Plans Resume For Regulation of Tax Preparers
Senators Hatch and Wyden Announce Bill from Joint Committee on Taxation
The effort by the Internal Revenue Service to regulate professional tax preparers gained new life this week when Senate Commerce Committee Chairman Orrin Hatch (R-UT) and ranking member Sen. Ron Wyden (D-OR) jointly announced the introduction of a new bill designed to combat identity theft. Sen. Hatch also announced an open executive session for the bill this week, on Wednesday, September 16, in Room 215 of the Dirksen Senate Office Building at 10:00 am.
An open executive session, commonly referred to as a markup, is convened to debate, amend and rewrite proposed legislation before reporting the bill to the full Senate for consideration. The session is open to the media and public, will be webcast, and is open for submission of comments.
The bill has been ascribed to the work of the Joint Committee on Taxation, “Description of the Chairman’s Mark of a Bill to Prevent Identity Theft and Tax Refund Fraud” (JCX-108-15), September 11, 2015. A copy of the bill can be found here.
The proposed original bill contains many of the provisions of last year’s Tax Refund Theft Prevention Act, also introduced by Hatch and Wyden, as well as incorporating suggestions from committee members. The draft summary contains 20 sections, the fifteenth of which reads:
Regulate all paid tax return preparers
For decades the IRS has exercised regulatory authority over attorneys, certified public accountants (CPAs), enrolled agents, and certain other individuals who “practice” before the IRS under Treasury Department Circular No. 230. This regulatory authority established standards of competence and ethical behavior that these parties are required to exercise before the IRS when representing taxpayers in any capacity. Many of these practitioners are also subject to professional standards of competence and conduct under both state laws and professional licensing agencies.
In June 2011, the IRS issued final regulations that established a new class of tax practitioners known as “registered tax return preparers” that it sought to regulate for the first time. The overwhelming majority of individual income tax returns are currently prepared by these now unregulated tax return preparers. There is substantial evidence indicating that incompetent and unethical tax return preparers are harming both their clients and the government. Most of the tax returns that involve refundable tax credits are prepared by unregulated tax return preparers.
Since 2011, the D.C. District Court (and the D.C. Circuit affirming on appeal) has prevented the IRS from enforcing these regulations on the grounds that the IRS’ authority to regulate practitioners is insufficient to permit regulation of tax return preparers who do not practice or represent taxpayers before an office of the Treasury Department.
The provision provides the Treasury Department and the IRS with the authority to regulate all aspects of Federal tax practice, including paid tax return preparers, and overrides the court decisions described above. Another provision authorizes the IRS to revoke identifying numbers issued to tax return preparers for failure to comply with regulations under the tax code or title 31 of the United States Code.
The provisions are effective on the date of enactment and are estimated to increase federal revenues by $135 million over the 10-year budget window.
Other provisions in the bill that would directly affect tax preparers include:
- 3, which would require the IRS to prepare a feasibility study for a program to allow persons who file an identity theft affidavit to elect to prevent the processing of any electronically-filed Federal tax return submitted by the person or anyone purporting to be such person. If such a plan proves feasible, preparers would have to be prepared to file more paper returns upon request.
- 7, which would increase electronic filing of returns. Under current law, a person that files fewer than 250 returns annually generally can file returns on paper. This provision reduces that number to 20 over a five year period – 250 to 200 for calendar year 2018, 200 to 150 for calendar year 2019, 150 to 100 for calendar year 2020, 100 to 50 for calendar year 2021, and 50 to 20 for calendar years thereafter. An additional provision in this section requires that paid tax return preparers electronically file all individual income tax returns that they prepare. A waiver from this requirement is available in the case of tax return preparers that lack reasonable Internet access.
- 8, which would modify due dates for filing certain information returns. This provision changes the due date for providing Forms W-2, W-3, and 1099-MISC information returns to the government (both electronically and paper filed) to within 15 days of the due date for employee and payee statements.
- 14, which provides for increased penalties for improper disclosure or use of information by preparers of returns. The provision would impose an increased monetary penalty for the disclosure of taxpayer identity information by a return preparer in cases where such information is used in an identity theft crime, whether or not related to the filing of a tax return. This provision is intended to provide a strong incentive for tax preparers to secure client records so that they cannot be stolen by identity theft criminals.
- 18, which requires authentication of users of electronic services accounts. In the past, unscrupulous tax return preparers have used the IRS’s suite of electronic services (e-Services) to perpetrate tax refund fraud. The provision requires the IRS to verify the identity of any individual opening an e-Services account before he or she is able to use such services.
“Protecting the private information of taxpayers at the Internal Revenue Service should be of highest importance to the agency and Congress,” Sen. Hatch said, commenting on his bill. “Unfortunately, as we learned this year, highly valuable information housed at the agency is susceptible to cyber criminals. Since this threat will not end, Congress should take appropriate bipartisan action to implement needed legislative policies that will better protect taxpayers and shield taxpayer dollars from thieves. With this markup, I’m hopeful the Committee will take the first step to advance reforms that will enhance the controls used to access private taxpayer information at the IRS and improve the overall security of the refund process.”
“The wave of organized crime targeting taxpayers and their hard-earned money is seemingly relentless, and there’s a lot of work to be done making sure that our laws, agencies and taxpayers themselves are able to fight back,” Sen. Wyden said. “This bipartisan legislation is a big first step toward cracking down on scam artists and cyber criminals who prey on taxpayers. This bill will ramp up penalties for tax ID theft, help root out the bad actors who pose as law-abiding return preparers, and vastly improve the security of taxpayer information. I’m confident this is legislation that the Finance Committee can get behind on a bipartisan basis, and I look forward to continuing to find ways to protect taxpayers from identity theft and fraud.”
The bill’s chances of a straight-up vote in the Senate and House are slim to non-existent – there are only 59 or so working days left for the Senate in this session. Already on the docket are issues such as immigration reform, the federal budget, the Iran Nuclear Agreement, an agreement on cyber-information sharing; a national medical marijuana policy, and more. Without a strong push by the Senate leadership, the bill will never come to the floor for such a vote.
But that’s not the strategy. Once voted out of committee, the bill can simply sit dormant until another must-pass bill comes to the Senate floor for a vote, and any Senator can suggest that this bill become an amendment to the other bill. So regulation might be passed as part of a highway funding bill, or any of a dozen other acts.
Another strategy is to find a bill that passes both the House and Senate in different versions. This will trigger a conference of the two houses to agree on language of the bill. While in conference, the final language could be amended to include the Hatch/Wyden identity theft protection language – and passed into law in the dark hours of the night.
Either way, it is critical that tax preparers pay close attention to the markup session and any amendments to the proposed bill, and that they be well-informed and prepared to act on this legislation. The three most important things to do today are:
- Continue to read the Taxing Subjects blog and the Drake information forums on Facebook, Titter and Linked-In for the latest in news on this legislation.
- Stay active with your state and local professional associations, which will undoubtedly take positions on this issue.
- Contact your elected representatives and let them know the concerns you may have on this issue. Be calm but persistent.
It is impossible to tell at this point whether the legislation will pass or fail. It has no companion bill in the House of Representatives, which has its own docket and calendar to contend with. But it is legislation that bears careful watching between now and New Year’s.