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Hearing on New IRS Paid Tax Return Preparer Program

July 28, 2011










July 28, 2011


Printed for the use of the Committee on Ways and Means




DIANE BLACK, Tennessee
JIM GERLACH, Pennslyvannia

RON KIND, Wisconsin

JON TRAUB, Staff Director
JANICE MAYS, Minority Staff Director



Advisory of July 28, 2011 announcing the hearing



David Williams, Director, IRS Return Preparer Office, Internal Revenue Service, Washington, D.C.

Jim White
Director, Strategic Issues, Government Accountability Office, Washington, D.C.


Kathy Pickering
Vice President – Government Relations and Executive Director of the Tax Institute, H&R Block, Kansas City, MO

Patricia Thompson
Chair, AICPA Tax Executive Committee, American Institute of Certified Public Accountants, Washington, D.C.

Paul Cinquemani
Director of Member Services, Business Development and Government Relations, National Association of Tax Professionals, Appleton, WI

Lonnie Gary
EA, USTCP Chair, National Association of Enrolled Agents Government Relations Committee, Washington, D.C.

David Rothstein
Researcher, Policy Matters Ohio, Research Fellow, The New America Foundation, Cleveland, OH


Thursday, July 28, 2011
House of Representatives,
Subcommittee on Oversight
Committee on Ways and Means,
Washington, D.C.

The subcommittee met, pursuant to notice, at 9:32 a.m., in Room 1100, Longworth House Office Building, Hon. Charles Boustany [chairman of the subcommittee] presiding.

[The advisory of the hearing follows:]

     *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.


     *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 statement of Mr. Williams follows:]

     *Chairman Boustany.  Thank you, Mr. Williams.

     Mr. White, you may proceed.


     *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 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.  ‑‑ 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.


     *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.


     *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 statement of Ms. Pickering follows:]

     *Chairman Boustany.  Thank you, Ms. Pickering.

     Ms. Thompson, you may proceed.


     *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  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 statement of Mr. Thompson follows:]

     *Chairman Boustany.  Thank you, Ms. Thompson.

     Mr. Cinquemani, you may proceed.


     *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 statement of Mr. Cinquemani follows:]

     *Chairman Boustany.  Thank you, Mr. Cinquemani.

     Mr. Gary, you are recognized for five minutes.


     *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 statement of Mr. Gary follows:]

     *Chairman Boustany.  Thank you, Mr. Gary.

     Mr. Rothstein, you may proceed.


     *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 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.  ‑‑ 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.  ‑‑ 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.  ‑‑ 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.  ‑‑ 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.  ‑‑ 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.]

Rep. Boustany’s for David Williams

The Ohio Society of CPAs
National Society of Tax Professionals
Center for Fiscal Equity
National Community Tax Coalition