July 6th, 2011

Some tax preparers who will be affected by official competency testing with the Internal Revenue Service take the most extreme view that IRS should force return preparers to get an accounting degree, while others say anyone preparing taxes for five years without problems should be grandfathered, according to recent comments to the agency.

The middle view in comment letters IRS received on Notice 2011-48 was that mandatory testing should be mainly multiple choice, focus on common errors found in the Form 1040 series, make 75 percent to 80 percent accuracy a passing grade, and be offered frequently enough that preparers who fail can take the test again quickly. Preparers also said they did not want to have to travel too far to take the test.

Comments are due July 7

IRS received more than 90 comment letters on what the new testing requirements for tax preparers should be. Testing will begin in 2011 for approximately 700,000 newly registered preparers, most of whom have never before had to pass a test in order to prepare taxes.

The testing regime is part of IRS’s new return preparer strategy, launched in 2010, and is aimed at improving industry competency and ethics. Under it, IRS required all preparers to get a new preparer tax identification number (PTIN) but exempted certain categories of preparers tested at the state level or by IRS, and those supervised by them.

Level of Difficulty

CPAs, attorneys, and enrolled agents, who have always had to pass a test at the state level or with IRS, are therefore not subject to the new IRS testing scheme. They were not hesitant, however, to express their views on the standards that should apply to others.

Enrolled agent Lawrence Rogers said the test should be very hard. “If it is not, there is no reason to have people take it at all,” he said. Test takers “have to know the subject matter, and not just guess at it. It should take four hours,” he said.

That was countered by Susan Santora, a tax preparer from Santa Monica, Calif., who said, “This is a competency test, not the enrolled agent exam.”

Areas for Focus

IRS should focus on errors frequently seen on the Form 1040, Form 1065, and Form 1120S, said Joseph Flack, a former Big Four CPA tax adviser now with another firm.

These include tax preparers who miss the various deduction limitations, such as basis limitations on partnership investments; at-risk rules regarding what is at risk; and ignoring personal interest limitations on refinancing non-principal residences.

On Form 1065s, failure to read partnership agreements and resulting incorrect allocation of losses have been problematic, Flack said. For the Form 1120S, S corporation shareholders are failing to track basis, and are therefore paying distribution in excess of basis and not picking up the gain, he said.

Rogers agreed that there should be a focus on frequently committed errors. The earned income credit, Schedule C deductions, and vehicle usage items would be a good place to start, he said.

Individual, sole proprietors, and Circular 230, are the top three areas that should be tested, said Anthony Curatola, a professor of tax and accounting at Drexel University.

In addition to a general multiple choice format, he recommended some tax calculations requiring a person to pull up tax tables or specific forms such as an earned income tax credit checklist.

Furthermore, since many of the registered tax preparers are using tax software, he suggested some questions be geared toward an understanding of the concept associated with tax liability instead of just calculations.

The New York State Society of Certified Public Accountants strongly believes that a practical section involving the preparation of a sample return is essential. In addition there should be one short essay question to test the applicant’s ability to communicate tax concepts to clients, President Richard Piluso said. The level of difficulty of testing should fall somewhere between that of the existing enrolled agent exam and the examination given to IRS’s Volunteer Income Tax Assistance applicants.

Open-Book Exams

There was general enthusiasm for an open-book test from some quarters. Arthur Rose, an enrolled agent with Shapiro & Shapiro CPAs, said the most common cause of improperly prepared returns is lack of knowledge in how to apply the correct set of laws and rules to the situation.

Most commenters said the test should only be in English, because tax laws are written in English. The government cannot afford to publish in numerous languages, said J.M. Klein, an accredited tax adviser from Woodland Hills, Calif.