IRS tightens rules on prep

Just as the holiday season transitions into the less-festive tax season, the Internal Revenue Service announced new regulations for people paid to prepare returns, meaning they must register with the government, complete competency tests and adhere to ethical and professional standards.

Until now, anyone could prepare a federal tax return and charge for the service without meeting any specific requirements. The IRS estimates that 80 percent of taxpaying households seek help with their returns each year.

The new rules do not apply this year and do not affect attorneys, certified public accountants or enrolled agents who already take competency tests. The IRS plans to study the accuracy of those groups of tax preparers in the future, though, to make sure the testing exemption should remain in place.

Other paid preparers will have three years to meet the testing requirement and may take the exam as often as it is offered until they pass. They also must complete 15 hours of continuing education each year, including classes on tax law updates and ethics.

Patti Hunt, assistant general manager at 19 local Jackson Hewitt Tax Service offices and an enrolled agent, said every tax preparer who works for her company takes five exams first. But she worries that computer software means plenty of people who buy and read a program once become amateur tax preparers.

Upon hearing of the new regulations, she said: "This is absolutely wonderful. We have been waiting for this for the longest time."

The IRS plans to develop a searchable database of tax return preparers who have registered and passed the

competency test. The agency also will make compliance checks.

The IRS developed the new regulations. The rules draw upon input from tax professionals, consumer advocates, software vendors and others. Commissioner Doug Shulman called for a review of the industry in June.

Bob Baldwin, a certified public accountant with Charleston-based Baldwin & Associates and a former president of the S.C. Association of Certified Public Accountants, said the new regulations mean customers can identify qualifications easily.

"This may be hard on people," he said. "There might be people who do tax returns just to be nice to people."

But over the past 30 years Baldwin has learned that "there are groups out there that are unscrupulous, that have taken advantage of the law," he said.

"It's better for the consumer," he added. "The tax code is complex enough you really want people who know what they're doing."

John Mitchell, franchise owner of four local Liberty Tax Service offices, said his company's tests already meet the IRS standards and that his employees take those in-house exams annually.

"What it will do is probably hurt some of the mom-and-pop businesses, send some their students over to us to or to (H&R) Block," he said.

This year, the IRS will send letters to some 10,000 paid tax return preparers across the country who frequently make errors. And IRS agents will visit some of the letter recipients in coming weeks to discuss how to avoid mistakes.

In an effort to step up awareness before the new rules take effect, agents also will visit tax return preparers while posing as customers.

Prep work

The IRS issued tips for choosing a tax return preparer:

--Use a preparer who signs the return and provides a copy.

--Avoid preparers who charge based on a percentage of the refund.

--Avoid preparers who say they can get larger refunds than others.

--Remember that only attorneys, certified public accountants and enrolled agents can represent taxpayers before the IRS in all matters. Return preparers can only represent taxpayers for audits of returns they prepared themselves.

--Find out if the preparer belongs to an organization that includes industry education standards and a code of ethics.