IRS loses lawsuit challenging authority to regulate tax preparers

Last year, three independent tax preparers, Sabina Loving of Chicago, Illinois, John Gambino of Hoboken, N.J., and Elmer Kilian of Eagle, Wisconsin, took on the IRS, accusing it among other things, of lacking the authority to license tax preparers. The three retained lead attorney Dan Alban of the Institute for Justice, a libertarian public interest law firm, in filing suit against the IRS in the U.S. District Court for the District of Columbia. 

U.S. District Court Judge James E. Boasberg issued an opinion that would bar the IRS from regulating tax preparers – all just days before the new tax season officially opens for business. (Jan 30, 2013)

The scheme to regulate tax preparers was a top priority for the IRS which felt that requiring tax preparers to register with the IRS, pass a competency test and take continuing education classes would protect taxpayers from potentially fraudulent preparers. The new system required registration (along with a fee), a competency exam and annual requirements to take at least 15 continuing education credits. In exchange for compliance, beginning in 2011, the IRS began issuing PTINs (Preparer Tax Identification Numbers) which must be included on paid returns; a public database of those tax preparers with valid PTINs was expected to be posted on the IRS web site.

But not everyone thought that regulation was a good idea: Under the new rules, attorneys, CPAs and enrolled agents (EAs) are exempt from the competency testing and continuing education requirements. That means that the real burden of complying with the new regulations tends to hit independent tax preparers and small businesses disproportionately – those who, under the new rules, must meet the criteria to be called a Registered Tax Return Preparer (RTRP). Without that designation, unless a preparer meets an exemption or exception, he or she may not work. Loving – and other tax preparers – thought those rules were unfair. That's how the matter ended up in district court.

Generally, a final ruling by a district court can be appealed to the United States court of appeals in the federal judicial circuit in which the district court is located. In this case, the matter would be appealed to the United States Court of Appeals for the District of Columbia Circuit – we can expect an appeal from the IRS.

But while all that gets sorted out, tax preparers wonder: what does this all mean for the upcoming tax season? That's not exactly clear. In theory, the decision should allow unregulated and unregistered tax preparers to file tax returns when the season opens on January 30. However, that's just days away – and the IRS has a system in place already predicated on the idea that preparers have to be registered with a valid PTIN. Whether a return submitted by an unregistered preparer will bounce because of the IRS system is yet to be determined. The IRS has not yet issued a statement about the ruling.

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Best tax preparation help for you

In the upcoming weeks, the World Wide Web will be flooded with articles relating to finding the right tax professional for your return preparation.

You will be hearing terms such as CPA, RTRP, EA, ERO – what not beside the tax professionals’ names in advertising. What do they all mean?

First and foremost, to prepare a tax return, a preparer needs a PTIN (Preparer Tax Identification Number). This is issued by the IRS to paid preparers so that they need not use the Social Security Numbers on the prepared returns.

As of now, for acquiring a PTIN, no training is needed. However, it is expected that by 2013, a pass in a specially designed minimum competency test will be mandatory for preparation of tax returns.

An RTRP (Registered Tax Return Preparer) will also be required to spend 15 hours annually in tax related continuous education measures. The new program will also include a mandatory background check on tax preparation applicants so as to dig out those with a criminal record. By 2013m, any tax preparation aspirant will need to pass the competency test and get through the background check to acquire the PTIN.

A CPA (Certified Public Accountant) will have an accounting degree. The accountant will have served under a CPA for a specified period and taken up extensive tests. The state issue the CPA certificate, and the requirements vary from state to state. They also need to meet annual continual assessment tests in all areas of accountancy including tax and audit.

A JD (Attorney) is a law school graduate, having passed the state bar exam for practicing law in that state.  They need to have continuing education in all areas of law including taxation.

A preparer, by working for the IRS or taking comprehensive tests in all areas relating to tax qualifies to be an EA (Enrolled Agent). Their continuing education requirement will specifically pertain to taxation for 3 years spread over 72 hours, and can practice in any state.

An ERO is an Electronic Return Originator who can electronically file tax returns. For taxpayers who have prepared their own return or for tax preparers who do not offer e-filing, this is applicable. In case the ERO is also a qualified CPA / RTRP / JD / EA, they can prepare the return too apart from filing it.

So, from the above listed specialists, whom do you need?

If you need to just e-file your return, all you need is the ERO.

If you are looking for a preparer, here are a few pointers to keep in mind:

Ø      Who is recommended? | Check on the IRS certification

Ø      Check out the fee charged | pre-determine how much you can spend

Ø      Ensure accessibility of preparer | what does the preparer have to say?

Ø      List down your other specific requirements

If you mark the 3^rd party designee box on the return, in case issues arise with the IRS, a general preparer can help you on accounting & audit issues. An EA, CPA or JD can represent you on any issue thrown up by the IRS.

These are the major tax preparation options available. Choose what suits you best, good luck with your taxes!