Unfortunately, we have all heard stories of people who have fallen victim to financial fraud. Fraud can take many forms and often harms our most vulnerable citizens. For example, many of us have received phone calls or other types of messages from scammers posing as IRS or law enforcement officials and threatening jail if a fabricated tax debt is not paid immediately. Other scammers convince victims to liquidate their assets and pay them to the scammers, stealing virtually all of their life savings and leaving them with large tax debts to boot. In another type of scam, scammers convince victims to take fraudulent positions on their tax returns with the promise of a large tax refund, often under the guise of friendship or help. Many of these fraudulent tax schemes are posted on social media and, unfortunately, reach a wide audience.

The IRS’s attempts to warn taxpayers are commendable, but more needs to be done

To minimize harm to taxpayers, the IRS conducts extensive educational campaigns to warn taxpayers about scams. Last year, the IRS Commissioner made preventing scams and fraud a top priority, and the IRS remains focused on preventing taxpayers from being harmed. Each tax season, the IRS conducts a “Dirty Dozen” campaign that includes a series of press releases detailing various scams and frauds, offering advice on how to avoid becoming a victim, and information on how to report fraud. Recently, the IRS issued a press release warning taxpayers about unscrupulous tax return preparers who misrepresent 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. A multi-pronged approach is needed to get ahead of this growing problem. Since prevention is better than cure, I believe that a sensible step to prevent improper tax situations would be for Congress to pass legislation or authorize the Treasury Department to issue regulations to limit the ability of incompetent or unscrupulous individuals to file tax returns.

Legislative recommendation for the approval of minimum competency standards

In my 2024 Purple Book, I made a legislative recommendation to authorize the IRS to establish minimum competency standards for tax return preparers. Currently, federal law does not impose competency or licensing requirements for paid tax return preparers. Licensed tax return preparers, including attorneys, accountants, and licensed agents, are typically required to pass competency tests and attend continuing education courses. Equally important, licensed tax return preparers are subject to the ethical duties and restrictions related to practice before the IRS set forth in Circular 230.

In contrast, non-licensed tax advisors are generally not subject to competency requirements or ethical standards, and In particular, the majority of income tax returns are prepared by non-licensed tax advisors.. As explained in more detail in my “Return Preparer Oversight Most Serious Problem” in the 2023 Annual Report to Congress, approximately 60 percent (over 300,000) of the unique Preparer Tax Identification Numbers (PTINs) recorded on income tax returns for tax year 2022 belonged to unlicensed tax return preparers. Imposing minimum competency requirements for all paid tax return preparers, including those currently unlicensed, would go a long way toward preventing the significant harm caused to taxpayers by incompetent and unscrupulous tax return preparers.

Lack of minimum standards harms taxpayers

As detailed in the “The Most Serious Problem” section, IRS data and many studies and investigations conducted over the years have found that taxpayers are harmed by both incompetent and unscrupulous unlicensed tax return preparers. In fact, IRS data suggests that the vast majority of improper Earned Income Tax Credit (EITC) payments are claimed on tax returns prepared by unlicensed preparers. In 2022, tax returns prepared by unlicensed preparers accounted for 96 percent of the total amount of EITC audit adjustments made to prepared tax returns. For comparison, the IRS estimates that the amount of EITC improper payments in fiscal year 2023 was $21.9 billion, or 33.5 percent of the dollars paid out.

Proposed oversight would make it harder for unscrupulous tax preparers to stay in business

How can minimum competency standards and general IRS oversight mitigate the harm taxpayers suffer from fraudsters? Only tax return preparers who meet the standards can obtain and retain their PTINs and sign tax returns as paid tax return preparers. Tax return preparers with valid PTINs must take the time to complete the examination and training requirements and, most importantly, are subject to the duties and responsibilities contained in Circular 230.

Will the proposed supervision complete eliminate unscrupulous tax return preparers? Probably not, but I believe it will fundamentally change the profession and make it much harder for unscrupulous tax 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 when preparers are sanctioned for violating these established minimum standards. Under the proposed oversight system, an unscrupulous tax return preparer with a valid PTIN who attempts to defraud his or her clients would risk significant sanctions, including revocation of the PTIN, which would prevent the tax return preparer from signing tax returns as a paid tax return preparer in the future.

Proposed oversight would make IRS messaging easier

Finally, the proposed tax preparer oversight system would make IRS communications much simpler: “Make sure your tax preparer signs your tax return and enters his or her PTIN.” Tax preparers can sign a tax return as paid tax preparers only if they have a valid PTIN, which requires compliance with the proposed minimum competency standards, including the conduct standards in Circular 230. In addition, all tax preparers who comply with the rules will have the opportunity to be listed in the IRS’s directory of tax preparers. So by making sure the tax preparer signs the tax return and enters his or her PTIN, and perhaps even confirming the preparer’s credentials in the IRS’s directory of tax preparers, the taxpayer can be assured that his or her tax preparer is familiar with basic tax laws.

To get to “yes”, compensation may be necessary

There is a long and complicated history of previous efforts to set minimum standards for 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, led by then-Chairman Grassley, and once by the full Senate, but the House of Representatives did not adopt the proposal. In 2009, IRS Commissioner Doug Shulman decided that the IRS would set standards for tax return preparers administratively. The IRS held numerous public hearings and developed a program that was generally supported by key stakeholders. But after the program was partially implemented, several tax return preparers questioned the IRS’s authority to set standards for tax return preparers without explicit authorization from Congress. In Loving against IRSA US district court ruled in favor of the authors and agreed that the IRS had exceeded its authority. That was in 2013.

Since then, advocates of tax preparer standards have introduced numerous bills either to set standards directly or to authorize the Treasury Department to set them. Opponents have argued that some of the requirements under consideration would place an undue burden on small business tax preparers. As a National Taxpayer Advocate, I believe that the goal of protecting taxpayers and the tax system by ensuring that tax preparers can meet minimum competency standards should prevail, but I recognize that compromises may be necessary to gain enough support to make tax preparer standards a reality.

Diploma

Given the significant harm that tax fraud causes to taxpayers and the tax administration, I urge Congress to pass legislation authorizing the IRS to set minimum competency standards for preparing federal tax returns. IRS data and various studies have consistently shown that taxpayers are harmed by both incompetent and unscrupulous unlicensed tax return preparers, and IRS data suggest that a significant portion of improper EITC payments are attributable to returns prepared by unlicensed tax return preparers. Such legislation would make it difficult for unscrupulous tax return preparers to stay in business and would simplify the IRS message about how to find reputable tax return preparers.

While the IRS continues to work with its partners to identify fraud cases and educate the public on how to avoid becoming victims, oversight of tax return preparers provides much-needed protection for taxpayers. It minimizes the harm caused to taxpayers by ever-evolving tax scams and unethical or uneducated tax return preparers without proper qualifications.