This article is the fifth in a series analyzing the proposed Taxpayer Assistance and Service Act (the “TAS Act”), bipartisan legislation introduced by Senators Crapo and Wyden to improve service and administration at the Internal Revenue Service (“IRS”).  Our prior entries in the series are Title I (Tax Administration), Title II (American Citizens Abroad), Title III (Judicial Review), and Title IV (Taxpayer Advocate).

This article examines the provisions of Title V of the TAS Act, titled “Tax Return Preparers.”  Title V establishes comprehensive minimum standards for paid tax return preparers and penalties for violating those standards.  Aimed at “crooked tax return preparers are regularly exploiting taxpayers to pad their own bottom lines,” according to Senator Wyden, the goal of these provisions is to ensure that “paid preparers actually know what they’re doing [and] follow the law.”   As a result, Title V attempts to implement the conclusions of studies by the GAO and TIGTA, which consistently find that returns prepared by non-credentialed preparers have higher levels of inaccuracies than other returns.

Penalties for Altering Returns (Section 501)

Preparer penalties under sections 6694, 6695, and 6695A do not apply when a preparer alters a taxpayer’s return after taxpayer signs it.  This loophole allows unscrupulous preparers to changes signed returns to, for example, claim an unsupported refunds or change direct deposit information because the altered submission is not considered a “return.”  This provision would expand the definition of “return” in the context of preparer penalties to include documents these type of documents purporting to be returns.

PTIN Penalties (Section 502)

This provision would impose a $250 penalty for each failure to furnish a valid preparer tax identification number (“PTIN”), with a (maximum penalty of $75,000 in a calendar year, and makes willful failures to furnish a valid PTIN a felony punishable by a fine of up to $50,000 ($100,000 for corporations), three years in prison, or both.  These changes would insure that penalties for failure to provide a PTIN apply to preparers who provide the wrong PTIN, another person’s PTIN, or a PTIN that has been suspended.

Increased Preparer Penalties (Section 503)

Thiis provision would increase civil penalties for certain preparer violations:

  • The penalty for failing to provide a taxpayer with a copy of the completed return would increase from $50 to $250 and the annual cap would increase from $25,000 to $50,000.
  • The penalty for the return preparer failing to sign the return would increase from $50 to $250 and the annual cap would increase from $25,000 to $75,000.
  • The penalty for failing to retain a copy of a return or a list of clients for whom the preparer prepared a return would increase from $50 to $250 and the annual cap would increase from $25,000 to $75,000.
  • The penalty for a business who employs return preparers who do not include the businesses’ name, tax identification number, and business address would increase from $50 to $250 and the annual cap would increase from $25,000 to $75,000.
  • The penalty for failing to comply with due diligence requirements regarding eligibility for the following items would increase from $500 to $1,000 and the annual cap would increase from $25,000 to $75,000:
    • Filing as head of household;
    • The child tax credit;
    • The American opportunity and lifetime learning credit; and
    • The earned income tax credit.
  • The penalty for misappropriating any payment made to a taxpayer would increase from $500 the greater of $1,000 or the full amount of the payment.

PTIN Denial, Revocation, and Suspension Authority (Section 504)

Under current law, anyone, regardless of their tax-related expertise or knowledge, who pays the required fee may obtain a PTIN and charge customers to prepare returns.  Demonstrated incompetence, defrauding taxpayers, or other lack of fitness to prepare returns are not grounds for the IRS to deny, revoke, or suspend a preparer’s PTIN – in 2014, the United States Court of Appeals for the District of Columbia Circuit ruled that the IRS lacks authority to regulate non-credentialed preparers in the same manner as attorneys, CPAs, and enrolled agents subject to Circular 230.

Under this provision, however, paid, non-credentialed tax return preparers would be required to demonstrate their suitability for preparing tax returns by providing information about competence and character, passing a criminal background and tax compliance checks, and completing up to 18 hours of continuing education annually.  Licensed attorneys, CPAs, and enrolled agents subject to Circular 230 would be exempt from these requirements.  The IRS would also have authority to deny, suspend, or revoke the PTIN of any preparer who fails to meet these standards, is incompetent or disreputable, or violates Circular 230 regulations. In addition, the IRS could impose a penalty of up to $5,000 for each violation of these standards by a paid, non-credentialed tax return preparer.

Conclusion

Title V of the TAS Act increases the regulation of return preparers by requiring paid, non-credentialed tax return preparers to meet new requirements in order to obtain a PTIN and imposes new and substantial penalties on all return preparers for altering signed returns, not furnishing a valid PTIN, and violating preparer requirements.  The goal is to increase the floor by insuring return preparers are qualified and penalizing, and revoking the ability to work, for those that are not.  Is more regulation the answer?  It may depend on how well the penalties offset the revenue.  But it’s a good start at insuring that return preparers have minimal qualifications.

The next post in this series will review Title VI, which focuses on the IRS Independent Office of Appeals.