We contracted with a
vendor to deliver the testing that will open with 270 sites
around the country. We have talked to them about looking at the
population distribution to understand where we can place the
sites.
We have also informed them that if we start to see areas--
yours is not the only one; I went to high school in Montana,
and of course, you know, there are a couple big cities and then
lots of space in between--there are people in those areas who
need access to the testing, and we need to make sure that if we
can't get them, if it is unreasonable, that we find another way
to deliver it.
For example, a mobile van, something that will enable
people to take those tests in a reasonable way.
One of the other things we are trying to do, because people
have life circumstances, even if travel is a bit of an issue,
but they also have other things going on, as I mentioned
before, is to give people enough time to take the test. So, for
anybody who is in our system now who has registered since the
beginning--the end of last year, they will have two years to
take and pass the exam. So that if there is a way to work it
into their schedule, or something like that, they will be able
to do it.
And we are going to monitor this very closely, to make sure
that if people are having problems getting access in your
district or in other areas, that we find a way to address that.
Mr. REED. Has there been any discussions or thoughts about
using technology, electronic, Internet, any--that type of
vehicle?
Mr. WILLIAMS. Initially, that was my solution to the whole
thing. We will do it online, and you could do it from home.
The problem we have discovered--and there is a whole field
of testing out there that I wasn't aware of before I started
this--is ensuring that the individual who is on the other end
of that transaction is actually who they say they are.
Mr. REED. Sure.
Mr. WILLIAMS. We work with a company called ProMetric. They
administer a lot of different kinds of exams. They administer
between 9 million and 11 million nationally and internationally
every year, and they do it for a variety of different people.
And they have given us some insights into how test-taking can
be compromised, I think would be the nice way to put it.
Mr. REED. Okay.
Mr. WILLIAMS. And so, they encouraged us not to go on the
online method. It would help in the circumstance you are
describing, but would also leave us open to a lot of
potential----
Mr. REED. Abuse. Okay. Thank you. With that, I yield back.
Chairman BOUSTANY. I thank the gentleman. I would like to
thank you both for being here today, for your testimony, for
the work you are doing to make this program successful. Please
be advised that Members may have additional questions that they
will submit, which will be part of the record, as well as any
answers you provide.
So, thank you, gentlemen, and we will now proceed with our
second panel of witnesses.
[Pause.]
Chairman BOUSTANY. Welcome to all of you, and thank you for
being here today. I will introduce our panel, our second panel.
First we have Ms. Kathy Pickering, who is vice president of
government relations, and executive director of the Tax
Institute at H&R Block.
Secondly, we have Ms. Patricia Thompson, who is chair of
the tax executive committee for the American Institute of
Certified Public Accountants.
Thirdly, Mr. Paul Cinquemani, who is director of member
services, business development, and government relations for
the National Association of Tax Professionals.
Next, Mr. Lonnie Gary, enrolled agent in USTCP, chair for
the National Association of Enrolled Agents, government
relations committee.
And Mr. David Rothstein, a researcher for Policy Matters
Ohio, and also a research fellow at the New America Foundation.
Again, I want to thank all of you for being here today. You
will each have five minutes to present your testimony with your
full written testimony submitted for the record.
Ms. Pickering, you may begin.
STATEMENT OF KATHY PICKERING, VICE PRESIDENT, GOVERNMENT
RELATIONS, & EXECUTIVE DIRECTOR, THE TAX INSTITUTE, H&R BLOCK,
KANSAS CITY, MISSOURI
Ms. PICKERING. Chairman Boustany, Ranking Member Lewis, and
Members of the Subcommittee on Oversight, thank you for
inviting H&R Block to present our views on the IRS return
preparer initiative.
We commend David Williams and the IRS return preparer
program office for their efforts to create an efficient and
effective regulatory program for the tax preparation industry.
We support the IRS in this initiative. In my comments today I
will provide the context for why the issue of tax preparer
regulation is vital to H&R Block, and address our concerns and
our recommendations for improving this important regulatory
initiative.
H&R Block is the leading provider of tax preparation
services. We have about 97,000 tax preparers in 11,000 offices,
40 percent of which are small business-owned. Many are located
in rural areas. While we do support the overarching goals of
the VPI program, we have a few concerns.
First, the competency exam has created redundancies and
unnecessary costs for H&R Block, totaling over $20 million. H&R
Block's process for training and quality control has been the
industry gold standard for 39 years. Our tax preparers, at a
minimum, must take our 84-hour basic income tax course, receive
a passing grade, pass a criminal background check, and complete
at least 24 hours of continuing education each year. The IRS
program will only require 15 hours of continuing education
annually.
It is important to note that when Congress debated the
Taxpayer Bill of Rights of 2008, there was bipartisan support
for H&R Block's competency testing to be certified for IRS
purposes. H&R Block strongly recommends that the IRS develop a
program review process to certify proven programs like ours, or
those in California and Oregon.
Our second concern is that compliance, enforcement, and
measurement programs have yet to be defined. Without this, it
will be impossible to know which actions did or did not result
in improved compliance. Given the considerable costs of
implementing the return preparer program, we hope to see that
the benefits of this program are commensurate with the expense.
Finally, H&R Block would like to work with the IRS to
create a group or mass registration renewal and payment
process. A group process would save time and money for the IRS
and tax preparers.
In conclusion, I would like to thank you for the
opportunity to provide H&R Block's perspective and
recommendations. We commend the IRS for creating the return
preparer program office. This was an important step in
strengthening the relationship between the IRS and the tax
preparation industry. David Williams's experience and
leadership will ensure that the initiative is ultimately
successful.
Despite our concerns, we remain committed to the goals and
objectives of the program. We look forward to continuing to
work with the IRS, to raising the standards of professionalism
and integrity in our industry, and we are confident that the
American taxpayer and the tax administration system will
benefit from our collective efforts. Thank you.
[The prepared statement of Ms. Pickering follows:]
Chairman BOUSTANY. Thank you, Ms. Pickering.
Ms. Thompson, you may proceed.
STATEMENT OF PATRICIA THOMPSON, CHAIR, AICPA TAX EXECUTIVE
COMMITTEE, AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS,
WASHINGTON, D.C.
Ms. THOMPSON. Good morning, Chairman, Ranking Member Lewis,
and Members of the Subcommittee. My name is Pat Thompson. I am
a CPA and chair of the AICPA Tax Executive Committee. I am also
the partner at Piccerelli, Gilstein & Company, LLP, located in
Providence, Rhode Island. Thank you for the opportunity to
appear here today.
It has been a year-and-a-half since the IRS released its
report on the paid tax return preparer community. The AICPA has
been a steadfast supporter of the IRS goal of enhancing
compliance and elevating ethical conduct. Ensuring that tax
return preparers are competent and ethical is critical to
maintaining taxpayer confidence in our tax system. Indeed,
these goals are consistent with the AICPA's own code of conduct
and enforceable tax ethical standards.
We believe the IRS should be commended for their efforts in
the implementation of the return preparer program.
Specifically, the IRS has devoted an unprecedented amount of
time to listening to stakeholders' concerns and suggestions
regarding the program, and made numerous changes and
adjustments.
Since the release of the report, and as the IRS has moved
to implement its recommendation, the IRS--I'm sorry, the AICPA
has expressed its concern regarding specific aspects of the
program.
One concern we had was the initial proposal to subject non-
signing staff of CPA firms who are supervised by CPAs to the
entire regulatory regime applicable to registered tax return
preparers, including testing and specific continuing education
requirements. However, we believe the changes adopted by IRS in
notice 2011-6 confirm the Service's recognition of the inherent
regulatory regime within which CPAs and other circular 230
legacy practitioners already practice, as well as the fact that
CPA firms must stand, as a matter of licensure, behind the work
done by its members and employees of the firm.
We believe these changes are appropriately focusing the
program on the unenrolled preparer community that was
implicated in GAO and TIGTA compliance studies cited in the IRS
report.
The AICPA supports the tax return preparer program as it is
structured today. Specifically, we support registering tax
return preparers and the issuance of unique taxpayer [sic]
identification numbers. Registration will allow the
accumulation of important data on specific preparers, as well
as classes of preparers, as a way that will allow the IRS to
tailor compliance and education programs in the most efficient
manner, expanding the ethical umbrella of circular 230 over all
paid income tax preparers.
Unenrolled preparers had previously not been subjected to
the ethical guidance of circular 230, nor the circular
sanctions on improper conduct. Creating a continuing education
construct geared towards the unenrolled preparer community. We
appreciate the Service's adoption in the recently-issued
package of final regulations under circular 230 of modification
to last year's proposed regulations regarding continuing
education.
Including a basic 1040-oriented examination as an aspect of
becoming a registered tax return preparer, moving away from a
multi-tiered testing structure in order to focus on the basics
is the correct remedial approach for the unenrolled preparer
community that was, again, implicated in GAO and TIGTA
compliance study. We also believe that having one examination
would be less confusing to taxpayers in understanding the
relative qualifications of the different classes of tax return
preparers.
With regard to taxpayer confusion regarding relative
qualifications, the IRS recognized this problem through the
recent issuance of notice 2011-45, which constrains registered
tax return preparers from misleading advertising and
solicitation, and will require them to use the following
statement in ads.
The IRS does not endorse any particular individual tax
return preparer. For more information on the tax return
preparers, go to IRS.gov. We are confident that the IRS website
will contain the additional information that taxpayers will
need to make appropriate choices concerning selection of a tax
advisor.
We also believe that any public database developed by IRS
that is designed to serve as a look-up function where taxpayers
may search for their preparer should be structured to mitigate
any taxpayer confusion regarding relative qualifications. We
are pleased with the work the IRS has undertaken with regard to
its tax preparer program, and want to emphasize our overall
support.
We share the Service's interest in improving tax
administration, and protecting the tax-paying public. We look
forward to working on the IRS as they continue to implement the
program.
Thank you again for the opportunity to testify, and I would
be happy to answer any of your questions.
[The prepared statement of Mr. Thompson follows:]
Chairman BOUSTANY. Thank you, Ms. Thompson.
Mr. Cinquemani, you may proceed.
STATEMENT OF PAUL CINQUEMANI, DIRECTOR OF MEMBER SERVICES,
BUSINESS DEVELOPMENT AND GOVERNMENT RELATIONS, NATIONAL
ASSOCIATION OF TAX PROFESSIONALS, APPLETON, WISCONSIN
Mr. CINQUEMANI. Thank you, Mr. Chairman, Chairman Boustany,
Ranking Member Lewis, Members of the Subcommittee, we thank you
for the opportunity to speak to you regarding our thoughts on
what we consider to be the important issues stemming from a
review of the return preparer review recommendations.
The IRS is following most recommendations on publication
4832. Long-term plans more detailed than that have not been
made available to stakeholders. We know for certain, though,
that before December 31 of 2013, affected tax preparers will
have to be registered, suitable, tested, and educated, or they
will not be permitted to continue as tax return preparers.
NATP is pleased that the process has led out with
registration. We have long counseled that relevant, accurate
data is needed before the IRS can determine the extent of its
preparer population, and then hone in on identifying the
perpetrators of problems. Until then, any systemic approach to
mitigating the tax gap or ridding Administration of the
unscrupulous and incompetent is speculative.
Registration, combined with mandatory eFiling will
hereafter give the government the ability to know not only its
population of preparers, but also to match them with the work
they do. And we will finally be able to really know who does
good work and who does not.
Implementation so far seems reasonable, in terms of its
proficiency. Considering the size of the task, amazing progress
has been made. However, there appears to be an imbalance in
treating affected tax preparers fairly. We have noted evidence
which leads to such impressions. Here are some example.
Number one, Section 10.3 of circular 230 literally prevents
affected tax preparers from giving pre-transaction or other
timely advice to their clients. The result of such a provision
is counter-intuitive to good tax administration. It is also an
egregious restraint of trade. It either puts taxpayers in
harm's way because they will not become compliant, or it forces
affected tax preparers out of business because they cannot
compete with those who are permitted to give such advice.
Third example--or, excuse me, second, the late decision to
carve out preparers who are adequately supervised by attorneys,
CPAs, and EAs, and the competitive advantage it gives the firms
that are so exempted.
Third, the change to requiring registration every year,
instead of every three years, and the cost it poses to
practitioners and to the IRS.
And, fourth, the need to delay continuing education
requirements until calendar year 2012.
While communication of such developments indicates that
progress is being made, the items just mentioned cause concern
on the part of those whose livelihoods are on the line. The
impact of the affected preparer community should be predictable
under the circumstances. As we educate our members on these
developments, those that must take the competency examination
in order to stay in business naturally have some concerns.
Many affected NATP members have registered the following
with us. Overall, they are very distressed at the ostensible
threat to their businesses. They want to study for and take the
examination immediately. Since their average age is 56, it has
been a little while since they have had to take an examination.
And this one they see as an examination that determines whether
or not they get to continue their livelihood or not. So they
do, indeed, have test anxiety.
They believe that they are being singled out as though they
are responsible for all the unscrupulous behavior and
incompetence in the preparation of tax returns. They believe
that they are discriminated against on the basis of
credentials. Some are going to retire. They are just going to
work up to December 31, 2013, and then end it. Others are
selling their practices. Still others are selling to
credentialed professionals, and staying on to make their
likelihood.
And for some, the restrain of trade provisions in revised
circular 230 were the last straw. They talk of taking to the
courts. NATP is concerned that the tax administration system
will be harmed by a loss of capable preparers that provide for
the current compliance enjoyed by the system. We believe that
many of these problems can be alleviated with reasonable and
economic tweaks in the process, going forward.
We recommend the following. First, remove the specific
restraint of trade provision in Section 10.3(f)3 of circular
230. On its face, regulators should be very interested that
taxpayers are informed. At equity, preparers should not be put
in a position of having to refer their clients to competitors
for advice in the course of planning, emergencies, or any other
instance in which taxpayers need help with compliance. At a
minimum, change the wording to reflect that registered tax
return preparers may give needed advice to their clients, but
that such advice will not be considered confidential or
privileged, as such communication has meaning under code
Section 7525.
The IRS should exercise more caution implementing this
program, especially in light of their current resource
limitations, until better information can be obtained through
matching PTINs with problem returns.
And a final recommendation. Building a program model that
can keep small business preparers in place, thereby assuring
jobs and livelihoods that can provide for healthy competition,
and therefore, better serve the taxpayer and the tax
administration system. Thank you.
[The prepared statement of Mr. Cinquemani follows:]
Chairman BOUSTANY. Thank you, Mr. Cinquemani.
Mr. Gary, you are recognized for five minutes.
STATEMENT OF LONNIE GARY, EA, USTCP CHAIR, NATIONAL ASSOCIATION
OF ENROLLED AGENTS GOVERNMENT RELATIONS COMMITTEE, WASHINGTON,
D.C.
Mr. GARY. On behalf of the National Association of Enrolled
Agents, NAEA, and 43,000 enrolled agents, I want to thank the
chairman, the ranking member, and the subcommittee, for the
invitation to testify on the IRS's efforts to provide new
standards for and oversight of unlicensed paid return
preparers.
EAs have, for some time, supported the efforts to bring
order to the chaos all too easily found in the return preparer
community. More recently, we applauded a number of early
decisions by IRS, including elements unpopular with many in the
industry, such as a requirement for both mandatory competency
testing, and for continued professional education for all non-
legacy circular 230 practitioners.
Clearly, IRS has kept its eye on the prize: protecting
taxpayers by adopting a variety of taxpayer safeguards,
establishing an IRS process for disciplining preparers, and
placing the Office of Professional Responsibility in charge of
ethical behavior, using the existing penalty structure for
failure to sign a return and/or failure to provide a valid
PTIN, and relying on registration fees to cover program
administration and enforcement.
EAs believe self-funding is essential for ensuring adequate
resources for full program implementation. Our main area of
concern, however, is that the registered tax return preparers
will be tested only on the most basic elements of individual
income tax returns, but be permitted to prepare all income tax
returns. Those who have taken a basic test would be able to
market themselves as qualified to meet all tax preparation
needs. Such an outcome protects only a portion of the tax-
paying public. And, frankly, we don't understand why IRS
insists on protecting some taxpayers, but not those with the
most complex returns.
We believe that taxpayers and the tax community are better
served by the basic proposition that tax returns should only be
done by a preparer who has shown competency through testing on
that particular return. IRS could achieve this by creating a
tiered credentialing with a limited credential, the registered
tax return preparer, and unlimited credentials: EAs, CPAs, and
attorneys.
Under a tiered system, legacy circular 230 practitioners
would be authorized to prepare all tax returns, as under the
current system, and would be granted unlimited practice before
IRS. The newly credentialed would demonstrate competency on
basic individual tax issues by passing an augmented part one of
the special enrollment exam, and then be granted authority to
prepare the basic return, along with limited representation
authority.
IRS could enforce this regime simply through computer
matching of PTINs to the type of return. We believe that,
without a tiered approach to credentialing, small business
taxpayers, in particular, will suffer unnecessarily. We suggest
it is reasonable to hold paid preparers responsible for the
special compliance issues associated with small business
taxpayers.
I close by touching on two issues of great importance:
promotion and enforcement. IRS must continue to reach out to
all segments of the paid preparer community to explain what is
expected, going forward, into the next filing season. Nothing
demonstrates this better than the fact that IRS recently
identified roughly 100,000 return preparers who failed to
comply with the new PTIN regulations for the 2011 filing
season.
Even more importantly, IRS must begin now to explain the
new oversight rules to the public. Changes of this magnitude
are likely to cause confusion among consumers, particularly as
some paid preparers are bound to promote their practices in an
unfamiliar, and possibly misleading, fashion.
We also remain concerned that many non-compliant preparers
will continue to set up shop in certain targeted communities
around this country, and continue exploiting less sophisticated
taxpayers. The public will be our best defense against these
individuals, but they must understand that they should only use
qualified preparers.
The public must also understand the difference between the
new registered tax return preparers and the legacy circular 230
practitioners. This won't be easy, but it is necessary for the
integrity of this process, and it needs to start now.
Promotion alone is not enough. The significant effort IRS
is expending on preparer oversight will be for naught, absent a
credible enforcement apparatus. Both taxpayers and qualified
practitioners need a single point of contact at IRS to refer
instances of suspected non-compliance. The Service must be
prepared to pursue and punish to the full extent of the law
parties who continue to prepare returns outside the new
regulatory framework.
I thank you for allowing the National Association of
Enrolled Agents to testify today, and I look forward to your
questions.
[The prepared statement of Mr. Gary follows:]
Chairman BOUSTANY. Thank you, Mr. Gary.
Mr. Rothstein, you may proceed.
STATEMENT OF DAVID ROTHSTEIN, RESEARCHER, POLICY MATTERS OHIO,
RESEARCH FELLOW, THE NEW AMERICA FOUNDATION, CLEVELAND, OHIO
Mr. ROTHSTEIN. Thank you, Mr. Chairman. Chairman Boustany,
Ranking Member Lewis, and Members of the Subcommittee, thank
you for giving me the opportunity to testify on behalf of
Policy Matters Ohio, the New America Foundation, and the
National Community Tax Coalition.
My research is primarily focused on the financial status
and socio-economic challenges experienced by the millions of
low and moderate income tax filers in the United States. And my
comments reflect the perspective of those who provide free tax
assistance to help these individuals through the VITA program.
My testimony today is based on the following four premises:
one, low and moderate-income tax filers need and deserve high-
quality, affordable options with regard to tax preparation
assistance. The costs and approaches of paid tax preparation
services should be transparent, and easy for consumers of such
services to understand.
Several exemptions related to the new paid preparer
regulations were established in response to issues raised by
the paid preparer industry itself. And there are--and, number
four, there are several implementation challenges that can be
easily modified or resolved, so that the process can best serve
working families, moving forward.
Let me start again by commending the IRS for undertaking
this large effort of regulating, educating, and tracking paid
tax preparers. This process is critical for both the tax
preparation sector and millions of clients who use their
services. The overall goal was to increase tax compliance and
ensure that taxpayers were knowledgeable, ethical, and skilled.
The registration process, in our view, is crucial to track
problem tax preparers, prevent the loss of income and revenue
from inflated and poorly prepared returns, maximize the intent
and delivery of refundable tax credits, and allow consumers to
comparison shop with full information in the marketplace.
That being said, we continue to have concerns about the
registration process, and the interpretation of guidelines
related to this initiative. We have some suggestions today that
we believe can help.
One concern relates to the delayed registration of some
100,000 paid tax preparers with the IRS. Additionally, the data
from this past tax filing season confirms that an extremely
high number of fly-by-night paid tax preparation sites set up
for a few weeks, charge high fees, and complete subpar and
error-riddled returns. At worst, the preparers are totally
disingenuous, targeting elderly and low-income filers, and
selling them unnecessary services related to transferring
funds, recovery rebates, and exaggerated refunds and Social
Security claims, even after tax season.
A recent wave of claims has suggested that several
companies have misled consumers by imitating the IRS or
associates of some fashion. The damage, in terms of taxpayers'
faith in the tax preparation sector has been significant. And
these continued abuses fly in the face of this new registration
program. The consumer community is concerned about enforcement,
not just after these occur, but in preventing them before they
occur.
A second issue of concern for taxpayers relates to who is
covered by the regulations. To be clear, we strongly believe
that anyone who the client thinks is a tax preparer should be
registered and required to complete continuing education. The
guidance from the IRS on this is helpful, but we are concerned
about how it will be enforced and monitored.
VITA site clients commonly report to us that when they have
engaged the services of certain paid preparers--generally the
fly-by-night ones--the bulk of their return is typically
completed by one person, where tax law informed knowledge is
necessary, and when the return is signed by a paid preparer at
the end, they barely look at the return at all. Or, worse, the
return is not signed at all.
We implore the litmus test of who the client thinks is
doing their taxes be used as a benchmark in some fashion.
Additionally, we think it is vital that the test for
certification be no less stringent than the existing individual
1040 section of the enrolled agents exam.
A third issue surrounds promotion and outreach for this new
program. The majority of low and moderate-income families are
unaware of this new registration requirement. They do not
understand what these credentials mean, and how this program
matters to them. Consumers need to know which preparer can do
what services for them, and what credentials are required by
preparers to perform such services.
Finally, a fourth issue of concern is transparency around
process and cost. Over the last decade, for several reasons,
the price of paid tax preparation has steadily increased. Most
of the time, total price is not provided to them until the
return is completely prepared. Under this new program we
suggested disclosure and transparency process which provides a
baseline of fees and costs associated with preparing the
return. The fees do not have to be universal. But rather, an
estimate for comparison purposes to understand the fee
structure upon completion.
Additionally, there needs to be a centralized toll free
phone number and database for complaints, which Mr. Williams
addressed earlier. Similar to researching a housing contractor
or auto repair facility using the Better Business Bureau,
taxpayers should be able to research their tax preparer for
type of registration, education, credentials, and performance.
In sum, we believe this regulation process for paid
preparers is needed and appropriate. We appreciate the
opportunity to testify before you on the consumer perspective
related to paid tax preparation.
I am happy to answer any questions. Thank you, sir.
[The prepared statement of Mr. Rothstein follows:]
Chairman BOUSTANY. Thank you. I have a question for all the
panelists. A very basic question. And that is, clearly when
you're starting a new program like this, communication is
important. And you have all touched on it.
So, I would like each of you to comment on what did the IRS
do well, and what did not work in their communication program
on the new requirements, particularly for those who are not
associated with a large firm or association. Give me your
perspective on the state of play right now on the communication
process. What worked? What didn't? I would like each of you to
comment, if you would.
Ms. THOMPSON. I will go first, if you like. We found that
the IRS was very willing to listen to everything that we had to
say, and their door was always open. So we felt that there was
good communication. And we would expect that communication to
continue, going forward. So we were very happy with the
process.
Chairman BOUSTANY. Okay. Ms. Pickering?
Ms. PICKERING. H&R Block has a direct line of communication
with the program office. We are able to have regular dialogue,
feedback and input with the IRS, and can share that with our
tax professionals.
However, it seems direct communication to the tax
professional community is challenging for the IRS. Obviously,
it is a large community, that's difficult to reach. I think the
IRS is continuing to work on that, through the IRS forums and
those kinds of things.
Chairman BOUSTANY. Thank you. Mr. Cinquemani?
Mr. CINQUEMANI. Perhaps the fact that we are located in
Appleton, Wisconsin, rather than right here in Washington, D.C.
might have some bearing on some of the communication that goes
on day-to-day here within the IRS. But we have generally been
very pleased with our ability to communicate with the Internal
Revenue Service. We found the new registered preparer's office,
in particular, very forthcoming and very helpful.
There was some rocky start kinds of things, which you would
expect in a program of this magnitude, and wide ranging. But we
are very pleased.
Chairman BOUSTANY. Thank you. Mr. Gary?
Mr. GARY. Yes. The National Association of Enrolled Agents
has had a very good relationship with the IRS in formulating
this process. We have had very good feedback and deliberations
with them.
I think the area where we have some concern is that, as Mr.
Williams had indicated in his earlier testimony, the public
will not be notified of the process until far downstream. We
believe the public should be on board now. They should know
that their preparer should be signing their return, and should
have a valid PTIN. And that is information that I think is a
little bit lacking, and should be improved upon by the IRS.
Chairman BOUSTANY. That is helpful. Thank you. And Mr.
Rothstein?
Mr. ROTHSTEIN. Thank you. Yes, the VITA community has been
welcomed, and we have worked with the IRS on this process. So
we did feel like our comments were included through IRS and
through other folks.
We do share the concern, again, about outreach and
promotion, as was just mentioned. Our clients and other low and
moderate-income families just don't understand what is going
on, or what will happen in the years to come. So the sooner we
get it out there, I think, the better.
Chairman BOUSTANY. Thank you. And, as you all know, on top
of the $64.25 PTIN application fee, preparers will have a
required competency exam. There will be fingerprinting,
continuing education requirements. So, just a basic question.
In your perspective, how will these new costs affect preparers?
And will we see an increase in prices, in reduced access? Is
that a potential problem, with regard to consumers? I would
like each of you to briefly comment on that, as well.
Ms. PICKERING. As we had discussed in our testimony, H&R
Block is deeply concerned about the additional fees for the
competency testing and the fingerprinting as well as the travel
costs to get to testing sites.
We are wondering, if we will start losing tax preparers who
want to end their careers because of the difficulty of
complying with these regulations. Unfortunately, this would
then result in limited service and fewer people available to
prepare tax returns. If that were to happen in rural areas,
then there is just that much less service for the members of
that community.
So we are trying to be very supportive of our tax
preparers, to help them as much as possible to navigate these
requirements.
Chairman BOUSTANY. Thank you. Ms. Thompson?
Ms. THOMPSON. Okay. I am going to answer this from the
general population, because, working as a CPA, we don't have
the same testing and CPE requirements that the IRS has in
place, because we already have our own testing and our own CPE,
so we have our costs that are already there, and it is just not
building on it.
But we do think that the IRS should be cautious about the
total cost of the program for the individual tax preparers that
are going to be involved in this. And that would include all
aspects of it, whether it is the testing, whether it is the CE,
whether it is the suitability check, whatever it might be.
Chairman BOUSTANY. Thank you. Mr. Cinquemani?
Mr. CINQUEMANI. As we have noted, many small businesses,
particularly some of the preparers that only do between 50--
like 50 and 100 returns, for example, have a difficult time
passing that on. They got into the business and into a niche,
so to speak, by preparing what they consider to be very good
services at a very reasonable fee for people.
Some of them left a practice that they were in, and in
retirement they have a great many people that they still
service. They are aware of their clients' financial needs and
restrictions. And they are concerned about having to pass those
prices on. They develop relationships in this manner over such
a long period of time, that it is difficult for them to deal,
for small business in particular.
Chairman BOUSTANY. Thank you. Mr. Gary?
Mr. GARY. Yes. The enrolled agent community also is not
affected directly by the pricing structure set up for
registered return preparers. We are aware of the burden that
the pricing might cause for individual practitioners. But, from
an--the cost of education, we feel, is a cost of doing
business, and we hope that the IRS will be very cognizant of
the overall burden that is placed on registered return
preparers in the form of fees.
Chairman BOUSTANY. Thank you. And Mr. Rothstein?
Mr. ROTHSTEIN. Yes. We share the same concerns about
increases in prices. But at the same time, we feel that we
would weigh more heavily on the knowledgeable and ethical
returns, and would agree that the cost of doing business would
supersede that.
Chairman BOUSTANY. Thank you.
Mr. ROTHSTEIN. Thank you.
Chairman BOUSTANY. Mr. Lewis?
Mr. LEWIS. Thank you, Mr. Chairman. I want to thank each
one of you for being here today. I appreciated just listening
to your testimony and reading your biographical sketch. I want
to thank you for all of your great work in this area.
Mr. Rothstein, I want to ask you--I think you made it
clear--I think four of you, at least--made it very clear that
you support the program, as presented by the IRS. And maybe one
of you has some reservation. But Mr. Rothstein, why is the
program so important?
Mr. ROTHSTEIN. Thank you, Mr. Lewis, for the question. The
program is so important because, as many--it has been discussed
before today that nearly 8 in 10 families who are filing their
taxes are either using software or are paying to do so.
The returns often times at our VITA sites--at the free tax
sites and free tax clinics that we work with--what we see are
people who have had bad returns done for several years. And the
need for correction on those is pretty intense. And we feel
that in this sector, there needs to be some benchmarks in
there, and there needs to be a good registration process.
Also, this is a very important time of year for low and
moderate-income families. It is often the most important time
of the year for them, where they can see upwards of one-eighth
of their annual income in a tax refund. So it becomes a very
important and crucial time for them. And we think that that
requires some serious education and sort of standings. Because
right now there is a lot of confusion in the marketplace of who
can perform what service, where people should go for what
service. And we think that this would dramatically improve
that.
At the state level, in California and Oregon, and even in--
recently in Maryland, when these types of paid tax preparation
regulations were passed, there were similar discussions. And
one of the things that consistently came up was, as a hair
dresser, you have to be registered, but as a tax preparer you
don't. And, even though a bad haircut is obviously very bad, at
the same time, a bad tax return is even worse.
Mr. LEWIS. Thank you. Mr. Rothstein, your testimony
recommended that the IRS establish a central number and
database for complaints. How would this help compliance?
Mr. ROTHSTEIN. Sure. I think what would happen is many tax
filers, when they are looking for somebody to perform this
service, would be able to do sort of their homework before they
go into the shop or the store, and they would be able to look
at the database and say, ``Okay, within my zip code there are
10 preparers, and these are their credentials, and they have a
satisfactory and good rating with the IRS right now. So 5 of
the 10 of them, I am going to go and look at.''
But right now, there is really no way to do that. You don't
know, as a consumer, before you walk into the store, what kind
of service you are going to get.
Mr. LEWIS. Thank you. Mr. Gary, I believe you traveled the
greatest distance to be here. All the way from California, am
I----
Mr. GARY. That is correct, sir.
Mr. LEWIS. From northern California?
Mr. GARY. Yes.
Mr. LEWIS. Okay. Well, thank you so much for being here. Do
you think the average taxpayer understands the program?
Mr. GARY. Taxpayer? No, actually, I don't think the average
taxpayer understands the program at all, and that is because
the IRS has failed to do outreach to the public. Right now
there is a significant number of people that go to--I think as
Congressman Becerra pointed out--the ghost preparers, or the
black market preparers. There is a significant number of tax
returns that are filed where a preparer has been paid for their
services, but they do not sign the tax return, and have not
obtained a valid PTIN.
So, I think, with outreach to the public and making the
public aware of their requirement to get a qualified tax return
preparer in order to do their tax return, is vital.
Mr. LEWIS. Thank you very much. I thank each one of you for
being here. You have been very helpful. I yield back, Mr.
Chairman.
Chairman BOUSTANY. Thank you, Mr. Lewis. Ms. Jenkins?
Ms. JENKINS. Thank you, Mr. Chair. Thank you for having a
second panel. And I would like to thank our panelists for all
taking time to be here today.
Ms. Pickering, in your written testimony you raised the
issue of working with the IRS to create a group PTIN
registration renewal process as a way to simplify the
administration and the new requirements. Can you describe how
this group registration would function, how it would save time
and money for the IRS, and what it would mean for your
individual tax preparers?
Ms. PICKERING. Thank you. Let me start by describing the
process that we went through this year to register our tax
preparers. As I mentioned, we have 97,000 tax preparers, a
portion of which are enrolled agents. And so, for them, as well
as all the others, we needed to ensure that their PTINs were
applied for.
Not all of our tax preparers have computers at home or
Internet access. Not all of them have credit cards. Their
personal situations vary. So H&R Block hosted registration
parties. In the fall, we invited all of our tax preparers into
the offices, so that we could provide access to computers,
access to the online systems, and then use our corporate credit
card to pay for their registration. It was important to us to
support our associates, and so we were paying for their
registration, as well. This consumed a lot of time and energy
around an action that simple.
We also had to modify our internal systems: our payroll,
human resources, and tax preparation systems, so that we could
have internal controls to ensure that our associates all had
PTINs, so that when they were preparing their returns, the
PTINs were all registered, as well.
With a group registration process, we would be able to
renew, register, and create a file, ideally, that we would send
to the IRS, and they could, through a batch process, update
their files. This is a process that we worked out with New York
the prior year--because New York has a state registration
system--and it was a way to alleviate the extra time and
administrative burden that was associated with this very
fundamental process.
Ms. JENKINS. Okay, thank you. I would be curious if any of
the other members of the panel feel like they would benefit
from a group registration option.
Ms. THOMPSON. I am with a staff of 50, and we did have all
of the individuals do the registration. They are all in our
office every day, so we don't have the same type of issues that
an H&R Block would, where they don't have access to the
computer. So they actually had it as part of their workday, and
we did have to monitor at the end that they did have their
PTINs, and they were ready to go at the beginning of the
season.
Ms. JENKINS. Okay. Anybody else want to comment?
[No response.]
Ms. JENKINS. All right. One of the goals for testing and
tax return checks is to catch bad actors in the tax return
preparer world, as a means to improve compliance. However, the
IRS has not created a clear measurement for taxpayer
compliance, and there is no defined compliance and enforcement
program yet in place when the bad actors are identified.
So I just would like all of you maybe to comment briefly in
detail any concerns in these areas, and any recommendations
that you might have to improve the program in your areas. Ms.
Pickering?
Ms. PICKERING. I would like to start. H&R Block has
commented recently on the EITC due diligence requirements, and
some of the challenges that we see with that program,
specifically when the IRS is conducting the EITC audits. Their
audit standards have not been published, and the auditors all
have subjective approaches to the implementation of their
standards.
And so, we would like to have published standards that say,
``This is,'' for example, ``what the EITC due diligence
guidelines and standards must be, and when we are conducting an
audit it must comply with these certain attributes.'' When we
have an objective, measurable standard like that, we will be
able to perform to that standard.
Ms. JENKINS. Okay. Any other thoughts?
Ms. THOMPSON. I would think one of the things that David
Williams had mentioned was the 10,000 letters and the 2,500
office visits. Maybe there is some work that can be done in
that area to better target the individuals that are actually
the bad actors. That might be helpful.
Ms. JENKINS. Okay, thank you. I yield back, Mr. Chairman.
Mr. CINQUEMANI. I would like to make one comment with
regard to that, if I may, please. I think we need to keep in
mind here that basically what we are doing is regulating a
large population of those who are already compliant, or are
certainly interested in already being compliant, so that when
it comes to looking at those who are unscrupulous, and even
incompetent, they are flying under the radar of a lot of the
systems.
And I don't know how the return preparer's office can be
held responsible for ferreting those people out. It would seem
to me that that would be an investigative and enforcement
function of perhaps the criminal investigation division of the
Internal Revenue Service.
Chairman BOUSTANY. Thank you. Mr. Becerra?
Mr. BECERRA. Thank you, Mr. Chairman. Thank you all for
your testimony. Mr. Rothstein, let me ask you a question. I
think Mr. Williams, in his testimony, said that one of the
concerns that many have raised--and you being one of them--is
that we need to make sure that we establish some form of public
database of preparers, so we can give the consumer a chance to
understand who--which preparers are in good standing, who has
been the bad apple and who has done work right.
Is it your sense that IRS is moving forward with that
proposal to establish such a database?
Mr. ROTHSTEIN. My sense is that it is definitely in their
time frame and framework to do so. We think the sooner, the
better, obviously. And our hope is that the more data that is
available on that database, the better, as well. We----
Mr. BECERRA. So the sooner the better?
Mr. ROTHSTEIN. The sooner the better.
Mr. BECERRA. So there is--IRS says they are trying to
establish that database. You are not saying no, you are just
saying try to get it sooner than later?
Mr. ROTHSTEIN. Absolutely.
Mr. BECERRA. What about--you have another recommendation
about providing transparency and disclosure of paid tax
preparer fees in a manner that would be similar to what we see
right now with a credit card fee disclosure box.
Do you know if IRS is moving forward with that
recommendation?
Mr. ROTHSTEIN. Representative Becerra, my sense is that I
have not heard that being the case. I would follow up with the
IRS and ask. But, to my knowledge, no, they are not.
Mr. BECERRA. We can follow up on that. I think that is a
good idea, again, to give consumers a chance to understand. It
is the buyer beware sort of caution, that you give consumers as
much information in advance, so they can make decisions, so we
don't have to try to remedy problems later on. So thank you for
that.
Mr. Gary, quick question for you. Do you think that
preparers should be required--these preparers that would get
registered--should be required to take the same type of test
for preparation of individual tax returns as you and your folks
who are enrolled agents do?
Mr. GARY. Yes, I do. Thank you for the opportunity to
address that question.
Mr. BECERRA. And if you could, do it quickly----
Mr. GARY. Yes.
Mr. BECERRA [continuing]. Because I don't have much time.
Mr. GARY. The IRS has a proven test for individual tax
competence, and that is Part I of the special enrollment
examination. It would save the taxpayer money, it would save
the government money, if the Part I were used.
Mr. BECERRA. And I wish we had more time, because I think
many people might be watching this, and not quite understanding
what the difference is between the different types of folks who
prepare. You've got CPAs who probably are as skilled and
trained as you can find, when it comes to someone who could
prepare a tax return for you. You have got enrolled agents who
are also skilled and have been certified by the IRS. And so
you've got a lot of different levels. You've got attorneys who
can do this, as well. And then you've got organizations like
H&R Block, who have been doing this for decades.
And so, it would be helpful, I think, for consumers to
understand what the difference is, so they know what they are
getting for the money.
Mr. Cinquemani, if I could ask you a question, I am a
little concerned by some of your testimony. I appreciate that
you are here, I appreciate your membership being here, but I am
a little concerned that you make it sound like what we are
trying to do through this registration and testing of
qualifications might drive someone out of business.
You mention, for example, the small operation, someone who
does 50 to 100 returns in a year. I don't think anyone wants to
cause difficulty for someone, especially who is a small
business man or woman who does a few of these.
But my understanding is that the fee, the registration fee
to get registered for these preparers, would be $65. Say you do
50 to 100 of these returns. That is a dollar or two more than
you would have to charge per return if you are one of these
preparers who is a small operation. To me, that is a small
price to pay to make sure that that consumer going to that
small operator is certified.
Mr. CINQUEMANI. Representative Becerra, the context in
which that comment was made with regard to putting people out
of business was with respect to Section 10.3(f)3 of circular
230, which basically states that a registered return preparer
cannot give advice, except in the preparation of a tax return,
okay?
Mr. BECERRA. Okay, and I understand that. And I would--and
I share some of your concern, because often times folks come in
with lots of questions that go beyond, ``Here are my documents,
prepare my tax return for me.''
But at the same time, rather than try to--let's move
forward, working together, to make sure that people who are
qualified are able to give the advice that consumers need----
Mr. CINQUEMANI. Agreed.
Mr. BECERRA. But I think what we are trying to do is
finally stop this pervasive underground--I call it a black
market operation that is out there. They are open one week and
they are gone the next. And a lot of folks pay good money to
get good advice.
And so all those small guys who do 50 or 100 and keep to
what their skill level is, and their qualifications are, I want
to put them--elevate them. But the guy that goes after that
101st person and causes them to be audited unfairly, we should
descend on them with a hammer so hard, that they become the
example for the rest of the industry.
So I hope you will continue to be engaged in your
membership, because I think----
Mr. CINQUEMANI. Absolutely.
Mr. BECERRA [continuing]. Every one of you provided
valuable testimony.
Mr. CINQUEMANI. Absolutely, we will.
Mr. BECERRA. I thank you very much, Mr. Chairman----
Mr. CINQUEMANI. And we are very supportive of the process,
as well.
Mr. BECERRA. Thank you. Thank you, Mr. Chairman.
Chairman BOUSTANY. Thank you. Mr. Reed.
Mr. REED. Thank you, Mr. Chairman. Mr. Cinquemani, I want
to give you an opportunity, because I am interested in the
comment you made about--that the advice that will no longer be
able to be provided--I think you were going to go down that
path in response to my colleague's question, previously.
So what advice would they not be permitted to do after this
is implemented? And could you give me some examples of what
that type of advice is?
Mr. CINQUEMANI. Yes. In the way it is worded currently,
someone can give advice in terms of where someone walks in with
a shoebox full of receipts, and you say, ``Well, you take--this
belongs on this line of the return, that belongs on that line
of the return.''
If someone during the year comes up and says, ``I want to
trade my dump truck for a D9 bulldozer''----
Mr. REED. Right, yes.
Mr. CINQUEMANI [continuing]. They are not permitted to give
that kind of advice, under the provision the way it is
currently stated. If someone has an emergency, a death in the
family, and they need advice on a final 1040 or 1041 return,
you can't give that kind of advice. If someone calls up and has
a concern about being compliant over one issue or the other,
that is giving advice.
Mr. REED. And so, under these proposed regulations, they
would no longer be able to be----
Mr. CINQUEMANI. That particular provision----
Mr. REED [continuing]. That pre-tax advice, and that type
of----
Mr. CINQUEMANI. Yes. And there is an easy fix to it.
Mr. REED. And what is the fix?
Mr. CINQUEMANI. The fix is just to basically say that they
can give advice, but that their advice is not deemed
privileged, as that communication is----
Mr. REED. Attorney-client type stuff?
Mr. CINQUEMANI. Yes.
Mr. REED. Okay. All right, I appreciate you clarifying that
for me.
The other inquiry I wanted to make of the panel, you
heard--maybe you were here when I was asking the Agency a
question about the rural areas. I come from a rural district of
New York. Do you see any concerns about impact that this would
have on servicing residents, citizens in rural areas of the
country, maybe from an H&R point of view?
Ms. PICKERING. Thank you for asking that question. H&R
Block is very concerned about that. With over 3,000, 4,000
offices in rural areas, as well, we have 170 tax preparers in
international areas, where they serve U.S. military bases. We
don't know how we will get those preparers through the
competency examination.
We did hear David say that it is something that they want
to understand----
Mr. REED. Work on, yes.
Ms. PICKERING [continuing]. And work on, but it is clearly
an area that is of big concern for us. What we don't want to
have happen is that we are unable to get our preparers
registered and then, as such, we are unable to serve those
communities that rely very heavily on this----
Mr. REED. So, from your point of view, is it legitimate,
fair to say, that it is a--this is a legitimate issue, a
legitimate concern, and needs to be addressed, in your opinion,
prior to full enactment of these provisions?
Ms. PICKERING. I would say that wholeheartedly. This is a
legitimate concern that we need to address.
Mr. REED. And then--I am always trying to be practical--do
you have any ideas on how we could address that, and then solve
that issue?
Ms. PICKERING. Our recommendation would be to let H&R Block
continue the program and accept our program--certify our
program.
Mr. REED. As equal. Okay. Any other ideas on how to address
that concern from any other members of the panel?
[No response.]
Mr. REED. Do other members of the panel think that is not a
concern? Anyone on the panel?
[No response.]
Mr. REED. All right. All right, thank you, Mr. Chairman. I
yield back.
Chairman BOUSTANY. Thank you. I want to thank all of you
for your testimony, and being patient, and answering our
questions. Please be advised that Members may have additional
questions that they will submit. Those questions and your
answers would be made part of the official record.
Again, thank you. I think this has been a very helpful
hearing for us, and as we go forward with this program. The
subcommittee now stands adjourned.
[Whereupon, at 11:24 a.m., the subcommittee was adjourned.]
QUESTIONS FOR THE RECORD
Rep. Boustany's for David Williams
SUBMISSIONS FOR THE RECORD
The Ohio Society of CPAs