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U.S. tax preparer rules land in Congress, tough road ahead

Signs at a H&R Block office are seen in Chicago April 14, 2009. REUTERS/John Gress
Signs at a H&R Block office are seen in Chicago April 14, 2009. REUTERS/John Gress

By Patrick Temple-West

WASHINGTON (Reuters) - An Obama administration push to clean up the tax preparation industry has landed in Congress where it is expected to stall, meaning further delays to rules to stamp out shoddy and deceptive tax preparers who are a drain on the U.S. Treasury and taxpayers.

After setbacks in the courts, the Obama administration this month asked Congress to pass a law that would specifically empower the Internal Revenue Service to regulate preparers, from sector leader H&R Block Inc to thousands of mom-and-pop shops.

The IRS had argued for years it did not need legislation to do this, but small-government activists recently prevailed in court in their effort to block the tax agency's attempts on its own to impose new regulations on up to 700,000 tax preparers.

Concurring with the activists, the U.S. Court of Appeals for the District of Columbia ruled last month that Congress never gave the IRS the power to impose test-taking and continuing education requirements on tax-return preparers.

The IRS now wants Congress to act, but there is little prospect that it will move quickly on that request, said Floyd Williams, the former IRS chief of legislative affairs. He is now a lawyer at a lobbying firm. "I don't think it's a go. I don't look for Congress to jump on that," he said.

The IRS request may have some traction in the Senate, where Democrat Ron Wyden, who chairs a committee that oversees the agency, has said he is "committed to focusing the committee on taking necessary actions to ensure robust taxpayer protection."

But in the Republican-controlled House of Representatives, the issue is not a top talking point among members of the tax-writing Ways and Means Committee, said a Republican staffer who asked not to be identified.

A spokeswoman for Ways and Means Committee Chairman Dave Camp, a Republican, said the IRS's request is under review.

Jeff Trinca, a lobbyist who represents enrolled agent tax preparers already licensed by the IRS, said, "Republicans are cautious ... There isn't a lot of grassroots support" for the IRS's proposed crackdown on the tax preparer industry.

NAVIGATING THE MAZE

The complex and confusing U.S. tax code each year drives millions of Americans to seek help with completing their tax returns, which supports a $9.4-billion industry.

About a third of the market is controlled by H&R Block, by far the industry's biggest firm, and three other sizable companies. The remaining two-thirds is divided among licensed and unlicensed preparers, many of them mom-and-pop operations.

Licensed preparers, such as enrolled agents, accountants and lawyers, would not have been subject to the IRS's proposed regulations, which were aimed mainly at unlicensed, unregulated tax preparers. That is the part of the market where the IRS sees the most mistakes and deception in tax returns.

Incompetent and unethical tax-return preparers "annually cost the taxpaying public billions of dollars," the Justice Department said in a court filing last year.

The department said in February it got permanent injunctions against more than 60 tax preparers in the prior 12 months.

Former IRS Commissioner Doug Shulman launched the agency's attempted crackdown in 2009, aiming to shrink the $450 billion "tax gap" between taxes owed to the IRS, but not paid.

Without federal action, regulation at the state level could help address the tax preparer problem, Williams said.

California is one of four states that regulate preparers. There tax preparers must pass a test and complete 20 hours of continuing education each year. But Cynthia Leachmoore, an enrolled agent in Soquel, California, said, "There's not enough consequence for someone who makes a bad mistake."

New York has moved recently to regulate preparers more closely, prompting complaints of a patchwork of state rules.

"My greatest fear is that states will each take regulations up on their own so that I would be unable to prepare a multi-state return," said Bill Nemeth, an enrolled agent in Georgia.

(Editing by Kevin Drawbaugh and Andrew Hay)

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