How Competent is your Tax Preparer

New Regulations Help Guarantee the Competency of Tax Preparers
Recently, the U.S. Internal Revenue Service (IRS) announced that in the near future, all signing tax return preparers will be required to register with the IRS, test for competency, and maintain no less than 15 hours of continuing professional education each year. This registration and licensing process is scheduled to begin in 2011 and is to be fully implemented within three years. How will the new law affect seniors and the Certified Senior Advisors (CSAs) that serve them?

Who Needs to Register – and Why
Many seniors believe that during retirement, their tax reporting and obligations are less than when they were actively employed. In reality, a retired senior’s taxes can be far more complex than they were previously. An experienced and qualified tax return preparer can help seniors understand the rules and regulations so that they can lessen the tax burden on their retirement incomes.

Certified Public Accountants (CPAs), attorneys, and Enrolled Agents (EAs – federally authorized tax practitioners) can prepare tax returns and are all subject to strict licensing, testing, and background investigation. Furthermore, they hold the particular privilege of representing taxpayers before all administrative levels of the IRS.

By contrast, other tax-returns preparers may represent taxpayers before the IRS only if they personally prepared the tax return in question and only at an initial IRS examination. If an issue remains unresolved after that meeting, the return preparer can go no further. Seniors who have a neighbor or acquaintance prepare their taxes could find themselves adrift in tricky and sometimes financially dangerous waters. The fact that a preparer charges for service does not mitigate such a risk.

The new procedures will require all paid tax preparers to register with the IRS by January 1, 2011. Upon registration, preparers will receive a Preparer Tax ID number (PTIN). This identification number will be the only one allowed in the IRS paid preparer system. Registration is the first step toward full licensing, which will be in place by 2014. The IRS has not yet fully determined the terms and cost of that licensing, which is likely to affect more than 1 million tax-return preparers.

Upon full implementation, regulated tax return preparers will be required to participate in at least 15 hours of continuing professional education each year; two of those hours must be in ethics and professional conduct. And for the first time in tax history, there will be a federal-level competency requirement on paid tax return preparers.

Two types of testing will be introduced. The first will be simple Form 1040 series preparation. The second level of testing will prove competency in preparing form Schedule C – Sole Proprietorship Business reporting and Schedule E, Rental Property reporting. A third level of testing will address the more complicated business returns for corporations and partnerships. CPAs, attorneys, and EAs will be exempted from the testing requirements, as long as they are active and in good standing with the licensing agencies that monitor their professions.

When the implementation process is complete, the IRS will publish a listing of regulated return preparers. CPAs, attorneys, and EAs will also be listed on the IRS site. One sure sign that a tax return preparer has not compiled with the new regulations will be a refusal to sign the return as the paid preparer. CSAs that may review the returns of seniors who say they paid for tax services should take particular note of such a discrepancy.

Advice for Seniors and CSAs
Seniors deserve the confidence that their tax returns will be complete and accurate and that anyone they pay to prepare those returns is knowledgeable, diligent, ethical, and accurate. Seniors who are selecting a trusted tax advisor should follow these guidelines:

1. Get a referral from a trusted friend, relative, or associate.
2. Have a brief telephone interview with the preparer.  Ask the following questions:
   • How long have you been preparing tax returns?
   • What experience do you have reporting rental property, retirement income, stock sales, and so forth?
   • How much time will you need to complete my return?
   • What will your estimated fee be for the preparation of my return?
   • Can you represent me before the IRS if there is a problem on my return?
   • Will you accept responsibility for an error in the preparation of the return and pay any penalty and interest associated with such an error?
   • What will I need to bring to an in-person meeting?
3. Make an appointment early in the filing season (January through April 15.)
4. Bring everything the return preparer might need.
5. Be prepared to answer questions about your income, lifestyle, and expenses. If the tax preparer does not ask any questions, he or she is probably not able to work in your best interest. Terminate the meeting and look for a different preparer.
6. If you have questions, ask them. Any tax preparer that is unable to answer questions about the preparation of your return is not knowledgeable enough to prepare the return.

Every CSA should have a cadre of tax professionals in his or her rolodex. Not every tax professional will work well with a particular client, so know your clients — and your tax professionals.

Also, CSAs who might be called on to review a senior’s tax return should encourage the senior to sign and file IRS Form 8821, Authorization to Disclose, with their tax returns. This form allows the IRS to send any correspondence, audit letters, or balance due notices to the CSA, as well as to the taxpayer. The form does grant power of attorney but can give a CSA the necessary knowledge to assist the senior, even if the CSA does not file the return. Section 7216 of the Internal Revenue Code prohibits a tax-return preparer from discussing confidential matters without a Consent to Disclose statement, signed by the taxpayer. Breaching §7216 subjects the preparer to a $1,000 penalty. Preparers should be cognizant of the taxpayer’s health and ability to conduct their affairs and should discuss the need for such a disclosure statement with their clients prior to an event that might require such disclosure.

Help Is on the Way
Remembering what your mother said: “If it sounds too good to be true, it probably is.” Seniors are among the most compliant of all taxpayers, but can be blind-sided by unscrupulous or incompetent preparers. Tax-return preparation should be carried out by knowledgeable professionals who understand tax laws and how they can be applied to help seniors maximize their finances. The new regulations can help to protect seniors – and all tax payers.