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Sadly, we have all heard stories of people falling victim to financial scams. Scams can take many forms and often harm our most vulnerable citizens. For example, many of us have received phone calls or other types of messages from fraudsters impersonating IRS or law enforcement officials threatening jail time if a fabricated tax debt is not immediately paid. Other scammers convince victims to liquidate their assets and pay them to the scammers, effectively stealing their life savings and leaving them with large tax liabilities to boot. Yet another type of scam involves the scammers convincing the victims to take fraudulent positions on their tax returns with the promise of a large tax refund, often under the guise of friendship or assistance. Many of these fraudulent tax schemes are posted to social media and are unfortunately reaching a wide audience.
In an attempt to minimize the harm inflicted on taxpayers, the IRS conducts robust outreach campaigns to warn taxpayers of scams. Last year, the IRS Commissioner made the prevention of scams and schemes a top priority, and the IRS is continuing to focus on efforts to prevent taxpayers from being harmed. The IRS conducts a “Dirty Dozen” campaign each filing season that involves issuing a series of news releases detailing various scams and schemes, providing pointers on how to avoid being a victim, and including information on how to report fraud. Recently, the IRS issued a news release warning taxpayers about unscrupulous tax return preparers misrepresenting the rules for claiming clean energy tax credits under the Inflation Reduction Act. Despite the IRS’s efforts, more and more taxpayers are being harmed by these scams. Getting ahead of this growing problem will take a multi-faceted approach. As an ounce of prevention is worth a pound of cure, I believe a meaningful step towards preventing improper tax positions is for Congress to pass a law, or authorize the Treasury Department to promulgate rules, to curtail the ability of incompetent or unscrupulous individuals to prepare tax returns.
In my 2024 Purple Book, I made a legislative recommendation to authorize the IRS to establish minimum competency standards for federal tax return preparers. Federal law does not currently impose competency or licensing requirements on paid tax return preparers. Credentialed return preparers, including attorneys, certified public accountants, and enrolled agents, are generally required to pass competency tests and take continuing education courses. Equally as important, credentialed return preparers are subject to the ethical duties and restrictions relating to practice before the IRS set forth in Circular 230.
By contrast, non-credentialed preparers generally are not subject to competency requirements or ethical standards, and notably, the majority of individual income tax returns are prepared by non-credentialed return preparers. As discussed in more detail in my Return Preparer Oversight Most Serious Problem in the 2023 Annual Report to Congress, about 60 percent (over 300,000) of unique Preparer Tax Identification Numbers (PTINs) recorded on tax year 2022 individual income tax returns belonged to non-credentialed return preparers. Imposing minimum competency requirements on all paid return preparers, including those who are currently non-credentialed, would go a long way toward preventing the significant harm inflicted on taxpayers by incompetent and unscrupulous return preparers.
As detailed in the Most Serious Problem, IRS data and many studies and investigations conducted over the years have found that taxpayers are harmed by both incompetent and unscrupulous non-credentialed return preparers. In fact, IRS data suggests that the overwhelming majority of Earned Income Tax Credit (EITC) improper payments are claimed on tax returns prepared by non-credentialed preparers. In 2022, returns prepared by non-credentialed preparers accounted for 96 percent of the total dollar amount of EITC audit adjustments made on prepared returns. For context, the IRS estimates the amount of EITC improper payments in fiscal year 2023 was $21.9 billion, or 33.5 percent of dollars paid out.
How will minimum competency standards and IRS oversight in general alleviate the harm inflicted on taxpayers by scammers? Only those return preparers in compliance with the standards will be able to obtain and maintain their PTINs and sign tax returns as the paid return preparer. Those return preparers with valid PTINs will have to take the time to satisfy the exam and training requirements and, most importantly, will be subject to the duties and responsibilities included in Circular 230.
Will the proposed oversight completely eliminate unscrupulous return preparers? Probably not, but I believe it will substantially change the profession and make it much more difficult for unscrupulous return preparers to stay in business. In my Purple Book legislative recommendation, I also recommend that Congress give the IRS the authority to revoke PTINs in cases where preparers are sanctioned for violations of these established minimum standards. Under the proposed oversight regime, if an unscrupulous return preparer with a valid PTIN tries to convince his clients to take fraudulent positions on their tax returns, the return preparer would risk facing significant sanctions, including PTIN revocation, which would prevent the return preparer from signing returns as a paid return preparer in the future.
Finally, with the proposed preparer oversight regime in place, the IRS’s messaging would become much simpler: “Make sure your preparer signs your return and enters their PTIN.” Preparers can only sign a tax return as a paid return preparer if they have a valid PTIN, which requires compliance with the proposed minimum competency standards, including the standards of conduct in Circular 230. Plus, all return preparers who comply with the rules will have the opportunity to be listed in the IRS’s Directory of Federal Tax Return Preparers. Thus, if the taxpayer ensures that the return preparer signs the return and enters their PTIN, and perhaps even confirms the preparer’s credentials in the IRS return preparer directory, they can have assurance that their return preparer is knowledgeable on basic tax laws.
There is a long and complicated history of prior efforts to establish minimum standards for federal tax return preparers. The proposal was first made in the National Taxpayer Advocate’s 2002 Annual Report to Congress. It was approved twice by the Senate Finance Committee under the leadership of then-Chairman Grassley and once by the full Senate, but the House of Representatives did not take up the proposal. In 2009, IRS Commissioner Doug Shulman decided the IRS would establish preparer standards administratively. The IRS held numerous public hearings and developed a program that key stakeholder groups generally supported. But after the program had been partially implemented, several preparers challenged the IRS’s authority to establish preparer standards without explicit congressional authorization. In Loving v. IRS, a U.S. district court sided with the preparers, agreeing that the IRS had exceeded its authority. That was in 2013.
Since that time, proponents of preparer standards have introduced numerous bills either to establish standards directly or to authorize the Treasury Department to establish them. Opponents have argued that some of the requirements under consideration would impose excessive burdens on small business preparers. As the National Taxpayer Advocate, I believe the goal of protecting taxpayers and the tax system by ensuring tax return preparers can meet minimum competency standards should predominate, but I am mindful that compromises may be required to attract sufficient support to make preparer standards a reality.
Considering the significant harm tax-related scams impose on taxpayers and tax administration, I encourage Congress to pass legislation authorizing the IRS to establish minimum competency standards for federal tax return preparers. IRS data and various studies have consistently shown that taxpayers are harmed by both incompetent and unscrupulous non-credentialed return preparers, and IRS data suggests that a significant portion of EITC improper payments are attributable to returns prepared by non-credentialed return preparers. Such legislation would make it difficult for unscrupulous return preparers to stay in business and would make IRS messaging on how to find reputable return preparers more straightforward.
While the IRS continues to work with its partners to identify scams and educate the public on how to avoid becoming a victim, return preparer oversight is a much-needed taxpayer protection that will minimize the harm imposed on taxpayers by continually evolving tax scams and unethical or uneducated non-credentialed return preparers.
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.