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The Color of Money

A loophole in new regulations may mean not all paid tax preparers are registered

By Michelle Singletary
Washington Post / January 10, 2010

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Maybe it’s me, but when I see the word ”all,” I assume it means all-inclusive. Recently, the Internal Revenue Service announced a major initiative to bring greater scrutiny to the tax preparation industry. IRS Commissioner Doug Shulman wants paid tax preparers to be tested for competency and be required to take continuing education courses.

One change would also mandate the registration of all paid tax preparers. However, this may not quite be the case.

Here’s what the IRS said in its report on tax preparers: ”Increased oversight begins with mandatory registration. . . . Registration of all tax return preparers will enable the IRS to collect more accurate data on return preparers. . . . The IRS, therefore, intends to require all individuals who prepare returns for compensation and are required to sign those returns to register.” (Emphases mine.)

But there was a caveat in the report.

When it comes to the registration of tax preparers, all may not really mean all. Already, the proposed rule would exclude attorneys, certified public accountants, and enrolled agents, who are licensed by the federal government to represent taxpayers before the IRS.

Nina E. Olson, the national taxpayer advocate, is concerned too many paid preparers may skirt the registration rule because of a common industry practice.

This is because Treasury regulations distinguish between a preparer who signs a return (a ”signing tax return preparer”) and a preparer who prepares ”all or a substantial portion” of the paperwork but does not sign it (a ”nonsigning tax return preparer”), Olson wrote in her annual report to Congress.

In some businesses, one person or a small number of people are designated to sign returns, even though these individuals may not have met, interviewed, or collected information from the taxpayer. The IRS initially will require only preparers who sign returns to register. The agency ”will consider extending the registration requirement to all preparers,” the report said. ”If the IRS regulates solely ‘signing tax return preparers,’ ” Olson wrote, ”many individuals engaged in return preparation will not be subject to registration.”

But Shulman said the IRS doesn’t want to put an undue burden on people who are simply passing along returns to preparers. He added the agency would make it clear it expects individuals providing a significant amount of work on a taxpayer’s return to sign it, and that means he or she would be required to be registered. The IRS says registration will make it easier for the agency to locate and review suspect returns prepared by certain preparers.

Olson is still right to be concerned about this loophole. Common sense and experience have proved that people will exploit regulatory loopholes. Certainly language can be crafted to exclude support staff and include the people preparing returns who need to be registered. ”All” should mean everyone.

Michelle Singletary is a columnist for The Washington Post.