The Internal Revenue Service says there could be more than a million people offering tax preparation services. Most offer sound advice, IRS Commissioner Doug Shulman says, but many don't and the agency knows little about them.
The new regulations, announced Monday, won't be in effect for the current filing season - individual tax returns are due April 15. But Shulman said tax preparers will be held to higher standards in future years as the IRS steps up its oversight to help reduce fraud and errors.
"Taxpayers will get improved service and enhanced standards from tax preparers, and they'll have less risk that they'll get bad advice," Shulman told reporters. "The tax preparation industry will get more consistency and a level playing field."
Shulman said he hopes to have all paid tax preparers registered by the 2011 filing season. Preparers will be given about three years to meet competency requirements, though there is much work to be done to develop standards and tests.
Eventually, tax preparers will be required to complete annual training and will be subject to penalties for unethical conduct, Shulman said. Taxpayers will be able to check the credentials of preparers on a public IRS database.
"We think this is incredibly important to the entire tax system that when people pay good money for a tax return preparer, they don't get bad advice," Shulman said.
Though the new regulations aren't in place yet, Shulman said the IRS is stepping up enforcement this tax season. He said the IRS will send notices to 10,000 preparers who have had frequent errors.
He said agents will also visit thousands of tax preparers. Some of the visits will be announced ahead of time; others will not. In some visits, agents will pose as taxpayers to see if they get accurate advice, Shulman said.
Shulman said taxpayers should avoid preparers who promise larger refunds, or those who charge fees based on the size of the refund.
H&R Block issued a statement supporting the new regulations. The tax giant said its training requirements already exceed those the IRS will require.
Rep. Jose E. Serrano, D-N.Y., chairman of the House appropriations subcommittee that oversees the IRS, said the rules would help stop "scam artists" who prey on low-income taxpayers.
More than 80 percent of taxpayers use a paid tax preparer or tax software to complete their yearly returns. However, paid tax preparers are unregulated in many states, unless they are also lawyers, certified public accountants or enrolled agents who represent taxpayers before the Internal Revenue Service.
Lawyers, certified public accountants and enrolled agents will not be affected by the new regulations. Some had said they were concerned that new IRS regulations would be redundant for them because they already are regulated through their professions. Shulman agreed and exempted them.
The IRS does a poor job overseeing paid tax preparers, making it difficult to detect those responsible for large numbers of errors or even fraud, said an inspector general's report issued in July.
Tax advisers are supposed to sign the returns they prepare, but they can use one of several numbers to identify themselves on returns, making it impossible to accurately track them, said the report by the treasury inspector general for tax administration.
Shulman said new registration requirements should help the IRS identify problem preparers. He estimated there are between 900,000 and 1.4 million people who are paid to prepare tax returns. He said the agency will have a better handle on the number once they have to register.
The IRS has the authority to issue the new regulations without legislation, he said.
Many professional organizations and tax preparation companies have said they would support increased oversight.
"I believe it will improve services to the general public," said Cindy Hockenberry, research coordinator for the National Association of Tax Professionals. "The comfort level will go up a little bit because the taxpayer will know that somebody is looking over this industry."
"In the past when just anybody could put out their shingle and do a return, that was just kind of a hotbed for unscrupulous behavior," Hockenberry said.