Update – Tax Preparer Requirements

Tax Preparer Requirements

There are currently no regulations on becoming a tax preparer or on the scope of work one must perform.  But for the last few months, the IRS has been trying to change that.

The ongoing saga of trying to change this has hit another step as a US Court of Appeals for the District of Columbia has formed a three judge panel and begun hear arguments on whether tax preparers should be regulated by the IRS.  The opening arguments have taken place, and while the decision remains months away, the case is important to tens of thousands of individuals.

The entire matter stems from the discussion of whether tax preparers represent tax payers, or simply perform a service.  Stemming from issues after the civil war, those who represent citizens before the IRS were given the title “enrolled agent” and have been required to show their competence and education.  This 1884 law authorized the IRS to regulate enrolled agents, but it has historically been understood and accepted that a tax preparer is simply performing services for a fee and nothing more.

The Obama administration explained before the judges that a tax preparer should come under this law, and therefore the IRS has the right to regulate.

The opposition – the Institute for Justice (a Libretarian advocacy law firm) – explains that congress has never given the authority to the IRS to regulate tax preparers and a tax preparer is simply performing a service.

Previous posts have revealed that the IRS is reaching to bring tax preparers under their purview and require them to pass a competency test and complete continuing education classes.

78 million people in the United States have paid someone to prepare their taxes.  Those performing this service range from full time CPA firms, boutique shops, large companies such as H&R Block, corner shops, franchises and even friends.   The implication of this law will potentially drive many people out of the business, and increase the fees preparers must then charge for their services.

Risk, Regardless

From a risk management perspective, a tax preparer – whether they technically “represent” a tax payer or not – is still performing a professional service for a fee.  This opens a preparer up to liability should filing deadlines be missed, an error made on the forms or incorrect information conveyed to the government resulting in penalties.

Whether tax preparers are held to the same professional standards as CPAs or enrolled agents is secondary to the point that preparers have the risk of a malpractice lawsuit the moment the engagement starts. It is important for all tax preparers to remain up to date on tax code changes and diligent with all client relationships.

Professional liability insurance – also known as malpractice insurance or errors and omissions insurance – can be purchased by tax preparers.  Many insurance companies offer these policies regardless of designations and do not require the applicant to be a CPA.  Premiums can be as low as $300 a year, and afford protection when needed most.  Contact a licensed broker today to discuss how to best protect your firm and tax practice from lawsuits.