Big Change Coming for Tax Preparers Next Year | USTaxAid

Diane Kennedy's Blog

Big Change Coming for Tax Preparers Next Year

Written by Diane Kennedy, CPA on October 30, 2012


The new plan for tax return preparers was supposed to be enacted at the beginning of 2012. The IRS delayed it one year and this next year is THE year. Non-licensed tax preparers will no longer be allowed to prepare tax returns for others.

You can still prepare your own tax return. This law just makes it mandatory that paid preparers show some level of competence before they start preparing returns.

I normally am pretty much against government interference in small business, but this is one time I’m for the changes. Granted, I’m not objective because I am a CPA and have spent lots of hours studying and practically implementing what I know. I do get upset when I see some of the garbage that other preparers have done that have gotten clients into trouble.

There was a lawsuit brought by small unlicensed tax preparers against the IRS, claiming the IRS had no right to interfere with their ability to make money. I did a quick search and haven’t seen how that settled out, but I suspect that the IRS will end up prevailing. The test is really too easy for anyone who knows something about tax work and the problems are too big when people who don’t know what they’re doing prepare tax returns.

Here are some of the problems I’ve recently seen:

  • An ongoing problem with uninformed tax preparers who don’t properly take the real estate professional deduction. If you make over $150,000, you can’t take your real estate losses against other income. The way out is if you or your spouse is a real estate professional and you materially participate in the property.

The problem is that too many people have just filed that they meet the criteria, without having a clue what it really means. The IRS hit the motherload in audits and now legitimately claimed deductions are going through rigorous audits.

If so many people hadn’t filed without understanding what the rules were, these audits would have never ramped up to where they are today.

  • • Incorrectly overriding tax programs. I had to override my tax program once this past year when a glitch wasn’t letting a client take a Section 179 flow through from a K-1, but most of the time if my program isn’t letting me do something it’s because I entered something wrong. So I need to investigate.I see it done wrong all the time. Some preparers unknowingly override systems to offset passive losses against nonpassive income or to take a home office deduction even though it creates a loss on Schedule C. Those kind of mistakes are just like thumbing your nose at the IRS. You will get audited.

I could go on and on about all the mistakes I see when new clients come to us because they’re now in trouble with the IRS and the unlicensed preparers aren’t returning their calls.

When you add in the fact that the test that the IRS has some ridiculously easy questions, it seems that the least you can expect is that your paid preparer has someone making sure they know what they are doing. For me, I’ve found that these bad returns have cost my clients a lot in the form of extra audit scrutiny and just generally getting lumped into a group with others who made mistakes, when they didn’t.

The new rules hit next year. But the unlicensed preparers who applied for a year’s reprieve still have to get the continuing education this year. It’s expected that many will not comply with this requirement, realizing they’re out of business this next year.

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