Panel backs licensing for tax return preparers

The Internal Revenue Service should develop a licensing scheme for tax preparers, reverse its decision to outsource some tax debt collection, establish a free electronic filing system and secure more resources for a taxpayer assistance program, a panel representing taxpayers recommended recently.

The Taxpayer Advocacy Panel, a volunteer federal advisory committee that relies on taxpayer input to address IRS service and customer satisfaction, submitted its recommendations in response to a request by IRS Commissioner Mark Everson at an April meeting.

In its Aug. 18 letter, the panel found that the current system, in which no qualifications or licenses are required to offer paid tax preparation services, leaves customers open to inept and unethical service and identity theft.

Panel members recommended that the IRS develop a licensing system, possibly based on existing training and testing used in the Volunteer Income Tax Assistance program, to license individual preparers annually and indicate the preparers' level of expertise. The license requirements also should include a background check designed to identify individuals with a history of financial crimes or other activities that should bar them from having access to customers' financial data, the group said.

Such a system also would assist the IRS in tracking unethical tax specialists, and ensure that preparers were up to date on the latest tax laws, the panel said.

The panel supported regulatory changes that the IRS proposed in March as measures to update tax preparation rules for an electronic era. Those changes included modifications to how preparers could share customer information that drew fire for making it too easy for individuals to unwittingly sign away significant rights to their financial and personal data.

The panel generally supported the updates, but said they did not do enough to address taxpayer concern over data security, especially when return processing is outsourced to foreign entities not subject to U.S. laws.

To tighten the security provisions, the panel recommended that preparers be required to remove personal data such as social security numbers, birth dates, telephone numbers and bank account information before sending returns to offshore locations, as well as to disclose where the data would be sent.

To address identity theft, the panel recommended a system of taxpayer identification numbers akin to those used by businesses. Taxpayers would file for an ID number using just their basic personal data -- social security number, address, and date of birth -- and would receive a number that could be used with employers, the IRS and state and local governments in lieu of a social security number. Tax forms would include just the filer's name and tax ID number.

"When fully implemented, any information that the tax preparers or practitioners have, use, disclose and/or sell becomes untraceable regarding any personal information about the taxpayer(s) and their dependents. This should effectively curb abuse of such data and identify theft," the panel wrote.

The committee also urged the IRS to drop a controversial proposal to outsource some tax debt collection. The plan has been under discussion for years but took a major step forward in March with the IRS' announcement that three firms had been selected for contracts in the initial program phase. It has been criticized in Congress and by the National Treasury Employees Union for putting taxpayer data at risk.

In a March appropriations subcommittee hearing, Everson conceded that employees could perform the work at far less cost. But vagaries of the budget process mean the agency does not have funds to hire more employees for the purpose.

After studying taxpayers' perceptions of the IRS Free File program, which partners with tax preparation companies to let low- and moderate-income filers prepare and submit returns electronically, the panel concluded that people misunderstood the program's purpose and sometimes became frustrated and distrustful when using it.

Many taxpayers believe the system allows them to file returns directly with the IRS, the panel said, and become confused by hidden fees imposed by participating companies and for additional services offered, such as audit insurance.

"Ultimately … taxpayers are looking for a direct e-file program with the IRS that would be truly free of charge," the panel said, and recommended that the IRS take measures to improve the program in the near term while building such an electronic filing capability.

Finally, the panel examined the Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs in light of cutbacks at Taxpayer Assistance Centers. It recommended that the IRS increase support to the volunteer-based programs. Praising the program for the elderly, the panel said ensuring that VITA receives the training, technology, marketing and other support to be fully successful could compensate for the loss of capacity at employee-staffed assistance centers as well as boost compliance with tax laws.