Several years ago, the IRS tried to license tax professionals. However, the courts ruled in Loving v. IRS that the agency couldn’t license those who prepared tax returns. I am going to present both sides of this argument. This article is meant to open up a discussion, and I have been on both sides of this issue.
I have been in practice for 23 years, and I’ve been licensed since 2000. There was a period of six years during which I was not licensed. My background involved taking accounting and tax classes in college. I was thrown into preparing what I considered to be complex returns fresh out of college. So, I learned on the job. Should I have been preparing tax returns at that time? Probably not, but I was.
I had people who could answer my questions, but when giving tax advice to clients, I was mentored and taught to do it one way. Although I had taken the one class of tax, which was all that is required of an accounting major by the way, I didn’t have a full and complete understanding of tax law. Obviously, we all have to start somewhere. Remember, this was 1994 and you couldn’t just “Google it” or join an online group to ask questions. What we did was look it up in the Master Tax Guide (which, I admit, I still collect).
I remember having a client who received a letter from the IRS about a tax return that I had prepared and I had to talk to the IRS. I learned that I had to have a power of attorney (POA) and I could talk to the IRS only about the returns that I prepared. I filed a POA and got a Centralized Authorization File number. I didn’t fully understand representation, nor did I know about taxpayer rights. I was there for the transition to the kinder, gentler IRS that we have today.
As time went on and with the Internet’s popularity growing, I learned about becoming an enrolled agent (EA). I was at a crossroads. I could have sat for the CPA exam or the EA exam. The difference was auditing financial statements, of which I had no interest, so I started studying for the Special Enrollment Examination to become an EA.
When I took the test, it was a two-day, four-part exam that had to be taken once a year, all at the same time. You had to pass at least two parts of the exam to not have to take them again. You couldn’t use a calculator, and the exam was hard.
I had five years of experience under my belt when I took the exam for the first time, and I passed three parts. Then I passed the final part the next year. I started studying for the text right after tax season and it lasted all the way through October, when the test was given. I studied every single night for three to four hours.
I became licensed and went through my first audit, but I had no idea what I was doing, but just like with preparing tax returns, I figured it out. A few years later, I stumbled on the National Association of Enrolled Agents (NAEA), the National Tax Practice Institute, and online courses on representation, and I learned a ton of information on how to represent clients before the IRS, Appeals, and the US Tax Court.
Should Tax Professionals Be Licensed?
Now, the question is: Do I think tax professionals should be licensed? My answer is yes, and let me tell you why. I can fully appreciate the ruling in Loving – someone trying to make a living and the IRS steps in all of a sudden and tries to stop it. But here is a story about an unlicensed individual who I encountered.
There was a lady who called me one day from a small town in Alabama that only had one tax preparer. This tax professional – and I use that term loosely – royally messed up her return. The client was audited and because the tax pro prepared the return, she was also allowed to represent the client at the audit. The audit didn’t go the client’s way and the tax pro couldn’t appeal because she wasn’t licensed. This left the client with a tax debt of $750,000.
I was retained, and through a Freedom of Information Act (FOIA) request, I got a copy of the auditor’s notes. My client’s issue was that she opened a pizza shop – not once, but several times. She lost her shirt and the argument was that she didn’t materially or actively participate in the business, so those losses were disallowed as passive, creating a large tax liability. I don’t think the tax preparer fully understood why these losses were being disallowed, and then she couldn’t appeal the decision.
Now, did my client know that the tax pro wasn’t licensed? In Florida, where I live, we license barbers. You would think that someone with access to clients’ financial information, Social Security numbers, etc., would need to have some licensing requirements and some oversight. But the dirty little secret of this business is that they don’t. My client didn’t know this until I told her. I begged for an audit reconsideration and got her tax bill down to $40,000.
There are countless returns that I have seen prepared by unlicensed preparers that are just plain and utter garbage. In 2017, it is scary to think that any criminal can get a Preparer Tax Identification Number and open a tax office. They then have free access to Social Security and bank account numbers. Although the taxpayer is responsible for what is on a tax return, after 23 years in this business, 99 percent of clients don’t understand what is on their tax return. Nor do they know that their signature on a fraudulent return could land them in prison. But there are no licensing requirements, and no oversight.
Now, I would like to point out that I have seen my share of professionals who have no business preparing tax returns. There are unscrupulous professionals who are in business to rip people off. We need a whole rethinking of this – and I have an idea.
My Idea to License Tax Professionals
First of all, any EA, CPA, or attorney, as of the date of implementation of this plan, should be grandfathered in. Secondly, we need some real oversight. Right now, we have the state boards of accountancy for CPAs, the State Bar for attorneys, and the IRS Office of Professional Responsibility (OPR) for EAs. Does the public know that? No, they don’t. If I only had a nickel for all the times I was referred to as a CPA, even though I have MST (Master of Science in Taxation) and EA after my name on everything. I used to let it slide, but the NAEA now wants me to educate the public.
The state boards of accountancy and state bar associations do excellent jobs of oversight for CPAs and attorneys, but frankly, the OPR sucks.
The licensing requirements would work like this: First, per Circular 230, anyone who prepares a tax return is subject to censor by the OPR – and make that common knowledge to the public. The state boards of accountancy allow you to search for someone’s license online, and that is what OPR should have in place as well. Further, you should be able to find online whether tax preparers have had any complaints made about them. Now, you have to either call OPR or send a FOIA request to get that info, but this is the 21st century. If I can do my grocery shopping online at 4 a.m., I should be able to search for a tax pro.
There should also be requirements for all tax preparers that must be met in order to prepare tax returns. They should take at least 15 hours of classes designed to teach them how to do a tax return properly. A test should be taken and passed before receiving a license. After that, they need 15 hours of continuing professional education (CPE) per year to maintain their license.
A separate license for representation should also be required. It’s important to be able to demonstrate that you know how representation works before you can represent a client. The reason is that it is a whole different set of rules. What is needed is the requirement of taking 15 hours of CPE per year that is geared toward representation to keep your license active.
Will implementing these types of changes take money? Yes, it will. But a discussion about the licensing of tax professionals needs to happen. With the way things are now, too many people are put at an unnecessary risk. Maybe it will cost a lot to introduce a formal licensing program, but I don’t see it working any other way.