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[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]

 
                 FRAUD IN INCOME TAX RETURN PREPARATION

=======================================================================

                                HEARING

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 20, 2005

                               __________

                           Serial No. 109-43

                               __________

         Printed for the use of the Committee on Ways and Means

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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

E. CLAY SHAW, JR., Florida           CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM MCCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM MCDERMOTT, Washington
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
PHIL ENGLISH, Pennsylvania           WILLIAM J. JEFFERSON, Louisiana
J.D. HAYWORTH, Arizona               JOHN S. TANNER, Tennessee
JERRY WELLER, Illinois               XAVIER BECERRA, California
KENNY C. HULSHOF, Missouri           LLOYD DOGGETT, Texas
RON LEWIS, Kentucky                  EARL POMEROY, North Dakota
MARK FOLEY, Florida                  STEPHANIE TUBBS JONES, Ohio
KEVIN BRADY, Texas                   MIKE THOMPSON, California
THOMAS M. REYNOLDS, New York         JOHN B. LARSON, Connecticut
PAUL RYAN, Wisconsin                 RAHM EMANUEL, Illinois
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
DEVIN NUNES, California
                    Allison H. Giles, Chief of Staff
                  Janice Mays, Minority Chief Counsel

                                 ------                                

                       SUBCOMMITTEE ON OVERSIGHT

                    JIM RAMSTAD, Minnesota, Chairman

ERIC CANTOR, Virginia                JOHN LEWIS, Georgia
BOB BEAUPREZ, Colorado               EARL POMEROY, North Dakota
JOHN LINDER, Georgia                 MICHAEL R. MCNULTY, New York
E. CLAY SHAW, Florida                JOHN S. TANNER, Tennessee
SAM JOHNSON, Texas                   CHARLES B. RANGEL, New York
DEVIN NUNES, California
J.D. HAYWORTH, Arizona

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

                            C O N T E N T S

                               __________
                                                                   Page
Advisory of July 13, 2005 announcing the hearing.................     2

                               WITNESSES

Internal Revenue Service, Nancy J. Jardini, Chief, Criminal 
  Investigation Division.........................................    13
Internal Revenue Service, Nina Olson, National Taxpayer Advocate.     6
Community Tax Law Project, Elizabeth Atkinson....................    20

                                 ______

American Bar Association, Kenneth W. Gideon......................    36
National Association of Enrolled Agents, Francis X. Degen........    39
National Society of Accountants, Robert L. Cross.................    44
American Institute of Certified Public Accountants, Tom Purcell..    48
National Association of Tax Preparers, Larry Gray................    53

                       SUBMISSIONS FOR THE RECORD

Brown, Alvin S., Fairfax, VA, letter.............................    61
Parrish, Bill, Kansas City, MO, statement........................    63
Pritikin, Joshua N., Santa Barbara, CA, statement................    65
University of Northern Illinois, Katrina L. Mantzke, and 
  University of Northern Iowa, Christine C. Bauman, joint letter.    65
Wu, Chi Chi, National Consumer Law Center, Boston, MA, statement.    66

                 FRAUD IN INCOME TAX RETURN PREPARATION

                              ----------                              

                        WEDNESDAY, JULY 20, 2005

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 3:02 p.m., in 
room 1100, Longworth House Office Building, Hon. Jim Ramstad 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE
July 13, 2005
No. OV-4

                   Ramstad Announces Hearing on Fraud

                    in Income Tax Return Preparation

    Congressman Jim Ramstad (R-MN), Chairman, Subcommittee on Oversight 
of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on fraud in income tax return 
preparation. The hearing will take place on Wednesday, July 20, 2005, 
in the main Committee hearing room, 1100 Longworth House Office 
Building, beginning at 3:00 p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. Invited 
witnesses will include representatives of the Internal Revenue Service 
(IRS), the National Taxpayer Advocate, and representatives of 
professional associations of tax preparers.
      
    BACKGROUND:
      
    According to the U.S. Government Accountability Office, more than 
70 million of the 131 million tax returns filed last year were prepared 
by a tax professional. Because of the increasing complexity of the law, 
taxpayers place a high degree of reliance on tax professionals, and due 
to this increasing reliance, tax professionals have become the 
guardians and distributors of billions of dollars in tax refunds and 
refundable credits. The IRS paid more than $227 billion in individual 
income tax refunds in fiscal year 2004, including $33 billion in 
refundable Earned Income Credits (EIC).
      
    The following are just several recent examples of malfeasance by 
preparers:
      
      A New Jersey tax preparer who prepared 13,000 returns in 
2001 and 2002 was caught on tape advising an undercover agent to 
include phony expenses on his tax return in order to qualify for a tax 
refund.
      
      Thousands of low-income Somali immigrants in Minnesota 
were victimized by a group of tax preparers who created fictitious 
businesses and claimed improper fuel tax credits in order to qualify 
for refunds. In addition to prosecuting the preparers, the IRS has 
commenced scores of taxpayer audits and will eventually audit nearly 
all of the victims.
      
      In Long Beach, California, a tax preparer is being 
prosecuted for generating hundreds of false returns claiming improper 
EIC refunds for Cambodian immigrants. The preparer allegedly used the 
proceeds from his tax preparation service to fund an armed insurgency 
in Cambodia.
      
    The IRS Criminal Investigation office and the Office of 
Professional Responsibility work together to hold tax professionals 
accountable, and the IRS has stepped up its enforcement efforts against 
corrupt professionals in recent years. Presently, the IRS has 343 
active investigations of tax professionals, and it identified about $79 
million in suspect refunds last year.
      
    In light of the amount of money at stake for the Federal Government 
and the severity of penalties faced by taxpayers for participating, 
however unwittingly, in an illegal tax filing, the statutory and 
regulatory structure that sets the boundaries for Federal tax practice 
is of utmost importance to taxpayers.
      
    In announcing the hearing, Chairman Ramstad stated, ``Because of 
the complexity of our laws, taxpayers increasingly rely on a 
professional tax preparer. Most tax preparers are honest, but there is 
a troubling and persistent occurrence of tax fraud by unscrupulous 
preparers who take advantage of taxpayers. It is incumbent on us to 
review what the IRS is doing to address this problem and consider our 
legislative options.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on evidence of negligent and fraudulent 
return preparation practices by tax professionals and the statutory and 
regulatory structure that sets the boundaries for Federal tax practice.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
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formatting requirements listed below, by close of business Wednesday, 
August 3, 2005. Finally, please note that due to the change in House 
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encounter technical problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
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materials in alternative formats) may be directed to the Committee as 
noted above.

                                

    Chairman RAMSTAD. The hearing will please come to order. I 
would like to welcome our witnesses as well as our audience 
here to this important hearing today. Like most Americans, 
Lusanga Ngiele and his wife do not consider themselves expert 
enough to prepare their own tax return. Although Mr. Ngiele is 
highly educated, a former Member of the General National 
Assembly of Zaire, it was a natural decision for him and his 
wife to entrust the filing of their tax return to a fellow 
African emigre who held himself out as a paid tax preparer, but 
unhappily for Mr. Ngiele and his family, it was a bad decision. 
To generate an Earned Income Credit (EIC) to which Mr. Ngiele 
was not entitled, the preparer improperly disregarded his 
marital status. The Internal Revenue Service (IRS) audit, 
interest, and penalties that followed caused severe personal 
and financial hardship, and this is far from an isolated 
example.
    The IRS will testify today that it is reviewing the tax 
returns of more than 33,000 victims of corrupt or incompetent 
tax preparers, and I am sorry to say that a number of these 
taxpayers are Somali immigrants from my home State of 
Minnesota. I have heard too many horror stories firsthand and 
from press accounts, that mention unscrupulous tax preparers 
preying on innocent Somali immigrants. Unfortunately, the 
Subcommittee budget does not allow for us to provide travel 
expenses for any of these victims to come here and tell their 
stories firsthand. Suffice it to say, hundreds of these hard-
working taxpayers are now subject to an IRS audit because they 
had the misfortune to secure the services of a preparer who 
claimed wholly unjustified fuel tax and other credits on their 
behalf.
    Each year, American taxpayers file over 130 million income 
tax returns and claim more than $275 billion in tax refunds, 
including approximately $33 billion in EICs. Increasingly, the 
individual most responsible for claiming these refunds is not 
the individual taxpayer but rather a professional tax preparer. 
There is nothing wrong with this. In fact, it is encouraging, I 
believe, that most taxpayers take their tax filing obligations 
so seriously that they pay a sizeable fee to get it right. The 
vast majority of preparers are honest, hard-working, virtuous 
people, but a few, an increasing few, are not. Unfortunately, 
taxpayers receive little or no guidance on how to avoid a bad 
or unscrupulous preparer. Tax preparers are not licensed by the 
IRS, as we all know, and although the IRS administers a 
detailed set of rules that governs tax practice, known as 
Circular 230, hundreds of thousands of income tax preparers are 
not covered by these rules. They are simply outside the 
parameters of the Circular. While States require a license for 
every profession, from raising dogs to giving haircuts, only 
California and Oregon require a license for tax preparers. The 
result; taxpayers are at risk.
    There are countless unfortunate examples of outright fraud 
by preparers, but fraud is not the only problem. Negligence is 
also a major problem. Negligence by a barely qualified 
preparer, such as your car dealer, could cause you to lose--
that is right, your car dealer, and we are going to see shortly 
what I mean--but negligence by unqualified preparers could 
cause taxpayers and is causing taxpayers to lose refunds to 
which they are entitled. One return preparation business that 
raises such questions I just alluded to is called, ``Tax Deals 
4 Wheels.'' I will let them explain how the process works. 
Please roll the film.
    [A videotape was played, the transcript of which follows:]

    ``Has your car seen better days? Does Uncle Sam owe you money? You 
can use your tax refund to purchase terrific transportation! Because 
`Tax Deals 4 Wheels' has your ticket to ride. Take your W-2, Drivers 
License and Social Security card to a participating `Tax Deals 4 
Wheels' dealer, and while you test drive that perfect car, `Tax Deals 4 
Wheels' will calculate your estimated refund. `Tax Deals 4 Wheels' can 
then file your taxes and apply part or all of your Refund Anticipation 
Loan toward that perfect car!''

                                

    Chairman RAMSTAD. We laugh, and the Chairman joins in 
laughter, but it is really not funny when you think that now 
some creative geniuses are offering tax preparation while you 
are test driving the car, and by God knows whom. The State of 
Oregon, which does license preparers, as I mentioned, has 
stopped Tax Deals 4 Wheels from signing a contract to prepare 
tax returns in Oregon.
    Today, we will hear from two high-quality and highly 
qualified panels of witnesses, including Nancy Jardini, the 
Director of Criminal Investigation at the IRS--thank you for 
being here, Director Jardini--and Nina Olson of the National 
Taxpayer Advocate. Thank you, Ms. Olson, for being here again. 
Also on our first panel is Elizabeth Atkinson, the President of 
the Board of Trustees of the Community Tax Law Project of 
Richmond, Virginia. We thank you, Ms. Atkinson, for being here, 
as well. By the way, this organization, incidentally, as I 
understand it, was founded by Ms. Olson. Congratulations to you 
both. On our second panel today, we are privileged to have five 
individuals representing the major tax practitioner groups. I 
look forward to the testimony of all the witnesses as they help 
the Subcommittee understand the scope of this problem. I am now 
pleased to yield to my very good friend, the distinguished 
Ranking Member from Georgia, Mr. Lewis.
    Mr. LEWIS. Thank you very much, Mr. Chairman. I want to 
thank you for holding this hearing today. Today's hearing will 
focus on whether tax return preparers should be subject to 
better oversight by the IRS or possible Federal regulation 
through the Tax Code. To begin looking at this question, the 
Subcommittee on Oversight will hear testimony from the IRS 
Taxpayer Advocate, the IRS Criminal Tax Division, and 
representatives of the professional tax preparer community. Tax 
fraud is unacceptable, whether done by individual taxpayers or 
with the help of tax return preparers. Today's hearing will be 
useful in understanding the extent of tax return fraud and the 
parties involved.
    I should note that the vast majority of taxpayers 
nationwide fully comply with our tax laws. It is also true that 
with some rare exceptions, tax return preparers provide 
taxpayers with valuable help in preparing their annual tax 
return and do so in a professional manner. It is the few very 
bad apples that cause trouble for our voluntary tax system. The 
IRS has programs designed to identify and deter those intent on 
violating the law. I look forward, with the Chairman and the 
Members, to the testimony of the IRS National Taxpayer Advocate 
and Criminal Tax Division representatives on this matter. Also, 
I welcome the views of representatives of the tax return 
preparation community. Mr. Chairman, again, I want to thank you 
as Chair of the Subcommittee for scheduling this hearing in 
follow-up to our earlier hearing on tax fraud by prisoners. I 
hope we don't have anyone coming in today that we sort of have 
to mask. I think this will be a little more real.
    Chairman RAMSTAD. That is right. To my knowledge, none of 
our witnesses today are handcuffed or manacled and none have to 
have a privacy shield.
    Mr. LEWIS. Thank you, Mr. Chairman.
    Chairman RAMSTAD. Thank you. I thank the distinguished 
Ranking Member. I now would call the first panel. I remind the 
distinguished panelists that we have a 5-minute rule. All of 
you are familiar with that. Also, your complete written 
testimony will be entered in the record. Please begin, Ms. 
Olson.

    STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE, 
                    INTERNAL REVENUE SERVICE

    Ms. OLSON. Mr. Chairman and Members of the Subcommittee, 
thank you for inviting me to testify here today. First, let me 
say that I believe return preparers play a central role in our 
tax system by helping millions of taxpayers comply with their 
Federal tax obligations. In fact, I have firsthand experience 
with the preparer-taxpayer relationship because I, myself, was 
an unenrolled preparer for 16 years before I became an 
attorney. It is precisely because this relationship is so 
important to the proper functioning of the tax system that we, 
as stewards of the system, must protect the integrity of that 
relationship. We can do so by ensuring that return preparers 
have basic knowledge about how to prepare tax returns and by 
ensuring that the IRS has adequate tools to deal with tax 
preparers who fail to do their jobs with integrity.
    While criminal cases obviously receive considerable press 
attention, the vast majority of problems involving unenrolled 
preparers stem from either preparer lack of knowledge or from 
preparer negligence that might constitute a civil offense, but 
not a criminal one. Lack of knowledge and lack of integrity, 
although related, are two separate problems that call for 
separate approaches, and they are, in turn, distinct from 
criminal acts. Lack of knowledge is the most pervasive problem. 
This year, more than 60 percent of individual filers use 
practitioners to prepare their returns and the majority of 
these returns were prepared by preparers who are not subject to 
any professional educational requirements at all. While IRS 
Criminal Investigation has the authority to address many of the 
egregious cases of fraud that have been highlighted in this 
hearing, the IRS currently has no authority to license 
preparers or require basic knowledge about how to prepare 
returns.
    Based on my experience, I believe the government needs to 
take steps to professionalize the tax preparation industry to 
protect both taxpayers and the tax system itself. It is 
remarkable to me that in the United States today, an insurance 
agent can't sell insurance without a license, a contractor 
can't build without a license, and a hair stylist can't touch a 
lock on a person's head without a license. Yet anyone can 
prepare a tax return for a fee with no training, no licensing, 
and no oversight required. In my 2002 Annual Report to 
Congress, I proposed a plan for the IRS to register, test, and 
certify unenrolled preparers. My proposal was generally well 
received and it was passed by the U.S. Senate last year as part 
of the Tax Administration Good government Act. This proposal 
was introduced again in the Senate this year as part of S. 832, 
and I am pleased that the Chairman and Ranking Member of the 
Senate Committee on Finance are again cosponsors. I encourage 
this Committee to pass similar legislation.
    The IRS originally expressed some misgivings that my 
proposal could place a strain on its enforcement resources, but 
as I describe in my written statement, I have designed the 
proposal carefully to avoid that result. California, for 
example, has adopted a registration system that is funded 
entirely by modest fees that preparers in that State pay. In 
addition, I note that the IRS itself has already designed a 
modest, but effective version of a testing and certification 
program and it did so within a one-year timeframe. ``Link and 
Learn Taxes'' is an online training program that allows 
Volunteer Income Tax Assistance volunteers to receive the 
training and certification necessary to prepare tax returns at 
VITA sites. The IRS estimates that about 10,000 volunteers 
received certification through this program for the 2005 filing 
season. So, this is imminently doable.
    Apart from education, I also believe that more needs to be 
done to address the problems of preparers who lack integrity. 
The civil penalty regime currently in law is not adequate, and 
in particular, penalty amounts are too low for the IRS to treat 
enforcement of preparer penalties as priority work. Therefore, 
in my 2003 Annual Report, I identified gaps and inadequacies of 
the current compliance regime for preparers and Electronic 
Return Originators (ERO) and I recommended that Congress 
strengthen oversight of all preparers by enhancing due 
diligence and signature requirements, increasing the dollar 
amount of preparer penalties, and assessing and collecting 
those penalties as appropriate.
    In conclusion, I believe a compelling case exists for 
regulating unenrolled return preparers at the Federal level. 
Federal regulation will protect all taxpayers and protect the 
tax system. We have a Federal tax system, and in my view, we 
owe our taxpayers Federal minimum standards of competency and 
Federal oversight. Thank you.
    [The prepared statement of Ms. Olson follows:]

 Statement of Nina Olson, National Taxpayer Advocate, Internal Revenue 
                                Service

    Mr. Chairman and distinguished Members of the Subcommittee:
    Thank you for inviting me here today to speak about the regulation 
of federal tax return preparers. For several years now, I have 
advocated for a two-pronged approach to this issue. First, as I 
outlined in my 2002 Annual Report to Congress, \1\ we must establish 
minimum levels of competency for return preparation by requiring the 
registration, examination, and certification of unenrolled return 
preparers. Second, as I described in my 2003 Annual Report to Congress, 
\2\ we must strengthen our oversight of all preparers by enhancing due 
diligence and signature requirements, increasing the dollar amount of 
preparer penalties, and assessing and collecting those penalties, as 
appropriate.
---------------------------------------------------------------------------
    \1\ National Taxpayer Advocate 2002 Annual Report to Congress 216.
    \2\ National Taxpayer Advocate 2003 Annual Report to Congress 270.
---------------------------------------------------------------------------
The Case for Regulation
    As recently as fifteen years ago, before the push for electronic 
filing and the expansion of the Earned Income Tax Credit (EITC), most 
tax return preparers were Certified Public Accountants (CPAs), 
attorneys, enrolled agents, or persons who were in the business of 
preparing tax returns. Attorneys and CPAs are licensed by the states 
and must complete a course of study in addition to passing a test. All 
states require these professionals to register, and most states require 
some amount of continuing professional education. Enrolled agents, who 
are authorized to practice before the IRS, must pass a rigorous IRS-
administered examination and complete 16 hours of continuing 
professional education every year. \3\
---------------------------------------------------------------------------
    \3\ Treas. Circ. 230 Sec. 10.6(e) (Rev. 6-2005).
---------------------------------------------------------------------------
    Unenrolled preparers, however, are an extremely diverse group. Some 
are public accountants who are tested and licensed by the states. 
Others are employees of major commercial tax preparation firms and, as 
such, are required to complete a series of courses and are subject to 
corporate quality control and due diligence standards. Still others are 
independent preparers who are members of various professional 
associations and annually complete professional training programs about 
tax law and tax preparation.
    However, with the advent of electronic filing and electronic 
commerce and the increase in the maximum EITC dollars available to 
taxpayers, a new class of preparers has emerged--one which is not 
engaged primarily in the business of preparing taxes. Rather, these 
preparers use tax preparation as a means to attract customers for some 
other product or service they offer that is unrelated to return 
preparation or even financial or tax planning. These products include 
check cashing, automobile sales, pawned items, furniture rentals, and 
even--through the use of payday-type loans issued on debit cards that 
are honored at only a few locations--general household necessities that 
are sold at grossly inflated prices during the filing season.
    Unlike fifteen years ago, when we could at least count on some 
minimum level of competency for ``unenrolled'' preparers because that 
was their primaru business, we have no such comfort with the new 
businesses that are now preparing returns, because tax preparation is 
only an ancillary product of their business. Indeed, with the excellent 
commercial tax preparation software now available, a return preparer 
need not have any actual knowledge of tax law or tax administration in 
order to begin preparing taxes.
    While this arrangement may seem to be an exercise in the free 
market, I believe it imposes unacceptable costs and risks on taxpayers 
and tax administration. We know, for example, that over 32 percent of 
EITC returns are prepared by unenrolled paid preparers and that the 
overclaim rate on those returns is over 34 percent. \4\ The IRS's 
criminal investigation division undertakes more than 200 preparer 
refund scheme investigations each year \5\ Preparer collusion with 
taxpayers is called ``brokered'' noncompliance--the preparer 
facilitates and enables the noncompliance. \6\ At the other end of the 
spectrum, a preparer's lack of training can lead to costly mistakes 
from the taxpayer's perspective--either failing to claim available 
credits or deductions, or overstating deductions or basis, leading to 
multi-year liabilities.
---------------------------------------------------------------------------
    \4\ Internal Revenue Service, Compliance Estimates for Earned 
Income Tax Credit Claimed on 1999 Returns (2/28/02). This data was 
derived from taxpayer answers to the examiner's question about how the 
return was prepared.
    \5\ Response provided by Criminal Investigation Division to 
Taxpayer Advocate Service Information Request, 1 (Nov. 2, 2004).
    \6\ For a detailed discussion of the types of noncompliance, see 
Leslie Book, The Poor and Tax Compliance: One Size Does Not Fit All, 51 
Kan. L. Rev. 1145 (2003) (discussing types of noncompliance); see also 
National Taxpayer Advocate 2004 Annual Report to Congress 211.
---------------------------------------------------------------------------
    These circumstances may lead to disaffected taxpayers and decreased 
compliance--and lots of avoidable work for the IRS. The current 
situation allows serious and competent unenrolled preparers to be 
tarred with the misdeeds of unscrupulous or incompetent unenrolled 
preparers, and it leads to taxpayer confusion about who one should turn 
to for help. Is ``buyer beware'' really an appropriate or sensible 
standard for the federal tax return preparation market?
What's the Solution?
    In my 2002 Annual Report to Congress, I proposed a scheme for the 
IRS to register, test, and certify unenrolled preparers. Since that 
time, my office has continued to study and meet with existing state and 
international regulators. In the summer of 2004, TAS conducted six 
discussion groups with all types of preparers at the Tax Forums \7\ on 
the question of regulation of return preparers. I or my staff met with 
representatives of almost all tax professional groups, including some 
large franchises. Moreover, we have worked with both this subcommittee 
and the Senate Finance Committee to address concerns of both tax 
professionals and the IRS about preparer regulation.
---------------------------------------------------------------------------
    \7\ The IRS Nationwide Tax Forums offer the latest word from the 
IRS on tax law, compliance and tax practice and procedure. The tax 
professional community is offered a one-stop shop with opportunities to 
attend seminar presentations and workshops, as well as focus groups 
with subjects from ethics and professional conduct to how to enroll and 
participate in e-file and the new e-services.
---------------------------------------------------------------------------
    The components of my original proposal include:

      Registration. Each person who prepares more than five 
federal tax returns for a fee in a calendar year and is not an 
attorney, CPA, or enrolled agent would be required to register with the 
IRS and pay a fee.
      Testing. As originally described, each applicant would be 
required to complete a test that demonstrates competency in certain 
returns. The proposal recommends two tiers of testing, based on the 
complexity of returns. Tier 1 would include the 1040 series, including 
simple sole proprietorship schedules (Schedule C); Tier 2 would include 
business and employment tax returns. The original proposal also 
recommended that each preparer be required to pass an annual refresher 
examination, reflecting tax law changes and the most common preparer 
return errors for the preceding year.
      Certification. The IRS would issue to successful 
applicants a certificate containing a certification number and 
expiration date. The preparer would enter the certification number on 
every return he or she prepares for a fee.
      Maintenance of Public List. The IRS would be authorized 
to maintain a public list (in print and electronic media) of return 
preparers who are registered and certified, who are registered but not 
certified, and whose registration has been revoked. This list should 
also be available on the Internet and be searchable.
      Consumer Information Campaign. The IRS should be 
authorized to conduct an extensive public awareness campaign that 
informs taxpayers of the need to look for a preparer's registration 
certificate before paying the preparer to prepare a tax return.
      Oversight and Penalties. Return preparers who fail to 
register would be subject to a scale of progressive deterrents ranging 
from educational notices and warnings to monetary penalties. The IRS 
would be authorized to notify the taxpayer if the taxpayer's return 
preparer was not registered with the IRS within the required time 
frame.

    I have since modified this proposal to permit the annual competency 
requirement to be met either by testing or completion of continuing 
professional education. \8\ We also think it may make sense to register 
all return preparers, including those licensed as attorneys and CPAs. 
\9\ In response to the IRS's concern that it cannot commit resources to 
administering a registration program, we have clarified our intent that 
some of these duties can be administered by professional groups and 
that the IRS can contract out much of the program's administration on a 
self-funding basis. Indeed, one such entity has already drawn up a 
proposal. \10\
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    \8\ Although many preparers can easily keep up their skill levels 
and the currency of their knowledge by attending seminars sponsored by 
associations of tax professionals, I continue to believe that some 
preparers--particularly those in remote areas or who have physical 
disabilities--will benefit from the availability of a self-study and 
web-based test option.
    \9\ These state-licensed professionals could submit proof of 
current good-standing status in lieu of completing the examination or 
continuing education requirements.
    \10\ A consortium of administrators recently approached the IRS to 
administer a program similar to that proposed in the Taxpayer 
Protection and Assistance Act of 2005 (S. 832). Under this proposal, 
there would be no initial cost to the IRS, and the proposed program is 
expected to be fully funded by preparer registration fees of 
approximately $35, imposed every three years. This proposal is in sharp 
contrast to the $25 million initial cost estimated by the Congressional 
Budget Office for the program included in S. 882, the Tax 
Administration Good Government Act of 2004. See Congressional Budget 
Office Cost Estimate, S. 882; Tax Administration Good Government Act of 
2004 (May 24, 2004).
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IRS ``Link and Learn Taxes''
    The IRS itself has already designed a modest but effective version 
of a testing and certification program--and did so within a one-year 
timeframe. ``Link and Learn Taxes'' is an online training program that 
allows Volunteer Income Tax Assistance (VITA) volunteers to receive the 
training and certification necessary to prepare tax returns at VITA 
sites. The IRS estimates that about 10,000 volunteers received 
certification through this program for the 2005 filing season.
    The program consists of six modules:

      Course Introduction
      Basic Module
      Wage Earner Module
      Pension Earner Module
      Military Module
      What's New This Year (for returning volunteers only)

    When a volunteer passes an individual module, he or she is 
certified to prepare returns involving issues addressed in that module. 
Thus, volunteers can tailor their certification toward the type of 
returns they anticipate preparing.
    Each module starts with a pretest. If the volunteer scores 70 
percent or higher on the pretest, the volunteer passes and is 
certified. If the volunteer fails the pretest, he or she must take 
individual lessons within each module. Each such lesson contains a 
number of sections, including:

      Comprehensive exercises that test individuals' knowledge 
of various issues;
      Additional references that provide links to forms, 
publications, and websites containing additional information on the 
topic;
      ``Check Your Knowledge'' questions located throughout 
each module; and
      Topic activities at the end of each topic allowing for 
practical application of the topics covered in the lesson.

    Each lesson concludes with a post-test. The volunteer must receive 
a score of 70 percent or higher to pass and receive certification. \11\
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    \11\ If a volunteer fails the post-test, he or she must take an 
additional post-test and pass with a score of 70 percent or higher.
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Improving the Oversight of All Preparers
    Regulation of preparers will go a long way toward increasing the 
accuracy of tax returns and providing taxpayers with some confidence 
that they are receiving assistance from a preparer who meets a minimum 
level of competence. However, there will always be preparers who are 
negligent or even unscrupulous. Since 1976, Congress has recognized 
that an appropriate system of penalties must exist to deter negligent 
or more serious preparer misconduct. \12\ In my 2003 Annual Report to 
Congress, I identified the gaps and inadequacies of the current 
compliance regime for preparers and Electronic Return Originators 
(EROs). Given that the IRS is virtually a nonexistent presence in the 
unenrolled preparer community--levying only $2.4 million in preparer 
penalties in calendar years 2001 and 2002, and collecting only 12 
percent (or $291,000) of those assessments \13\--and given that 
preparers can easily absorb these low-dollar penalties into the cost of 
doing business, I made the following recommendations:
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    \12\ See, e.g., Tax Reform Act of 1976, Pub. L. No. 94-455, 
Sec. 1203(b)(1).
    \13\ General Accounting Office, Tax Administration: Most Taxpayers 
Believe They Benefit from Paid Tax Preparers, but Oversight for IRS is 
a Challenge, GAO-04-70 (October 2003) 16.

      Increase the IRC Sec. 6694(a) preparer penalty for 
understatements due to unrealistic positions from $250 to $1,000 and 
the IRC Sec. 6694(b) penalty for intentional disregard of the rules and 
regulations from $1,000 to $5,000.
      Increase the preparer penalties under IRC Sec. 6695(a) 
through (e) with respect to certain requirements for preparation of 
income tax returns for other persons (including signing the return and 
providing the taxpayer with a copy of the tax return), from $50 per 
occurrence to $100 per occurrence.
      Increase the preparer penalty under IRC Sec. 6695(f) for 
negotiation of a refund check from $500 per check to $1,000 per check.

    We know that preparers play a role in EITC noncompliance. 
Currently, EITC preparers are required to meet certain due diligence 
requirements \14\ and are subject to a $100 penalty for each failure to 
meet those requirements. \15\ Where EITC overclaims result from either 
preparer incompetence or intentional disregard of the rules and 
regulations, the IRS often cannot recover any overpayments from the low 
income taxpayer. Moreover, many competent and scrupulous return 
preparers complain that they cannot compete with return preparers who 
are willing to turn a blind eye to taxpayers who are gaming the system. 
Thus, to ensure that preparers conduct the proper due diligence in 
preparing EITC returns and to increase the personal risk for preparers 
who are more than merely negligent in preparing such returns, we made 
the following legislative recommendations:
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    \14\ To meet the due diligence requirements, EITC preparers must 
complete an eligibility checklist (using either IRS Form 8867 or a 
comparable form), complete the EITC worksheet(s) in the Form 1040, 
1040A or 1040EZ instructions or in Publication 596 (or a comparable 
form), have no knowledge that any of the information used to determine 
if a taxpayer is eligible for the EITC is incorrect, and retain this 
information for three years following the date of filing (the three-
year period begins on the June 30th following the date the 
taxpayer was given the return to sign. Treas. Reg. Sec. 1.6695-2(b)(1)-
(4).
    \15\ Treasury regulations require preparers of EITC returns or 
refund claims to record how and when information used to complete the 
required EITC checklist and worksheet was obtained by the preparer, 
including the identity of any person furnishing the information. Treas. 
Reg. Sec. 1.6695-2(b)(4)(i)(C). IRS Form 8867, Paid Preparer's Earned 
Income Credit Checklist, is not required to be filed with the 
taxpayer's return, so the IRS has no systematic way of verifying due 
diligence compliance.

      Amend IRC Sec. 6695(g) to impose a tiered penalty 
structure for violation of the EITC due diligence requirements. For the 
first year in which the IRS imposes a penalty against an EITC preparer, 
the penalty would be $100 per occurrence; for the second year, $500 per 
occurrence; and for the third year, $1,000 per occurrence. The IRS 
should waive or abate the penalties, in whole or in part, where the 
preparer enrolls in EITC education courses and demonstrates an ability 
to comply with due diligence requirements.
      Amend IRC Sec. 6695(g) to require the EITC due diligence 
certification to be signed, under penalties of perjury, by the return 
preparer and attached to the taxpayer's income tax return and expand 
the due diligence requirements to address the most common EITC preparer 
errors.
      Amend IRC Sec. 6695 to authorize the Secretary to impose 
a civil penalty against a tax return preparer who, by reason of 
intentional misstatement, misrepresentation, fraud, deceit, or any 
unlawful act causes a taxpayer a tax liability attributable to the EITC 
in an amount equal to the tax attributable to the disallowed EITC.

    Taxpayers suffer from and the IRS continually struggles with 
various submissions from persons who purportedly ``assist'' taxpayers 
with tax debts, for a fee, but who are not authorized to practice 
before the IRS. We see this most often in the realm of Offers-in-
Compromise (OICs) and, to a lesser extent, in Collection Due Process 
hearings. In the OIC arena, businesses review recent IRS public filings 
of Notices of Federal Tax Liens and then notify the taxpayers that they 
can help the taxpayers settle for ``pennies on the dollar.'' These 
preparers merely transmit taxpayer-prepared OIC forms and financial 
statements, without review for accuracy, to the IRS. Because the 
preparers are not required to sign these forms, the IRS does not know 
who has prepared them and thus cannot assess any negligence penalties 
against the preparers. To help remedy this situation, we proposed the 
following:

      Amend IRC Sec. 6695 to impose a penalty of $100 per 
occurrence on persons who fail to sign or include certain information 
on specified IRS forms prepared by them for a fee, including 
applications for Offers-in-Compromise and financial information 
statements of individuals and businesses.
      Amend the Internal Revenue Code to authorize the 
Secretary to impose a $1,000 penalty, per occurrence, against any 
person who willfully and intentionally misrepresents his or her 
professional status on a power of attorney authorizing him or her to 
represent a taxpayer before the IRS or who willfully and intentionally 
practices before the IRS without proper authorization.

    Electronic Return Originators (EROs) are persons or entities that 
originate electronically filed returns. EROs are subject to three 
levels of sanctions by the IRS for failing to comply with e-file 
Program requirements. These sanctions include a warning or written 
reprimand; the loss of e-file privileges for one year; and the 
suspension from the e-file program for the balance of the year and two 
additional years for fraud or other known criminal activity. The IRS 
has no statutory authority to impose monetary penalties against 
egregious or repeat offenders of ERO program requirements.
    Prior to becoming an ERO, applicants are subject to a suitability 
investigation, which may include the following:

      A criminal background check;
      A credit history check;
      A tax compliance check to ensure that all requisite 
returns are filed and paid, and to identify fraud and preparer 
penalties; and
      A check for prior non-compliance with IRS e-file 
requirements.

    IRS monitors EROs through visits based on mandatory or random 
referrals. During FY 2005, the IRS has a goal of visiting 1 percent of 
the over 200,000 active e-file participants. During fiscal year 2004, 
the IRS made 1,294 visits, \16\ which resulted in 224 warnings, 154 
written reprimands, 88 recommended suspensions, 31 immediate 
suspensions and 16 Criminal Investigation referrals. \17\ According to 
the IRS Criminal Investigation Division, 70 percent of 58,774 
electronically filed returns identified in fiscal year 2004 through its 
Questionable Return Program (QRP) were filed through EROs, and at 
present, 85 percent of fraudulent returns have a loan product such as a 
Refund Anticipation Loan associated with them.
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    \16\ There were substantially fewer than 200,000 EROs in FY 2003, 
when IRS set the work plan for ERO visits during FY 2004.
    \17\ IRS, 2004 e-file provider Monitoring Report.
---------------------------------------------------------------------------
    We recommend that Congress amend the Internal Revenue Code to 
authorize the Secretary to impose a $1,000 penalty, per infraction, in 
addition to other available sanctions, on EROs who repeatedly or 
egregiously fail to comply with ERO Program requirements. Where 
preparers, including EROs, commit violations by charging a fee for 
services that is a percentage of the taxpayer's refund or is based on a 
return item, or by failing to advise the taxpayer of the fact that a 
Refund Anticipation Loan product is a loan and the terms of that loan, 
the IRS should be authorized to assess a penalty equal to the greater 
of $100 per occurrence or 50 percent of the fee for such service. \18\
---------------------------------------------------------------------------
    \18\ National Taxpayer Advocate 2003 Annual Report to Congress 273.
---------------------------------------------------------------------------
    In addition, S. 832, a bill pending before the Senate Finance 
Committee, would attempt to address some of the problems associated 
with RALs by requiring RAL providers to disclose more information to 
potential customers. Among other things, the bill would require RAL 
facilitators to register annually with the IRS and to disclose to 
taxpayers, both orally and in writing, that they may file an electronic 
tax return without applying for a RAL, the cost of a RAL, the cost of 
other types of consumer credit, and the expected time within which tax 
refunds are typically paid by the IRS. I think taxpayers deciding 
whether to purchase a RAL would benefit considerably from complete and 
clear disclosure of this information.
Conclusion
    I believe a compelling case exists for regulating unenrolled return 
preparers. The fact that about 60 percent of individual taxpayers use 
paid preparers \19\ makes it unacceptable to expect 50 states and one 
district to enact 51 different regulatory schemes. We have a federal 
tax system and we owe our taxpayers federal minimum standards of 
competency and federal oversight.
---------------------------------------------------------------------------
    \19\ Taxpayer Usage Study (TPUS) Weekly Report 14, based on a 
sample of all individual income tax returns for Tax Year (TY) 2004 
filed through May 6, 2005.
---------------------------------------------------------------------------
    Regulation of return preparers and enhanced tools for oversight of 
those preparers will increase taxpayer compliance and decrease IRS work 
resulting from errors. It will recognize the ever-increasing role that 
return preparers play in the fairness and accuracy of the tax system. 
More importantly, it will recognize that the IRS has an obligation to 
that part of the taxpayer population that is responsible for our 85 
percent compliance rate--to ensure that if they need assistance 
preparing returns and the IRS isn't stepping up to the plate to help, 
then the least we can do is ensure that paid preparers are nominally 
competent, just as we are ensuring that voluntary VITA preparers are. I 
believe this obligation is a fundamental aspect of taxpayer service and 
a cornerstone for achieving more voluntary compliance.
    Thank you for the opportunity to testify today. I look forward to 
working with your subcommittee on this important matter.

                                

    Chairman RAMSTAD. The Chair thanks you, Ms. Olson. Ms. 
Jardini, please.

 STATEMENT OF NANCY J. JARDINI, CHIEF, CRIMINAL INVESTIGATION 
               DIVISION, INTERNAL REVENUE SERVICE

    Ms. JARDINI. Thank you, Chairman Ramstad, Ranking Member 
Lewis, and Members of this distinguished Subcommittee, for the 
opportunity to discuss the IRS' efforts to ensure that tax 
professionals comply with the law and adhere to professional 
standards. I also wish to commend the Subcommittee staff, who 
were extremely helpful as we worked together to prepare today's 
hearing. During the 2005 filing season, almost 123 million 
individual income tax returns were filed with the IRS, of which 
more than 74 million, or 60 percent, were signed by a 
professional tax preparer. It is in the best interest of the 
American people, as well as tax administration, to ensure that 
tax practitioners comply with the law, and therefore, this is 
one of our four overarching IRS enforcement priorities in our 
IRS strategic plan.
    Unfortunately, not all tax return preparers are above 
board. For nearly 30 years, Criminal Investigation's Return 
Preparer Fraud Program has focused on identifying unscrupulous 
return preparers and referring those cases either to our field 
offices for criminal investigation and prosecution or to our 
civil partners within the IRS for injunctive action, 
examination, and application of penalties. Our criminal 
enforcement efforts during the past 5 years have identified 
over 200,000 questionable returns prepared by return preparers 
on behalf of clients. These returns claimed over $700 million 
in refunds.
    During that same time period, Criminal Investigation 
initiated over 1,000 investigations of return preparers. Cases 
referred to the Department of Justice recommending prosecution 
have increased by over 125 percent over just the last 4 years. 
The number of individuals sentenced increased more than 60 
percent, with an average sentence in these cases 19 months of 
imprisonment. To further deter this fraudulent activity, 
Criminal Investigation aggressively publicizes enforcement 
results to send a clear message that unscrupulous return 
preparers will be prosecuted and sent to jail.
    In the civil arena, since August of 2002, more than 98,000 
audits have been completed and over $200 million in additional 
tax has been assessed on returns related to these ongoing 
investigations. Similarly, we have worked closely with the 
Department of Justice and have seen a dramatic increase in the 
number of civil injunctions used to terminate this conduct. 
Professionalism and responsibility in the preparer and 
practitioner community is a cornerstone of a successful 
voluntary compliance system. As Commissioner Everson has 
repeatedly stressed, it is service plus enforcement that equals 
compliance. Registration and education may strengthen honest 
preparers, which we applaud, but we are concerned that this not 
dilute our important enforcement efforts designed to address 
fraudulent practices that steal money from the revenue and from 
honest taxpayers.
    Many fraudulent preparers rely on extensive knowledge of 
the tax law and IRS procedures to devise methods to circumvent 
the system. Unscrupulous preparers who are intent on ripping 
off the system will continue to commit fraud regardless of any 
educational or registration structure. Some will merely abide 
by the regulations, become certified preparers, and continue to 
prepare fraudulent returns with the imprimatur of the Federal 
government. Others will be driven underground and continue 
their fraudulent conduct, but will be harder for us to detect 
as this will serve only to deter them from signing fraudulent 
tax returns, but not from, in fact, preparing fraudulent 
returns. The IRS strategic plan which targets professionalism 
and accountability in the preparer and practitioner community 
is in the first year of a 5-year deployment. Our message today 
is that we seek to continue our productive partnership with the 
preparer and practitioner community, including the Taxpayer 
Advocate Service, but we stress the important role that 
enforcement efforts must play in leveling the playingfield for 
all law-abiding practitioners in protecting the revenue for all 
citizens.
    To that end, the IRS currently has numerous tools available 
to address return preparer fraud and to educate the public. 
Effective application of these tools requires strong support of 
the IRS enforcement mission during this critical building 
stage. Some of the key tools include the Criminal Investigation 
Fraud Detection Centers, which deploy expert intelligence 
analysts who look at sophisticated data mining and data 
analysis tools and identify unscrupulous return preparers as 
well as defining the scope of their schemes. Numerous civil and 
criminal penalties can be deployed once return preparer schemes 
are identified and examined. The parallel investigative process 
permits a civil injunction to be issued, which allows us to 
stop fraudulent conduct in its tracks. Finally, we have no 
aggressive education and outreach program geared specifically 
to this problem which targets both law-abiding taxpayers and 
the preparer community.
    In conclusion, the IRS recognizes the need to focus 
intensively on professionalism in the preparer community and 
unscrupulous return preparers, as reflected in our strategic 
plan. While we have made progress, continued support of the IRS 
enforcement and outreach efforts will go a long way in 
identifying and stopping this type of fraud and educating well-
intentioned taxpayers. Thank you, and I look forward to taking 
your questions.
    [The prepared statement of Ms. Jardini follows:]

Statement of Nancy J. Jardini, Chief, Criminal Investigation Division, 
                        Internal Revenue Service

    Thank you for the opportunity to discuss how the unique skills of 
the Internal Revenue Service Criminal Investigation Division, or CI, 
are being utilized to detect and investigate allegations of tax return 
preparer fraud. In support of the overall IRS Mission, CI serves the 
American public by investigating potential criminal violations of the 
Internal Revenue Code and related financial crimes in a manner that 
fosters confidence in the tax system and compliance with the law. CI 
plays a critical role in the IRS's efforts to address fraud in the area 
of tax return preparers.
    One of the enforcement goals of the IRS Strategic Plan for 2005 
through 2009 is to enhance enforcement of the tax laws by ensuring that 
attorneys, accountants and other tax practitioners comply with the law 
and adhere to professional standards. CI has aligned its strategic plan 
to meet this goal by focusing additional resources on legal source tax 
investigations and maximizing the impact of criminal enforcement 
through education and outreach. Legal source tax investigations are 
CI's primary resource commitment which includes investigating 
unscrupulous tax return preparers involved in abusive tax promotions 
and other tax evasion schemes.
    Through the skill and effort of our dedicated employees and the use 
of effective investigative tools, CI, along with our partners in the 
IRS civil divisions, is able to identify, deter, and when warranted, 
criminally investigate the individuals who knowingly and willfully 
violate the law by preparing false returns. Many of those 
investigations are ultimately referred to the Department of Justice for 
prosecution and result in prison sentences, fines and other sanctions. 
Those not resulting in criminal prosecution are referred for civil 
examination.
    Return preparer fraud has been one of CI's key investigative 
priorities for many years and this year is no exception, as evidenced 
by our current inventory of return preparer investigations which is at 
a five year high. Cases referred to the Department of Justice 
recommending prosecution have increased by 125% over the past 4 years, 
going from 73 in 2001 to 167 in 2004. The number of individuals 
sentenced during that same time period increased more than 60%, from 56 
in 2001 to 90 in 2004. The average sentence was 19 months. 
Additionally, to further deter this type of fraudulent activity, CI 
continues to publicize enforcement results to send a clear message to 
the public that unscrupulous return preparers will be prosecuted.
Tax Return Preparers
    Millions of Americans rely on tax practitioners for advice on the 
preparation of their personal and business-related returns each year. 
Although the taxpayer ultimately bears the responsibility for filing 
timely, complete and accurate tax returns, return preparers provide an 
important service. During the 2005 filing season, over 122.9 million 
individual income tax returns were filed with the IRS of which more 
than 74.2 million tax returns, about 60%, were signed by a professional 
tax preparer. These numbers do not reflect the returns that are 
prepared by someone who does not sign the return. There is no question 
that unscrupulous preparers prepare returns without signing them but we 
have no way of determining the scope of the problem.
    Tax return preparers vary significantly in their level of 
education, expertise and experience. They also vary significantly in 
the types of services they provide and the clientele they serve. They 
may be employed by large accounting firms, partnerships or they may be 
sole proprietors. They may be attorneys, CPAs, Enrolled Agents or tax 
return preparers who have no formal education and little, if any, 
training or experience in accounting, tax law or tax return 
preparation. Their clients might include large corporations, businesses 
and individuals and they could offer general bookkeeping and accounting 
services in addition to preparing and filing tax returns. Some tax 
practitioners are also Electronic Return Originators (ERO) which 
enables them to electronically file a client's tax return with the IRS.
    Most return preparers are assiduous in performing their duties and 
play an important role in our tax system by preparing accurate returns 
for their clients. Unscrupulous return preparers adversely affect 
compliance and contribute to the tax gap. To address this concern, the 
IRS Strategic Plan for 2005 through 2009 states, ``We will encourage 
ethical behavior and deter non compliance by making the consequences of 
practitioner misbehavior more widely known within the boundaries of law 
and regulation. Those practitioners who choose not to comply with 
established standards of conduct will be subject to a broad range of 
coordinated actions that will effectively address their misconduct, 
e.g., the assessment of preparer penalties, disciplinary sanctions 
imposed under the authority of Treasury Circular 230, suspension of 
electronic filing privileges, the pursuit of injunctive action and, 
where warranted, criminal prosecution initiated by the Department of 
Justice.''
    Another long term strategic goal of the IRS is to detect and deter 
domestic and off-shore abusive tax schemes. The promoters of these 
schemes often use layers of complex offshore financial transactions, 
illegal trusts and other sophisticated means of concealing assets to 
avoid detection thereby giving their illegal activities the appearance 
of legitimacy. Unscrupulous tax return preparers play an integral role 
in many of these abusive tax schemes by facilitating the preparation 
and filing of false tax returns and related documents.
    A return preparer is any person who preparers tax returns (or 
claims for refund) for compensation. Return preparers are broadly 
categorized by the IRS as either enrolled preparers or unenrolled 
preparers. Circular 230 is the IRS publication that contains 
regulations governing the practice of Attorneys, CPAs, enrolled agents 
and actuaries, and appraisers representing clients before the IRS. The 
IRS Office of Professional Responsibility administers the provisions of 
Circular 230 and can impose sanctions including censure, suspension or 
disbarment on enrolled agents, attorneys and CPAs who act 
irresponsibly, unprofessionally, or illegally.
    Not all tax preparers are practitioners subject to Circular 230. 
IRS Publication 470, which contains Revenue Procedure 81-38, prescribes 
the standards of conduct for unenrolled tax preparers. It limits these 
preparers to representation of taxpayers before the IRS solely for the 
years in which they prepared the returns. Unenrolled preparers must 
conform to the standards of conduct which are prescribed in the 
procedure and can be prohibited from representing clients before IRS 
for unprofessional or illegal conduct.
Civil Penalties
    Return preparers can be subject to civil penalties if they act in 
negligent or intentional disregard of Treasury or IRS rules and 
regulations. Internal Revenue Code Sec. 6694 imposes penalties on 
income tax return preparers who understate a taxpayer's tax liability. 
Where a preparer has taken a position on a return or refund claim for 
which he or she knew or should have known that there was ``not a 
realistic possibility of being sustained on its merits,'' that preparer 
shall be subject to a $250 penalty, absent a showing of reasonable 
cause for the understatement. A preparer will be subject to a $1,000 
penalty if the understatement is attributable to the preparer's willful 
attempt to understate the tax liability or is due to the preparer's 
reckless or intentional disregard of rules or regulations. In addition, 
Internal Revenue Code Sec. 6695 imposes penalties on preparers for such 
activities as the preparer's failure to furnish a copy of their 
clients' prepared return to the client, failure of the preparer to sign 
the prepared return, failure of the preparer to furnish the preparer's 
identifying number on the prepared return and the preparer's 
negotiation of a client's refund check. Penalties under Internal 
Revenue Code Sec. 6695 range from $50 to $500 per occurrence and are 
subject to an annual maximum penalty of $25,000.
    Preparers of returns or refund claims involving the Earned Income 
Tax Credit (EITC) must satisfy certain due diligence requirements for 
determining the taxpayer's eligibility for or amount of the credit. 
Failure to do so could result in a penalty of $100 for each failure to 
meet such due diligence requirement under Internal Revenue Code 
Sec. 6695(g).
    The provisions of Circular 230 and Revenue Procedure 81-38 only 
apply to those who want to represent clients before the IRS. 
Notwithstanding these provisions, anyone can prepare a return for 
someone else. Therefore, fraudulent conduct occurs in both the enrolled 
and unenrolled preparer population.
Criminal Provisions
    Tax return preparers can also be subject to possible criminal 
sanctions arising from their preparation of fraudulent returns or other 
documents. Criminal penalties can be imposed for the willful attempt to 
evade or defeat tax (Title 26, USC Sec. 7201--up to 5 years 
imprisonment and not more than $250,000 fine), the willful making of 
false statements under penalties of perjury (Title 26 USC 
Sec. 7206(1)--up to 3 years imprisonment and $250,000 fine), and the 
willful aiding, assisting, counseling, or advising in the preparation 
of any document in connection with the Internal Revenue laws that is 
false or fraudulent with respect to a material matter (Title 26 USC 
Sec. 7206(2)--up to 3 years imprisonment and not more than $250,000 
fine.
Unscrupulous Tax Return Preparers and Abusive Tax Schemes
    Unscrupulous return preparers, whether covered by Circular 230 or 
not, willingly and knowingly engage in fraudulent return schemes and 
assist in preparing returns to facilitate abusive tax schemes for 
profit. Unscrupulous return preparers frequently prepare returns for 
many clients. These clients/taxpayers are not only ultimately 
responsible for additional taxes and interest owed, but could be 
subject, depending on culpability, to severe civil and criminal 
sanctions. Many times, taxpayers are not just mere unwitting prey of an 
unscrupulous preparer but instead, knowledgeable and willing 
participants of the scheme. Some of the most common tax preparation 
schemes are committed by claiming false dependents; inflating 
deductions on schedule A (Itemized Deductions) including charitable 
contributions, medical or dental expenses; claiming tax credits through 
falsifying material matters such as business expenses; and creating a 
false Schedule C business in order to offset the taxpayer's income.
    Unscrupulous return preparers play a pivotal role in abusive tax 
schemes. These schemes are aggressively promoted to affluent taxpayers 
and are characterized by the use of multiple flow-through entities such 
as trusts, Limited Liability Corporations (LLCs), Limited Liability 
Partnerships (LLPs) International Business Companies (IBCs), foreign 
accounts, offshore credit/debit cards and similar instruments. These 
complex multi-layer transactions conceal the real nature of the 
transactions and ownership of the taxable income or assets. Promoters 
of these abusive tax schemes could not succeed without the active 
participation of unscrupulous return preparers who charge hefty fees in 
exchange for their involvement. In one of the most significant abusive 
tax schemes ever prosecuted, six people including an accountant from 
Los Osos, California, were convicted for their roles in promoting a 
fraudulent tax shelter to more than 1,500 clients. The defendants 
earned tens of millions of dollars in fees as they assisted clients in 
taking $120 million in false deductions. The deductions were generated 
through a series of complex transactions involving foreign bank 
accounts.
    Fraudulent behavior on the part of some practitioners does not 
generally have its foundation in a lack of understanding of the 
Internal Revenue Code and associated filing requirements. Rather, 
return preparers engaging in fraudulent activity frequently rely on 
extensive knowledge of the tax law and IRS procedures to devise 
sophisticated ways to circumvent the system.
CI's Return Preparer Program
    Criminal Investigation's Return Preparer Program (RPP) was 
established in 1977 and was enhanced in 1996 with the addition of the 
IRS Revenue Protection Strategy. During the past five years, through 
the RPP CI has identified over 200,000 questionable returns prepared by 
practitioners on behalf of their clients. These returns claimed over 
$700 million in refunds. Additionally, during that same time period, CI 
initiated over 1,000 investigations on return preparers. Since August 
2002, more than 98,000 audits have been completed and over $200 million 
in additional tax has been assessed on returns related to on-going 
return preparer investigations.
Electronic Filing and Refund Anticipation Loans
    Tax returns can be prepared, filed electronically and accepted by 
the IRS one day and the taxpayer or unscrupulous preparer can obtain a 
Refund Anticipation Loan (RAL) the next. During the 2005 filing season, 
taxpayers filed over 66 million returns electronically. Approximately 
16%, or 11 million, of those returns had a RAL indicator. While the 
majority of RALs are associated with legitimate returns, seventy-five 
per cent of the identified questionable and/or fraudulent returns have 
an associated RAL.
Return Preparer Fraud Detection Tools
Fraud Detection Centers
    Since 1977, CI has been screening suspected fraudulent tax returns. 
This is done by the Criminal Investigation Fraud Detection Centers 
(FDC) at each of the IRS campuses where tax returns are filed. One of 
the functions of the FDC is to detect and develop return preparer 
schemes for criminal investigation or for referral to an IRS civil 
division for examination. There are approximately 600 analysts and 
staff members employed at these FDCs nationwide. The FDC investigative 
analysts evaluate data identified by data mining algorithms, conduct 
critical investigative analysis, and work with our partners in the 
civil divisions of the IRS in the preparation of the RPP scheme 
packages. For processing year 2005 to date, over 33,000 questionable 
returns have been identified claiming almost $100 million in refunds 
associated with unscrupulous tax return preparers.
Identification of Schemes Using Technology
    CI, in conjunction with the IRS's Information Technology Services 
(ITS) has developed the Electronic Fraud Detection System (EFDS) which 
is used by CI analysts at the FDCs. The EFDS houses large quantities of 
taxpayer data and has the capability to combine refund returns with 
other IRS files into one centralized system. In fact, EFDS is the 
second largest database maintained by the IRS. All refund returns are 
scrutinized by EFDS, which results in the identification of a 
substantial proportion of false returns. While this system has greatly 
enhanced the way the IRS identifies false returns, IRS is still unable 
to detect all false returns. As new schemes are identified, we program 
our computer systems to identify them to maximize the efficiencies of 
the automated systems.
    In conjunction with EFDS, CI also utilizes a specific analysis tool 
for identifying potentially unscrupulous return preparers. The 
development of this tool is still in its infancy. It is comprised of 
electronically captured tax return information which can be filtered 
and sorted according to specified criteria. This has proven to be 
effective in identifying potentially unscrupulous return preparers for 
civil examination and/or criminal investigation.
Special Investigative Techniques
    Another effective investigative tool used by CI is our undercover 
program. Criminal Investigation conducts undercover operations in 
significant financial investigations when it is not possible to obtain 
evidence through less intrusive means. Undercover operations are 
extremely sensitive and potentially dangerous. Careful planning and 
oversight is critical to the success of an undercover operation and to 
the safety and security of the undercover special agent. Criminal 
Investigation works closely with its partners in the civil operating 
divisions to identify preparers who have demonstrated the propensity to 
prepare false returns, thereby allowing for more judicious use of the 
undercover technique. Over the past four years, CI has conducted over 
400 undercover operations relating to unscrupulous return preparers. 
During fiscal year 2004 over 71% of the returns prepared for an 
undercover agent contained false information.
Parallel Proceedings
    Stopping unscrupulous return preparers as quickly as possible is 
critically important to the integrity of the tax system. One of the 
most effective means of accomplishing this is through the use of 
parallel proceedings. Parallel proceedings are simultaneous but 
separate criminal and civil proceedings. Obtaining a civil injunction 
effectively stops the illegal activities of the promoter while the 
criminal investigation proceeds. This process does not adversely impact 
the criminal prosecution, but is a useful means of discouraging 
additional taxpayers from participating in the scheme.
Publicity, Education and Outreach
Publicity
    Criminal Investigation works with media outlets and trade 
organizations to publicize criminal convictions involving all aspects 
of tax and financial fraud. This is especially true in unscrupulous 
return preparer cases because publicity will both deter other preparers 
from fraudulent activities and will increase taxpayer awareness to the 
importance of selecting a competent return preparer. In addition to 
seeking publication in traditional news outlets and trade publications, 
CI also posts public information about convictions on the IRS.gov 
website.
Education/Outreach
    The IRS and CI in particular, continue to make a concerted effort 
to educate and alert taxpayers about unscrupulous tax return preparers 
and their tactics because prevention is an integral part of our 
enforcement strategy. Listed on the IRS.gov web site are various links 
taxpayers may access to learn about unscrupulous tax return preparers, 
dishonest practices, statistical data, examples of tax return preparer 
investigations, tax fraud alerts, a tax return preparer fraud fact 
sheet and how to report suspected fraudulent activity. Through the web 
site, taxpayers can also access the IRS annual news release on 
significant tax scams known as the ``Dirty Dozen.'' Return Preparer 
Fraud is designated as one of the IRS ``Dirty Dozen.''
    In an effort to prevent return preparer fraud, CI has developed a 
close working relationship with the return preparer community and does 
extensive outreach in this area. For the past 11 years, CI has 
participated in fraud discussions with practitioners at the IRS 
Nationwide Tax Forums. These forums offer information on the most 
current changes in the tax law, as well as updated information 
involving compliance and tax practices and procedures. Criminal 
Investigation has presented Refund Fraud and Abusive Tax Scheme 
seminars to approximately 18,000 tax practitioners and enrolled agents 
in the last two years alone. Representatives of CI also meet with local 
tax practitioner groups to continue the dialogue about badges of fraud 
and to encourage tax practitioners to alert the IRS about potential 
fraudulent schemes through field office contacts and the Fraud Hotline.
Highlights of Investigative Efforts
    Jackson Hewitt Franchise Owner and his Manager Sentenced for 
Conspiring to Defraud the IRS--On May 23, 2005, in Detroit, MI, Preston 
Harris, manager of a Jackson Hewitt franchise, was sentenced to 18 
months in prison to be followed by three years of supervised release. 
Harris was also ordered to pay $231,053 in restitution. Previously, on 
May 6, 2005, William Thomas, co-owner and general manager of three 
Jackson Hewitt franchises, was sentenced to 30 months in prison to be 
followed by three years of supervised releases. Thomas was ordered to 
pay $229,805 in restitution. On July 26, 2004, Thomas and Harris were 
convicted by a jury on one count of conspiracy to defraud the IRS by 
means of fraudulent claims and two counts of filing false claims for 
refunds.
    According to court records, Thomas and Harris, along with others, 
prepared over 50 false tax returns containing false and fictitious 
information, enlarging income tax refunds due to their clients by over 
$115,000. The false information included claiming false charitable 
contributions and un-reimbursed employment related expenses. Some false 
returns claimed fictitious dependants and head of household status, 
along with creating fictitious Schedule C businesses, in order to 
generate an Earned Income Tax Credit. At sentencing, the total tax loss 
was calculated to be approximately $229,000.
    Van Nuys Tax Preparer Sentenced for Preparing False Income Tax 
Returns--On April 18, 2005 in Los Angeles, CA, Luis Olguin was 
sentenced to 18 months in prison to be followed by six months of home 
detention and was ordered to pay $140,067 in a fine to the Internal 
Revenue Service. He will also be required to pay a special assessment 
of $200. In addition, Olguin is barred from the preparation of tax 
returns during the three year period of supervised release. Olguin, who 
operated L&L Professional Services, a tax preparation business, 
admitted in his plea agreement that he prepared 234 false tax returns 
for the tax years 2000 through 2002, which claimed false and fraudulent 
Schedule A deductions.
    Stone Mountain Tax Preparers Sentenced in Tax Fraud Scheme--On 
March 3, 2005, in Atlanta, GA, Deborah L. Thrower and Shashona P. 
Payton were sentenced on charges of conspiracy to commit tax fraud. 
Thrower was sentenced to 21 months in prison, ordered to pay $337,684 
in restitution to the IRS, and was given a 3 year term of supervised 
release. Payton was sentenced to a two year term of probation, with a 
special condition that she serves six months of the probationary term 
in home confinement. She was also ordered to pay $60,251 in restitution 
to the IRS. Thrower and Payton, who are mother and daughter, pled 
guilty in October, 2004 to conspiring with one another to file false 
tax returns with the IRS in order to generate fraudulent tax refunds 
for their clients. For a fee, Thrower and Payton prepared federal 
income tax returns for their clients that were electronically filed 
with the IRS. In pleading guilty, the defendants admitted that they 
knowingly falsified their clients' federal income tax returns in order 
to generate a fraudulent refund by, among other things, falsely 
inflating the taxpayers allowable expenses and deductions, and by 
falsely reporting the taxpayers filing status, eligibility for 
dependent exemptions, individual retirement account contributions, 
student loan deductions, child care credits and expenses, and 
eligibility for the Earned Income Tax Credit. The effect of these false 
entries was to negate the taxpayer's taxable income, which, when 
combined with the withholdings, generated a false refund payment by the 
IRS.
    Local Tax Preparer Sentenced to 3 years in Federal Prison--On 
January 3, 2005, in Dallas, TX, Yolanda Lavell Kaiser was sentenced to 
36 months imprisonment following her guilty plea in October to one 
count of aiding and assisting in the preparation of a false tax return. 
Kaiser was also ordered to pay $104,195 in restitution. Kaiser admitted 
that in February 2002, she prepared a tax return for an individual 
knowing that it was false and fraudulent in that it overstated the 
amount of the taxpayer's income and withholding, and falsely 
represented that the taxpayer was entitled to claim an education 
credit. Kaiser's preparation of this and other fraudulent tax returns 
resulted in a tax loss of $90,095. Kaiser also admitted that at the 
time she committed this offense, she was in the business of preparing 
and assisting in the preparation of tax returns and that this offense 
was a part of a pattern and scheme from which she derived a substantial 
portion of her income.
    Three CPAs Plead Guilty in Anderson's Ark and Associates 
International Tax Scheme--On May 16, 2005, in Seattle, WA, Tara Lagrand 
of Naples, FL; Gary Kuzel of Downers Grove, IL; and Lynden Bridges of 
Wheat Ridge, CO, pleaded guilty to aiding and assisting in the filing 
of false income tax returns. The estimated tax loss that resulted from 
the defendants filing false income tax returns was between $2.5 and $5 
million for each defendant. These three accountants were part of 
Anderson's Ark and Associates (AAA), an organization through which 
fraudulent tax shelters and investment scams were promoted and sold. In 
their plea agreements, each defendant admitted that they assisted AAA 
clients, from their respective states, by preparing and filing the 
partnership agreements, promissory notes, and income tax returns 
required to implement the ``Look Back'' program--one of the two 
fraudulent schemes promoted by the AAA organization.
    Grass Valley Woman Sentenced in Tax Fraud Scheme--On May 9, 2005, 
in Sacramento, CA, Karen Louise Younce was sentenced to 37 months in 
prison followed by three years of supervised release and ordered to pay 
a special assessment of $100 for her role in a large-scale abusive 
trust scheme. Younce previously admitted, as a part of her plea, that 
during 1992 through August 2002, she participated in a conspiracy to 
impair, impede and obstruct the IRS in the computation, assessment and 
collection of more than $2 million in federal income tax liabilities. 
For a fee, Younce advised and assisted her clients in transferring 
assets and income-generating entities into domestic and foreign trusts, 
which she created and marketed for the purpose of evading federal 
income taxes. Younce also advised and assisted her clients in cycling 
their U.S. income through off-shore bank accounts she controlled and 
then returned the income to the clients.
    In conclusion, our achievements are the result of a collective 
effort of the men and women of IRS CI, as well as our partners in the 
civil divisions. These dedicated employees are some of the most skilled 
financial investigators, auditors and investigative analysts in the 
federal government, and we are proud of the role we play in protecting 
our nation's revenue.
    Mr. Chairman, I thank you for this opportunity to appear before 
this distinguished committee and I will be happy to answer any 
questions you and the other committee members may have.

                                

    Chairman RAMSTAD. Thank you, Ms. Jardini. Thanks for your 
help in preparing for this hearing today. Now your testimony, 
please, Ms. Atkinson.

STATEMENT OF ELIZABETH ATKINSON, PRESIDENT, BOARD OF TRUSTEES, 
         COMMUNITY TAX LAW PROJECT, RICHMOND, VIRGINIA

    Ms. ATKINSON. Thank you, Chairman Ramstad, Ranking Member 
Lewis and distinguished Members of the Subcommittee, for 
inviting me here today to speak about examples I have witnessed 
of taxpayers who have been victimized by bad preparers, both 
fraudulent and incompetent. In both my private practice and 
through my affiliation with the Community Tax Law Project, 
which does pro bono work for low-income taxpayers, I have dealt 
with many taxpayers who have been victimized by bad return 
preparers. Because of tax law complexity, taxpayers 
increasingly must rely on paid preparers to prepare their tax 
returns and comply with the law. Your support for ensuring 
appropriate regulation and safeguards for taxpayers is key to 
maintaining taxpayers' trust in the fairness of the tax system.
    Many taxpayers choose a preparer based on the 
recommendations of their family, friends, and community. Often, 
they choose a preparer based on the convenience of location or 
the reputation of the national tax preparer franchise, such as 
H&R Block, Jackson Hewitt, and Liberty Tax. Most taxpayers, in 
my experience, believe that because the preparer is in 
business, he or she is competent. A good tax preparer is an 
important financial advisor and often does things beyond 
preparing the tax return, such as preparing student loan 
applications, Small Business Administration (SBA) loan 
applications, and providing some business planning advice. A 
bad preparer, however, can have a devastating effect on a 
family, and here are some examples that I have encountered in 
my experience. One was a schoolteacher who used a preparer who, 
without her knowledge, inflated her itemized deductions on her 
Schedule A to generate a bigger tax refund. The preparer was 
discovered by the IRS and prosecuted. As part of the case 
against the preparer, all of his clients were audited, 
including the schoolteacher, for 3 years. She was then assessed 
additional tax, interest, and a negligence penalty equal to 20 
percent of the tax. She appealed the negligence penalty to the 
Appeals Division of the IRS. The IRS Appeals Officer refused to 
remove the penalty because he said she had a college degree. 
She should have known better. She then offered to have the 
Appeals Officer, who likewise had a college degree, to come 
teach her high school Spanish class, since if having a college 
degree prepares you for all these things, she thought the same 
should apply to him. Still, the penalty was not removed, and 
she further pointed out that if she had known how to prepare 
her tax return, she would have done it herself rather than 
having to pay someone to do it. It took several years for this 
woman to repay the IRS the taxes that she owed, and her faith 
in the tax system has been badly shaken as a result of her 
experience.
    Another taxpayer we recently encountered at the tax clinic, 
responded to a newspaper ad that suggested prior years' returns 
could be reviewed for mistakes and amended returns could be 
filed. She then contacted the preparer. He reviewed and amended 
her returns. He showed her wages on the returns, but then on 
Schedule A backed off the wage amounts, bringing the taxable 
income to zero under a claim of right doctrine. She didn't 
understand any of this and now has a large balance with the IRS 
and no real recourse against this preparer, who is out of 
State. The preparer, in addition to advertising in the 
newspaper, operates a website. Our staff attorney at the clinic 
contacted the IRS Office of Professional Responsibility and was 
told because the preparer is not a Circular 230 preparer, that 
that office had no jurisdiction. She then asked where she could 
refer this preparer for some appropriate action to be taken, 
and there was some discussion about what Criminal Investigation 
office might have jurisdiction, since the preparer was in one 
State but the taxpayer was in a different State. Basically, it 
ended up in a runaround situation.
    Furthermore, we had a group of Sudanese immigrants who were 
victimized by a woman who advised them to file tax returns 
claiming dependency exemptions for people whose identities had 
been stolen. She then got them to a return preparer who 
prepared returns and got refund anticipation loans for the 
taxpayers. They then split these loans with this woman 
conducting the fraudulent scheme. The woman told them that this 
was a mechanism for reimbursing the people whose dependency 
exemptions were being used and that this was perfectly legal in 
the United States. Of course, this group had no familiarity 
with the U.S. tax system. We also had a Hispanic couple who 
went to the tax preparer together and explained that they are a 
married couple. However, the preparer advised the wife to file 
Head of Household and claim grandchildren who did not live in 
the household, but whom they occasionally babysat. This was 
done for the purpose of obtaining a larger EIC. I see that my 
time is up, Mr. Chairman. I thank you for the opportunity to 
share some of these examples.
    [The prepared statement of Ms. Atkinson follows:]

    Statement of Elizabeth Atkinson, President, Board of Trustees, 
             Community Tax Law Project, Richmond, Virginia

    Dear Chairman Ramstad and members of the Subcommittee. My name is 
Elizabeth Atkinson and I am a tax attorney practicing in Norfolk, 
Virginia. I am also the President of The Community Tax Law Project 
(CTLP), a low-income taxpayer clinic that represents low-income 
taxpayers in tax disputes. It is through my affiliation with CTLP that 
I present to you examples of the impact of incompetent and unscrupulous 
tax preparers on the lives of trusting taxpayers. Because of tax law 
complexity, taxpayers increasingly must rely on paid preparers to 
prepare their tax returns. Your support for ensuring appropriate 
regulation and safeguards for taxpayers who must pay professional 
preparers to do their tax returns is key to maintaining taxpayers' 
trust in the fairness of the tax system.
    There are many types of tax preparers, ranging from the housewife 
who earns a bit of income preparing tax returns for friends and 
neighbors, to CPAs and tax attorneys at firms large and small. The 
knowledge, competence and experience of these preparers vary widely. 
One set of tax preparers is highly regulated, the so-called Circular 
230 preparers. This group consists of attorneys, CPAs, and Enrolled 
Agents who must meet certain educational standards, often hold a state 
license, and are subject to extensive state regulation and continuing 
education requirements. Members of this group face severe consequences 
for improper tax return preparation, including fines and possibly loss 
of a license and ineligibility to practice before the IRS.
    Non-Circular 230 preparers have almost no regulation. Only two 
states, Oregon and California, regulate them. However, most taxpayers 
have never heard of Circular 230 and don't realize that the return 
preparer they have just paid is not accountable for his work under the 
law.

CHOOSING A PREPARER:

    Many taxpayers choose a preparer based upon the recommendations of 
family, friends, colleagues and neighbors. Others choose a preparer 
based upon convenience of location or the reputation of one of the 
national tax return preparation franchises, such as H&R Block, Jackson-
Hewitt and Liberty tax. Most taxpayers, in my experience, believe that 
because the preparer is in business, he or she is competent.
    A good tax preparer is an important financial advisor. He or she 
may make suggestions on investments, such as recommending saving for 
retirement via an IRA, give business planning advice, make the taxpayer 
aware of various tax incentives such as the education credits or the 
Earned Income Tax Credit, and otherwise assist the taxpayer in 
achieving financial health. Tax returns are also used for making 
mortgage lending decisions, student loan applications and often other 
loans such as SBA loans. Often the tax preparer may assist with the 
preparation of these documents as well as the tax return itself.
    A bad tax preparer, on the other hand, may have a devastating 
effect on a family. Witness the following examples experienced in 
private practice and the tax clinic.
    A schoolteacher used a preparer who, without her knowledge, 
inflated the itemized deductions on Schedule A to produce a bigger tax 
refund. The preparer was discovered by the IRS and prosecuted. As part 
of the case against the preparer, the IRS audited all of the preparer's 
clients, including the schoolteacher's returns for three years, 
assessed additional tax and a negligence penalty. The schoolteacher 
appealed the negligence penalty. The IRS appeals officer refused to 
remove the penalty because he said that, since she had a college 
degree, she should have known better. She then offered to have him 
teach her high school Spanish class, on the reasoning that, he too had 
a college degree. She further pointed out that if she knew how to 
prepare tax returns, she would have done it herself rather than paying 
a preparer. It took several years for this woman to repay the IRS the 
taxes assessed against her and her faith in the tax system remains 
shaken.
    Another taxpayer responded to a newspaper ad that suggested prior 
years' tax returns could be reviewed for mistakes and amended returns 
could be filed in order to get a refund. The taxpayer contacted the 
preparer who then reviewed and amended her returns to deduct all of her 
wage income on Schedule A under a claim of right doctrine. The taxpayer 
thought the preparer was a professional and trusted his expertise. She 
was later audited, now owes a large balance and has no real recourse 
against the preparer who lives in another state. This preparer operates 
a website as well as conducting newspaper advertising. When the staff 
attorney at the tax clinic contacted IRS Office of Professional 
Responsibility (OPR) about the preparer, she was told that OPR could 
not deal with an unenrolled preparer. She could not get specific 
information from OPR on where to refer the preparer so that it could 
get handled. One issue was the question of what office of IRS Criminal 
Investigation would have jurisdiction.
    A group of Sudanese immigrants were victimized by a woman who 
advised them to file tax returns claiming dependency exemptions and the 
earned income tax credit for people unrelated to them (whose identities 
had been stolen). The woman assured the immigrants that this was legal 
and the way it was done in the United States. She then sent them to a 
preparer to get refund anticipation loans. She split the refund loans 
with the immigrants, claiming that she needed to compensate the people 
whose names and numbers were used.
    A Hispanic couple went to a tax preparer together and told the 
preparer that they are married. The preparer advised the wife to file 
head of household and claim the grandchildren whom they occasionally 
babysit but who do not live in the household. This meant a larger 
refund, including EITC, to which the taxpayers were not entitled (over 
$5000 more than they were due). The preparer encouraged the taxpayers 
to get a refund anticipation loan. This is a very common scheme that we 
see. The preparer is motivated to inflate the refund to sell a refund 
anticipation loan so that he receives a bigger commission.
    An 18-year-old man went with his girlfriend to a nationally 
franchised tax return preparation chain. The preparer filed the return 
as married filing jointly, even though the couple was not married, and 
the tax return claimed children for whom he could not be the biological 
father as the children were teenagers. The preparer listed the 
birthdates on the tax return but did not question the taxpayer to 
determine whether the eligibility requirements for the dependency 
exemption, or earned income credit were met. Through the preparer, the 
``couple'' obtained a Refund Anticipation Loan of $4700. The IRS 
disallowed the refund when the return was filed. Now the taxpayers owe 
the bank $5220 on the loan.

IDENTIFYING UNSCRUPULOUS PREPARERS

    There are several ways to detect an unscrupulous preparer. Since 
the bad preparer generally uses a predictable pattern of creating 
larger tax refunds, such as the schemes described above, often IRS 
computer algorithims can detect the patterns and flag the returns. The 
IRS then will open a preparer project and select all the returns 
prepared by a certain preparer.
    Also, experienced IRS field personnel often are aware of the bad 
preparers in the community. Unfortunately, as the IRS decreases its 
field presence, moving to centralized workgroups, these ``eyes and 
ears'' are not as prevalent. Also, many of the field personnel are 
discouraged when they make referrals that receive no follow-up. When I 
worked for the IRS from 1982 through 1997, it was widely known that 
referrals to the Director of Practice (predecessor to the Office of 
Professional Responsibility) went nowhere.
    Last tax season, the IRS proposed using ``undercover shoppers'' at 
the VITA sites, where preparers are unpaid volunteers. Instead of 
focusing its limited resources on volunteers, the IRS should send 
``undercover shoppers'' to follow-up on preparers who advertise their 
ability to get big refunds in the newspapers and on the internet.
    Often state and local tax officials and community advocates are 
aware of bad preparers. The IRS should do more to partner with these 
groups to identify and stop bad return preparers.

RECOMMENDATIONS

    I believe the IRS should strategically focus its limited resources 
with respect to this issue. One bad preparer can prepare in excess of 
100 returns per year. Stopping one bad preparer can prevent 100 cases 
wasting audit resources and potentially also wasting collection 
resources downstream.
    The first focus of the IRS should be educating taxpayers on 
selecting a return preparer, common ``schemes'' employed by 
unscrupulous preparers and the devastating consequences for the 
taxpayer of selecting a bad preparer. The IRS could partner with tax 
professional groups to conduct a media campaign and to reach high 
school students and immigrants who are filing returns for the first 
time. The IRS Website contains good information on these issues, but 
often lower to middle income taxpayers lack internet access, especially 
the elderly, those in rural areas, and those who speak English as a 
second language.
    The IRS should establish a hotline number for reporting bad 
preparers. The IRS should also partner with state and local tax 
officials and community advocates to identify and take appropriate 
action against bad preparers.
    The IRS should treat the victims of bad preparers as victims rather 
than co-conspirators. When working on preparer projects, the focus 
should be on assisting the taxpayer in understanding what is wrong with 
the tax return, taking corrective action, educating the taxpayer on 
selecting a good preparer and finding the least intrusive way of 
resolving tax deficiencies that exist due to the bad preparer.
    The IRS should work pro-actively with the Low-Income Taxpayer 
Clinics to enable the clinics to provide pro bono representation to 
those victims who qualify for tax clinic assistance. The IRS should 
also work proactively with the Taxpayer Advocate Service to ensure that 
taxpayers understand the availability of TAS assistance in such cases. 
This would enable the IRS to work a preparer issue more efficiently and 
would lessen the taxpayer's hostility toward the IRS. My experience in 
these cases is that the victim of a bad preparer feels tremendous 
hostility toward the IRS because of the perception that the IRS could 
have prevented the situation through proper oversight. The taxpayer 
also feels that the IRS treats him as a co-conspirator when in fact the 
taxpayer did not understand that the tax return was incorrect or 
fraudulent. Correcting these misperceptions will strengthen the 
relationship between the IRS and the taxpayer and encourage the 
taxpayer to stay in the system.
    Thank you.

                                

    Chairman RAMSTAD. The Chair thanks all three of you expert 
witnesses for your testimony here today and shedding light on 
this problem and proposed reform. Before yielding to the 
distinguished Ranking Member, I have a question for each of our 
witnesses. First, for Ms. Jardini, obviously, not every case 
investigated by Criminal Investigation in IRS results in 
prosecution. I think we all recognize that some cases are best 
handled administratively. Would you compare the administrative 
sanctions available to the IRS with respect to practitioners 
regulated under Circular 230 with those not so regulated?
    Ms. JARDINI. First, let me explain that those regulated 
under Circular 230 are not necessarily return preparers. What 
the Service seeks to do under Circular 230 is represent those 
professionals--attorneys, Enrolled Agents (EA), Certified 
Public Accountants (CPA), appraisers, and so forth--who wish to 
represent clients before the IRS. We have an interest, of 
course, a strong interest in ensuring that that professional 
community who is representing clients before the IRS adheres to 
a certain standard of professionalism. Tax return preparers are 
not deemed as individuals who represent individuals before the 
IRS, so there is a slightly different distinction there. 
Nonetheless, the Office of Professional Responsibility has the 
authority to impose sanctions of all sorts, including 
disbarring or essentially disallowing professionals under their 
jurisdiction from practicing before the IRS. That does not 
prevent those individuals from filing returns. At the same 
time, overall, the IRS in general, not just the Office of 
Professional Responsibility, but the civil exam functions, have 
the ability to impose a panoply of penalties against all 
preparers, Circular 230 or not, if they engage in fraudulent, 
unprofessional, or unethical conduct. So, we do have authority 
as it relates to a variety of individuals.
    Chairman RAMSTAD. I thank the witness. Thank you, Ms. 
Jardini, for that response. The next question I would like to 
ask you, Ms. Olson. Some observers, practitioners, so-called 
experts in the field believe that registration of tax return 
preparers will do little or nothing to stop corrupt preparers 
from engaging in criminal activity. We have heard that argument 
with respect to other criminal activity as well, and that might 
be right, but can you discuss how licensing of preparers would 
benefit taxpayers looking for assistance?
    Ms. OLSON. Licensing enables the taxpayer to seek help from 
someone that they know is minimally--has met some minimal 
competency standards. It gives a bright line between going to 
someone who you are not sure about but your neighbor has 
referred you to, to someone that the IRS has said--at least 
this person has passed a test, has taken continuing education, 
and more importantly, that this person has gone through the 
steps and is holding themselves out to be a true preparer. I 
think that it is important to note, as Nancy Jardini said, for 
example--the Circular 230 preparers, in the regime that we 
have--you can be barred from practicing before the IRS, 
representing a taxpayer before the IRS, but then turn around 
and hang out a shingle the next day--after you have already 
been determined to have done some misconduct that brings around 
that sanction--and prepare returns. We are exposing our 
taxpayers, the vast majority of our taxpayers, to that kind of 
preparation without any real viable means for sanctions.
    Chairman RAMSTAD. Thank you, Ms. Olson, for that response. 
Finally, Ms. Atkinson, you alluded in your testimony to 
fraudulent preparers failing to adhere to the EIC due diligence 
requirements. Have you seen many examples at the Community Tax 
Law Project, over which you preside, of this failure to adhere 
to the EIC's due diligence requirement?
    Ms. ATKINSON. Yes, Mr. Chairman. We have seen very frequent 
examples of that, frequently in concert with refund 
anticipation loans. Most often, that is the context in which 
those occur. Frequently, the IRS will flag those returns and 
not issue the refund, but then the taxpayer is still saddled 
with this refund anticipation loan and must pay that back with 
really very little legal recourse in most cases.
    Chairman RAMSTAD. So, in your experience, given the 
examples you have encountered, is it fair to say that it is 
infrequent that the IRS assesses penalties for failing to 
adhere?
    Ms. ATKINSON. It is infrequent, and in my experience, while 
I believe the Criminal Investigation Division has done a good 
job with prosecuting some bad preparers, the civil regime is 
totally lacking with respect to even when penalties are 
imposed. Those do not seem to be operating as a deterrent, or 
at least a sufficient deterrent, obviously.
    Chairman RAMSTAD. That seemed to be the modus operandi. 
Fraud of that nature seemed to be the modus operandi of the 
``Tax Deals 4 Wheels'' schemes that are quite widespread, as I 
have been told. Do you have any comments, either of you, on 
that question, Ms. Jardini or Ms. Olson?
    Ms. OLSON. One of the consequences of the automobile loans, 
which I saw when I was at the Community Tax Law Project and 
have certainly seen cases coming across my desk as National 
Taxpayer Advocate, is that the refund anticipation loan is used 
as a downpayment toward the vehicle. The taxpayer, because the 
loan is a means to buy a more expensive vehicle than the 
taxpayer could actually afford, can't afford the monthly 
payments on the financing that they have put forward with that 
large downpayment from the Refund Anticipation Loan (RAL). So, 
they end up repossessing the vehicle. So, the taxpayer ends up 
without the refund, with a refund anticipation loan debt, and 
then when the taxpayer can't pay it, they get cancelation of 
indebtedness income from the repossession of the vehicle and 
they end up with a tax liability for the following year. 
Because of that pyramiding complication for the taxpayer, the 
IRS is tarred with those kinds of transactions because it all 
happens through the tax system.
    Ms. JARDINI. I would agree, Mr. Chairman, that these types 
of transactions we are talking about are appalling and that 
they take advantage of innocent taxpayers. The unfortunate fact 
is that some of the registration and education requirements 
that we are talking about here today aren't going to solve that 
problem because all those car dealers or furniture dealers or 
whomever else is out there promoting those deals could equally 
get licensed and then they will have a license to say that the 
Federal government says that what they are doing is okay, 
because there is nothing inherently illegal about what they are 
doing. So, that is a concern that we have about that.
    Separately, with respect to one of Ms. Atkinson's comments, 
we agree within the IRS that the enforcement structure has 
suffered to some degree in vigorousness, particularly between 
1998 and 2002. I know this Subcommittee has heard the 
Commissioner speak about that, and you have seen the charts 
that show the dramatic decreases in enforcement revenue and 
audit coverage and criminal investigations, and that is all now 
starting to come back. It is important that we remember that we 
are on a track here to aggressively pursue this. It is a 
strategic initiative and we need an opportunity within the IRS 
to get on our feet with this and really be able to establish 
programs and vigorous penalties in the programs we have, before 
we talk about instituting additional administrative burdens.
    Chairman RAMSTAD. The Chair would thank all three of you 
for being here today and for very clearly framing the issue. I 
think we have done that, in terms of possible reforms. I think 
nobody disputes the nature, the scope of the problem, and now 
the question is what do we do about it. At this time, the Chair 
would yield to the distinguished Ranking Member, the gentleman 
from Georgia, Mr. Lewis.
    Mr. LEWIS. Thank you very much, Mr. Chairman. Let me join 
you in thanking Members of the panel for being here and for 
your wonderful testimony. Ms. Jardini, Commissioner Everson, 
told the Committee during a briefing that he opposed the 
addition of Federal regulation of paid tax return preparers. He 
said that the IRS should beef up its current program rather 
than have the Congress impose new responsibilities on the IRS. 
Your written testimony does not address this issue. Do you 
agree with the Commissioner? Would you please explain your 
position?
    Ms. JARDINI. Mr. Lewis, I always agree with the 
Commissioner in his vast wisdom.
    Mr. LEWIS. Oh, I didn't know that.
    [Laughter.]
    Ms. JARDINI. Let me say that it goes to the answer that I 
had just started to give, and that is to say to you that we are 
in the beginning of the first year of a 5-year strategic plan 
for the overall effectiveness of the service. For every issue 
in enforcement that we could address within the Service, we 
identified four important enforcement initiatives that we 
intend to pursue vigorously over the period of 2005 to 2009. 
One of those initiatives is fraud and professionalism in the 
preparer community, and we agree that we need to more 
adequately assess and deploy the tools we currently have 
available to us before we start talking about adding additional 
tools and additional burdens on. So, I would fully agree with 
that statement, sir.
    Mr. LEWIS. Let me continue. For each criminal case 
discussed at the end of your statement, what was the original 
source of your fraud investigation? Do you have tips or 
undercover operations? The IRS computer system? The whole fraud 
program, how do you get to the bottom of this?
    Ms. JARDINI. There are a number of ways that we do. Our 
partnership with the practitioner community is extremely 
important in this arena because we get very, very valuable tips 
and information from the practitioner community. On the ground 
where these 123 million returns came in between January 1 and 
April 15 of this year, our Fraud Detection Centers in the IRS 
campuses are applying our Electronic Fraud Detection System 
data mining tool as well as the Return Preparer Analysis tool 
to identify those schemes that are identified to be related 
with one particular preparer that have similar characteristics 
and that involve a dramatic number of returns. Obviously, we 
are looking for the most egregious conduct.
    The less egregious ones are sent out for civil examination. 
The more egregious ones are sent out to our field offices for 
what we call undercover shopping. What that means is, we have 
identified a return preparer through our systems that is likely 
engaging in fraudulent activity. We send an undercover agent in 
to determine whether he or she can discover what exactly that 
practitioner is touting, and from there, we develop a criminal 
investigation on that particular preparer. Our undercover 
shopping program has been very, very successful and highlights 
the success of these programs. In the last 4 years, over 70 
percent of the undercover investigations in the shopping 
expeditions we have done have resulted in the development of an 
active criminal prosecution.
    Mr. LEWIS. In some neighborhoods, especially in the inner 
cities, during tax filing season, you see these what I call 
``fly by night'' operations that put up the big signs or the 
billboards. Come in, bring your W-2 form or whatever.
    Ms. JARDINI. Sure.
    Mr. LEWIS. Some of them are in a storefront, some rundown 
building, maybe just with a computer, maybe a desk, maybe a 
telephone. It is almost like a fast food mentality.
    Ms. JARDINI. Exactly.
    Mr. LEWIS. Rush in and get your work done and file it. How 
do you track people like that? They are here today and they are 
gone tomorrow. Do any of you want to respond to that type of 
operation?
    Ms. OLSON. The IRS doesn't track those people. The point of 
my proposal, sir, is to not put those people out of business, 
because, in fact, they are in the community that needs that 
preparation done, but to raise the level of competency for 
those folks. So, if you have a car dealer or a check cashing 
place, they have to, in order to hang out their shingle and 
receive a fee for tax preparation, they have to have learned 
the rules of tax preparation. If, to go to Nancy's concerns, 
they don't follow those rules and they continue to do inflated 
loans and they take inflated deductions and they take inflated 
EICs, then their license is revoked, and we have a public 
database that people can search to know whether or not their 
preparer is licensed by the IRS or has been revoked, and more 
importantly, we have a public information campaign that makes 
the taxpayer an educated consumer.
    To go to the concerns about cost, the IRS doesn't need a 
lot of resources to implement this program because you use the 
taxpayer him or herself to find the right preparer. We give 
them the tools to select the right preparer. California today 
uses an outside contractor to administer their entire program 
at no cost to their government. The IRS can do that. I find it 
really interesting that the IRS has a schizophrenic approach to 
tax preparer oversight. They are interested in the 
professionals who promote tax shelters; they are interested in 
criminal preparers, who are very few compared to the 200,000 to 
300,000 to 600,000 preparers; they are interested in regulating 
volunteer preparers; yet for the preparers for the vast 
majority of taxpayers, there is no oversight whatsoever.
    Mr. LEWIS. Ms. Atkinson?
    Ms. ATKINSON. I would like to say that the taxpayers cannot 
wait 5 years. For every tax preparer that is out there, 
generally speaking, you have got at least 100 bad returns that 
then get into the system. The taxpayer gets audited, and the 
IRS is spending a lot of resources on auditing, collection--on 
things that would not happen if you stopped the problem at the 
beginning. I know what you are saying. I have seen the same 
thing you have, and I think that regulation--the beauty or 
barber shop can function, why can't a tax system function with 
licensing? I don't understand why not.
    Ms. JARDINI. If I might, Mr. Lewis, the example you are 
talking about, the fly-by-night, trunk-of-the-car, storefront 
tax preparer; they are not engaging in fraudulent conduct 
because they don't know better and education isn't going to 
help them. These are stone-cold criminals who are engaging in 
fraudulent conduct and are doing so in a fashion to evade the 
law. It is absolutely untrue that the IRS doesn't track those 
people. In Criminal Investigation, we can tell you, in our 
experience, they shut down somewhere this week and they pop up 
somewhere else next week. Generally speaking, we are able to 
track them. What we are hoping to avoid is to drive those 
individuals further underground.
    Mr. LEWIS. Thank you very much. Thank you, Mr. Chairman.
    Chairman RAMSTAD. Thank you. At this point, the Chair would 
recognize Mr. Beauprez.
    Mr. BEAUPREZ. I thank the Chairman. Let us stay on that 
point for a minute, Ms. Jardini. Which is the bigger problem? 
If 60 percent of these 123 million tax returns are 
professionally prepared, is the bigger problem the faulty ones 
that, they just don't know any better, they are basically 
incompetent--lack some degree of competency--or is it that they 
are really gaming the system; they set out to be less than 
honest?
    Ms. JARDINI. The people we are talking about today, the 
people Criminal Investigation is interested in, the examples 
set forth by Ms. Atkinson are people that are engaged in 
knowing and intentional fraudulent conduct. Those individuals 
represent less than one-half of 1 percent of all 
professionally-prepared returns in this country. So, while it 
is an important problem, and it is an important problem for 
taxpayers, and why we care deeply about it, and it is one of 
our strategic initiatives, we need to keep that particular 
point, and the scope of it, in mind.
    Separately, these individuals are not going to be cured and 
the problems Ms. Atkinson referenced are not going to be solved 
by education. These people are, in fact, overly educated in the 
tax system. I reference Prisoner John Doe. He is a return 
preparer, which is defined as an individual who is preparing 
returns for others for money, for compensation. It is not 
because he doesn't know any better.
    Mr. BEAUPREZ. No, he obviously knew the Tax Code about as 
well as most anybody I have come across. He knew exactly how to 
use it to his end. Ms. Olson, you have talked, all of you have 
talked, and I know that our second panel is going to address 
the issue, as well, about certification, some kind of national 
certification. Maybe use California as the reference. What does 
this cost? What are we looking at?
    Ms. OLSON. I don't have the estimates before me. They are 
in my written testimony. I will be glad to get you them. There 
is actually a proposal that a consortium of outside companies 
have presented and formulated for the IRS that shows that it 
will be self-funding, that it is self-funding.
    Mr. BEAUPREZ. I accept that----
    Ms. OLSON. I can get you the additional information.
    [The information follows:]

    A consortium of administrators recently approached the IRS to 
administer a program similar to that proposed in the Taxpayer 
Protection and Assistance Act of 2005 (S. 832). Under this proposal, 
there would be no initial cost to the IRS, and the proposed program is 
expected to be fully funded by preparer registration fees of 
approximately $35, imposed every 3 years. This proposal is in sharp 
contrast to the $25 million initial cost estimated by the Congressional 
Budget Office for the program included in S. 882, the Tax 
Administration Good government Act of 2004. See Congressional Budget 
Office Cost Estimate, S. 882; Tax Administration Good government Act of 
2004 (May 24, 2004).

                                

    Mr. BEAUPREZ. To be devil's advocate for just a little bit, 
there could be an outrageous cost and the program would still 
be self-funding.
    Ms. OLSON. No, I think that the proposal was a $35 fee for 
preparers.
    Mr. BEAUPREZ. Annually?
    Ms. OLSON. Yes.
    Mr. BEAUPREZ. That would be the other question I would 
have, and maybe back to you, Ms. Jardini, again. The Tax Code, 
in spite of all of our talk about simplification, it seems to 
be growing in both size and complexity. I am assuming you are 
not talking--or when you talk about certification, you are 
talking about annually or at least fairly periodic, not some 
sort of lifetime certification, are we?
    Ms. JARDINI. Well, I am not actually talking about 
certification, but let me say that there are certification 
programs out there, as Ms. Olson referenced, in California and 
in Oregon, but the fact of the matter is that we don't have any 
empirical data from those yet. There is one study out of Oregon 
which tells us that, in that structure, the returns prepared by 
professional certified preparers are more accurate than self-
prepared returns. We don't have a datapoint or baseline on that 
to know what it was like before, what it is like nationally. 
Other than that, there is just no data, and there is no real 
ability for us to point to those yet because they are so new, 
to take what is good from those programs and apply those 
nationally to the Federal government. So, I would suggest that 
we need more information.
    Mr. BEAUPREZ. Yes. I would worry, as well, that we may push 
the problem underground. Let me give you a different reference 
point, one that I expect that the Chairman and the Members of 
the Committee are familiar with, as well. Before I came to 
Congress, I was a community banker. You can imagine that when 
you are making loans, you are relying on the accuracy of the 
analysis you do for any credit application, and principal in 
that analysis is the tax returns. The old garbage in, garbage 
out scenario happens way too frequently. Sometimes, I am 
convinced it is not accidental. Sometimes, it may ``favor,'' if 
I can put that in quotes, the credit applicant. It may also 
work to their disadvantage when all their income is not 
accurately stated. So, it is very much a large problem out 
there and one that I hope we can find a way to get our arms 
around, and maybe this hearing today, especially from all of 
our panelists, both panels included, we can come up with some 
legitimate, sound ideas that might push our work here in 
Congress forward. I thank the panelists and I thank the 
Chairman.
    Chairman RAMSTAD. The Chair now recognizes the gentleman 
from North Dakota, Mr. Pomeroy.
    Mr. POMEROY. I thank the Chair and enjoy once again seeing 
this panel. They do a tremendous job, I think, in their 
respective areas and it is good to see you again. Ms. Jardini, 
do some of the differences expressed between you and Ms. Olson 
basically come down to the distinction between overt fraud and 
sheer incompetence?
    Ms. JARDINI. I think that is right. This is not the first 
time, nor will it be the last time, that Ms. Olson and I have 
had this conversation and the vigorous dialog about criminal--
--
    Mr. POMEROY. We have even had some disagreements across the 
dais once in a while.
    Ms. JARDINI. My point is that criminals--first of all, the 
victims are not always the victims. The victims in some of 
these instances are actually knowing co-conspirators in the 
fraud----
    Mr. POMEROY. Sure.
    Ms. JARDINI. When you talk about regulating individuals and 
you are walking down the street in a regulated world and you 
have the fly-by-night tax preparer that Mr. Lewis discussed 
with a sign in front that says, ``Come to me; I will get you 
your largest refund,'' and the guy next door who has his 
certifications framed in the window and a sign that says, 
``Honest tax preparation,'' I would be afraid to see how many 
citizens walked into the one that said ``Largest return'' and 
ignored any certification whatsoever. So, the question here 
really is how much are people willing to--in some instances, 
how much are they willing to listen to and what can we do to 
educate them about the pitfalls of certified or uncertified.
    Mr. POMEROY. Your part of the business is fraud----
    Ms. JARDINI. Yes, it is.
    Mr. POMEROY. Not competency?
    Ms. JARDINI. No.
    Mr. POMEROY. You don't have information coming across your 
desk regarding preparer errors.
    Ms. JARDINI. Well, within my ambit are the Fraud Detection 
Centers in the campuses that look at all of these schemes that 
we develop and determine what the level of willfulness is here.
    Mr. POMEROY. For example, just to illustrate the point, the 
EIC; for many years we heard about rampant fraud. Some say, 
well, it is just darn confusing and people are making mistakes. 
It seems like the initial government Accountability Office 
(GAO) research would tend to confirm that it is actually 
preparer error, not fraud. Have you reached a conclusion on 
that?
    Ms. JARDINI. Well, actually, the Service currently is 
undergoing a test project on certification related to the EIC 
and those results should be available to this Subcommittee very 
soon. It is in the clearance process.
    [The information is being retained in the Committee files.]
    Mr. POMEROY. Now, last year, I believe, of about 25,000 
returns that were examined, they found 67 involving fraud.
    Ms. JARDINI. That is still ongoing. That pilot project----
    Mr. POMEROY. That 67 may go higher?
    Ms. JARDINI. I can't tell you that because that report is 
not public and I haven't viewed it. What I can tell you that we 
do know preliminarily from that study, and what you will know 
in full soon when you have the report, is that the purpose of 
it was to maximize enrollment, minimize errors, and minimize 
fraud. What the program found was with specific directive 
contact with those taxpayers, there was a change in the manner 
in which they filed their EIC claims. So, there is an impact, 
but the results of that will be to you shortly.
    Mr. POMEROY. I think that shows the interplay between--even 
though you have differences of opinion on things, you are 
certainly serving the same ends. Advancing competency reduces 
fraud in certain direct ways. Ms. Olson, the proposal that you 
are talking about is a minimum competency. There are States 
that have done this for preparers?
    Ms. OLSON. Yes. Oregon and California have, and they 
actually have been around for a number of years, and I think if 
you talk to Oregon or California, they would strenuously 
disagree with Ms. Jardini about whether they have good data or 
not. They think that they do. I think another thing to point 
out is, GAO itself has done several studies that show on the 
competency side that incompetent preparers harm taxpayers. They 
don't claim credits and deductions and things that they are 
entitled to. I think that that is the other side of this 
equation. We don't think about the things that--because a 
preparer isn't up on the Code, and hasn't had to take 
continuing education, so they don't know how the law has 
changed and what new benefits are there, that taxpayers don't 
avail themselves of everything that they are entitled to. I 
think that by the focusing on fraud so much--which I commend 
Criminal Investigation for all the work they are doing in that 
area--I don't see this as mutually exclusive. I see this as 
addressing another aspect of a problem.
    Mr. POMEROY. Thank you. I yield back, Mr. Chairman.
    Chairman RAMSTAD. The gentleman from Georgia, Mr. Linder.
    Mr. LINDER. Thank you, Mr. Chairman. Ms. Olson, you said 
that there are 200,000 or 300,000 or 600,000 tax preparers in 
this country. How many are there? That is a pretty big----
    Ms. OLSON. Well----
    Mr. LINDER. Do you have any idea?
    Ms. OLSON. I don't have an idea. We derived our number, 
from 300,000 to 600,000, from the IRS database of preparers who 
had signed returns and then we sort of extracted from that, 
entities that prepare returns how many are attorneys
    Mr. LINDER. So, you don't know?
    Ms. OLSON. I don't----
    Mr. LINDER. I only have 5 minutes. Let me get to it.
    Ms. OLSON. Yes. I am sorry.
    Mr. LINDER. Can you name any professional or 
nonprofessional, any organization or group of organizations 
whose competency is certified at the Federal level?
    Ms. OLSON. Securities dealers. We actually modeled our 
proposal under the securities dealer regulation scheme. I 
thought that maybe we could contract with some of the 
professional associations----
    Mr. LINDER. Securities dealers? Is that contracted within 
terms of----
    Ms. OLSON. They do contract out, yes.
    Mr. LINDER. Okay. Ms. Jardini, tax preparers tell me that 
the only category of taxpayers who overstate their income are 
people seeking EITC refunds. They might get a W-2 for $1,000 a 
month in income and then go to a tax preparer and say, ``I want 
to be honest with you; I made another $12,000 last year and I 
just want to make sure it is reported.'' They get themselves up 
to $22,000 or $23,000, and get the highest EITC return. How do 
you find that?
    Ms. JARDINI. How do we find it in the system?
    Mr. LINDER. How big is that?
    Ms. JARDINI. How big is that problem? Well, I can tell you 
with respect to return preparers, we see fraudulent--in terms 
of fraudulent return preparers----
    Mr. LINDER. These are honest return preparers who are 
taking the word of the taxpayer and overstating their income so 
they get a larger EIC.
    Ms. JARDINI. Right. Right.
    Mr. LINDER. Do you have a measurement of that?
    Ms. JARDINI. I don't have an exact measurement for you, 
sir, on that, but what I can tell you is because of the 
regulations of the EIC program and because it is a refundable 
credit, there is opportunity there for both dishonest people 
who want to claim income they don't have as well as 
unscrupulous preparers to take advantage of that, and we do see 
fraud in that program. I can't give you the specific number 
right now.
    Ms. OLSON. Sir, the IRS just completed its national 
research program and I think that its study will identify some 
of that. Its 1999 study, which is the most current one that we 
have, pending this new one, found some evidence, but said it 
was minimal. It does happen, but it was minimal dwarfed with 
the other types of overclaims that we saw.
    Mr. LINDER. I happen to disagree with you, but----
    Ms. OLSON. Okay.
    Mr. LINDER. Ms. Atkinson, you said that the first focus 
area should be educating taxpayers on selecting a return 
preparer. We have 10,000 school districts in this country who 
can't educate people who their Senator is. How are we going to 
set them aside and teach them how to select a tax preparer?
    Ms. ATKINSON. Well, school would be a good place to start. 
I just think that there are some things that the IRS could do, 
could partner with some of the professional organizations, 
because the professional organizations have--the ABA, for 
instance, I believe about a year ago, did do a media campaign 
on selecting a preparer and things like that which I think was 
a good model of the kind of thing that can be done.
    Mr. LINDER. Do you agree with the idea of certification?
    Ms. ATKINSON. I do.
    Mr. LINDER. You say that a good preparer is an important 
financial advisor. He or she may make suggestions on 
investments, suggest recommended savings for retirement. Would 
that tax preparer also have a financial certification?
    Ms. ATKINSON. Well, I think in some cases, that is the 
case. I know that----
    Mr. LINDER. In general, a tax preparer who is certified is 
not going to be certified to make these kind of 
recommendations.
    Ms. ATKINSON. No, that is correct, but I believe that the 
certified financial planners' professional organization 
increasingly is trying to build a base of getting people 
certified in financial planning because it is----
    Mr. LINDER. That is not what you said. You said a good tax 
preparer is an important financial advisor.
    Ms. ATKINSON. Well, a tax preparer ends up being a 
financial advisor indirectly when they prepare other sorts of 
documents for financial things, such as loan applications, and 
they don't recommend specific investments, but they say things 
like, if you were to put money in an IRA, it would be 
deductible to this extent in your income bracket. So, perhaps I 
crafted that inartfully, but certainly, tax preparers, part of 
their duty--and I think part of the problem is that they don't 
necessarily advise, if they are uneducated, on credits the 
taxpayer could take, or savings vehicles which would reduce the 
tax, but certainly not recommending a specific investment.
    Mr. LINDER. Thank you, Mr. Chairman.
    Chairman RAMSTAD. The Chair recognizes the distinguished 
Chairman of the Subcommittee on Trade, Mr. Shaw.
    Mr. SHAW. Thank you, Mr. Chairman. I want to pursue a line 
of questioning that Mr. Linder started, because I think this is 
something that we should be taking a look at, and that is the 
question of how do we track reported income that was not 
income. If somebody puts down that they have received 
additional income and received it by cash, you would, first of 
all, think that was an honest person that was stepping up to 
the plate and doing it. Then when you look behind it and say, 
well, Social Security wasn't paid on that, but we are paying 
out the EIC based upon the information that we get, it would 
seem to me, Ms. Jardini, that this is something that would be 
almost impossible to be able to track down and be able to 
pinpoint. I agree with John Linder and disagree with Ms. Olson; 
I think this is widespread. I used to Chair the Subcommittee on 
Human Resources when we set all this stuff up, and I have 
tracked it and know that it is a problem. How big a problem do 
you see it as, and what we should do to close that gap? It is 
an ever-growing problem and we have seen it a lot in south 
Florida.
    Ms. JARDINI. Right, and this is also relevant to the 
prisoner problem we just discussed a few weeks ago here in this 
Subcommittee, and is also an important problem all across 
Florida. This is the problem of income verification and how we 
do that most effectively within the Service. I agree with both 
of you that it is a substantial problem and we do see 
significant fraud in this area. In our Fraud Detection Centers 
in the campuses, once these--every single refund return runs 
through the Electronic Fraud Detection System and we are 
looking for specific characteristics; cash income being one of 
them. For example, Schedule C or 1099 income that would be hard 
to verify is one of the characteristics we look to, as well as 
identifying the Head of Household filing status in some 
instances. These are characteristics that might, when taken 
together, indicate that this is a return that we would pull out 
of sequence and attempt to verify.
    We have 600 analysts nationwide who attempt to verify those 
returns, literally hundreds of thousands of returns, 3-and-a-
half month period that represents the filing season. In some 
instances, what those analysts are doing is literally picking 
up the phone and attempting to verify income through employers 
or employment listed, which frankly is not the most efficient 
way to go about it. In 2006, we hope to be funded to deploy the 
National New Hire Database from the Department of Health and 
Human Services, together with our Electronic Fraud Detection 
System, which will be an enormously valuable tool for us in 
verifying W-2 wage income. We would then--because they keep 
very, very good up-to-date statistics in that system, be able 
to turn more of our attention toward Schedule C and 1099 and 
other types of income that is more difficult to verify.
    Mr. SHAW. Does the IRS in turn, then, try to collect the 
money that would be due to the Social Security Trust Fund out 
of those particular wages?
    Ms. JARDINI. I don't know what the referral process would 
be to--what the civil examination process----
    Mr. SHAW. My guess is that IRS is not talking to Social 
Security. That is my guess, but----
    Ms. JARDINI. We do talk to them with frequency in relating 
to verifying income data, because they do have verification of 
Social Security numbers and other issues that we are trying to 
work together with them to try to make some progress. I am not 
aware of----
    Mr. SHAW. I think it would be quite helpful if maybe you 
were to take a look at the Code and see exactly how we define 
income subject to the EITC and make it subject to only Federal 
Insurance Contributions Act (FICA) wages and that Social 
Security has been paid. That would cut down a lot of it, and it 
would almost take a conspiracy with the employer in order to 
play the system there, which I think would cut down on quite a 
bit of it. In another area, and this is something I am not sure 
any of you are equipped to answer, but would the State--and I 
think I know the answer to this--I don't think the State can 
regulate who can file income tax returns. Is that a correct 
assumption?
    Ms. OLSON. That the State cannot?
    Mr. SHAW. Yes, the State. Now, the State can certify--I 
know they have who the CPAs are and how you set those things 
up, and those are State regulated even though it is subject to 
nationwide qualifications as to education, and the test is 
similar all over the country. I question whether the States--
maybe I should say, do any of the States attempt to regulate 
who can file income tax returns?
    Ms. JARDINI. Well, as was previously mentioned, California 
and Oregon both do, and as Ms. Olson pointed out, while they 
would tout successes potentially from that, there is no 
empirical data to establish that the educational and 
certification requirements that they have imposed result in a 
higher-quality return. What their success is, they would tout 
would be additional registration, which is not necessarily an 
outcome measure.
    Mr. SHAW. I wonder if anybody has challenged that, as to 
whether a State can require qualifications as to who can and 
who cannot file a Federal return. It is an interesting 
question, but anyway, God bless them if they are trying to do 
it. I hope they would. Just maybe one further question very 
quickly, Mr. Chairman, and that is, are there certain preparers 
whose name appears as a preparer on the bottom of the return 
and it sends up a red flag that almost automatically calls for 
an audit? Or to state it another way, does the reputation of 
the preparer have anything--make it more or less likely that 
the individual will be audited?
    Ms. JARDINI. Well, as I pointed out previously, our Fraud 
Detection System as well as our Return Preparer Analysis Tool 
look at a whole bunch of characteristics of returns. If we had 
evidence that a specific identified tax return preparer had, in 
the past, prepared fraudulent returns, that would be a 
characteristic that would flag it and cause us to look at all 
of the returns associated with that particular preparer.
    Mr. SHAW. Thank you. Thank you, Mr. Chairman.
    Chairman RAMSTAD. Thank you, Mr. Shaw. I want to thank 
again the three witnesses here today, truly expert witnesses. 
Thank you for your testimony and I look forward to working with 
you on this matter.
    Chairman RAMSTAD. We have a series of votes, six, to be 
exact, starting about 4:45, so we have enough time for our 
second panel, if we could quickly make the transition. If the 
five distinguished witnesses would take their respective 
places, we would begin. We have just enough time for the 
testimony--the 5-minute rule applies, of course--of each 
witness, and then it should give us about 10 minutes for 
questions, so we will be able to get the second panel. Thank 
you, gentlemen, for your patience and thank you for coming here 
today to enlighten the Subcommittee on the problem that has 
been outlined and the possible reforms.
    The second panel comprises Kenneth W. Gideon, Chair of the 
Section of Taxation of the American Bar Association; Francis X. 
Degen, President of the National Association of Enrolled Agents 
(NAEA); Robert L. Cross, Chairman of the Right to Practice 
Committee of the National Society of Accountants; Tom Purcell, 
Chair of the Tax Executive Committee, American Institute of 
Certified Public Accountants(AICPA); and Larry Gray, government 
Liaison, National Association of Tax Professionals. Gentlemen, 
again, thank you all for being here today, for your patience 
and indulgence. Your testimony, please, Mr. Gideon.

  STATEMENT OF KENNETH W. GIDEON, CHAIR, SECTION OF TAXATION, 
                    AMERICAN BAR ASSOCIATION

    Mr. GIDEON. Thank you, Mr. Chairman and Members of the 
Committee. The section of Taxation appreciates the opportunity 
to appear today and discuss proposals for ensuring that tax 
return preparers are both ethical and competent. Because return 
preparers play an important role in the efficient and effective 
administration of the tax laws, these proposals complement 
efforts of the IRS to regulate tax professionals and to 
increase the level of taxpayer compliance. Today, more 
taxpayers than ever pay third-party preparers to prepare their 
individual returns, but most of these preparers, as you have 
heard today, are subject to no regulation by anyone or any 
registration or competence requirement of any kind. This is in 
contrast to the groups whose representatives are testifying on 
this panel, who are subject to regulation under Circular 230 as 
well as State certification programs and examinations with 
respect to their competence. Improving the quality of income 
tax return preparation, we think, will benefit all taxpayers. 
First, individuals who use paid preparers will be less likely 
to file erroneous returns.
    Second, and perhaps equally important, taxpayers who are 
least able to understand complicated tax rules. Taxpayers with 
little education, taxpayers who speak English as their second 
language, should be able to consult a preparer who is 
competent. There are bills that have been introduced both in 
this body and in the Senate to address this. The National 
Taxpayer Advocate has proposed a registration system. The 
section of Taxation today supports a registration program for 
tax return preparers who are not already regulated 
professionals. To be effective, we think this program should 
have six components: Registration, examination, continuing 
education, public awareness, adequate administration, and 
funding.
    We would limit registration to a preparer who prepares at 
least five returns a year and receives at least $5,000 in fees 
for that preparation. This would target the program where it is 
most needed, on commercial preparers. It is also important that 
the program not interfere with volunteer tax assistance 
programs, such as VITA, or other non-commercial tax return 
preparation for low-income taxpayers, relatives, civic groups, 
and the like. Therefore, the scope of the registration 
requirement should be flexible enough to permit volunteer 
preparer expense reimbursement without triggering registration. 
In addition, we don't believe that there is any need to include 
professionals that are already subject to regulation under the 
other programs, such as Circular 230, in such a registration 
program. We think an examination is a very good idea for 
testing competence, but there may be other ways, particularly 
as a transitional matter, for people who have demonstrated that 
they can competently prepare returns by partially preparing 
returns for years without having penalty problems. So, there 
may be some role for grandfathering.
    Second, we think that another consideration that the 
Committee should keep in mind is that you do not want to 
inhibit the entry of new return preparers into the program. You 
may want to provide for their supervision on an interim basis 
by people who are already in the return preparation business. 
We support mandatory continuing education for preparers. We 
think this is likely to be both more cost effective and a 
better way to go than annual reexamination or something of that 
sort. We think that this program will only be successful if it 
is adequately and properly administered. We note that there is 
a concern about burdening the Service with this regard. We 
think that a good deal of this proposed program, particularly 
the largely clerical tasks of the mechanics of registration, 
recordkeeping, credentials verification, examination 
administration, for example, could be performed by outside 
contractors under Service supervision. A group like the Office 
of Professional Responsibility will have to, in our judgment, 
supervise discipline and supervise the actual contractors 
themselves administering the program, but we think that a lot 
of routine administration could be done through contractors, 
and that, through fees, this could probably be done without a 
burden on the Federal budget.
    Nevertheless, as a final matter, if you are going to 
register progress, it is important that such a program be 
adequately funded and, therefore, Congress will need to assure 
that the Service has the funding for the supervisory resources 
that would be involved, and that there is an adequate system of 
private funding, if that is the way you go, to administer the 
exams and the like. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Gideon follows:]

 Statement of Kenneth W. Gideon, Chair, Section of Taxation, American 
                            Bar Association

    Good afternoon. My name is Kenneth Gideon. I appear before you 
today in my capacity as Chair of the American Bar Association Section 
of Taxation. This testimony is presented on behalf of the Section of 
Taxation. It has not been approved by the House of Delegates or the 
Board of Governors of the American Bar Association. Accordingly, it 
should not be construed as representing the policy of the Association.
    The Section of Taxation appreciates the opportunity to appear 
before the Subcommittee on Oversight (the ``Subcommittee'') today to 
discuss proposals for ensuring that tax return preparers are both 
ethical and competent. Because tax return preparers play an important 
role in the efficient and effective administration of the tax laws, 
these proposals complement the efforts of the Internal Revenue Service 
(the ``Service'') to regulate tax professionals and increase the level 
of taxpayer compliance.

              American Bar Association Section of Taxation

    The Section of Taxation is comprised of more than 18,000 tax 
lawyers. Our members include attorneys who work in law firms, 
corporations and other business entities, government, non-profit 
organizations, academia, accounting firms and other multidisciplinary 
organizations. As the country's largest and broadest-based professional 
organization of tax lawyers, one of our primary goals is to make the 
tax system fairer, simpler and easier to administer.
    Our members provide advice on virtually every substantive and 
procedural area of the tax laws, and interact regularly with the 
Internal Revenue Service and other government agencies and offices 
responsible for administering and enforcing such laws. Many of our 
members have served in staff and executive-level positions at the 
Service, the Treasury Department, the Tax Division of the Department of 
Justice, and the Congressional tax-writing committees.

             The Need for Tax Return Preparer Registration

    Today, more taxpayers than ever pay a third party to prepare their 
individual income tax returns. Paid preparers advise taxpayers on 
issues for which guidance is unclear. They explain record-keeping and 
other requirements. Many taxpayers use them to navigate their way 
through overlapping or recently changed provisions. The complexity of 
many provisions, such as the credits for earned income, dependent care, 
and education, raises particular needs for preparer assistance.
    Many paid preparers are subject to no regulation by the Service or 
by state licensing authorities. Their situation contrasts with that of 
attorneys, CPAs, and enrolled agents (``Regulated Professionals''), who 
are subject to oversight through Circular 230 rules and the Service's 
Office of Professional Responsibility. Attorneys and CPAs must pass 
licensing examinations to practice their professions. Enrolled agents 
who do not have prior experience working for the Service pass a written 
examination that tests their knowledge of tax law and procedure. 
Regulated Professionals are subject to continuing professional 
education requirements and ethical obligations. By contrast, paid 
preparers are subject only to the Internal Revenue Code's preparer 
penalties. Under current circumstances, it can be difficult for the 
Service to locate and review all returns prepared by a preparer when 
instances of willful or reckless conduct or intentional disregard of 
rules and regulations are detected.
    In most states, individuals who are not Regulated Professionals can 
advise taxpayers and prepare tax returns. Neither the Internal Revenue 
Code nor the Treasury Regulations impose any skill, knowledge, 
training, or other qualifications on tax return preparers. Members of 
the public, who are unaware that no such requirements exist, have no 
means of determining which preparers are ethical and competent and 
which are not.
    Improving the quality of tax return preparation will benefit all 
taxpayers. First, individuals who use paid preparers will be less 
likely to file erroneous tax returns. Because erroneous returns result 
in unexpected tax liability, imposition of interest on back taxes, and 
time spent resolving problems, even inadvertent errors cause hardship. 
In addition to individual hardships, correcting these returns diverts 
Service resources from other taxpayer education and enforcement 
activities. Second, taxpayers who are least able to understand 
complicated tax rules, i.e., taxpayers with little education or who 
speak English as their second language, should be able to consult a 
preparer who is competent.
    Bills addressing these problems have been introduced in both Houses 
of Congress, and the National Taxpayer Advocate has proposed a 
registration system. These proposals are thoughtful responses to a 
problem that affects the administration of tax laws and individual 
taxpayers. The Section of Taxation supports a registration program for 
tax return preparers who do not qualify as Regulated Professionals. To 
be effective, this program should have six components: registration; 
examination; continuing education; public awareness; administration; 
and funding. My testimony focuses on these components.
    Registration. The program should establish criteria for determining 
which preparers are subject to the Registered Preparer program rules. 
Limiting the registration requirement to any preparer who both prepares 
at least five tax returns in a calendar year and who receives fees 
totaling at least $5,000 per annum for such preparation would assure 
targeting of the program where it is most needed--on commercial 
preparers. Obviously, any initial registration thresholds can be 
revisited in light of information gathered in the program's early 
years. What is important is that the program adopted not burden or 
interfere with volunteer tax assistance programs, such as VITA, or 
other non-commercial tax return preparation for low-income taxpayers, 
relatives, civic groups, etc. (even if the preparer receives a modest 
payment or expense reimbursement). In addition, we do not believe that 
there is any need to include Regulated Professionals in a registration 
program and would oppose such inclusion.
    Examination. An examination can test technical knowledge, 
competency to prepare returns, and familiarity with the standards of 
tax practice required of preparers. But an examination may not be the 
only means for assessing competence. Congress might, for example, 
consider ``grandfathering'' individuals who have prepared returns for 
at least three years without being assessed preparer penalties (at 
activity levels in each of those years that would have met the 
registration threshold had it been in effect).
    The Registered Preparer program should not be structured in a 
manner that might adversely affect recruiting new tax preparers. Unless 
qualification examinations are offered on a frequent basis, entry-level 
preparers might be denied registration based on timing rather than on 
lack of knowledge. Perhaps an always available on-line examination with 
suitable security protections could be designed. Because being 
unregistered has potentially adverse consequences, Congress may wish to 
provide interim registration status for individuals who are relatively 
new tax preparers. Interim registrants might be subject to continuing 
education requirements and mandatory supervision by Registered 
Preparers or Regulated Professionals. A maximum time limit for interim 
status would be appropriate.
    Continuing Education. The Section supports mandatory continuing 
education for retaining status as a Registered Preparer. This 
requirement mirrors requirements already imposed on most Regulated 
Professionals. Registered Preparers can focus their continuing 
education on those topics that are most relevant to their practices. We 
believe that continuing education is more likely to serve the public's 
needs than annual re-examination of preparers. It is also likely to 
involve fewer administrative costs. Mandatory re-examination and other 
appropriate sanctions might be imposed on Registered Preparers who fail 
to meet the continuing education requirement.
    Public Awareness. Public lists of Registered Preparers should be 
available in both print and online formats in English and other 
languages. Public service announcements and similar publicity should 
acquaint preparers and the public with the new program.
    Administration. A registration program will be successful only if 
it is effectively administered. However, the mechanics of registration, 
record-keeping, credentials verification, and examination 
administration could be performed by one or more private contractors 
under Service supervision. This approach would avoid burdening Service 
employees with tasks that are largely clerical and preserve Service 
resources for matters requiring judgment, such as examination content 
and discipline of preparers who violate the rules. The IRS Office of 
Professional Responsibility (``OPR'') should receive authority to 
regulate Registered Preparers comparable to the authority it has for 
Regulated Professionals. The OPR should be charged with devising the 
qualifying examination or approving an examination prepared by others. 
Allowing routine program administration tasks to be performed by 
private contractors would be one way of assuring that the program does 
not adversely affect the Service's existing taxpayer service and 
enforcement functions.
    Funding. Congress must adequately fund any Registered Preparer 
program. If private contractors administer registrations and 
examinations, they might directly collect fees sufficient to offset 
their costs. The OPR or any other Treasury or IRS offices given 
responsibility for publicity of the program, oversight of the 
registration and examination process, and Registered Preparer 
discipline must have adequate staffing and funding to perform those 
tasks.

                                Summary

    A well-designed and administered Registered Preparer program would 
benefit taxpayers who use preparers and benefit tax administration 
generally. Such a program would support the Service's focus on 
enforcement and further its commitment to ensuring the integrity of the 
tax system. A registration program would recognize that tax return 
preparers are an integral part of effective tax administration and 
should reduce the likelihood that tax returns prepared by such 
preparers will include inadvertent and purposeful errors.
    As always, Section members stand ready to work with you and your 
staff members on this important matter.

                                

    Chairman RAMSTAD. Thank you, Mr. Gideon. Mr. Degen, your 
statement, please.

STATEMENT OF FRANCIS X. DEGEN, PRESIDENT, NATIONAL ASSOCIATION 
                       OF ENROLLED AGENTS

    Mr. DEGEN. Thank you, Mr. Chairman, for this opportunity to 
testify. I suggest to you that the paid preparer problem we are 
addressing today has two components, intentionally noncompliant 
returns attributable to preparer fraud and other noncompliant 
returns attributable to preparer negligence and incompetency. 
Both are problematic. We share the concerns of the Congress 
regarding fraud and incompetency because they undermine the 
integrity of our voluntary tax system, contribute to the $300 
billion-plus gross tax gap, and perhaps most importantly, 
create resentment in those who file honest returns. A taxpayer 
or tax preparer who is doing the right thing should not feel 
that he or she is the dupe in the preparation of income tax 
returns.
    To help remedy this disturbing situation, NAEA urges 
Members of this Subcommittee to take legislative action. As one 
of our Members commented in regard to this hearing, people 
drive in excess of the speed limit until they notice the cop. 
Then they all observe the speed limit for a while, but when the 
cop leaves the beat, speeds begin to creep back up. Mr. 
Chairman, it has been too long since the tax cop has been out 
circling the neighborhood in his black and white. While fraud 
is the focus of the hearing today, preparer error is a major 
cause of noncompliance. Unfortunately, too many preparers fail 
to attain adequate training and education or do not undergo the 
necessary annual investment in time and money to keep up with 
the constantly changing tax code.
    Mr. Chairman, it is important to place negligence and 
incompetency on an equal footing with intentional fraud when 
attempting to understand the magnitude of the noncompliance 
problem among unregulated preparers. The NAEA strongly endorses 
the concept of regulating all paid return preparers. In the 
Senate, Senators Bingaman, Grassley, and Baucus have developed 
thoughtful legislation that addresses most of these elements. 
The NAEA has endorsed this legislation as the most 
comprehensive road map to address the problem of unregulated 
preparer noncompliance. While any legislation can be improved, 
we would urge the Subcommittee to use this legislation as your 
base for drafting a House bill. If, however, you choose to 
start from scratch, we would urge you to consider the following 
four principles in developing your legislation.
    Number one, the legislation should contribute significantly 
to taxpayer access to competent and ethical preparation 
services. The legislation should require all non-Circular 230 
paid preparers to pass an IRS-supervised initial competency 
examination. We urge you to avoid a scenario where preparers 
can fulfill this requirement by taking one of a multitude of 
different tests created by various outside groups. Further, 
paid preparers should be required to complete annual continuing 
education and should be subject to the ethical standards of 
Circular 230.
    Number two, build on the existing regulatory framework and 
consolidate enforcement under one entity. The Office of 
Professional Responsibility would oversee one ethical code, one 
set of coordinated exams that would allow for professional 
advancement and standardized continuing education requirements.
    Number three, ensure adequate resources for administration, 
promotion, and most importantly, for enforcement. Without 
enforcement and potential disciplinary action, the legislation 
would not be effective.
    Number four, strike the correct balance for creating a new 
tax practice credential. Congress needs to be cognizant of the 
ramifications of creating a new credential in the world of tax 
administration. Currently, the general public is presented with 
three options for individuals that are authorized to practice 
before the IRS, EAs, lawyers and CPAs. Circular 230 is very 
specific as to how these individuals may advertise and 
generally present themselves to the public. A new credential 
that implies a higher level of authority and competency than 
merely preparing basic tax returns will cause confusion and 
undermine the general intent of the legislation.
    In closing, Mr. Chairman, NAEA stands ready to work with 
you in developing legislation to regulate unenrolled preparers. 
As I have testified before this Subcommittee at a previous 
hearing, most people would be astounded to find out that while 
their barber or manicurist is licensed, their tax preparer may 
not be. Comparing the downside of a bad haircut to an incorrect 
tax return, it is time to establish Federal standards to ensure 
basic competency and, therefore, good behavior. It stands to 
reason that an ethical and competent tax preparer is a 
taxpayer's best and lowest-cost insurance against IRS problems 
and the Service's best and lowest cost assurance of return 
compliance. Thank you. I am sorry.
    [The prepared statement of Mr. Degen follows:]

   Statement of Francis X. Degen, President, National Association of 
                            Enrolled Agents

    Thank you, Mr. Chairman, Ranking Member Lewis, and members of the 
Oversight Subcommittee for asking the National Association of Enrolled 
Agents (NAEA) to testify before you today. NAEA is the premier 
organization representing the interests of the 40,000 enrolled agents 
(EAs) across the country. EAs are the only practitioners for whom the 
IRS directly attests competency and ethical behavior. Over the years, 
NAEA has worked tirelessly to increase the professionalism of its 
members and the integrity of the tax administration system as a whole.
Background
    Based on input from our membership, I suggest to you that the paid 
preparer problem we are addressing today has two components--
intentionally non-compliant returns attributable to preparer fraud and 
other non-compliant returns attributable to preparer negligence and 
incompentency. Both are problematic.
    Legislators care about return fraud and incompetency because they 
undermine the integrity of our voluntary tax system, create resentment 
in those who file honest tax returns, and contribute to the $300 
billion plus gross tax gap. We share those concerns. Further, as 
federally licensed enrolled practitioners, EAs find themselves at a 
disadvantage when competing in the marketplace against the unscrupulous 
and find that these bad actors sully the reputation of all licensed tax 
professionals.
    In our testimony today, I would like to present a picture of the 
problems presented to the tax system by unlicensed return preparers, 
who in many instances we have found to be unscrupulous or incompetent, 
and unfortunately in far too many cases both unscrupulous and 
incompetent. To help remedy this disturbing situation, the NAEA urges 
members of this Subcommittee to take legislative action.
The Problem
    While most of the focus for the IRS and policymakers over the last 
few years has been on large dollar compliance areas such as corporate 
tax shelters and executive compensation, generally involving licensed 
practitioners, NAEA members have observed equally disturbing trends in 
the world of return preparation for ordinary taxpayers, almost always 
involving unlicensed preparers.
    The NAEA is not alone in acknowledging this problem. In her 2003 
annual report, the National Taxpayer Advocate noted that over 55 
percent of the 130 million individual taxpayers hired a return 
preparer. The majority of those preparers did not possess a legitimate 
license demonstrating competency or ethical standards. The result is 
startling; Ms. Olson noted that at least 57 percent of EITC earned 
income overclaims were attributable to returns prepared by unlicensed 
paid preparers, resulting in billions of dollars in lost revenue to the 
government.
    For our members and all preparers who abide by the highest levels 
of ethical and competency standards in order to live up to the 
requirements set by federal regulations, the competitive disadvantages 
of this situation are stark. Time and time again, when our members are 
surveyed, they relate instances of what we call ``preparer shopping'' 
during every tax season. Indeed some taxpayers gather up their tax 
documents and walk out of a practitioner's office because someone right 
down the street has guaranteed them a minimum refund amount: $1,000, 
$3000 or even higher. Or, the taxpayer wants the preparer to help them 
create phony business or unreimbursed employee business expenses. Or, 
incorrectly report expenses or income from rental property. Or, not 
report ``under-the-table'' income. The list goes on and on.
    Many of our members are aware of specific preparers in their 
neighborhoods that specialize year-in and year-out in ripping off the 
Treasury. Many have even complained to the IRS, but because of the lack 
of resources, the agency appears to focus on practitioners currently 
regulated under Circular 230. As one of our members commented in regard 
to this hearing, ``People drive in excess of the speed limit until they 
notice the cop; then they all observe the speed limit for a while, but 
when the cop leaves the beat, speeds begin to creep back up.'' Mr. 
Chairman, it has been too long since the tax cop has been out circling 
the neighborhood in his black and white.
    While fraud is the focus of this hearing today, preparer error is a 
major cause of noncompliance. We all know the tax code is too 
complicated. Unfortunately, too many preparers who are open for 
business today fail to attain adequate training and education or do not 
undergo the necessary annual investment in time and money to keep up 
with the constantly changing tax code. Mr. Chairman, it is important to 
place negligence and incompetency on an equal footing with intentional 
fraud when attempting to understand the magnitude of the non compliance 
problem among unregulated preparers.
What can be done?
    Mr. Chairman, we all acknowledge that the tax code is exceedingly 
complex. Dramatically simplifying the code would likely reduce 
incidences of noncompliance. However, absent significant 
simplification, we must deal with the situation as it currently exists.
    NAEA strongly endorses the concept of regulating all unenrolled 
paid return preparers, requiring an initial test for competency, 
background checks, annual minimum continuing education requirements and 
compliance with the current Circular 230 ethical standards. 
Additionally, the Office of Professional Responsibility needs adequate 
resources to both enforce the rules and promote all preparers covered 
by Circular 230.
    After many months of working with the current regulated groups--the 
enrolled agents, lawyers and CPAs--in addition to the unenrolled 
preparers, Senators Bingaman, Grassley and Baucus have developed 
thoughtful legislation that addresses most of these elements. NAEA has 
endorsed this legislation as the most comprehensive roadmap to address 
the problem of unregulated preparer noncompliance. While any 
legislation can be improved, we would urge the Subcommittee to use this 
legislation as your base for drafting a House bill. If you choose to 
start from scratch, though, we would urge you to consider the following 
principles in developing your legislation.
Principle 1. The legislation should contribute significantly to 
        taxpayer access to competent and ethical tax preparation 
        services
    The legislation should require all paid preparers not currently 
governed by Circular 230 to pass IRS' initial competency examination 
testing understanding of basic individual income tax laws and ethical 
standards. We urge you to avoid a scenario where preparers can fulfill 
this requirement by taking one of a multitude of different tests 
created by various outside groups. The public needs to have full 
confidence that their licensed preparer has passed the initial 
examination and met all the basic standards established by the Treasury 
Department. Further, paid preparers should be required to complete 
annual continuing education and be subject to the ethical standards of 
Circular 230. These changes will contribute significantly to the use of 
qualified and ethical individuals preparing returns.
Principle 2. Build on the existing regulatory framework and consolidate 
        enforcement under one entity
    Rather then constructing a parallel regulatory framework and 
enforcement entity for different groups of paid preparers, the 
legislation should consolidate all persons preparing returns (enrolled 
agents, lawyers, CPAs, and paid preparers) under the current 
regulations (Circular 230) and the existing Office of Professional 
Responsi-

bility. In other words, there should be one ethical code, one set of 
coordinated exams that would allow for advancement within the 
profession, and standardized continuing education requirements all 
administrated under the current regulatory system.
    In addition to being cost effective, this consolidation would 
ensure uniformity of standards and enforcement across all preparers.
Principle 3. Ensure adequate resources for administration, promotion 
        and--most importantly--for enforcement
    The legislation should allow OPR to retain all registration fees 
for administration of the program, including policing all practitioners 
and preparers under its jurisdiction. Most importantly, the 
authorization to retain these fees would ensure that the office would 
have adequate resources to investigate and penalize unlicensed 
individuals. This would go a long way toward discouraging taxpayers 
from shopping for the ``best deal'' among preparers and will help shut 
down many EITC mills across the country.
    Additionally, the bill should authorize OPR to retain penalties 
administered under the program for promotion of all Circular 230 
preparers to the general public. This will assist the public in 
understanding the importance of paying only licensed individuals for 
tax preparation and will assist the public in understanding the 
difference between the various groups allowed to do paid preparation.
Principle 4. Strike a correct balance for creating a new tax practice 
        credential
    Congress needs to be cognizant of the ramifications of creating a 
new credential in the world of tax administration. Currently, the 
general public is presented with three options for individuals that are 
authorized to practice before the IRS: EAs, lawyers, and CPAs. Circular 
230 is very specific as to how these individuals may advertise and 
generally present themselves to the public. A new credential that 
implies a higher level of authority and competency than merely 
preparing basic individual tax returns will cause confusion and 
undermine the general intent of the legislation.
     For example, since the passage of the IRS Restructuring and Reform 
Act, there has been a great deal of confusion as to the credentials and 
bona fides of Electronic Return Originators or EROs. The IRS has issued 
signage denoting official endorsement of individuals qualifying as 
EROs, as well as financed a public awareness campaign in support of the 
program. Anecdotal evidence (the appearance of billboards and bus stop 
signage) in poorer neighborhoods claiming a government stamp of 
approval demonstrates the danger of putting out to the public confusing 
titles or credentials that overstate competency.
    Additionally, state regulators would be very leery if not outright 
hostile toward the creation of a new credential in the accounting/tax 
preparation marketplace. States regulate the use of credentials and 
many list a litany of titles (e.g., certified tax consultant, chartered 
accountant, registered accountant) and abbreviations likely or intended 
to be confused with CPA that may not be used. After years of conflict, 
the majority of state boards of accountancy have accepted that a person 
recognized by IRS as being enrolled may use the enrolled agent name and 
EA abbreviation. Creating nomenclature that might overstate its 
intended mission is likely to re-ignite this battle, and at the very 
least potentially counter the underlying intent of the legislation.
Closing
    In closing, Mr. Chairman, we stand ready to work with you in 
developing legislation to regulate unenrolled paid preparers. As I have 
said before this Subcommittee at an earlier hearing, most people would 
be astounded to find out that while their barber or manicurist is 
licensed, that their preparer may not be. Comparing the downside of a 
bad hair cut to incorrect tax return, it is time to establish federal 
standards to ensure basic competency and ethical behavior.
    Your own hearing announcement confirmed the large number of 
taxpayers who use paid preparers. Whether it be due to the complexity 
of the Internal Revenue Code or to a healthy fear of the IRS or simply 
a service that the average person doesn't want to be bothered with, 
taxpayers do seek professional assistance. It stands to reason that an 
ethical and competent tax preparer is a taxpayer's best and lowest cost 
insurance against IRS problems and the Service's best and lowest cost 
assurance of return compliance.

                                

    Chairman RAMSTAD. Not at all. Thank you, Mr. Degen, for 
your testimony. Mr. Cross, please.

   STATEMENT OF ROBERT L. CROSS, CHAIRMAN, RIGHT TO PRACTICE 
           COMMITTEE, NATIONAL SOCIETY OF ACCOUNTANTS

    Mr. CROSS. Thank you, Mr. Chairman, for this opportunity to 
share the thoughts of the National Society of Accountants. We 
are kind of a diverse group. We have CPAs. We even have a 
couple of Juris Doctorates in our membership and EAs and a lot 
of these unenrolled tax preparers. I would direct you simply to 
the summary of the testimony that we put and I want to talk 
about just two of these issues, because I know we are pressed 
for time. The first one that I want to talk about is the fact 
that we support the idea of registration and have supported it 
since we first advanced this idea several years ago. We also 
support the idea of an initial exam, but we think that there 
should be a waiver of that initial examination for people who 
have already demonstrated both their competence and their 
knowledge of the tax laws. We think that there are three groups 
of people who are qualified for this type of an exemption from 
taking an exam.
    The first ones are people who hold a credential already 
established by a national credentialing body, such as the 
credentials that I hold, an accredited Business Accountant and 
an accredited Tax Advisor from the Accreditation Council for 
Accountancy and Taxation. We are required to maintain 40 hours 
of annual Continuing Professional Education (CPE) just to keep 
that up, in contrast to the 16 hours that an EA is required to 
put in every year.
    The second group are people who hold an accountancy license 
from a State Board of Accountancy. Now, this is the same board 
that regulates CPAs, but a lot of States have a second tier of 
license that are not equivalent to CPAs. Some of them are 
Licensed Public Accountants. Some have the title Public 
Accountant. Some of them have the title Accounting 
Practitioner. They have all established a license based on 
knowledge, based on experience, based on education, and based 
on an examination that has established their credential.
    The third group are people like those in Oregon and 
California, who have a license to prepare tax returns in their 
State according to a scheme that was established under their 
State law. We think that those are legitimate tax return 
preparers and they should not have to go back out and 
reestablish their ability and their competency through this 
exam.
    The next point I want to make is point six on our summary, 
and that is the adoption of some other independent exam for 
doing this. The IRS is currently trying to outsource the EA 
exam. They haven't accomplished that yet. To put a new exam 
requirement on top of them while they are trying to do that, we 
think is simply a burden that should be avoided. There are 
groups out there, such as the Accreditation Council for 
Accountancy and Taxation, who already have a psychometrically 
correct exam, verifiable exam that is out there. One of those 
exams--Oregon also has exams. There are exams available in the 
marketplace that would make it possible

to simply outsource this and have it handled perfectly. I think 
my time is up, so I am just going to close by saying I would be 
happy to answer your questions and yield the floor.
    [The prepared statement of Mr. Cross follows:]

 Statement of Robert L. Cross, Chairman, Right to Practice Committee, 
                    National Society of Accountants

    Thank you, Mr. Chairman and members of the Committee, for this 
opportunity to testify before the Committee and share our views 
regarding the regulation of federal income tax preparers. My name is 
Robert L. Cross. I am the chairman of the Right to Practice Committee 
of the National Society of Accountants (NSA). I am a co-owner of Cross 
Business Services, Inc. Our firm provides accounting and tax 
preparation services to individuals and small businesses from offices 
in Northglenn, Colorado and Wheatland, Wyoming.
    The National Society of Accountants (NSA) is a voluntary 
association of certified public accountants, enrolled agents, licensed 
public accountants, other licensees of state Boards of Accountancy, tax 
practitioners who are licensed by state agencies, and accountants and 
tax practitioners who hold credentials from a nationally recognized 
credentialing body. Many of these members are not currently subject to 
direct regulation by the Internal Revenue Service. NSA and its 
affiliated state organizations represent approximately 30,000 
practitioners who provide accounting, advisory and tax related services 
to more than 19 million individuals and small businesses. In short, NSA 
represents accountants who serve Main Street rather than Wall Street.
    As you know, Senate Bill S. 832 proposes new regulation for the 
federal tax preparation industry. This proposed legislation would have 
a significant impact on the profession and the Internal Revenue 
Service. Estimates of the number of tax practitioners required to 
register in the first year of the program range from 200,000 to as high 
as 600,000.
    The Senate bill instructs Treasury to develop (or approve) and 
administer an eligibility examination designed to test the knowledge 
and technical competency of individuals who prepare federal income tax 
returns. NSA has supported the concept of registration for federal 
income tax preparers since we first introduced the concept several 
years ago. NSA further supports the use of an eligibility examination. 
However, NSA can fully support the Senate bill, and any similar 
legislation, only if it provides recognition of tax practitioners who 
have already demonstrated their professional competence and their 
commitment to life-long learning either by earning credentials offered 
by a nationally recognized credentialing body or by being licensed to 
practice accounting by a state Board of Accountancy or by being 
licensed to prepare income tax returns by an agency established under 
state law. Allowing individuals who possess such credentials or 
licenses to receive a waiver from the initial examination requirement 
will achieve that recognition. These individuals would still be 
required to register, pay the appropriate fees and meet the other 
requirements specified in the bill.
    The Accreditation Council for Accountancy and Taxation (ACAT), a 
nationally recognized credentialing organization, offers three 
credentials that fully satisfy the competency and ethical standards 
that the Senate bill seeks to achieve. Those credentials are: 
Accredited Business Accountant (ABA), Accredited Tax Advisor (ATA) and 
Accredited Tax Preparer (ATP). Individuals who hold these credentials 
have demonstrated their knowledge and competency through a regimen that 
includes education, experience and examination on topics that include 
substantial taxation and ethical components. To maintain their 
credentials, they comply with rigorous annual continuing professional 
education requirements. More detailed information concerning ACAT's 
organization and mission is contained in the addendum attached to this 
testimony.
    Any individual holding a license from a state Board of Accountancy 
has likewise demonstrated a level of competence that is based on a 
long-established regulatory standard that has education, experience and 
examination as required components. Every state accountancy regulatory 
scheme requires continuing professional education as a condition for 
license renewal.
    The states of California and Oregon license tax preparers in their 
respective jurisdictions. The licensing qualifications differ slightly 
in each state, but both require a substantial educational element, 
including state and federal taxation and ethical conduct, as a 
prerequisite to granting a license. In both states, continuing 
professional education is a requirement for license renewals. 
California currently licenses approximately 36,000 tax preparers and 
Oregon licenses approximately 8,000 preparers under their respective 
programs. These states already impose adequate and efficient licensing 
requirements on their tax and accounting professionals. We do not 
believe additional federal requirements should be imposed on these 
individuals or similarly situated individuals in other states.
    In addition, the Internal Revenue Service has extended Circular 230 
privileges to public accountants in the States of Pennsylvania, New 
Jersey and Rhode Island. Under the provisions of Circular 230, a 
``certified public accountant'' is a person duly qualified to practice 
as a certified public accountant in any state, territory, or possession 
of the United States. Certified public accountants who are not 
currently under suspension or disbarment from practice before the 
Internal Revenue Service may practice before the Internal Revenue 
Service. A number of other states have a public accountant license 
class that has practice rights substantially equivalent, if not 
identical, to those granted to CPAs. These licensed public accountants, 
like their CPA counterparts, are subject to regulation and supervision 
by state Boards of Accountancy and must meet continuing education, 
professional standards and other requirements in order to maintain 
their practice rights. We firmly believe that if the Internal Revenue 
Service has already recognized the competence and integrity of these 
tax and accounting professionals in these states, Congress should as 
well.
    NSA proposes that Treasury consider adopting an ACAT examination on 
taxation and ethics as the eligibility examination. ACAT examinations 
are psychometrically valid and are supported by a huge database of 
available questions that is updated annually. Iowa, Minnesota and 
Delaware currently use the ACAT ABA examination to qualify a second 
tier of accounting licensees. Alternatively, the proposed legislation 
should instruct Treasury to allow for the substitution of any test 
developed by a nationally recognized credentialing body provided the 
examination meets minimum standards. Allowing for the substitution of 
such exams will reduce the burden on Treasury and the practitioner 
community, while still achieving the public policy purposes of the 
legislation.
    The Senate bill has a section that ``clarifies'' the Enrolled Agent 
credential. NSA supports this concept because it will establish a 
uniformity of regulation and eliminate ambiguities and conflicting 
restrictions that have evolved in many state regulatory schemes over 
time. The truthful use of earned credentials is an individual right 
that all responsible regulatory legislation should serve. National 
attention to this issue is both appropriate and overdue.
    The descriptor used to identify this new class of regulated tax 
preparers deserves the attention of your Committee. The staff notes, 
accompanying the Senate bill, include the term ``enrolled preparer'' 
when referencing those individuals subject to the proposed regulation. 
NSA believes that this term diminishes the Enrolled Agent credential 
and has the potential to confuse the public. Further, it does not 
adequately describe the services performed by this group of tax 
preparers. We recommend that terminology used to describe this group be 
neutral. We suggest ``Registered Federal Tax Return Preparer.''
    Another section of the Senate bill provides for levying fines and 
then keeping the money to fund a public awareness campaign. We question 
the propriety of this provision and ask that Congress reconsider the 
potential for abuse. Principled legislation should allow Treasury to 
abate a punitive fine for an inadvertent human error. Perhaps there 
should be a ``pattern of neglect or misconduct'' before heavy fines are 
levied.
    The ``one-year from enactment'' provision is another area that must 
concern everyone. Such a short time period to develop both a testing 
and a registration system certainly has the potential to disrupt the 
subsequent tax-filing season. The staff description of the Senate bill 
states, ``efficiencies will be gained by coordinating the exam 
requirement with the enrolled agent exam.'' Until such time as the 
enrolled agent exam is successfully outsourced and its structure 
entirely revised, we believe this conclusion is questionable at best 
and could lead to a disruption of the filing season in the first year 
of implementation. Processing the exams and the attending record 
keeping for 200,000 to 600,000 individuals certainly has the potential 
to overwhelm the system. A safer approach would be to instruct Treasury 
to devise a testing system independent of the Special Enrollment 
Examination that applicants could use throughout the year. Such a 
process would follow the proven model that the securities and insurance 
industries use. We think that development of a workable regulatory 
structure, as anticipated by S. 832, simply requires more time to both 
develop and implement. Extending the time frame to two years or perhaps 
three would be more realistic.
In summary, NSA supports:

1.

The concept of registration of tax preparers

  

2.

The use of an initial examination

3.

A requirement for ongoing continuing professional education

4.

The requirement for registration renewal every three years.

5.

A waiver of initial examination for individuals who:

a.

Hold credentials offered by nationally recognized credentialing bodies

b.

Hold a license to practice accountancy from a state Board of Accountancy

c.

Hold a license to prepare tax returns established under state law

6.

The adoption of an ACAT exam for initial licensing or alternatively 
developing the initial examination separate from the Enrolled Agent exam

7.

The clarification of the Enrolled Agent credential

8.

Finding a better descriptor than `enrolled preparer' (``Registered Federal 
Tax Return Preparer'' for example)

9.

Reconsideration of using preparer penalty money to fund public awareness 
efforts

10.

Extending the time period for development and implementation of the 
structure

    I am pleased to answer any questions you may have.

                               ----------

    Suggested language.

    Inserting a new Section 4(b)(3) and renumbering the existing 
4(b)(3) to 4(b)(4) would achieve statutory authority for examination 
waivers.
    Proposed new Section 4(b)(3)

    (3) WAIVER OF EXAMINATION

    (A) IN GENERAL--The regulations under paragraph (1) shall provide 
for a waiver of the examination described in paragraph (2) in those 
cases where an applicant for registration can demonstrate that their 
technical knowledge and competency has been established through a state 
licensing activity or by obtaining a credential from a nationally 
recognized credentialing body in accountancy or taxation.

    (B) CONCURRENCY--An applicant for registration who requests a 
waiver of examination shall be required to submit evidence that 
establishes the fact that their license or credential is currently 
valid and that they have currently completed such continuing education 
requirements as may be required to maintain their license or 
credential.

                               ----------

    Since its inception in 1945, the purposes of NSA have been to 
promote and improve the profession as a whole and to provide its 
members with services directed to those purposes, including educational 
programs in accountancy and taxation. NSA has a long history of 
focusing efforts toward realistic and meaningful forms of uniform 
statutory regulation at both the state and national levels. NSA is 
guided by principles that strive to balance the public interest with 
the rights of regulated individuals and defend our common values.
    Most NSA members are sole practitioners or partners in small to 
mid-sized firms. The NSA bylaws require our active members to either 
possess or obtain and maintain a license or a nationally recognized 
credential in accountancy or taxation. For these purposes, NSA 
recognizes credentials that are awarded by the Accreditation Council 
for Accountancy and Taxation. NSA members agree to adhere to a code of 
ethics and professional conduct as a condition of membership. NSA 
further requires continuing professional education as a condition of 
membership renewal. NSA has 48 state affiliates. For more information 
about NSA please visit our website at http://www.nsacct.org

                             ACAT Addendum

    Established in 1973, the Accreditation Council for Accountancy and 
Taxation (ACAT) is a non-profit independent testing, credentialing and 
monitoring organization. The ACAT mission is to accredit practitioners 
who have:

      demonstrated knowledge of the principles, practices, and 
ethical standards of accounting, and taxation, and related financial 
services in order to provide the highest level of service to the 
public.
      committed to a rigorous standard of continuing 
professional education
      agreed to adhere to a strict Code of Ethics, embracing 
Circular 230 tenets

    While ACAT's numbers include CPAs and state licensees, the ACAT-
targeted practitioner is the accountant/taxation specialist who serves 
small- to medium-sized businesses. ACAT currently has approximately 
5,000 credential holders.
    Current holders of the ACAT Accredited Business Accountant, 
Accredited Tax Advisor and Accredited Tax Preparer credentials fully 
satisfy the competency and ethical standards that the Senate bill seeks 
to achieve. Individuals who hold these credentials have demonstrated 
their knowledge and competency through a regimen that includes 
education, experience, and/or examination on topics that include 
substantial taxation and ethical components. To maintain their 
credentials, they comply with rigorous annual continuing professional 
education requirements.
    The Accredited Business Accountant earns the credential by passing 
an eight-hour, 200 question exam. The examinations are psychometrically 
valid and are supported by a substantial database of questions based on 
the ACAT Job Practice Analysis, conducted every five to seven years. 
Iowa, Minnesota and Delaware currently use the ACAT ABA examination to 
qualify a second tier of accounting licensees. Based on the validity of 
its examination ACAT has been invited to bid on the Enrolled Agent 
examination for the IRS. The Accredited Tax Advisor earns the 
credential through passing the EA or CPA exams or through an eight-
course curriculum with examinations at the end of each course. The 
Accredited Tax Preparer has in the past qualified by taking a two-
course curriculum with examination at the end of each course, or 
through demonstration that at least 60 hours of taxation CPE have been 
taken over the past three years. All credentials have a three to five 
year experience requirement. In December, ACAT will introduce an 
Accredited Tax Preparer examination based on the Ethics and Taxation 
portions of the Accredited Business Accountant examination.

                                

    Chairman RAMSTAD. Thank you very much, Mr. Cross. Mr. 
Purcell, please.

   STATEMENT OF THOMAS J. PURCELL III, CHAIR, TAX EXECUTIVE 
 COMMITTEE, AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

    Mr. PURCELL. Chairman Ramstad, Mr. Lewis, and Members of 
the Subcommittee, on behalf of the AICPA, I am very grateful to 
be able to testify here today. This afternoon, I have three 
main points. They, to some extent, are redundant with what the 
prior panelists have said, so I will try to put our specific 
concern on each one of them. First, we remain committed to tax 
preparers who have high ethical standards and competent 
professional knowledge. Second, we support the concept of 
registration of return preparers, subject to various 
implementation issues, but we also encourage further study of 
the specific abuses that might be the motivation for this 
hearing today. Then third, if a system is created that would 
provide for registration of preparers, there are a couple of 
implementation issues that we would like to see addressed.
    So, with regard to that competent professional knowledge 
and high ethical standards, whatever system might come out--I 
think Mr. Gideon mentioned this also--there needs to be both 
the marriage of the competency, which is the technical piece, 
but also the motivation to aspire to higher standards, and that 
has to be enforceable. For the professions, we enforce it 
ourselves. For a system like this, it would be enforced from 
some other body on the outside, such as the IRS. So, you have 
to be cognizant of creating a new bureaucracy by doing this.
    Second, the concept of registration is attractive, but if 
it is motivated by specific issues that you might address 
seperately, it might be more efficient to look at those. For 
example, Mr. Shaw mentioned in the earlier panel about the 
EITC. If you look at the significant complexity of that, found 
a way to carve out some of those issues so it became a much 
easier process to enforce, it takes away the ability to game 
the system and you make it a more efficient process. Also, you 
might want to look at the refund anticipation loans. If there 
are abuses of that, then maybe you should question whether 
these should even be an allowable method of financing for low-
income people.
    Finally, if you do create a system, a couple of issues to 
address, and I think some have already mentioned it, but to 
reiterate: we have a system, Circular 230, that enforces those 
of us at this table and we have a significant process that has 
already been created. Any system that you create has to be 
integrated with that to make sure that there is transparency 
and ease of transfer of professional expertise across those 
different criteria. You also would want to take a look at the 
ERO program to see if that is an appropriate surrogator for a 
system of enforcement.
    We want to avoid any public confusion with regard to these 
new designations. I think Ms. Jardini mentioned in her 
testimony in response to Mr. Shaw's question, about a person 
who had come down to see--here is where you can get your 
maximum refund or here you can go to the professional who has 
certificates on the wall, and who says that they will do the 
best job that they can. The public would be motivated to 
perhaps go to the person promising the greater refund. Well, if 
you don't have appropriate regulation of this new system, you 
might still have that problem.
    Plus, we also wouldn't want to create a situation where 
someone in the public would equate different levels of 
professional competency. There exists a potential problem of 
going to the lowest common denominator, and the public equating 
everyone who might be professionally certified to do anything 
with regard to tax, with regard to this new designation.
    Finally, whatever the system might look like, to be 
equitable and to be fair in terms of competitive forces, it 
should be self-funding and have some components of self-
enforcement. Those of us who are professionals pay significant 
development fees to get ourselves prepared to enter the 
profession. We pay significant fees on a regular basis to 
remain competent to practice our profession. We have mandatory 
CPE, which costs not only the dollars to get the training, but 
also the out-of-pocket costs for missing client services, and 
we have to pay professional organization fees to maintain 
enforcement mechanisms. So, if you are going to create a new 
system that regulates return preparers, to be equitable, it has 
to recognize these differences in the competitive marketplace. 
Thank you, and I will answer questions at the end if there is 
time.
    [The prepared statement of Mr. Purcell follows:]

  Statement of Tom Purcell, Chair, Tax Executive Committee, American 
               Institute of Certified Public Accountants

    Mr. Chairman and members of the House Ways and Means Subcommittee 
on Oversight, the American Institute of Certified Public Accountants 
thanks you for the opportunity to appear before you today. I am Tom 
Purcell, Chair of the AICPA Tax Executive Committee; and Associate 
Professor of Accounting and Professor of Law at Creighton University, 
Omaha, Nebraska.
    The AICPA is the national, professional association of CPAs, with 
approximately 350,000 members, including CPAs in business and industry, 
public practice, government, and education; student affiliates; and 
international associates. Our members advise clients on federal, state, 
and international tax matters and prepare income and other tax returns 
for millions of taxpayers. They provide services to individuals, not-
for-profit organizations, small and medium-sized businesses, as well as 
America's largest businesses. It is from this broad perspective that we 
offer our thoughts today.
    We strongly support the implementation of high professional 
standards for tax practitioners; and for this reason, we applaud the 
Subcommittee on Oversight for holding today's hearing on the regulation 
of federal income tax return preparers. We understand that today's 
hearing is, in general, an oversight investigation regarding the 
concept of the federal regulation of tax return preparers. However, 
Senator Jeff Bingaman introduced legislation this year (S. 832, the 
Taxpayer Protection and Assistance Act of 2005) that specifically 
addresses some of these issues. When my testimony refers to the 
``preparer registration proposal,'' I am referring to the general 
concept of the regulation of federal income tax return preparers, and 
at other times I will specifically address relevant provisions of S. 
832.
    In summary, my testimony today focuses on the AICPA's positions on 
(1) high professional standards for tax professionals, (2) federal 
legislation that regulates unlicensed tax return preparers, and 
addresses the enforcement and consumer protection problems associated 
with the Earned Income Tax Credit and refund anticipation loan 
programs, (3) exempting CPAs, attorneys, and Enrolled Agents from 
regulation under any new legislation enacted to regulate federal income 
tax return preparers, (4) Congressional review of the current 
Electronic Return Originator application process and how that process 
might overlap even a ``limited'' registration process for federal 
income tax return preparers, and (5) ensuring that the persons subject 
to any preparer registration initiative be the persons who bear the 
cost of the new program, and not those tax professionals already 
subject to Circular 230.
AICPA Commitment to Professional Ethics
    The AICPA commends Congress for passage last year of the anti-tax 
shelter provisions of the American Jobs Creation Act of 2004, and for 
the current focus on regulation of unlicensed income tax return 
preparers. This effort is consistent with our longstanding track record 
of establishing high professional standards for our CPA members, 
including the AICPA Code of Professional Conduct and our enforceable 
Statements on Standards for Tax Services. These standards provide 
meaningful guidance to CPA members in performing their professional 
responsibilities.
    We have consistently supported protecting the public interest by 
prohibitions against misuse of our tax system. We continue to be 
actively engaged in proposing and evaluating various legislative and 
regulatory matters designed to identify and prevent taxpayers from 
undertaking, and tax advisers from rendering tax advice on, 
transactions having no purpose other than the reduction of federal 
income taxes in an abusive manner.
Addressing EITC and Refund Anticipation Loan Problems
    Legislation to regulate preparers has generally been proposed by 
members of Congress as a partial response to (1) the high error rate 
associated with Earned Income Tax Credit (EITC) claims and (2) consumer 
protection concerns associated with refund anticipation loans.
    Congress is rightly concerned with the high error rate associated 
with EITC claims and with the proliferation of high-interest, short-
term refund anticipation loans (RALs). According to the Treasury 
Inspector General, an IRS study of 1999 tax returns suggests that--out 
of the $31 billion in EITC claims by taxpayers that year--between 27 
and 32 percent of those claims were erroneous. \1\ With respect to the 
RALs, commercial preparers aggressively encourage the use of RALs by 
low income taxpayers, sometimes misleading these taxpayers about the 
true cost of such loans. These concerns have resulted in the 
introduction of bills such as S. 832. Among other provisions, S. 832 
provides for the regulation of what the bill refers to as ``income tax 
return preparers'' and ``refund anticipation loan facilitators.''
---------------------------------------------------------------------------
    \1\ Testimony of J. Russell George, Treasury Inspector General for 
Tax Administration, Hearing on IRS's Fiscal 2006 Budget Request, Senate 
Committee on Appropriations, Subcommittee on Transportation, Treasury, 
the Judiciary, Housing, and Urban Development, and Related Agencies, 
April 7, 2005.
---------------------------------------------------------------------------
    In addition to any deliberations over the regulation of tax 
preparers, the AICPA also recommends that Congress consider proposals 
that directly address the enforcement problems associated with the EITC 
program and the consumer protection

issues surrounding refund anticipation loans. By addressing the 
specific problems associated with EITC program and RALs, we believe 
such proposals may result in more tangible increases in compliance than 
a preparer registration proposal might alone yield.
Exemption for CPAs, Attorneys, and Enrolled Agents
    The AICPA supports the language contained in S. 832 [Section 
4(b)(1)(A)] that requires the IRS to prescribe regulations (within one 
year of the bill's enactment) regulating what the bill refers to as 
``compensated preparers not otherwise regulated under [31 USC 330]'' 
(the enabling legislation upon which Circular 230 is issued). Since 
they are already regulated by Circular 230, CPAs, attorneys, and 
Enrolled Agents (EAs) would be exempt from the proposed new regulation 
regime imposed on currently unlicensed preparers. We commend the 
drafters of S. 832 for their recognition that CPAs, attorneys, and EAs 
are already subject to a regulation process imposed upon them by state 
boards of accountancy, state bars, court systems, and Circular 230, and 
recommend that any proposal continue to include such exemption.
Public Awareness Campaign
    One important priority of the Service during the 2005 tax filing 
season was its public release of tips advising taxpayers how to choose 
a competent paid federal income tax return preparer. This publicity 
campaign resulted in wide coverage by U.S. newspapers and media 
outlets. We strongly support this recent publicity campaign and find it 
an excellent foundation for any future public information and consumer 
education campaign conducted in support of a preparer registration 
initiative, such as the one required under Section 4(f) of S. 832.
    Any effective public relations campaign should be centered on 
educating the taxpaying public about selecting an ethical, competent 
federal income tax return preparer. S. 832 accomplishes this through 
the implementation of a public awareness campaign that (1) encourages 
``taxpayers to use for Federal tax matters only professionals who 
establish their competency'' under Circular 230, and (2) informs ``the 
public--that any compensated preparer--must sign the return, document, 
or submission prepared for a fee and display notice of such preparer's 
compliance'' with such regulations.
    As stated above, S. 832 requires that the IRS prescribe regulations 
(within one year of the bill's enactment) for the regulation of 
``compensated preparers not otherwise regulated under'' Circular 230. 
In drafting regulations, we understand that a central feature of any 
public awareness campaign will likely involve the IRS's description or 
``title'' that the agency gives to previously unlicensed tax 
preparers--but now, newly regulated as income tax preparers under 
Circular 230.
    A major concern about any new registration regime is that it may be 
difficult for taxpayers to discern the competency level of these newly 
regulated income tax preparers as compared to professionals already 
regulated under Circular 230. In order to prevent confusion in the 
marketplace among the taxpaying public, we suggest that the IRS utilize 
a title for these newly regulated income tax preparers that is clearly 
distinguishable from the current professionals regulated under Circular 
230; that is distinguishable from the words CPA, attorney, or EA.
    While not included in the preparer registration proposal contained 
in S. 832, the Senate's 2004 version of the proposal \2\ required the 
IRS to maintain a public list (in print and electronic media, including 
Internet based) of Federal income tax return preparers. We commend the 
current drafters of S. 832 for not including a requirement for the 
Service to maintain a public list of this sort. We believe that 
mandatory maintenance of this type of public list, while laudatory, may 
create redundancies with current IRS programs and initiatives. For 
example, Congress has requested that the IRS implement strategies 
designed to increase the electronic filing of tax returns. The IRS 
currently maintains a public list of companies or organizations that 
offer free tax filing and e-filing for low-income tax persons; and 
another list of tax professionals who have been accepted into the 
electronic filing program, whom the IRS calls ``Authorized IRS e-file 
Providers'' or Electronic Return Originators (EROs). We fear that the 
creation of an additional list of tax professionals at the IRS website 
may actually end up confusing or even diluting the IRS's current 
message and goals surrounding the promotion of e-filing.
---------------------------------------------------------------------------
    \2\ See section 141 of H.R. 1528, the Tax Administration Good 
Government Act, as passed the Senate on May 19, 2004.
---------------------------------------------------------------------------
Electronic Return Originator Application Process
    Congress should consider reviewing the current Electronic Return 
Originator application process, and how the ERO process might overlap 
or duplicate even a ``limited'' registration process for tax return 
preparers. Under the current ERO applica-

tion process, IRS conducts a background check of all principals and 
responsible officials affiliated with a tax return preparer's firm. 
This background check includes: (1) an FBI criminal background review; 
(2) a credit history check; and (3) an IRS records check with respect 
to the preparer and the firm's adherence to tax return and tax payment 
compliance requirements, including a review of any prior non-compliance 
under the IRS e-file program. After such a review, Congress and the IRS 
might find it more beneficial (on a budgetary or resource allocation 
basis) to use or expand the current ERO public list of practitioners 
instead of creating a new, but separate list of professionals as 
envisioned by legislation regulating income tax return preparers.
Development of an Examination for Income Tax Preparers
    As described above, one of the stated reasons for developing 
legislation to regulate unlicensed preparers involves the high error 
rate associated with erroneous Earned Income Tax Credit claims found on 
Form 1040, U.S. Individual Income Tax Return. However, Section 4(b)(2) 
of S. 832 mandates that the IRS develop examination procedures for 
unlicensed tax preparers testing the technical knowledge and competency 
of a preparer in the preparation of Federal tax returns, including 
individual and business income tax returns and specifically the EITC. 
There are significant differences in the competencies necessary to 
prepare individual returns and those needed to prepare business income 
tax returns. Before an examination can be prepared, there must be 
consistency between the purposes of the unlicensed preparer regulation 
regimen and the content to be tested. While we are not opposed to 
including questions on any such new examination covering business 
income tax returns, we believe it is important to recognize that such 
questions clearly delve into competencies that exceed basic income tax 
knowledge.
    Should it be Congress' intent to specifically address errors on 
individual income tax returns (and even more specifically EITC errors), 
the examination should principally focus on basic individual income tax 
knowledge. However, the proposed S. 832 examination regimen would be 
much broader. In developing the examination content and approach, the 
IRS could implement a testing procedure that builds on existing 
examination models, such as the Service's testing for Volunteer Income 
Tax Assistance (VITA) volunteers and the Enrolled Agent (Special 
Enrollment) examination. We believe that the examination developed for 
any new preparer registration regime should be sufficiently rigorous to 
test basic competencies and ethical standards.
Administrative and Budgetary Concerns
    In addition to the implementing regulations required by a 
registration proposal, a whole new enforcement program would be 
required to be developed within the IRS's Office of Professional 
Responsibility, as envisioned by a legislative proposal like S. 832. 
This would place significant budgetary demands on the IRS and thereby 
place the Service in the unenviable position of having to allocate its 
fixed annual budget among a number of competing, but important 
priorities.
    Should a preparer regulation regime be enacted into law, we 
strongly believe the most equitable way to fund the new examination and 
registration process would be to ensure that the persons subject to the 
new procedures (i.e., the previously unlicensed preparers)--be the 
persons who bear the cost of the new program, and not the CPAs, 
attorneys, and Enrolled Agents already subject to Circular 230. More 
specifically, these latter professionals are already subject to 
examination and regulation fees imposed upon them under other programs, 
such as by state boards of accountancy, state bars, court systems, and 
Circular 230.
    S. 832 provides the IRS with the authority to utilize the funds 
collected through the assessment of preparer penalties for the funding 
of the public awareness campaign required by the legislation. The AICPA 
is concerned that this measure could create an inadvertent (and 
possibly an overt) incentive for Service employees to initiate 
overzealous and inappropriate enforcement actions against tax 
professionals and the preparer community. This could particularly 
become a problem should the ``failure to sign'' and the ``failure to 
furnish identifying number'' preparer penalties be raised ten-fold from 
$50 to $500 for each such failure, as provided for under S. 832. We 
believe that any funds collected through the assessment of preparer 
penalties should remain a funding source for the federal government's 
general revenues and not for the administration of a specific federal 
program such as a preparer registration initiative.
    Thank you for the opportunity to share these views with you.

                                

    Chairman RAMSTAD. Thank you, Mr. Purcell. Mr. Gray, please.

     STATEMENT OF LARRY GRAY, GOVERNMENT LIAISON, NATIONAL 
                ASSOCIATION OF TAX PROFESSIONALS

    Mr. GRAY. Chairman Ramstad, Ranking Member Lewis, and the 
Subcommittee, the National Association of Tax Professionals 
would like to thank you for the opportunity to speak to you 
today. As I am fifth in the order, I agree with almost 
everything that has been said in the prior statements and also 
some of the testimony from the earlier panel. I do believe any 
kind of regulation or licensure will raise the bar. I think any 
proposed regulation for paid preparers should be sure of 
fundamental things like, they sign the return, that they stand 
behind their work, and that they have continuing education to 
stay current. For example, I can tell you, as a speaker across 
the country doing continuing education on new tax law, between 
the changing of the laws and our profession becoming more 
dependent on computer technology, education is a real problem.
    At the National Association of Tax Professionals, for 
years, we have had a code of ethics and we also have a standard 
of professional conduct. One interesting note on education is 
that we have surveyed our Members, because our Members are a 
cross-section of Circular 230 and non-Circular 230 Members, and 
the interesting note is the non-230 members actually average 
slightly more continuing education than the Circular 230 
Members. Just a little sidebar note there. I think dealing with 
the unethical, unscrupulous preparers, if you go out in the 
public and look today, you are going to see that most of them 
are coming from under the auspices of Circular 230. They are 
CPAs, attorneys and EAs. I think that is because they do come 
under a much more stringent set of tests. So, if there was any 
kind of licensure that came about, I think that that may raise 
the bar to that group, but I think, also, it may be--we may 
find different statistics. So, I think as far as, will this 
help on the unethical preparers, I have to agree with earlier 
testimony in the first panel. I don't know that it will. One of 
the big concerns is that they may very well go underground.
    I want to quote Nina Olson and the fact that she said that 
the greater tax practitioner community is honest, ethical, 
competent, and conscientious, and I think that is a true 
statement. I think that there are a few that ruin it for all of 
us. If you were to come up with legislation, just a couple of 
items of comment, and again, I kind of agree with some of the 
other panelists here today. I think that one of the issues, if 
we are going to have a campaign, that it is a public campaign 
about authorized preparers. Now, one thing you might note, 
there is already a public campaign out there that the IRS does 
each and every year. You go to walk into a tax office and it is 
a little yellow sign that says, ``Authorized ERO''. So, there 
is already a program that is advertising to the public. Keep 
that in mind, both from the compliance side and also from the 
marketing side. I think, and I again agree with an earlier 
statement, that any marketing must be very, very clear to the 
public. I think that if you walk into a practitioner's office 
and I said, well, I have

got a CPA, I have got an EA, and I have got this other item, 
whatever you are going to call it, authorized, registered, 
whatever, again, I think that that is just a minimum threshold 
that says they have got certain skills to do basic returns. I 
think, again, we have to be very cautious about marketing 
confusing information or titles.
    Next, I think there should be a transition period or a 
grandfathering period, whichever may be. I don't want to get 
too specific because that will probably be for a later date for 
implementation, but I think, again, there should be some 
consideration there. For the reference of the earlier panel, 
99.5 percent of the people out there that prepare returns do 
care. Again, please don't create another bureaucracy. I think 
there needs to be a partnering with the outside community, and 
I think there should be an equal playingfield with all 
organizations, because that is why we are here at the table.
    Finally, in the area of testing, when you go to look at 
testing and you realize that last year there were approximately 
131 million individual returns filed, 6 million corporate 
returns, 3 million partnerships, 1 million trusts, estates, and 
similar, that means that 93 percent of the returns filed last 
year were individual returns. So, I think what you have to look 
at there--the testing needs to reflect the type of business the 
person is going to do and not require him to know everything 
about all because that could be virtually impossible. At this 
point in time, in order to take questions, again, I would like 
to thank you for allowing the National Association of Tax 
Professionals to speak and I am open for questions.
    [The prepared statement of Mr. Gray follows:]

 Statement of Larry Gray, Government Liaison, National Association of 
                             Tax Preparers

    Chairman Ramstad, Ranking Member Lewis, and Members of the House 
Subcommittee on Oversight, thank you for the invitation to participate 
in today's hearing to consider concepts of enhanced regulation of paid 
tax return preparers.
    My name is Larry Gray and I am a CPA and managing partner of 
Alfermann Gray & Co. I am currently serving on the Electronic Tax 
Administration Advisory Committee of the IRS, and a past member of the 
IRS Commissioner's Advisory Group and on various Subcommittees, 
including Compliance and Small Business.
    Our society and the business environment have become so complex 
that, despite repeated efforts on behalf of Congress and the regulatory 
agencies, the process of computing and reporting accurate tax 
liabilities on the part of citizens has also become complex. Licensing 
and/or registration is a step toward ensuring that taxpayers receive 
professional and credible services from currently unlicensed paid tax 
preparers. Any proposal to regulate paid preparers should ensure that 
they sign the returns they prepare, stand behind their work, continue 
their education to stay current on tax laws and regulations, and 
maintain the highest ethical conduct while servicing taxpayers.
    For reasons put forth by Nina Olson in her recent reports to 
Congress, the time may be right for tax return preparers to register 
with the IRS (or the Treasury) and be prepared to demonstrate 
reasonable competency through minimum requirement testing. One of 
Nina's primary goals is to protect the taxpayers from unethical 
preparers. Both the Taxpayer Advocate and the Commissioner of the 
Internal Revenue Service, however, have acknowledged that the tax 
practitioner community at large is honest, ethical, competent and 
conscientious. Taxpayers should be able to rely on licensed or 
registered preparers as competent guides in tax matters and as 
preparers of tax returns.
    Relying on all of them for ethical and scrupulous conduct is 
another matter, however. Licensing and/or registering tax return 
preparers will likely not solve that problem. A quick review of 
disbarment and suspension cases as well as civil and criminal tax cases 
will reveal that most prosecuted perpetrators of fraud, schemes and 
other forms of tax system abuse are already licensed and authorized to 
practice before the IRS. The reason for that may be that those 
currently authorized to practice before the IRS (attorneys, CPAs, EAs, 
etc.) are under a scrutiny not experienced by unlicensed tax return 
preparers.
    Certainly there is a significant problem with erroneous and 
fraudulently filed EITC and other such abuses of the tax system as it 
relates to low income citizens. Reasonable speculation is that these 
problems are likely perpetrated primarily by unlicensed tax return 
preparers. The additional scrutiny of unlicensed tax return preparers 
may very well serve good purpose if that speculation turns out to be 
factual. It would seem logical that regulation of unlicensed paid 
preparers can only raise the bar. That, in itself, seems a worthy goal. 
The fact is, however, that the population of unscrupulous and unethical 
tax return preparers is not defined and is currently not determinable.
    Despite our best efforts, there is a strong likelihood that 
unscrupulous and unethical tax return preparers not already licensed or 
regulated will simply ``go underground'' when registration and 
regulation is required. Better to have them there than operating in the 
``open'' as they currently do. In its effort to make tax return filing 
easy and economical for the American public, Congress and the IRS have 
unintentionally fostered an environment where such dishonest and 
unprincipled people can readily have free and easy access to software 
and electronic filing capability. Those issues must be tackled from a 
compliance and enforcement standpoint.
    The fact is that the greater tax practitioner community, 
acknowledged as ``honest, ethical, competent and conscientious'' by 
both Nina Olson and the Commissioner of Internal Revenue, will likely 
welcome licensing or registration as a means to put distance between 
themselves and ``fly-by-night'' charlatans that bilk the American 
public every tax season. Those that are unlicensed want to distance 
themselves from any perception that, just because they are unlicensed, 
they are somehow not knowledgeable or straightforward in their 
practice. Many of these unlicensed individuals have degrees in 
accounting, taxation and other disciplines as well as decades of 
experience in the field.
    There needs to be some way to easily identify qualified tax return 
preparers and inform the public of who is authorized to prepare their 
tax returns. Taxpayers must have a clear understanding of where to go 
for professional service in getting their returns completed. The 
American public deserves that. Terminology used to identify such 
preparers must be clear to the public, clear to the tax administration 
system and clear to the tax preparation community. Any government 
marketing effort to educate the public regarding newly licensed 
preparers must distinguish them so as not to confuse the public with 
existing credentials already in use such as Certified Public 
Accountant, Enrolled Agent, and attorney.
    There must be a transition from being unlicensed or unregistered to 
becoming licensed and/or registered. There should be a reasonable 
phase-in period to allow current unregistered preparers to become 
registered before they are prohibited from preparing returns. 
Registration and licensing has the potential to negatively affect the 
livelihood of hundreds of thousands of small businesses, self-employed 
individuals and millions of their taxpayer clients. It could seriously 
and negatively impact the ability of the tax administration system if 
significant numbers of otherwise competent and legitimate tax return 
preparers currently servicing that system close their doors because of 
costly; redundant; overly burdensome; and ineffective regulation.
    Care needs to be exercised not to create another government domain 
to add more bureaucracy, red tape, and consequent taxpayer cost to the 
tax system. It would be a gross disservice to taxpayers and the tax 
administration system to drive ``good preparers'' out of business to 
reduce the number of ``bad preparers.''
    For the same reasons, care needs to be exercised in the requirement 
of examination to demonstrate competency. A sizable portion of the tax 
professional community works only with individual returns. This fact 
isn't hard to understand when one considers that there are 
approximately 131 million individual returns prepared annually compared 
to 6 million corporate returns, 2 million partnership returns and 1 
million gift, trust and excise tax returns. What is the sense in 
requiring all paid preparers to demonstrate competency across the 
entire spectrum of possible tax returns? It is not reasonable to test 
specialists in areas that they do not practice.
    The purpose of these comments is not to object to the requirement 
of competency in any way, but rather to speak to the practicalities of 
the way the industry operates, the need to maintain a stable tax 
administration system, and the need for taxpayers to have economical 
access to good professional assistance and advice. Any proposal will 
need to give the Secretary of the Treasury the flexibility to 
accommodate an efficient, high quality tax administration system 
sensitive to the needs of the tax preparation industry and taxpayers as 
a whole.
    We would hope that, as regulation of paid preparers is debated and 
enhanced, direction would be given the Treasury to keep the licensing 
process efficient, fair and economical. We would also hope that 
legislation would provide the Commissioner of the IRS with the 
resources needed to enforce already existing law enacted to stamp out 
unethical and unscrupulous behavior within our tax system. We point out 
that this behavior is also demonstrated by some taxpayers--those prone 
to ``shop'' the tax professional community to see who will provide them 
with the best tax result or highest refund.
    Thank you for your time and consideration of my comments. Chairman 
Ramstad and members of the Subcommittee, I look forward to our dialog 
and your questions on this issue.

                                

    Chairman RAMSTAD. Thank you, Mr. Gray. The Chair thanks all 
five of you truly expert witnesses for your testimony today, 
representing a real cross-section of the practice, to be sure. 
I am going to be brief so that I can defer to my colleagues, 
but it seems to me that there is a consensus. In fact there is 
unanimity among this panel, all five of you favor some form of 
licensing or registration for tax preparers with certain 
caveats. Is that a fair statement?
    Mr. GIDEON. That is correct, Mr. Chairman.
    Chairman RAMSTAD. Mr. Degen?
    Mr. DEGEN. Yes, that is correct.
    Chairman RAMSTAD. Mr. Cross?
    Mr. CROSS. Yes.
    Chairman RAMSTAD. Mr. Purcell?
    Mr. PURCELL. Yes.
    Chairman RAMSTAD. Mr. Gray?
    Mr. GRAY. Yes.
    Chairman RAMSTAD. Of course, that raises the threshold 
question as far as Congress' involvement is concerned, as to 
the proper Federal role in this area. More specifically, 
whether licensing or registration of Federal income tax return 
preparers should be a function of the Federal Government or the 
States, as we are now seeing played out in California and 
Oregon. Just a one word or one sentence from each of you. 
Should this be a Federal function or a State function? Mr. 
Gideon?
    Mr. GIDEON. I think a national system is preferable here 
because these are national returns being filed.
    Chairman RAMSTAD. Mr. Degen?
    Mr. DEGEN. I would agree. This is a Federal Tax Code. We 
need Federal regulations and not 50 different sets, because 
people move constantly. Someone in New York will go to Texas, 
go to Oregon. They have to have uniform protection.
    Chairman RAMSTAD. Mr. Cross?
    Mr. CROSS. One of the reasons that we support this is 
because it is anticipated to be Federal. We have had a lot of 
regulatory problems because of working with individual State 
boards.
    Chairman RAMSTAD. Thank you. Mr. Purcell?
    Mr. PURCELL. Federal.
    Chairman RAMSTAD. Mr. Gray?
    Mr. GRAY. Federal. I am a CPA. I am licensed by a State 
board, but my test was a national standards test.
    Chairman RAMSTAD. The Chair is not at all surprised by the 
responses. It certainly makes sense; we are talking about 
Federal taxes, the IRS and the Federal Tax Code. Again, thank 
you for your response to that. Another two quick questions, 
trying to survey and take advantage of your expertise here 
today. One, should there be an initial examination? Mr. Gideon?
    Mr. GIDEON. As I said in my testimony----
    Chairman RAMSTAD. In fact, let me ask both questions in 
concert so you can respond to both simultaneously. Should there 
be an initial examination, and should there be a continuing 
educational requirement for preparers?
    Mr. GIDEON. Yes, to both with a caveat for some 
grandfathering as has been mentioned.
    Chairman RAMSTAD. Mr. Degen?
    Mr. DEGEN. Yes, to both unequivocally.
    Chairman RAMSTAD. Mr. Cross?
    Mr. CROSS. Yes to both with the waivers we talked about.
    Chairman RAMSTAD. Mr. Purcell?
    Mr. PURCELL. Yes to both, but I think we would want to 
study the grandfather issue also.
    Chairman RAMSTAD. Mr. Gray?
    Mr. GRAY. Yes to both as far as an initial exam and, again, 
either grandfathering or phasing in.
    Chairman RAMSTAD. Again the Chair thanks all five of you 
for your responses. You probably are unprecedented as a five-
person panel for the brevity of your responses and I am very 
grateful for that as well. The Chair would at this time 
recognize my friend, the distinguished Ranking Member from 
Georgia, Mr. Lewis.
    Mr. LEWIS. Thank you very much, Mr. Chairman, and I join 
you, Mr. Chairman, in thanking Members of this panel for their 
wonderful and meaningful testimony. You made a lasting 
contribution to the work of this Committee and we really 
appreciate it. I will be very brief also, Mr. Chairman. Mr. 
Cross, your Members will not directly be affected by the 
proposal to regulate preparers, correct?
    Mr. CROSS. Yes, they would.
    Mr. LEWIS. They would?
    Mr. CROSS. We have a cross-section. We have three 
different--four different classifications and probably 50 to 55 
percent of our Members are currently not regulated under 
Circular 230 and would be required to become regulated if this 
were to go into place.
    Mr. LEWIS. Let me ask you further, Mr. Cross, is there any 
organization that represents unenrolled preparers? And if so, 
what group is that?
    Mr. CROSS. Our group represents unenrolled preparers and so 
does----
    Mr. LEWIS. Mr. Gray's group?
    Mr. CROSS. Yes.
    Mr. LEWIS. Could maybe one of you tell me or tell Members 
of the Committee how many unregulated preparers there are out 
there? You have any idea? You do not represent all of them, do 
you?
    Mr. CROSS. No. Our Membership is----
    Mr. LEWIS. You would not want to represent some of them, 
right?
    Mr. CROSS. Yes. We represent some of them. Now we represent 
around 30,000 people, and I would say probably somewhere 15- to 
20,000 of those people that we represent through our 
Membership, direct membership and Membership of our affiliates 
are in that group of some 200,000 on the downside to 600,000 
that Ms. Olson was referring to. So, those people are not 
represented. They do not want belong to--a lot of those people 
do not belong to an association of any kind.
    Mr. GRAY. There is also a large group out there of 
unregulated preparers that do not sign returns. So, when you 
start doing that----
    Mr. LEWIS. You say someone will prepare a return for 
someone and they will not sign it?
    Mr. GRAY. Yes, and that is the unknown unknown. So, when 
you go to address those, that is where you can see--I have seen 
estimates within the IRS, upward of a million if you take all 
those too. So, I think what they were referring to earlier, 
whether it is 2-, 4- or 600,000--they were referring to 
signatures if I heard their testimony correctly--but that does 
not include all those people that are underground. There is a 
whole underground out there and they just buy computer software 
and it says, by paid preparer and you can transmit it. We have 
got to realize the world we are in and technology of today. In 
3 minutes I can have software running and do somebody's return 
and it will print at the bottom of it, ``self-prepared.'' So, 
that is the larger unknown.
    Mr. LEWIS. Let me ask you this. Inform me, should there be 
a condition, law or regulation that if someone prepares your 
return for you, you should be required to sign it?
    Mr. GRAY. Right, and I agree with you because in my 
statement that was the first thing that I said any 
legislation----
    Mr. LEWIS. You think that should be part of the 
legislation?
    Mr. GRAY. That should be the very first thing is that they 
would be required to sign that return.
    Mr. LEWIS. Thank you very much.
    Mr. Purcell, should refund anticipation loans be banned?
    Mr. PURCELL. That is not a question that I am competent to 
answer, representing the Institute. Now as a person----
    Mr. LEWIS. I just want you to just speculate, what do you 
think?
    Mr. PURCELL. As an individual who has helped with volunteer 
income tax clinics and worked with low-income people I find 
them very difficult to justify. I think they are predatory and 
potentially unfair methods of financing for low-income people. 
So, I would seriously look at those as possible ways to be 
fixed, but AICPA does not have an official position.
    Mr. LEWIS. Thank you very much. I appreciate that response.
    Thank you, Mr. Chairman.
    Chairman RAMSTAD. The Chair thanks the Ranking Member for 
your great leadership and your many contributions to the 
Subcommittee. The distinguished gentleman from Colorado, Mr. 
Beauprez.
    Mr. BEAUPREZ. Thank you very much, Mr. Chairman. Mr. Gray, 
to you first of all and then to which other Members of the 
panel may want to respond. You mentioned just a minute ago tax 
returns that are prepared now with the assistance of 
technology. We all know that. I want to explore for just a 
second with you, if we go down this path that you are all 
advocating, are we taking care of the problems in the future, 
or the problems in the past or both? Your industry is the way 
that Americans collectively are preparing their tax returns. Is 
it changing so rapidly with the advent of technology that maybe 
we are behind the curve?
    Mr. GRAY. Actually I would like to divide that into two 
parts. I think we have to look at the population that is trying 
to comply and then those that are not going to comply. So, I 
will excuse the ones that are going to ignore the law no matter 
how many rules you have. If somebody just robbed a bank and the 
speed limit is 55 miles an hour----
    Mr. BEAUPREZ. Bad choice. I was a banker. Do not say robbed 
a bank.
    Mr. GRAY. Yes, but you are not there any more so that is 
the past. I listened to your earlier remarks. Anyway, of the 
other group, I think what happens is is that we have a tendency 
to get so busy in today's world and we get so dependent on 
technology that we forget education and we start to get these 
crutches out there. Last week I was in Houston and surveyed 
several hundred practitioners, 230 and non-230, and it is 
amazing how many tax questions they get wrong. It is because, 
again, we think it is a button on the computers. Now as far as 
those other returns out there, those self-prepared, that is the 
people over there that are just trying to get around the 
system. Those people may continue to try to get around the 
system. If I can go to a local store and buy software and print 
it out, then I am going to do that if I am trying to go 
underground.
    Mr. BEAUPREZ. Anyone else?
    Mr. CROSS. I think there is a real problem with tax 
software because you need to identify it. The fact that the 
software simply prints out and says, self-prepared. It is self-
prepared if John Doe went to Office Depot and bought it. 
However, John Doe could go to Office Depot, buy that software, 
and prepare somebody else's return and it still says self-
prepared.
    Mr. GRAY. Right, it is just like the car dealership ad you 
played earlier. You go down there; that is an ERO. Well, 
somebody had to put the information in the computer, and I 
would imagine you go down there they are going to say, we do 
not prepare returns here. Somebody had to get it off the paper 
into the computer for the ERO to transmit. Those are the real 
world issues that you are dealing with.
    Mr. CROSS. So, identifying that software is part of--and 
controlling that, is going to be part of the solution.
    Mr. BEAUPREZ. Thank you. Mr. Degen?
    Mr. DEGEN. Just to go back to your original question, I do 
not believe the technology, the increase is going to change the 
problem. The problem is, the conduct of tax preparers, whether 
they be fraudulent or incompetent or whatever. What the 
technology does is enable people to do it easier without having 
paper and pencil. If a person doesn't know, for example, that a 
taxpayer took a distribution from a plan and rolled it over and 
they do not know how to put it in, the program is going to 
produce----
    Mr. BEAUPREZ. The input side.
    Mr. DEGEN. Exactly. I just want to make one other comment 
to Congressman Lewis. Sir, in the Internal Revenue Code right 
now is a requirement that paid preparers are to sign tax 
returns. The penalty, I believe, is $50 or something very, very 
low and not very meaningful. So, I just wanted to point that 
out.
    Mr. BEAUPREZ. Let me ask the five of you, if I might, 
another question. Having been on the business side, which I 
already disclosed, I find it interesting--I certainly--you make 
a compelling case, I will give you all that, but I find it 
interesting that an industry is coming to the Federal 
government saying regulate us. The old cliche, ``Be careful 
what you ask for or just just might get it,'' comes to mind. 
What is the downside, gentlemen? Why don't you just run down 
very quickly and answer the question of, if we go this route 
what is the potential downside, too much bureaucracy? I have 
heard that, or a new bureaucracy. What else might concern you 
if we go down this path? What should we avoid?
    Mr. GIDEON. I think that if the program is carefully 
administered and targeted at individual return preparation, as 
has been said, I do not think there is much potential for much 
going wrong. I think that if the program tried to expand beyond 
that compass then I think you get into areas of worrying about 
overregulation, making people qualify, get knowledge that they 
really do not need to be individual return preparers and the 
like. I think if, as I think the kind of shared view of what 
this program would be, if it stays in that compass, it ought to 
be fairly simple to do and it ought to raise the standard of 
individual return preparers.
    Mr. DEGEN. The only downside I see, conceptually I think 
this is perfect. We may disagree on some of the words, but the 
concept of protecting two--there are two things here. We want 
to protect the taxpayer, but we also want to protect the 
system, and I think that is what this whole concept is about. I 
do think that the only downside is the lack of funding. IRS 
would need money on two ends. Number one, to promote the 
legislation, promote it correctly. One of the big problems, and 
I am sure others on the panel have the same problem is, in this 
credentialing we see people that have billboards, huge 
billboards that say, I will prepare your taxes; I am an ERO. 
Then they have that huge blowup of the ERO symbol, that little 
blue logo that the IRS has. That is a problem. We cannot have 
that. So, IRS has to have the money to promote the credentials 
of whatever you decide.
    The second thing is, the Congress has to give IRS the money 
to enforce this. I was listening before to poor Ms. Jardini. 
Her hands are tied by funding. They only have a certain amount 
of people. There needs to be more funding both on the promotion 
side and on the enforcement side.
    Mr. BEAUPREZ. My red light is already on but if you have 
got a--with the indulgence of the Chair, if you have got a 
quick comment on that point.
    Mr. CROSS. I have one comment and that is that we have to 
be certain that we do not create a roadblock to new people 
coming into the profession. We have to be able to get them in 
minimally and welcome them so that--and then build their 
competency afterward.
    Mr. GRAY. I agree with that. Testing is a minimum 
threshold. It is not where you should be performing at. I think 
the other thing that this could do is, in your low-income areas 
you may have less availability because, what about if I am a 
volunteer? Can I volunteer or do I come under this also? Just 
be aware, if you start making exceptions to anybody preparing--
in that case they are not receiving for a fee--there can be 
just as much confusion on putting the stuff on the right line 
on the right return if they have not met that threshold.
    Mr. BEAUPREZ. Mr. Purcell?
    Mr. PURCELL. The only downside I would see in addition to 
what I have heard is that this would create, I think, an 
unfortunate reinforcement in the public's mind that our tax 
system is so darn complex that we have to regulate a bunch of 
people so they can get their individual tax return prepared, 
even though it contains just very few issues that are on the 
return, because we have made something like the EIC so complex 
that they cannot do it themselves.
    Mr. BEAUPREZ. I thank the panel and I thank the Chair.
    Chairman RAMSTAD. Thank you, Mr. Beauprez. You mean our tax 
system is not complex?
    Mr. PURCELL. It is too complex.
    Chairman RAMSTAD. The Chair certainly agrees. I am sure 
every Member of this Subcommittee agrees. Well, let me again 
thank all five of you expert witnesses. Thank you for your very 
important testimony on this very important issue. We certainly 
appreciate you taking time from your busy schedules to help 
enlighten us and to contribute to the discourse here. Thank you 
very much. Since there is no further business before the 
Subcommittee, this hearing is adjourned.
    [Whereupon, at 4:48 p.m., the hearing adjourned.]
    [Submissions for the record follow:]

                                            Fairfax, Virginia 22931
                                                      July 19, 2005

Mr. Chairman and other Members of the Subcommittee on Oversight

    Alvin Brown and Associates is a tax law firm specializing in IRS 
issues and problems. I had a 25 year career in the Office of the IRS 
Chief Counsel. In my current tax practice I have tax return preparer 
clients (``Preparers'') who have been or are presently being examined 
by the IRS. Some of my Preparer clients are under under IRS criminal 
investigation. I have some first-hand insight into the problems of the 
Preparers, the reasons for the examination, and how the IRS conducts 
their investigations and brings fraud charges in most of the 
situations.
    The most important fact that I can give this Committee from my 
personal experience is that the Preparer technical knowledge of the tax 
law and procedures is grossly inadequate. There are no statutory, 
educational, or experience requirements for any person to qualify as a 
``Tax Return Preparer.'' Some Preparers barely know the English 
language and their English communication skills are poor; some do not 
have technical skills to work with software. These Preparers are not 
attorneys, accountants or enrolled agents. It is my personal opinion 
that the problems that Preparers get into with the IRS are caused by 
their lack of training and lack of knowledge which correspondingly 
results in the negligent preparation of U.S. tax returns. Preparers are 
not required to be licensed by the IRS. Any person who is not a minor 
can become a tax return preparer without any qualifications to engage 
in the business of tax return preparation, including incarcerated 
felons. There is no requirement for any tax return preparer to even 
warn a customer of their lack of knowledge or training. It follows that 
excessive error will occur in the preparation of tax returns by 
unqualified and inexperienced Preparers. As one might expect, 
incompetent, inexperienced and untrained Preparers have been the cause 
of negligently filed tax returns thereby causing a significant negative 
impact on tax revenue.
    It is my opinion that basic educational/experience requirements 
will eliminate a

large amount of tax return preparer negligence. There are standards for 
Enrolled Agents (those who qualify to represent taxpayers before the 
IRS). It makes sense to provide qualifying standards for those who 
which to become professional tax return preparers.
    I also believe that the Internal Revenue Service should be charged 
with the responsibility of formulating a licensing requirement in order 
to permit individuals to practice as professional Tax Return Preparers.
    My personal experience in representing return Preparer clients is 
that their errors arise from negligence--not from fraud. The IRS, 
appropriately, is aggressive in investigating tax return preparers. I 
respect that effort and encourage that effort. But there is a very 
obvious difference between ``negligence'' and ``fraud''--and is very 
easy for the IRS to spin negligence into fraud. In any investigation of 
a tax return preparer, the IRS will always ask the preparer's customer 
whether the errors on their tax return were caused by their (customer) 
input or the input of the tax return preparer. This question and those 
like it are quite intimidating to the customer. If the customer says: 
``Yes, that is my number or data,'' that person (in his own mind) is 
likely to think that he will be charged with ``fraud'' by the IRS Agent 
for providing erroneous data to the tax return preparer, for not having 
proper documentation, or because they think they might be audited. On 
the other hand, if the customer says that the number or data was 
provided by the Preparer, then the customer is not at risk. The 
Preparer will likely be charged with fraud by the IRS if there are 
multiple customers who are similarly intimidated by an IRS 
investigation who state that the data was sourced from the Preparer. It 
is my personal opinion that most of the tax return preparer 
investigations involve elements of IRS intimidation of the customers of 
the Preparer. Therefore, I believe that the IRS should not be able to 
bring a fraud charge against a tax return preparer if the charge is 
based solely upon the testimony of customers who are concerned about 
self-incrimination, the basis of their perceived ``intimidation.'' The 
problem of IRS ``intimidation'' to customers who are not under 
investigation is very substantial. That intimidation results in the 
conversion of acts of negligence into tax fraud cases in many 
instances. The Preparer is at a disadvantage if the data received from 
the customer to the Preparer is communicated orally, because the source 
of the data used in the tax return cannot be traced.
    In summary, I have the following observations and recommendations:

      A great deal of the distortions in tax determined by 
Preparers arises from negligence and lack of tax technical training and 
experience. The IRS can easily remedy the problem by licensing tax 
return preparers. In that licensing requirement, the IRS can create the 
necessary standards and qualifications for licensing. The cost of that 
effort and the monitoring of that effort can be covered by licensing 
fees. Since the IRS provides testing for Enrolled Agents, they can 
easily formulate appropriate educational/experience requirements for 
tax return preparers. A licensing requirement will bring with it 
professional standards and accountability. The reduction of negligence 
of return preparers will also reduce the amount of tax revenue lost by 
negligence.
      Fraud charges against tax return preparers should not 
supported if based solely upon testimony from customers. The customer 
appears to have a conflict of interest when confronted by an IRS 
Examiner because they have in their own minds great concern about their 
own self-incrimination risk during the IRS interview--particularly in 
fraud cases. I have seen criminal charges brought with just five 
witnesses with significant conflict of interest pressures on the 
customers (e.g., fraud, loss of employment if a fraud charge is 
brought, and fear of audit). Although customer testimony is probative, 
that testimony should not be treated as conclusive evidence of fraud.
      In order to reduce the IRS ``intimidation'' factor by the 
IRS to customers of tax return preparers, it would be helpful to be 
able to identify the source of the data used in the tax returns at the 
time the tax returns are filed. This can be done with a few questions 
in the tax returns to establish if all of the deductions, exemptions 
and credits be documented. If there are any estimated numbers, a 
question can be asked about who provided the estimates. Attachments can 
be required by the IRS for explanations of undocumented data or 
estimates. Since the key question asked by an IRS Examiner to a 
Preparer customer is whether the data was provided by the preparer (to 
document a fraud issue), that issue

can be eliminated by having that data specified in the customer's 
income tax return.

            Respectfully submitted,
                                               Alvin S. Brown. Esq.
                                                       Tax Attorney

                                

            Statement of Bill Parrish, Kansas City, Missouri

    Congressman Ramstad, thank you to you and your committee for 
providing the opportunity to submit comments regarding the proposed 
regulation of tax professionals as contemplated under S B 832.
    I am Bill Parrish, the founder and CEO of (oneplusone) \3\, an 
affiliation of tax and accounting professionals serving taxpayers and 
small businesses in 17 states. Collectively, we serve over 69,000 
individual taxpayers and 12,000 small business clients as we aid them 
in their accounting and tax compliance needs. I am a Past President of 
the Accreditation Council for Accountancy and Taxation (ACAT), an 
independent credentialing organization offering accounting and tax 
credentials based upon demonstration of successfully mastering the 3 
``e's'', education, examination, and experience. I am also a Past 
President of the Coalition for Affordable Accounting, an organization 
representing some 124,000 accounting and tax professionals. I have been 
a speaker at the Internal Revenue Service's Tax Forums and a guest on 
the Internal Revenue Service's Tax Talk Today.
    As cited in your announcement of this committee hearing, 
``According to the U.S. Government Accountability Office, more than 70 
million of the 131 million tax returns filed last year were prepared by 
a tax professional.'' This truly demonstrates the impact tax return 
preparers have on the compliance system within the U.S. tax system. 
Your announcement continues to refer to 3 recent examples of tax 
preparer malfeasance and alludes to 343 active investigations of tax 
professionals. We are told that the IRS cannot tell us with certainty 
how many paid tax return preparers there are in the U.S. today. The 
ranges of numbers we hear are from 300,000 to 600,000 and just 
recently, we heard that there were 1.2 million preparers who signed a 
tax return as the preparer last year. No matter which number you rely 
upon, it is a huge number.
    The thrust of recent activity has been to curtail the abusive tax 
shelter industry, and appropriately so. Taxpayers have been bilked out 
of millions of dollars, the proper tax amounts have not been paid by 
the innocent purchasers of such tax schemes, and the rest of the honest 
taxpayers have to make up the difference. Such practices need to be 
stopped and now. However, if we compare the 343 cases to 1.2 million 
preparers, or 600,000 or even 300,000 paid preparers, it appears we are 
hunting ants with a canon. Legislation, as it is being proposed, is 
aimed at the entire profession, not just the abusive section within the 
community. The related costs of implementation and monitoring will be 
disproportionate to the segment at which regulation needs to be aimed.
    Everyone agrees that regulation is appropriate for this industry, 
but let's look at some of the impacts of the current proposals.
    Is such regulation going to identify all paid preparers? I submit 
that it will not. Currently, there is an ``underground community'' of 
paid tax preparers. They show up in January, usually in neighborhoods 
where many residents may be uninformed immigrants or with low levels of 
education. The preparers set up shop and prepare thousands of returns, 
often not signing the returns they prepare. Their work is at best less 
than acceptable and is often bogus, creating huge refunds which are 
fraudulent. At the end of the tax season, the underground office is 
closed and the operators have disappeared leaving the taxpayer to deal 
with the authorities on their own. Next year, the same underground 
practitioners set up shop in yet another neighborhood and continue 
their ruse. This regulation, while imposing a heavier penalty on 
preparers who do not sign the returns they have prepared, does nothing 
to step up the efforts to put these unscrupulous preparers out of 
business permanently. Instead, some portions of this proposal may drive 
some marginal preparers underground, therefore adding to the problem. 
Consideration needs to be given to attacking the different parts of the 
problem of tax preparer regulation rather than a broad brush stroke 
intended to fix everything at once.
    Is the proposed implementation timeframe long enough to allow 
Treasury and the IRS to work jointly on developing a sufficient 
solution? I submit that the timeframe is not sufficient. Currently the 
IRS administers the examination and compliance monitoring for the 
Enrolled Agents Status. This special enrollment empowers designated 
practitioners to ``represent'' taxpayers before the IRS. The process 
begins with a uniform exam, administered once a year. Currently, we are 
advised the IRS is seeking to outsource this examination to provide for 
more efficiency. Under this proposal, the IRS will be further burdened 
with developing an exam to be used for registration of tax preparers. 
The contemplation appears to be ``an'' exam which therefore would not 
be specific to the type of return(s) being prepared. It could become a 
``cookie cutter'' approach. If the examination bar is set too low, it 
will not differentiate between those who are poor, adequate, or 
superior. In fact, such an approach would only result in a registration 
process but the public might believe their preparer, no matter what 
level of knowledge they possess, are ``up to par'' since they passed 
the exam and are enrolled. If the desired result is simply a 
registration, then the exam is superfluous.Conversely, if the 
examination pass bar is set to high, many existing practitioners who 
are quite capable of providing a quality service at the level which 
their clients require would not pass such an exam. It is conceivable 
that if the exam pass bar were set too high, there would not be enough 
enrolled tax preparers to serve the U.S. taxpayers in the first year. 
Such a process should also recognize that not all tax preparers are 
good test takers. Such recognition must be a part of a well balanced 
system. Time needs to be given Treasury and the Service to adequately 
prepare and finally implement an examination process which matches the 
types of returns being prepared. A preparer who only prepares 1040 EZ 
or 1040 A returns should not be required to pass an exam based upon the 
knowledge necessary to complete a Corporate Income Tax Return, form 
1120. A phase in over a 5 year period would allow ample time for such 
design and testing.
    Have the anticipated administrative burden and related costs been 
fully examined? I am confident the Treasury and the IRS have put their 
collective pencil to this, and am equally confident the burden and 
costs are both excessive and overwhelming. If such a registration 
process is enacted with the stroke of a presidential pen on a bill 
passed by both houses, almost immediately the IRS will be faced with a 
massive education process to locate all paid preparers and educate them 
on the new requirements for registration. Those preparers who are most 
accessible are those who are regularly attending continuing education 
events and conferences therefore already sharpening their preparation 
skills. It is the other segment of this profession, those who are not 
updating their skills regularly, that most need this contact yet will 
most likely fall through the cracks the first year. The service would 
be faced with not only developing an exam in a hurry, but locating 
testing sites across the country if not around the world, and finally 
giving such an exam. Then comes grading and notifying the participants 
of the results; the creation of an adequate database of the enrolled 
preparers needs to be developed and tested; an ongoing process of 
notification of renewal processes and requirements would need to be 
implemented. Such regulation, as proposed, demands almost immediate 
implementation of a very complex system. Can we really expect such a 
process to not be expensive and almost impractical? Study needs to be 
given to an act that contemplates implementation at affordable costs 
and with the least strain upon existing resources both for the 
government and the tax professional community. Ultimately, all of these 
costs will be passed on to the U.S. taxpayers.
    Has an adequate level of thought been given to the classes of 
practitioners who may be exempted from registration? While other 
designations may be appropriate for exclusion on their face, careful 
study needs to be given to the criteria for maintenance of other 
credentials. As an example, several state boards of accountancy have 
now adopted a non-active status for Certified Public Accountants. Such 
a status may be available for someone who has met all of the 
requirements to be granted the designation, CPA, some are not required 
to maintain the current requirements for renewal because they are not 
in public practice. As contemplated under this act, all of those who 
have qualified and hold a current certificate or license will be exempt 
from registration. Other highly qualified practitioners, such as those 
who have earned designations from credentialing organizations such as 
the Accreditation Council for Accountancy and Taxation are, however, 
required to register and pass an exam. Through such processes as ACAT 
imposes, the practitioner has demonstrated minimum levels of education, 
have demonstrated their knowledge through the passing of a rigorous 
exam on tax and ethics, and have demonstrated a minimum of 3 years 
experience in public practice. It appears redundant to again subject 
practitioners to such additional requirements.
    Many taxpayer advocacy groups and individuals are calling for the 
immediate regulation of the tax preparation profession, an idea that is 
perhaps long overdue. It is my hope that an approach can be developed 
that is well thought out and is both practical and affordable. I 
propose that we not throw out the baby with the wash, but instead, 
bring forth positive legislation that will cause positive impact upon 
the system as a whole, a system that will offer greater security to the 
taxpayer community, greater pride to the tax preparer profession, and 
greater faith in the system on the part of government. We are in this 
partnership and we all need to be working towards commonly supported 
goals.
    I appreciate the opportunity to provide my thoughts and suggestions 
on this subject and would be delighted to provide further thoughts, 
should the opportunity arise.
    (oneplusone) \3\ is a national cooperative alliance of independent 
tax and accounting practitioners who provide services to the general 
public in 17 states. (oneplusone) \3\ provides educational services to 
the independent practitioners as well as practice management 
information, access to products and services at discounted prices, and 
provides a venue for dialogue amongst the member practitioners. A 
condition of membership is the strict adherence to a professional code 
of ethics and a commitment to ongoing professional education.

                                

       Statement of Joshua N. Pritikin, Santa Barbara, California

    Tax fraud is indeed a vexing problem. Instead of more vigilant 
enforcement, I believe a better solution is to adopt the FairTax.org 
proposal. The FairTax (HR 25) would replace all income taxes with a 
progressive national retail sales tax. A NRST would be easier to 
enforce compared to an income tax because there are fewer points of 
collection. There are only about 20 million retail businesses as 
compared with approximate 150 million individuals. Assuming the same 
amount of money for tax enforcement efforts, almost ten times as much 
money would be available per filer. The simplicity of tax collection 
compared to other tax proposals is a major advantage FairTax HR 25.

                                

                                                      July 20, 2005
Dear Subcommittee on Oversight, Committee on Ways and Means,

    As you examine fraud in income tax return preparation and federal 
regulation of tax preparers, we refer you to our co-authored academic 
paper entitled ``An Education and Enforcement Approach to Dealing with 
Unscrupulous Tax Preparers'' that was published in The American 
Taxation Association (ATA) Journal of Legal Tax Research, Volume 2, 
June 11, 2004. You can access the paper at http://aaahq.org/ic/
index.htm. We provide an abstract of the paper below which states our 
support of education and enforcement rather than regulation to curb 
these abuses.
    ABSTRACT: (``An Education and Enforcement Approach to Dealing with 
Unscrupulous Tax Preparers,'' The ATA Journal of Legal Tax Research, 
Volume 2, 2004, June 11, 2004, by C. Bauman and K. Mantzke)
    In both her 2002 and 2003 Annual Reports to Congress, the National 
Taxpayer Advocate (NTA) proposed national registration, examination, 
certification, and enforcement requirements for all Federal Tax Return 
Preparers (FTRPs). An FTRP is defined as someone, other than an 
attorney, CPA, or enrolled agent, who prepares more than five federal 
tax returns in a calendar year. This proposal was primarily motivated 
by the NTA's experience in dealing with taxpayers who were exploited by 
unscrupulous tax preparers, especially with respect to the earned 
income credit (EIC). Although the IRS believes that all taxpayers 
should have access to quality tax return preparation, it contends that 
it is premature to consider a legislative remedy to tax preparer 
problems since the full extent of the problem is unknown and the 
related financial impact on limited IRS resources has not been 
quantified.
    The purpose of this paper is to examine the proposed regulation of 
FTRPs by reviewing the development of similar regulatory proposals over 
the past several decades, outlining current and proposed federal 
regulation of tax preparers, discussing state regulation of tax 
preparers, describing concerns with increased regulation, and offering 
alternative recommendations to regulation, specifically education and 
enforcement.

            Respectfully submitted,
                                                Christine C. Bauman
                                            Associate Tax Professor
                                        University of Northern Iowa

                                                 Katrina L. Mantzke
                                            Assistant Tax Professor
                                    University of Northern Illinois

                                

    Statement of Chi Chi Wu, National Consumer Law Center, Boston, 
                             Massachusetts

               ``Fraud in Income Tax Return Preparation''

    We are pleased to submit for the Subcommittee's consideration a 
recent report issued by the National Consumer Law Center entitled 
``Corporate Welfare for the RAL Industry: The Debt Indicator, IRS 
Subsidy, and Tax Fraud.'' In addition to a number of other issues, this 
report examines the role of refund anticipation loans (RALs) and the 
IRS-supplied debt indicator in potentially boosting tax fraud, 
including fraud perpetrated by tax preparers.
    The IRS and Treasury terminated the debt indicator in 1994 due to 
fraud in electronically filed returns, but then reinstated it in 1999. 
According to one IRS official, currently 80% of fraudulent 
electronically filed returns are tied to a RAL or other refund 
financial product.\1\ Since the IRS reinstated the debt indicator in 
1999, fraud appears to have increased. E-file fraud had increased 
several-fold since 1999--approximately 1 in every 1,200 e-filed returns 
is phony, compared with a rate of about 1 in every 5,000 four years 
ago. The Treasury Department's Financial Crimes Enforcement Network 
(FinCEN) has raised similar concerns about the role of RALs in 
promoting tax fraud. FinCEN issued a warning to banks in August 2004, 
noting that RAL fraud had multiplied between 2000 and 2003.\2\
---------------------------------------------------------------------------
    \1\ Allen Kenney, IRS Official Shines Spotlight on E-Filing Fraud, 
2004 Tax Notes Today 130-4, July 6, 2004.
    \2\ FinCEN, SAR Activity Review, Issue 7, August 2004, at 15, 
available at www.fincen.gov/sarreviewissue7.pdf.
---------------------------------------------------------------------------
    Thus, we believe one way to reduce tax fraud by preparers is to 
reduce the number of RALs and to once again eliminate the debt 
indicator. Thank you for your consideration

                CORPORATE WELFARE FOR THE RAL INDUSTRY:

             THE DEBT INDICATOR, IRS SUBSIDY, AND TAX FRAUD

    Executive Summary

      The debt indicator is an acknowledgement from the IRS 
telling tax preparers whether a taxpayer's refund will be paid versus 
intercepted for government debts. The debt indicator has proven to be a 
substantial benefit to the refund anticipation loan (RAL) industry, as 
it about doubles the number of RALs made by the industry.
      The debt indicator has helped boost RAL profitability. 
The IRS terminated the debt indicator in 1994 due to RAL fraud, and the 
price of RALs rose significantly, from $29-$35 to $29-$89. The IRS 
reinstated the debt indicator in 1999 partly to lower RAL prices. RAL 
prices dipped for a year in 2000, but have gone back up to pre-
indicator levels. Meanwhile, the amount of RAL fraud has multiplied 
since the debt indicator was reinstated.
      The debt indicator raises significant privacy issues. It 
is unclear whether taxpayers realize they are allowing the IRS to 
provide sensitive personal information to tax preparers about debts 
owed to the federal government, such as child support and student loan 
debts.

    A. History of the Debt Indicator

    The debt indicator is a service provided by the Internal Revenue 
Service that screens electronically filed tax returns for any claims 
against a taxpayer's refund.\3\ The debt indicator informs the preparer 
whether a taxpayer's full refund amount will be paid and not offset by 
other obligations collectible by the federal government, such as prior 
tax debt, child support arrears, or delinquent student loan debt.\4\
---------------------------------------------------------------------------
    \3\ IRS, Publication 1345, at 32. See also George Guttman, IRS 
Reinstates Debt Indicator to Increase Electronic Filings, 85 Tax Notes 
1125, Nov. 29, 1999 [hereinafter ``Guttman, IRS Reinstates Debt 
Indicator ''].
    \4\ Id.
---------------------------------------------------------------------------
    When the IRS first provided the debt indicator in the early 1990s, 
it was called the ``direct deposit indicator.'' In 1994, the IRS 
terminated the debt indicator due to concerns over massive fraud in e-
filed returns that involved refund anticipation loans (RALs).\5\ The 
elimination of the debt indicator elicited ``screams of rage'' by the 
RAL industry.\6\ In addition to cutting into their profits, the RAL 
industry claimed there would be multitudes of disappointed clients who 
could not get their RALs.\7\ Two of the four major RAL lenders, Mellon 
Bank and Greenwood Trust, stopped making RALs and left the market.\8\
---------------------------------------------------------------------------
    \5\ Ryan Donmoyer, IRS Takes Aim at RAL Fraud, Hits Preparer 
Profits, 66 Tax Notes 1750, February 20, 1995 [hereinafter ``Donmoyer, 
IRS Takes Aim at RAL Fraud '']. See also Malcolm Sparrow, Fraud in the 
Electronic Filing Program: A Vulnerability Assessment Prepared for the 
Internal Revenue Service, September 1, 1994.
    \6\ See Robert Scott, E-Filing Vendors Outraged Over Death of DDI, 
Accounting Today, November 21, 1994, at 2. See also Timothy J. 
Mullaney, IRS Fraud Watch Cuts Refund Loans, Baltimore Sun, March 12, 
1995, at 1D (``The refund loan industry paints the story as a tale of 
Big Government beating up on the entrepreneurs who made the loans a 
multi-billion industry between 1990 and last year.'').
    \7\ Susan Edelman, There's Trouble in Rapid City, New Jersey 
Record, February 19, 1995 at b1.
    \8\ Donmoyer, IRS Takes Aim at RAL Fraud, 66 Tax Notes at 1088.
---------------------------------------------------------------------------
    Over the next few years, the RAL industry pressed for reinstatement 
of the debt indicator.\9\ Then, in 1998, Congress imposed a goal on the 
IRS to have 80% of returns electronically filed.\10\ Not 
coincidentally, a year later, the IRS announced it was re-instating the 
Debt Indicator.\11\ However, note that the Congressional 80% e-file 
goal is not mandatory, but merely exhortatory, in that the statutory 
language actually states ``it should be the goal of the Internal 
Revenue Service to have at least 80 percent of all such returns filed 
electronically by the year 2007; . . .'' \12\
---------------------------------------------------------------------------
    \9\ See Council For Electronic Communication Advancement, Testimony 
before the Subcommittee on Oversight--House Ways and Means Committee, 
March 23, 1995 (statement of industry group advocating for revival of 
the debt indicator); Stuart Kahan, Blackout on Electronic Filing, 
Practical Accountant, September 1, 1995, at 50.
    \10\ Pub. L. 105-206, 112 Stat. 723, Sec. 2001(a)(2) (1998).
    \11\ Internal Revenue Service, Announcement of Opportunity to 
Obtain a Debt Indicator in a Pilot Program for Tax Year 1999 Form 1040 
IRS E-file and On-Line Returns, 64 Fed. Reg. 67,621 (December 2, 1999).
    \12\ Pub. L. 105-206, 112 Stat. 723, Sec. 2001(a)(2) (1998) 
(emphasis added).
---------------------------------------------------------------------------
    The first year of the reinstatement of the debt indicator was a 
pilot.\13\ Subsequently, the IRS decided to make the debt indicator 
permanent and provide it for all e-filed returns, not just returns 
associated with a RAL application.\14\
---------------------------------------------------------------------------
    \13\ Internal Revenue Service, Announcement of Opportunity to 
Obtain a Debt Indicator in a Pilot Program for Tax Year 1999 Form 1040 
IRS E-file and On-Line Returns, 64 Fed. Reg. 67,621 (December 2, 1999).
    \14\ Internal Revenue Service, Publication 1345A--Filing Season 
Supplement for Authorized IRS e-file Providers (Rev. January 2002).

---------------------------------------------------------------------------
    B. The Debt Indicator Increases RAL Volume

    The debt indicator has had a dramatic effect on the volume of RALs 
and electronically filed returns. In 1994, prior to the elimination of 
the debt indicator, the number of RALs had risen to 9.5 million.\15\ 
After the termination of the debt indicator, RAL volume dropped and by 
1999, the numbers of RALs had fallen to 6 million.\16\ When the debt 
indicator was reinstated effective the 2000 tax season, the number of 
RALs rose sharply to 10.8 million.\17\ The number of RALs continued to 
increase to 12.1 million in 2001 and 12.7 million in 2002.\18\
---------------------------------------------------------------------------
    \15\ Donmoyer, IRS Takes Aim at RAL Fraud, 66 Tax Notes at 1088.
    \16\ Guttman, IRS Reinstates Debt Indicator, 85 Tax Notes at 1125. 
We were unable to find industry RAL volume data from 1995-1998.
    \17\ The IRS reported that there were 12 million requests for the 
Debt Indicator in 2000. (Statistic provided by the Internal Revenue 
Service, on file with the author). We assume that each of these 
requests for the Debt Indicator was for purposes of a RAL application. 
Since 90% of RAL applications result in an approved loan (see note 37 
below), this means there were about 10.8 million RALs in 2000. Note 
that even when a RAL application is denied, the consumer is usually 
flipped into a refund anticipation check, which is the non-loan tax 
financial product offered by RAL banks, and still must pay a fee. See 
also Chi Chi Wu, Jean Ann Fox, and Elizabeth Renuart, Tax Preparers 
Peddle High Priced Tax Refund Loans: Millions Skimmed from the Working 
Poor and the U. S. Treasury, National Consumer Law Center and Consumer 
Federation of America, January 31, 2002, [hereinafter ``NCLC/CFA 2002 
RAL Report''], available at www.consumerlaw.org/initiatives/refund--
anticipation.
    \18\ Based on 13.4 million RAL applications in 2001 and 14.1 
million RAL applications in 2002. Chi Chi Wu and Jean Ann Fox, The High 
Cost of Quick Tax Money: Tax Preparation, `Instant Refund' Loans, and 
Check Cashing Fees Target the Working Poor, National Consumer Law 
Center and Consumer Federation of America, January 2003, at 3 
[hereinafter referred to as ``NCLC/CFA 2003 RAL Report.'']; Chi Chi Wu 
and Jean Ann Fox, All Drain, No Gain: Refund Anticipation Loans 
Continue to Sap the Hard-Earned Tax Dollars of Low-Income Americans, 
January 2004, at 4 [hereinafter referred to as ``NCLC/CFA 2004 RAL 
Report.''].
---------------------------------------------------------------------------
    Data from individual companies in the RAL industry showed similar 
trends. In 1994, the nation's largest commercial preparation chain, H&R 
Block, processed 5.5 million RAL applications.\19\ After the debt 
indicator was eliminated, that number dropped to less than half, 2.35 
million in 1995.\20\ By 1999, that number was at 2.8 million.\21\ When 
the debt indicator was reinstated, RAL volume rose to 4.8 million for 
Block.\22\
---------------------------------------------------------------------------
    \19\ Gene Meyer, H&R Block Joins Program That May Trim Cost of 
Fastest Refunds, Kansas City Star, November 17, 1999.
    \20\ H&R Block Inc., 1995 Form 10-K: Annual Report Pursuant to 
Section 13 or 15(d) of the Securities Exchange Act of 1934.
    \21\ H&R Block Inc., 1999 Form 10-K: Annual Report Pursuant to 
Section 13 or 15(d) of the Securities Exchange Act of 1934, at 5-6.
    \22\ H&R Block Inc., 2000 Form 10-K: Annual Report Pursuant to 
Section 13 or 15(d) of the Securities Exchange Act of 1934, at 4.

------------------------------------------------------------------------
                                                      H&R Block # of RAL
              Year                Overall # of RALs    applications\23\
------------------------------------------------------------------------
1994                             9.5 million         5.5 million
1995                             NA                  2.3 million
1996                             --                  2.4 million
1997                             --                  2.6 million
1998                             --                  2.4 million
1999                             6 million           2.8 million
2000                             10.8 million        4.8 million
2001                             12.1 million        4.5 million
2002                             12.7 million        5.2 million
------------------------------------------------------------------------
\23\ Based on H&R Block Form 10-Ks for respective fiscal years.

    Other industry player reported similar trends. In 1994, all but 
10,630 of the returns prepared by Jackson Hewitt were associated with 
RALs.\24\ After the debt indicator was dropped, the number of returns 
without RALs at Jackson Hewitt rose to 138,000 by late February 
1995.\25\ RAL lender Santa Barbara Bank & Trust reported a sharp 
increase in loans versus non-loan refund anticipation checks following 
reinstatement of the debt indicator.\26\
---------------------------------------------------------------------------
    \24\ James Denn, IRS's Hunt for Tax Cheats to Delay Refund Checks, 
Albany Times Union, February 19, 1995, at A1.
    \25\ Id.
    \26\ Pacific Capital Bancorp, 2000 Form 10-K: Annual Report 
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, 
at 23. [hereinafter ``PCB 2000 Form 10-K'']
---------------------------------------------------------------------------
    The debt indicator also had similar effects on the volume of 
electronically-filed returns in general. The IRS reported there were 14 
million e-filed returns in 1994, but only 12 million in 1995.\27\ H&R 
Block reported that its e-filed returns declined 22% in 1995.\28\ This 
decrease reflects the close link between e-filed returns and RALs that 
existed in the mid-1990s.\29\
---------------------------------------------------------------------------
    \27\ Stuart Kahan, Blackout on Electronic Filing, Practical 
Accountant, September 1, 1995, at 50. See also NACTP Steps Up 
Communication Efforts, Accounting Today, August 21, 1995, at S22.
    \28\ H&R Block Inc., 1995 Form 10-K: Annual Report Pursuant to 
Section 13 or 15(d) of the Securities Exchange Act of 1934. See also 
Timothy J. Mullaney, IRS Fraud Watch Cuts Refund Loans, Baltimore Sun, 
March 12, 1995, at 1D.
    \29\ See NCLC/CFA 2002 RAL Report at 19-20.
---------------------------------------------------------------------------
    When the IRS reinstated the debt indicator, it publicly 
acknowledged that it expected the program to produce 2 million more e-
filed returns than if it were not reinstated.\30\ With the close link 
between e-filing and RALs, the IRS surely must have been aware that 
there would be a corresponding increase in the number of RALs. Indeed, 
RAL issuers predicted that the reinstatement of the debt indicator 
would increase RAL demand by 50%.\31\ These predictions proved correct, 
as Block alone nearly doubled its RAL volume and made 2 million more 
loans (and thus e-filed returns) in 2000. Thus, much of the expected 
increase in e-filed returns was actually an increase in the number of 
RALs.
---------------------------------------------------------------------------
    \30\ Guttman, IRS Reinstates Debt Indicator, 85 Tax Notes at 1127.
    \31\ Id.

    C. The Debt Indicator and RAL Approval Rates: The IRS Security 
---------------------------------------------------------------------------
Blanket

    The debt indicator promotes RALs by assuring lenders that the 
taxpayer's refund will be issued and thus the loan will be repaid. For 
the pre-1995 debt indicator, if the indicator came back showing there 
was no federal offset, there was an over 99% chance the IRS would issue 
the refund.\32\ At that time, the approval rate for RALs was 92%--and 
all but 0.5% of loan denials were turned down based on the debt 
indicator.\33\ As one IRS employee stated, the debt indicator was a 
``federally supplied security blanket'' and ``we were doing their 
credit check for them.'' \34\
---------------------------------------------------------------------------
    \32\ Guttman, IRS Reinstates Debt Indicator, 85 Tax Notes at 1125.
    \33\ Id.
    \34\ Timothy J. Mullaney, IRS Fraud Watch Cuts Refund Loans, 
Baltimore Sun, Marh 12, 1995, at 1D (quoting an IRS spokesperson in 
Baltimore).
---------------------------------------------------------------------------
    The elimination of the debt indicator in 1995 significantly lowered 
RAL approval rates. The approval rate for Beneficial (which became 
Household) dropped from 92% to 78%.\35\ This 78% rate includes partial 
approvals; the approval rate for a RAL of the taxpayer's full refund 
was only 40-50%.\36\ Banc One's approval rate for RALs also dropped by 
25-30%.\37\ Even with the decrease in approval rates, Beneficial ended 
up with significant losses on RALs in 1995.\38\
---------------------------------------------------------------------------
    \35\ James R. Kraus, Beneficial's Tax-Refund Lending Program Seen 
on Course After Pullout from Earned-Income Side, American Banker March 
8, 1995.
    \36\ Susan Edelman, There's Trouble in Rapid City, New Jersey 
Record, February 19, 1995 at b1.
    \37\ Id.
    \38\ Daniel Dunaief, Deals: Mellon Leads $1.25B Loan to Underpin 
H&R Block's Tax-Refund Loan Program, American Banker, November 7, 1996, 
at 20. However, much of the defaults were recovered, probably through 
the rather heavy-handed tactic of cross-lender debt collection. See 
NCLC/CFA 2002 RAL Report at 24. Beneficial alone expected to collect 
$180 million in bad loans in 1997. Daniel Dunaief, Deals: Mellon Leads 
$1.25B Loan to Underpin H&R Block's Tax-Refund Loan Program, American 
Banker, November 7, 1996, at 20.
---------------------------------------------------------------------------
    With the reinstatement of the debt indicator, RAL approval rates 
appear to be back around 90%.\39\ Thus, the debt indicator helps 
increase RAL approval rates and RAL profits. Of course, this service is 
not without its cost. One question is how much does it cost IRS to 
provide the debt indicator? While we do not have definitive 
information, note that in 1994, the IRS suggested imposing a fee for 
the debt indicator of $8 per return.\40\
---------------------------------------------------------------------------
    \39\ Household International, Exploring the Refund Anticipation 
Loan (RAL): Questions and Answers, on file with the authors. This 90% 
approval rate is reflected in H&R Block's SEC filings as well. In 2003, 
H&R Block stopped reporting in its 10-K the number of RAL applications 
it processed, and started reporting the number of RALs that were 
actually made. Block processed 5.15 million RAL applications in 2002. 
H&R Block, 2002 Form 10-K, at 4. Of those, 4.67 million loans were 
approved. H&R Block, 2003 Form 10-K, at 5. The latter number divided by 
the former is 91%.
    \40\ Robert W. Scott, IRS Mulls New RAL Charge; Banks Likely to 
Pass It On, Accounting Today, July 11, 1994. It is unclear whether the 
$8 represented the cost of the debt indicator or was a revenue enhancer 
for the IRS.

---------------------------------------------------------------------------
    D. Reinstatement of the Debt Indicator Has Not Lowered RAL Fees

    The existence of the debt indicator has had an impact on RAL fees 
as well, although in the end it appears to be more of a profitability 
boost for RAL lenders. Prior to the elimination of the debt indicator, 
the loan fee for RALs was approximately $29 to $35.\41\ The largest RAL 
lender, Beneficial, charged a flat fee of $29 per RAL.\42\ Bank One 
charged a flat fee of $31,\43\ while the lender for Jackson Hewitt 
charged $29 to $35.\44\
---------------------------------------------------------------------------
    \41\ These figures and the figures used in the following discussion 
include only the loan fee, and do not include the administrative fee 
charged by the tax preparers for processing the RAL application.
    \42\ Timothy J. Mullaney, IRS Fraud Watch Cuts Refund Loans, 
Baltimore Sun, March 12, 1995, at 1D; Susan Edelman, There's Trouble in 
Rapid City, New Jersey Record, February 19, 1995 at b1; James Denn, 
IRS's Hunt for Tax Cheats to Delay Refund Checks, Albany Times Union, 
February 19, 1995, at A1.
    \43\ Susan Edelman, There's Trouble in Rapid City, New Jersey 
Record, February 19, 1995 at b1.
    \44\ James Denn, IRS's Hunt for Tax Cheats to Delay Refund Checks, 
Albany Times Union, February 19, 1995, at A1.
---------------------------------------------------------------------------
    After the debt indicator was eliminated, RAL fees jumped 
dramatically. Beneficial began using a tiered fee structure, with fees 
of $29 to $89, depending on the size of the loan.\45\ Banc One began 
charging $41 to $69 and Jackson Hewitt charged $69 to $100.\46\ By 
1999, Beneficial loans made through H&R Block cost $40 to $90.\47\
---------------------------------------------------------------------------
    \45\ George Guttman, Electronic Filing: Who Pays, Who Benefits, 66 
Tax Notes 1750, March 20, 1995; Susan Edelman, There's Trouble in Rapid 
City, New Jersey Record, February 19, 1995 at b1.
    \46\ James Denn, IRS's Hunt for Tax Cheats to Delay Refund Checks, 
Albany Times Union, February 19, 1995, at A1.
    \47\ Guttman, IRS Reinstates Debt Indicator, 85 Tax Notes at 1127.
---------------------------------------------------------------------------
    One of the benefits that the IRS and industry touted for 
reinstating the debt indicator was lower RAL fees.\48\ In fact, lower 
RAL fees constituted one of four measures by which the success of the 
pilot program for reinstatement was to be judged.\49\ The IRS Assistant 
Commissioner for Electronic Tax Administration, Bob Barr, threatened to 
end the debt indicator if RAL prices did not decrease.\50\ Industry 
expressed its agreement that fees would decrease, with one RAL issuer 
claimed that its fees would be reduced 30 to 40%.\51\
---------------------------------------------------------------------------
    \48\ Id.; PCB 2000 Form 10-K, at 23.
    \49\ Amy Hamilton, Taxwriter Zeroing in on `Rapid Refund Loans,' 91 
Tax Notes at 192-193. The other measures were signficantly increased 
levels of e-filing, increased service to taxpayers, and effectiveness 
of refund lenders in identifying fraudulent returns.
    \50\ Guttman, IRS Reinstates Debt Indicator, 85 Tax Notes at 1127.
    \51\ Id.
---------------------------------------------------------------------------
    When the debt indicator was reinstated, RAL fees did go down. 
However, this decrease turned out to be temporary. For example, RAL 
fees at H&R Block and Household Bank dropped for one year, but then 
shot back to pre-Debt Indicator levels. After the IRS reinstated the 
debt indicator, Household and Block's fees went from $40-$90 to $20-$60 
for the 2000 tax season.\52\ Both the IRS \53\ and industry touted this 
decrease in RAL fees.\54\ However, fees went back up in 2001, with 
Block/Household charging $30 to $87--close to the fees charged prior to 
reinstatement of the debt indicator.\55\
---------------------------------------------------------------------------
    \52\ Refund Anticipation Loans May Include Several Fees, St. Louis 
Dispatch, Feb 22, 2000, at C6.
    \53\ Preliminary IRS Modernization Conference Transcript, 2000 Tax 
Notes 24-65, Jan. 14, 2000.
    \54\ Statement of Mark Ernst, President and CEO of H&R Block, 
Testimony Before the Subcommittee on Oversight of the House Ways and 
Means Committee, April 3, 2001.
    \55\ Chris Serres, Speedy Refunds, Hefty Fees, Raleigh News and 
Observer, February 25, 2001, at E1. Pamela Yip, Personal Finance 
Column, Dallas Morning News, February 25, 2001.
---------------------------------------------------------------------------
    Also, part of the decrease in RAL fees in 2000 occurred because 
Block offered a ``no fee'' RAL in six markets, including entire state 
of California.\56\ However, Block and Beneficial appear not to have 
offered this ``no fee RAL'' after the 2000 tax season. One reason was 
probably that the ``no fee RAL'' program was subject of a lawsuit for 
deception by a competitor.\57\
---------------------------------------------------------------------------
    \56\ Amy Hamilton, Taxwriter Zeroing in on `Rapid Refund Loans,' 91 
Tax Notes 189, 192 (April 9, 2001).
    \57\ JTH Tax v. H&R Block Eastern Tax Services, 128 F. Supp. 2d 
926, 938 (E.D. Va. 2001), aff'd in part, vacated in part, and remanded 
in part, 2002 U.S. App. LEXIS 477 (4th Cir. January 10, 
2002).
---------------------------------------------------------------------------
    RAL fees never went down again after 2001, but RAL profits have 
increased. The increase in RAL fees from 2000 to 2001 for H&R Block/
Beneficial resulted in Block's RAL revenues increasing by 49% from 2000 
to 2001.\58\ Most of the revenue increase appears to be the result of 
the higher RAL fees, because per-RAL-revenue rose by 43.9%, while sales 
volume only increased by 2.7%.\59\
---------------------------------------------------------------------------
    \58\ H&R Block, One to One: 2001 Annual Report, at 23.
    \59\ Id.
---------------------------------------------------------------------------
    Thus, the main effect of the debt indicator appears to be, not in 
lowering RAL fees, but in higher RAL profits. If the reinstatement of 
the debt indicator had really lowered RAL fees back to pre-1995 prices, 
a RAL would only cost a flat fee of $37.53 or $45.91 in 2005 (the 
equivalent of $29 or $35 in 1994 adjusted for inflation).\60\ Instead, 
they currently cost about $35 to $115, with Block and its lending 
partner charging a fee of $100 for RALs for the average refund of 
slightly over $2,000.\61\ These fees translate into effective annual 
interest rates (APR) ranging from about 40% to over 700%.\62\
---------------------------------------------------------------------------
    \60\ According to the Department of Labor's cost of living 
calculator at www.bls.gov
    \61\ Chi Chi Wu and Jean Ann Fox, Picking Taxpayers' Pockets, 
Draining Tax Relief Dollars: Refund Anticipation Loans Still Slicing 
Into Low-Income Americans' Hard-Earned Tax Refunds, National Consumer 
Law Center and Consumer Federation of America, January 2005, at 12.
    \62\ NCLC issues a series of annual reports on the RAL industry, 
which are available at www.consumerlaw.org. The last report documented 
how RALs drained over $1 billion in loan fees, plus $389 million in 
separate fees charged by tax preparers, from the wallets of more than 
12 million American taxpayers in 2003.

---------------------------------------------------------------------------------------------------------------
                                      RAL Price-- Beneficial/   RAL price-- Bank One   RAL Price--Jackson Hewitt
                Year                   Household & Block \63\           \64\                      \65\
----------------------------------------------------------------------------------------------------------------
1994                                  $29                      $31                     $29 to $35
1995                                  $29 to $89               $41 to $69              $69 to $100
1996                                  $29 to $89               --                      ----
1997                                  $40 to $90               --                      ----
1998                                  $40 to $90               --                      ----
1999                                  $40 to $90               --                      $49 to $80 \66\
2000                                  $20 to $60               --                      ----
2001                                  $30 to $87               --                      ----
2002                                  $30 to $90               $34 to $87              ----
2003                                  $30 to $90               $34 to $89              $34 to $89
2004                                  $30 to $100              $34 to $89              $29 to $94 (& $5 for
                                                                                        EITC)
2005                                  $30 to $110              $34 to $99              $29 to $99(& $5 for EITC)
----------------------------------------------------------------------------------------------------------------
\63\ From: George Guttman, Electronic Filing: Who Pays, Who Benefits, 66 Tax Notes 1750, March 20, 1995;
\64\ From the Taxwise website at www.taxwise.com/banks/bankone.asp.
\65\ For 2003 to 2005, these are the prices of Jackson Hewitt's lending partner, Santa Barbara Bank & Trust,
  from the Taxwise website at www.taxwise.com/banks/santabarb.asp.
\66\ Beware of Those Who Offer Tax Refund Loans `A Bad Buy,' Roanoke Times, February 22, 1999.

    It appears the debt indicator is an IRS subsidy that increases 
profits for the RAL industry. The debt indicator has made each 
individual RAL more profitable, encouraging RAL lenders to aggressively 
promote RALs and increase RAL volume.

    E. Privacy Issues

    In addition to being a taxpayer-funded subsidy to the RAL industry, 
the debt indicator program raises significant privacy concerns. In 
fact, the IRS may be violating its own privacy law in providing the 
service to tax preparers. The IRS Code contains broad and strong 
privacy protections for taxpayer information. Section 6103 of the IRS 
Code states that all ``[r]eturn and return information shall be 
confidential'' and shall not be disclosed.\67\ ``Return information'' 
is broadly defined and includes the taxpayer's ``nature, source, or 
amount of his--liabilities. . . .''\68\ Therefore, information as to 
whether a taxpayer is subject to a refund offset would be information 
about the nature or amount of a taxpayer's liabilities.
---------------------------------------------------------------------------
    \67\ 26 U.S.C Sec. 6103.
    \68\ 26 U.S.C. Sec. 6103(b)(2)(A).
---------------------------------------------------------------------------
    It would seem that the information disclosed by the IRS to a RAL 
provider would constitute a violation of the IRS privacy statute, 
unless there is an exemption. One possible exemption would be the 
provision that allows the IRS to disclose return information with a 
taxpayer's consent.\69\ However, the IRS regulations set forth clear 
and definite requirements for such consent, including that the consent 
be set forth in a separate written document pertaining to the 
disclosure, and that the document reference the particular data item of 
return information to be disclosed.\70\
---------------------------------------------------------------------------
    \69\ 26 U.S.C. Sec. 6103(c).
    \70\ 26 C.F.R. Sec. 301.6103(c)-1(b) and (b)(iii).
---------------------------------------------------------------------------
    A document that conceivably grants such consent is IRS Form 8453, 
which is used to authenticate an e-filed return. Yet the consent to 
disclose information in Form 8453 is not a separate, stand-alone 
document pertaining solely to the disclosure.\71\ Furthermore, the 
consent is buried in small print inadequate to clearly inform taxpayers 
that they are permitting the IRS to disclose personal financial 
information to their tax preparers about whether they owe a child 
support or student loan debt.
---------------------------------------------------------------------------
    \71\ The IRS also requires that tax preparers who receive the debt 
indicator to have return preparation software that includes a mandatory 
consent to disclose the debt indicator. IRS Publication 3614, 
Application for Memorandum of Agreement--Debt Indicator. As with Form 
8453, the question is whether the consent is meaningful and meets the 
requirements of the regulation.
---------------------------------------------------------------------------
    Another exemption allows the IRS to send an acknowledgement to an 
e-file provider without the need for a stand-alone consent form, along 
with ``such other information as the [IRS] determines is necessary to 
the operation of the electronic filing program.'' \72\ Because RALs 
increase the number of e-filed returns, the IRS may argue that this 
language permits it to send the debt indicator in the e-file 
acknowledgement (as it currently does) without a stand-alone consent 
form. However, while it increases the number of e-filed returns, that 
is not a factor that is ``necessary'' to the operation of the e-file 
program.
---------------------------------------------------------------------------
    \72\ 26 C.F.R. Sec. 301.6103(c)-1 (d).
---------------------------------------------------------------------------
    Even if IRS can legally provide the debt indicator, there still 
remain significant privacy issues regarding the program. With the debt 
indicator, the IRS is providing an indicator that communicates personal 
and potentially embarrassing financial tax information to the tax 
preparer.\73\ Indeed, when the IRS proposed requiring a similar 
indicator on tax returns filed through the Free File Alliance, 
commercial preparers objected strongly, citing privacy concerns.\74\ 
National Taxpayer Advocate Nina Olson noted ironically ``These 
businesses already rely heavily on returns flagged with an indicator to 
tell them that this return has other outstanding refund offsets'' and 
``Let's use the same argument to say the debt indicator should be 
eliminated.'' \75\
---------------------------------------------------------------------------
    \73\ While the tax preparation process often results in taxpayers 
divulging their personal financial information to a tax preparer, the 
debt indicator may reveal additional information that would not 
necessarily be part of that process, and would be sensitive since it 
involves delinquent debts owed to the government.
    \74\ Amy Hamilton, Businesses Resist IRS Requests to Flag Taxpayers 
Using Free File, Tax Notes Today, December 1, 2003, at 1062.
    \75\ Id.
---------------------------------------------------------------------------
    Given the lack of prominence of the consent in Form 8453, it is 
unclear whether most taxpayers actually realize they are giving 
permission for IRS to reveal the presence of government debts to their 
preparer. It is even unclear whether they know about the debt indicator 
itself or understand what it is.

    F. Re-Emergence of Fraud

    The debt indicator represents an IRS subsidy in another respect, 
that is, in the amount of fraud it promotes and the taxpayer dollars 
spent combating that fraud. As discussed above, the IRS dropped the 
debt indicator in 1994 due to concerns over mounting fraud in refund 
claims.\76\ IRS data had indicated that 92% of fraudulent returns filed 
electronically involved RALs.\77\ It was believed that the debt 
indicator led to tax fraud because of its role in supporting RALs, 
whose quick turnaround period makes fraud detection difficult.\78\
---------------------------------------------------------------------------
    \76\ Malcolm Sparrow, Fraud in the Electronic Filing Program: A 
Vulnerability Assessment Prepared for the Internal Revenue Service, 
September 1, 1994. Robert D. Hershey, I.R.S. Fraud Found to Net Big 
Refunds, New York Times, October 6, 1994, at A21.
    \77\ George Guttman, Improper Refunds Sapping Billions, 66 Tax 
Notes 19, October 3, 1994, at 23.
    \78\ Id. Note that tax refund fraud is often perpetrated, not by 
taxpayers, but by unscrupulous preparers. The taxpayer is often herself 
a victim of the fraud.
---------------------------------------------------------------------------
    The elimination of the debt indicator seems to have had its 
intended effect. According to the Assistant Attorney General in charge 
of the Tax Division at the Department of Justice, eliminating the debt 
indicator, along with other fraud prevention measures, successfully 
reduced the number of fraudulent claims.\79\
---------------------------------------------------------------------------
    \79\ John Tigue & Linda Lacewell, Tax Litigation--Interview with 
Loretta C. Argrett--Part II, New York Law Journal, July 17, 1997. See 
also NACTP Steps Up Communication Efforts, Accounting Today, August 21, 
1995, at S22.
---------------------------------------------------------------------------
    When IRS reinstated the debt indicator in 1999, it attempted to 
address the fraud issue by requiring tax preparers to institute fraud 
prevention measures. The first year of the debt indicator was termed a 
pilot, and only certain tax preparers who entered into memoranda of 
agreement with the IRS were eligible to receive the debt indicator.\80\ 
As a condition of the agreement, tax preparers were required to 
actively screen returns for potential fraud and abuse, using measure 
such as requiring two valid forms of identification and verifying 
questionable W-2s.\81\ However, after the 2000 tax season, the debt 
indicator is no longer a pilot and is provided to all taxpayers who e-
file.\82\ Thus, it is unclear whether these fraud prevention measures 
are still mandatory.
---------------------------------------------------------------------------
    \80\ Internal Revenue Service, Announcement of Opportunity to 
Obtain a Debt Indicator in a Pilot Program for Tax Year 1999 Form 1040 
IRS E-file and On-Line Returns, 64 Fed. Reg. 67,621 (December 2, 1999).
    \81\ IRS Publication 3614, Application for Memorandum of 
Agreement--Debt Indicator.
    \82\ IRS Publication 1345A--Filing Season Supplement for Authorized 
IRS e-file Providers (Rev. January 2002).
---------------------------------------------------------------------------
    Whether or not these fraud prevention measures are in effect, fraud 
is still a significant issue with respect to RALs. Gary Bell, Director 
of the IRS Criminal Investigation Division's Refund Crimes Unit, noted 
that currently 80% of fraudulent e-filed returns are tied to a RAL or 
other refund financial product.\83\ Furthermore, fraud appears to have 
increased since the debt indicator was reinstated. Bell noted that e-
file fraud had increased by more than 1,400 percent since 1999 (when 
the debt indicator was reinstated), and that approximately 1 in every 
1,200 e-filed returns was phony, compared with a rate of about 1 in 
every 5,000 four years ago.\84\
---------------------------------------------------------------------------
    \83\ Allen Kenney, IRS Official Shines Spotlight on E-Filing Fraud, 
2004 Tax Notes Today 130-4, July 6, 2004.
    \84\ Id.
---------------------------------------------------------------------------
    The Treasury Department's Financial Crimes Enforcement Network 
(FinCEN) has raised similar concerns about the role of RALs in 
promoting tax fraud. FinCEN issued a warning to banks in August 2004, 
regarding RAL fraud.\85\ In this report, FinCEN also noted that RAL 
fraud had multiplied between 2000 and 2003.\86\ FinCEN noted that ``To 
make this type of loan appealing to the public, funds are made 
immediately available, leaving little time for the lender to perform 
due diligence to prevent fraud.''\87\ As one commentator noted, the IRS 
has a fraud detection system, but ``it may take the IRS three or more 
weeks to process the return, especially in the peak of the spring 
filing season. Meanwhile, the RAL lenders have processed the loan 
within a couple of days of the return being filed, the money is in the 
hands of the bad guys, and they can disappear without a trace, . . 
.''\88\
---------------------------------------------------------------------------
    \85\ FinCEN, SAR Activity Review, Issue 7, August 2004, at 15, 
available at www.fincen.gov/sarreviewissue7.pdf.
    \86\ Id. at 17.
    \87\ Id. at 17.
    \88\ Gail Perry, Electronic Filing Fraud: Latest Tax Scam's Got 
Legs, Accounting Today, August 9, 2004, at 3.

---------------------------------------------------------------------------
    G. Conclusion

    As it did in 1994, the IRS should terminate the debt indicator. The 
program represents a form of corporate welfare and government subsidy 
of an industry already rolling in profits from making usurious loans to 
low-income taxpayers. It has increased profits for the RAL industry, 
while resulting in no permanent price decreases for consumers. Not only 
does the RAL industry siphon off hundreds of millions of tax dollars by 
skimming the Earned Income Tax Credit from working poor families, the 
IRS abets this drain and makes it more profitable by conducting part of 
the RAL lenders' credit checks using taxpayer-funded resources. 
Furthermore, the debt indicator represents even more of a subsidy, in 
that it generates more fraud related to RALs, which the IRS must spend 
enforcement dollars to address.
    The National Consumer Law Center is a non-profit organization 
specializing in consumer issues on behalf of low-income people. NCLC 
works with thousands of legal services, government and private 
attorneys, as well as community groups and organizations, who represent 
low-income and elderly individuals on consumer issues.
    The author would like to Jean Ann Fox, Consumer Federation of 
America; Alan Berube of the Brookings Institution, and Julie Kruse of 
the National Community Tax Coalition for their assistance, feedback and 
comments.
    This research was funded by the Annie E. Casey Foundation. We thank 
them for their support but acknowledge that the findings and 
conclusions presented in this report are those of the author alone, and 
do not necessarily reflect the opinions of the Foundation.

                                 

```