Regulation and Tax Preparer Qualifications

Tax preparer regulation is a controversial topic among policy makers, the Internal Revenue Service, and certification providers. Proponents claim that regulation protects taxpayers from incompetent preparers while opponents assert that regulation increases costs and discourages preparers from attaining higher qualifications. Following longstanding regulations in Oregon and California, the IRS implemented the Registered Tax Return Preparer program in 2012, which was unexpectedly invalidated in just its second year. Using this quasi-experimental setting and a unique dataset of all U.S. tax preparers obtained from the IRS, we test the effect of regulation on tax preparer qualifications. We find that tax preparer regulation is positively associated with theproportion of highly qualified tax preparers. We also find that regulation increases (decreases) the likelihood that a market entrant (exiter) is highly qualified. In additional analysis, we find some evidence that tax preparer regulations are associated with increased fees and better tax return quality.

Unreasonable S Corporation Compensation: Why has the IRS Failed to Enforce Circular 230?

ABSTRACT The fact that S corporations are required to pay reasonable compensation to shareholding employees is well established. In this paper, three S corporation reasonable compensation cases are discussed to demonstrate the issues faced by the taxpayer, as well as the penalties and professional responsibility problems that may impact the tax preparer. Analyses of the cases indicate that (1) paying low S corporation salaries leads to taxpayer penalties, and (2) that the language in Treasury Circular 230 may allow the IRS to apply penalties to the tax preparers involved with these cases. However, there is no evidence that the IRS has imposed penalties on the preparers related to these or any other S corporation reasonable compensation cases. I briefly review a series of preparer penalty cases in an effort to show that preparer penalties have been applied to situations bearing similarities to S corporation reasonable compensation cases.

What You Do Know Can Hurt You: An Instructional Case Requiring Application of Professional Standards to an Ethical Dilemma Facing an Auditor and Tax Preparer

SUMMARY This instructional case, based on a real-life experience, introduces students/professionals to an ethical dilemma faced by a CPA who serves as both an auditor and a tax preparer for related parties. The CPA becomes aware of a large amount of gambling activity undertaken by an individual income tax client who is employed as the executive director of the local branch of a national charitable organization. The local branch also happens to be an audit client of the CPA. Through the case, students/professionals gain an understanding of and appreciation for a realistic ethical dilemma faced by a CPA who also prepares personal income tax returns for related parties. To help the CPA resolve the issues in this case, students/professionals must understand and apply relevant professional standards, including the AICPA Code of Professional Conduct, AU-C Section 240 “Consideration of Fraud in a Financial Statement Audit,” and IRS Circular 230 “Regulations Governing Practice Before the Internal Revenue Service.” A survey questionnaire administered to students who completed the case during an upper-level accounting course suggests that students found the case to be an enjoyable and valuable learning experience that helped them to recognize personal and professional ethical issues facing auditors and tax professionals, as well as to access and apply professional standards to such ethical issues.

The Role of Auditors, Non-Auditors, and Internal Tax Departments in Corporate Tax Aggressiveness

ABSTRACT Using confidential data from the Internal Revenue Service on who signs a corporation's tax return, we investigate whether the party primarily responsible for the tax compliance function of the firm—the auditor, an external non-auditor, or the internal tax department—is related to the corporation's tax aggressiveness. We report three key findings: (1) firms preparing their own tax returns or hiring a non-auditor claim more aggressive tax positions than firms using their auditor as the tax preparer; (2) auditor-provided tax services are related to tax aggressiveness even after considering tax preparer identity, which supports and extends prior research using tax fees as a proxy for tax planning; and (3) Big 4 tax preparers, in particular, are linked to less tax aggressiveness when they are the auditor than when they are not the auditor. Our findings help policymakers and researchers better understand an important feature of tax compliance intermediaries; particularly, how the dual role via audits is related to observable corporate tax outcomes.

Avoiding The Imposition Of Penalties And Sanctions Under Circular 230 On Tax Practitioners

The Treasury Department and the IRS have established certain standards for those who are tax practitioners. Certified Public Accountants and other tax practitioners face potential penalties if they violate those standards. Treasury Department Circular No. 230 contains the rules that guide practitioners. It also specifies a number of tax preparer penalties and sanctions that can be imposed on those who practice before the IRS. Sanctions can include censure, suspension, disbarment, and the assessment of monetary penalties. The imposition of these sanctions can have a significant negative impact on a CPAs practice. The CPA firms reputation and its ability to generate income can be adversely affected. The purpose of this article is to summarize the penalties and sanctions contained in Treasury Circular 230. The article also recommends courses of action that tax practitioners should take in order to minimize their exposure to those sanctions.

THE AIA'S SPECIAL BULLETIN SERIES AND ITS EARLY GUIDANCE ON TAX ISSUES RELATED TO DEPRECIATION, 1920–1929

ABSTRACT When the final state ratified the 16th Amendment to the U.S. Constitution in 1913, levying taxes directly on individual incomes became a reality and opened up expanded taxation on businesses. For example, the supporting legislation allowed for the deduction of wear and tear on equipment as a business expense based on the service lives. Unfortunately for the tax preparer, there was no clear meaning of wear and tear and the interpretation of the of service lives in the legislation. With little or no guidance to CPA tax preparers and their clients, it was inevitable that Bureau of Internal Revenue examiners would question returns with such deductions. To help its members to understand better, the new law and the ever-increasing complexity of accounting issues related to it, the American Institute of Accountants began to publish the Special Bulletin Series in January 1920. Many of the answers present in the Bulletins between 1920 and 1929 solved accounting and tax problems in ways still used nearly a century later.

An Investigation of the Impact of Preparer Penalty Provisions on Tax Preparer Aggressiveness

ABSTRACT The Small Business Work Opportunity Act of 2007 enacted significant changes in tax return preparer penalties. This study uses an experiment to examine the effectiveness of the revised preparer penalty provisions at reducing tax preparer aggressiveness. Specifically, we examine the impact of two significant components of the changes to the preparer penalty provisions—penalty amount and reporting standard required to avoid penalty imposition—on tax preparers' recommendation and signing decisions involving an aggressive tax position. We find that the increase in penalty amount has no effect on tax preparers' recommendation decisions, but does affect their signing decisions. A higher reporting standard significantly reduces both tax preparers' willingness to recommend an aggressive position and to sign a tax return containing an aggressive position. Data Availability: Data used in this study are available from the first author upon request.