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Shady tax preparers, watch out

In most states, virtually anyone can hang out a shingle and go into business figuring taxes. The IRS is looking into regulating and perhaps licensing all preparers.

By MarketWatch

The Internal Revenue Service says it will investigate ways to regulate the hundreds of thousands of tax-return preparers currently operating without federal oversight.

While certified public accountants, tax attorneys and enrolled agents must comply with minimum standards for training and registration, many other tax preparers nationwide simply set up business and start working on taxpayers' returns, with no education requirements and no need to register with federal authorities.

Meanwhile, state regulation of preparers varies widely, with only a few states overseeing their operations, the IRS said. The IRS doesn't know how many tax preparers are in business nationwide, though estimates range from 600,000 to 900,000.

"Right now, there is no clear national standard regulation of paid tax-return preparers," said Doug Shulman, the IRS commissioner, in a conference call with reporters. "Virtually anyone can set up a tax-return-preparer business."

More than 80% of U.S. taxpayers hire a tax preparer or use tax-preparation software to do their returns. (See "Get the most from your tax software.")

Tax-prep software makers also may find their practices examined in the IRS review process, which is expected to culminate at the year's end with Shulman making recommendations to President Barack Obama and to the Treasury Department.

"We can't do this kind of review without taking into account the role that software plays in tax preparation," Shulman added, "but the focus of the review is preparers."

Taxpayers at risk

The IRS investigation may result in a range of new rules, from "standards of ethical conduct to training and education requirements to registration and licensing," Shulman said. But he was quick to point out that he won't make his recommendations until the review is over and that he's not "prejudging" the process.

Although the IRS already can go after preparers who engage in fraud and can impose penalties for some other conduct, the tax agency "must ensure that all preparers are ethical, provide good service and are qualified," he said.

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Should you do your own taxes? © Photodisc Red / Getty Images
Should you do your own taxes?
There are many reasons you might want to hire a professional preparer. But don't pay a pro just to fill in the blanks on your tax forms.

In a limited study last year of tax returns completed by unlicensed paid preparers, 17 out of 28 -- or 61% -- were prepared incorrectly, including one that showed a taxpayer owing $4,903 more than he actually did, according to a study by the Treasury Inspector General for Tax Administration, which provides independent oversight of IRS activities.

"This is a critical issue for the nation's taxpayers. When people pay good money, they should not get bad advice," Shulman said.

The IRS review process will involve getting input from a diverse group of people, including preparers and taxpayers. Later this year, the agency will hold a series of public meetings nationwide. Meeting schedules will be posted at the IRS Web site under the "tax professionals" section.

Continued: ID numbers coming for all?

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