Analysis: Minimum Standards and the Administration’s FY18 IRS Budget Proposal
July 24, 2017
On May 30 we wrote about the Trump administration’s fiscal year 2018 (FY18) budget, and gave our first impressions on its tax administration contents. The budget included several noteworthy policy proposals, including an initiative to increase oversight of paid tax return preparers, which David Kautter, the administration’s nominee for Treasury Assistant Secretary for Tax Policy, supported last week.
The return preparer proposal is significant – not merely because it raises revenue – but because it addresses a real issue, one that requires congressional action.
The inconvenient truth is that millions of taxpayers have no way to assess whether the person they have paid to prepare their return is in fact competent to do so and committed to protecting his or her sensitive (and valuable) return information.
A surprising number of people are at risk. Tax professionals filed more than half of all individual tax returns filed in 2016, some 78.7 million of them.1 And anyone who prepares or assists in the preparation of federal tax returns for compensation is required to hold a valid preparer tax identification number (PTIN). The kicker, though, is that roughly 60 percent of the 713,000 individuals who hold a current PTIN have not demonstrated basic competency.
How does this play out? Those who seek professional assistance generally are looking for accurate returns, ease in filing, and the maximum possible refund. Then, we add these compounding factors: The tax code changes every year and stolen identity refund fraud remains a large and growing issue. For instance, spear fishing (which used to be limited to real fish) focused on return preparers continues to grow. What this means is that aside from an inaccurate return—or worse, a return that is riddled with falsehoods—taxpayers need to contend with the very real possibility that their return preparer cannot or will not secure their sensitive information.
While some oppose minimum standards, and suggest tax preparers have a right to unfettered access to their clients, many believe otherwise. For instance:
- Legislators of both parties have introduced bills providing IRS the authority to implement minimum standards. In the last Congress, Rep. Diane Black (R-TN) sponsored a bill that would have required a non-credentialed compensated return preparer to pass a competency exam, satisfy an annual continuing education requirement, and complete a background check. Former Rep. Xavier Becerra (D-CA) repeatedly introduced legislation that similarly would have provided minimum standards.
- The National Taxpayer Advocate in her vision for a taxpayer-centric 21st Century tax administration system, wrote: “The last broad theme is the need for establishing minimum standards of and testing for competency of federal tax return preparers. [I have] long recommended a pragmatic oversight theme designed to protect U.S. taxpayers from unscrupulous and incompetent return preparers…[and note] that without such standards and oversight, the entire system is at risk.”2
- Low-income advocacy groups have favorably weighed in. Prosperity Now (formerly CFED), wrote: “For tax year 2012, over 76% of the preparers filing EITC returns were not required to meet minimum competency standards. For taxpayers using these services, like all taxpayers, no information is easily available to identify…the previous track record of the numerous paid preparers available. This information vacuum creates an opportunity for unscrupulous tax preparers to enter the field of otherwise high-quality preparers and exploit low-income filers who are understandably hoping for a large, quick refund, with no faith that their return will be accurate.”
Filing a tax return is one of the most significant financial transaction of the year for many people, and those who seek professional assistance deserve competent help.
The time to address this issue is now.
(Analysis and Insights by Bob Kerr)