WASHINGTON (Dow Jones)--The U.S. Internal Revenue Service said Thursday it will recommend new federal standards for tax-return preparers by the end of this year.
The changes could affect chain tax-preparation companies, including H&R Block Inc. (HRB), Jackson Hewitt Tax Service Inc. (JTX) and Liberty Tax Service, and multitudes of self-employed preparers.
While the IRS will consider the role of tax-software providers, human preparers are the focus of the IRS effort to craft stricter standards, IRS Commissioner Doug Shulman told reporters in a conference call. "There are many, many excellent preparers," he said. "There are also some unscrupulous preparers out there."
"In most states, anyone can charge to prepare tax returns, regardless of training, education, experience, skill, licensing or registration," Shulman said. "When people pay good money, they should not get bad advice," he said.
Shulman said the IRS will submit recommendations by the end of the year to U.S. Treasury Secretary Timothy Geithner, which could include regulatory or legislative changes.
In addition to enrolled agents, lawyers and accountants licensed to represent taxpayers before the IRS, the recommendations would cover a growing category of unlicensed tax preparers and tax-software providers, according to an IRS news release.
Chain tax-preparation companies employ hundreds of thousands of preparers nationwide who are so-called unenrolled preparers, who haven't passed the federal test required to become an enrolled agent.
"I applaud the IRS in their efforts to require tax-reparer certification," said John Hewitt, chief executive of Liberty Tax Services, the third-largest U.S. tax-preparation firm. "It certainly hasn't hindered us in Oregon and California," he said of two states that regulate tax preparers.
Hewitt said Liberty has an internal system of employee training and certification, which he said he will press the IRS to incorporate into any new certification process it proposes. He said from 15 to 20% of preparers at Liberty franchises are either enrolled agents or CPAs.
H&R Block, the largest tax-preparation firm, also welcomed the IRS announcement. "Whether through face-to-face advice or through online or software programs, it is critical that all tax preparers have the training, including appropriate licensing, to prepare returns correctly, and to comply faithfully with the law," he said.
Scott Schneeberger, an analyst with investment firm Oppenheimer & Co. Inc., wrote in a Thursday research note that the IRS initiative is "significantly positive" for the big tax preparation firms. "As the larger preparers are already more closely monitored than the large, highly fragmented population of mom & pop preparers, the larger companies have been seeking increased regulation and oversight of the broader industry," wrote Schneeberger. But the announcement comes on the heels of a string of government reports that highlighted errors in return preparation by chain and independent preparers.
In a September 2008 study, auditors from the Treasury Inspector General for Tax Administration posed as taxpayers at 28 tax-preparation firms, both chain and self-employed. They reported that 17 of the 28 returns had errors, with six returns containing omissions or misstatements the IG said were "willful or reckless."
Shulman said IRS will hold a series of public meetings to gather input on the new regulations. He said while he has reached no conclusions about what is appropriate, possible elements range from a standard of ethical conduct for preparers, to education and training requirements, to mandatory registration or licensing of all return preparers.
"For me, everything is on the table," he said.
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