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Chairman Charles Boustany (R-LA) Subcommittee on Oversight Hearing on the New IRS Tax Return Preparer Initiative
Thursday, July 28, 2011
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. At a Subcommittee hearing earlier this year, even the Commissioner of the IRS testified that he relies on a paid tax 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 were disheartening. GAO found that nearly all tax returns that were prepared during its review contained mistakes. Not all mistakes are intentional, but they all contribute to erroneous returns that have cost taxpayers billions. For example, errors related to refundable tax credits 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 the lengthy and expensive audit process. 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 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 remains unclear how the initiative will ultimately impact tax compliance. A recent report issued by the 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 to $77 million annually in registration fees alone. This does not include the additional costs 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 threats.
This is a critical issue for tax administration and it is important that Congress understands the new requirements and continues its oversight to judge whether the new program improves tax compliance. Taxpayers, paid preparers, and the IRS are best served if this initiative is successful.