Beginning last year the IRS required all paid tax preparers register with the IRS (and pay $64.25 for the privilege.) As part of the registration process, they checked to make sure tax preparers were current on their own taxes. They now have an exam that all preparers must pass by the end of 2013, as well as continuing education requirements. Background checks and fingerprinting are planned but have not yet been implemented. They want to ensure a "basic competency" in the profession - which is great. There are some preparers out there who just shouldn't be doing taxes. Now perhaps they will either get the knowledge they need or get out of the business.
I have difficulty with the next step in the process - making the tax preparer comply with due diligence requirements and stiffly penalizing them if they do not. Tax preparers will have to start asking some potentially prying questions of their clients.
In case you weren't aware, there is a big "tax gap" out there. Latest release from the IRS (IR-2012-4, January 6, 2012 at http://www.irs.gov/newsroom/article/0,,id=252038,00.html?portlet=107) estimates the tax gap at $385 billion. That's what the IRS thinks should be paid in taxes if everyone fully and accurately reported all of their income and expenses. Essentially, it's what they think cheaters cost the government. People who use someone else's child as their own so they can claim the kid. Businesses that don't report all of their income or exaggerate their expenses. Or even people who bump up their charitable contributions. The IRS also estimates that these cheaters make up about 16.9% of us (i.e., about 83.1% of us are in compliance with tax laws.) The IRS has struggled for years trying to reduce this tax gap. They have a new approach now. Make tax preparers find it.
I've always been of the philosophy that a taxpayer is responsible for their own tax return. I will prepare the return based on what they tell me. I can get all the numbers on the right forms and lines and help them find legal deductions and credits. If the client says they made $10,000 in their landscaping business, that is what I'll report. I will gently educate about keeping good business records, mileage logs, etc., but I will not audit their records. The IRS due diligence requirement now says that if I know, or have reason to know, that a client's information is incorrect, inconsistent, or incomplete, I have to ask and document additional questions. For example my landscaper, who's only income is the $10,000 (an awfully round number, isn't it?), is driving a brand new truck and has four children, I have to ask how they are paying for their living expenses. If I don't ask, I can be penalized up to $5000 for negligence.
This is a big change for many tax preparers. This will be a big change for some taxpayers (perhaps that 16.9%). If you don't want your tax preparer asking prying questions, make sure you have good records and your information is complete and consistent. Don't say anything in front of your tax preparer that could be misleading. Just like you can't joke around at the airport about having a gun, you can no longer joke about your Swiss bank account at the tax office.
I would like everyone to be honest on their tax return, and most are. I pay every dime I owe and recognize that if some are cheating, the rest of us are paying their way. I'll do what I reasonably can to eliminate cheaters. I just hope the IRS doesn't take this due diligence thing too far against honest tax preparers. I'd much rather spend my time with clients finding legal tax savings. That's what's fun about doing taxes!