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February 2010

Tax Time Education for Tax Preparers

I have heard from a number of consumers over the past several years that their local, paid tax preparers were ill-prepared to help them file a correct tax return. As a result, the consumers are very concerned they stand a much higher probability of being audited.

Training of tax professionals is a significant issue because the IRS estimates more than 60 percent of taxpayers utilize a tax preparer for their returns. Forgive my editorial comment here, but taxpayers would likely need fewer tax preparers if the federal tax code wasn’t filled with so many special provisions favoring one group over another, all of which makes tax returns so complicated. While I still prepare my tax return each year, I have given up doing it totally on my own. Instead, I have turned to using either the TurboTax or H&R Block software. Nationwide, 20 percent of all taxpayers resort to software to prepare their tax returns.

The IRS has similar concerns about tax preparers because it just issued rules requiring new standards to be met by employees of tax preparation firms such as H&R Block and Jackson Hewitt Tax Service as well as thousands of independent preparers and small tax preparation operations. Beginning in 2011, tax preparers will be required to register and pay a fee to the IRS, pass a new “competency exam” within three years, and attend 15 hours of continuing education each year. Prior to this new rule, tax preparers were not required under federal law to meet any standards. IRS Commissioner Doug Schulman said in a press release, “This is something that is long overdue. Until now, there have been no national, professional standards for one of the largest financial transactions individuals have each year.”

As noted, the new requirements do not take effect until 2011. However, the IRS is mailing letters to more than 10,000 paid tax preparers nationwide to remind the them “to be vigilant in areas where the errors are frequently found,” according to the IRS press release. The IRS says these tax preparers make the largest number of errors.

Certified public accountants (CPAs) are not covered by this new rule because they already meet significantly stricter continuing education requirements.

Tax preparers can find more information about this new rule at: http://www.irs.gov/taxpros/article/0,,id=210909,00.html.

For now, consumers should continue to: (1) be wary of tax preparers who claim they can obtain larger refunds than others, (2) avoid tax preparers who base their fees on a percentage of the refund, (3) use a reputable tax professional who signs the tax return and provides a copy, (4) consider whether the individual or firm will be around months or years after the return has been filed to answer questions about the preparation of the tax return, (5) check the person’s credentials and understand only attorneys, CPAs, and enrolled agents can represent taxpayers before the IRS in all matters—including audits, collections, and appeals—while other return preparers may only represent taxpayers for audits of returns they actually prepared, and (6) find out if the return preparer is affiliated with a professional organization that provides its members with continuing education and other resources and holds him or her to a code of ethics.

I hope all goes well with your federal and state tax returns.  

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