Tax Preparer Regulation: IRS Needs a Documented Framework to Achieve Goal of Improving Taxpayer Compliance
Published: 2011-03-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Paid preparers prepare about 60 percent of all tax returns filed, and their actions significantly affect the Internal Revenue Service's (IRS) ability to administer tax laws. Previously, GAO found that some preparers made significant errors in preparing tax returns and proposed stricter regulation of preparers. IRS is implementing new requirements for paid preparers that it believes will increase tax compliance, which will reduce the gross tax gap between taxes owed and taxes paid, last estimated at $345 billion for 2001. GAO was asked to (1) describe IRS's plans for implementing and ensuring paid preparer compliance with the requirements; (2) assess IRS's resource estimates for the requirements; and (3) assess IRS's plans to use the requirements to improve taxpayer compliance and evaluate their effect. To meet these objectives, GAO reviewed IRS planning documents and interviewed IRS officials and representatives and members of paid preparer associations.
section_title: What GAO Found
paragraphs: IRS has implemented a registration requirement for paid preparers that includes obtaining a preparer tax identification number (PTIN) and plans to implement competency testing and continuing education requirements. IRS also plans to require paid preparers to adhere to standards of practice and the revisions are currently being reviewed by the Office of Management and Budget. In addition, IRS has conducted an outreach campaign consistent with key practices to inform paid preparers of the new requirements. For example, IRS developed a standardized message that it distributed in different formats. IRS is developing strategies for how to ensure that paid preparers comply with the new requirements, according to the director of IRS's Return Preparer Office. IRS is funding the paid preparer requirements through user fees, which it is setting consistent with established criteria for cost estimating. For example, in setting the PTIN user fee to ensure it covered program costs, IRS identified key costs associated with registration, estimated fixed costs, and based some variable costs on similar registration efforts. IRS has discussed but not documented a framework for how it plans to use the requirements to improve taxpayer compliance. For example, IRS plans to develop a comprehensive database containing information on paid preparers and related tax returns. Also, IRS has yet to document how it will assess the requirements' effect, for example, by identifying what baseline data IRS needs. Without a documented framework, IRS may have difficulty (1) assessing whether it has adequately planned for what data it needs to collect and (2) deciding how to allocate resources given competing priorities. A framework could also help assure paid preparers, who bear the burden of complying with the requirements, that IRS will assess whether the requirements provide their intended benefit.
section_title: What GAO Recommends
paragraphs: GAO recommends that IRS document a framework for using the paid preparer requirements to improve taxpayer compliance and evaluate their effect on taxpayer compliance. In commenting on a draft of this report, IRS agreed with the recommendation.

section_title: Letter
paragraphs: Paid tax return preparers prepare approximately 60 percent of all tax  returns filed. The Internal Revenue Service (IRS) has acknowledged that  paid preparers’ actions have an enormous impact on its ability to  administer tax laws effectively. In previous work, described in our  background section, we found that some paid preparers made significant  errors in preparing tax returns, and we proposed stricter oversight of  preparers as an option to address this issue. While paid preparers could be  subject to penalties with respect to the preparation of tax returns, until  recently IRS had not regulated the conduct and competency of all paid  preparers. IRS is implementing new requirements, such as requiring  certain types of paid preparers to pass a competency test. IRS has  concluded that these requirements will increase tax compliance, which  will reduce the gross tax gap between what is owed in taxes and what is  paid voluntarily and on time. IRS’s most recent estimate for the gross tax  gap was $345 billion for 2001.
You asked that we assess IRS’s administration of the new requirements for  paid preparers. In response, this report’s objectives are to (1) describe  IRS’s plans for implementing and ensuring paid preparer compliance with  the requirements; (2) assess IRS’s resource estimates for developing and  implementing the requirements; and (3) assess IRS’s plans to use the  requirements to improve taxpayer compliance and evaluate the effect of  the requirements.
To describe IRS’s plans for implementing and ensuring paid preparer  compliance with the requirements, we analyzed IRS documents and  interviewed officials from IRS’s Return Preparer Office (RPO) and Return  Preparer Implementation Project Office (RPIPO) based on IRS’s plans for  the requirements, internal control standards, and our prior work on  communicating with the public about a new initiative. To assess IRS’s  resource estimates, we reviewed IRS documents on the user fee that IRS is  charging paid preparers for obtaining a preparer tax identification number  (PTIN) and interviewed officials from IRS’s RPO, RPIPO, and Chief  Financial Officer’s office based on prior GAO work on cost estimating and  user fees. To assess IRS’s plans to use the requirements to improve  taxpayer compliance and evaluate the effect of the requirements, we  reviewed IRS documents and interviewed RPO and RPIPO officials  utilizing IRS’s plans for the requirements and prior GAO work on  evaluating performance. In addition, for all three objectives, we  interviewed representatives from paid preparer associations and a  representative from a retail tax return preparation chain. For further  details on our scope and methodology, see appendix I.
We conducted this performance audit from July 2010 to March 2011 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
subsections: section_title: Background
paragraphs: A paid preparer is any person who prepares for compensation, or who  employs one or more persons to prepare for compensation, all or a  substantial portion of a tax return or claim for refund of tax. Paid  preparers prepared almost 60 percent of all federal tax returns filed in  2008 and 2009. IRS does not know how many paid preparers there are but  estimates there are between 900,000 and 1.2 million. Prior to the new  requirements for paid preparers there were no national standards that a  paid preparer was required to satisfy before being compensated for  preparing a federal tax return. Currently, attorneys, certified public   accountants (CPA), enrolled agents (EA), enrolled actuaries, enrolled  retirement plan agents, and other individuals authorized to practice  before IRS are subject to standards of practice under Department of the  Treasury Circular No. 230. Most EAs are required to pass an examination  and complete annual continuing education, while attorneys and CPAs are  licensed by states but are still subject to Circular 230 standards of  practice if they practice before IRS. Previously, other paid preparers were  not regulated, required to pass a competency examination, complete  continuing education, or adhere to the standards of practice in Circular  230. The states of Oregon, California, New York, and Maryland all regulate  paid preparers, but oversight in each state varies. IRS has noted that the  lack of uniform federal regulation of all paid preparers has resulted in  greatly varying oversight of paid preparers depending on the paid  preparer’s professional affiliations, or lack thereof, and the geographical  area in which they practice.
In previous work, we and the Treasury Inspector General for Tax  Administration (TIGTA) found that some paid preparers made significant  errors preparing tax returns and we recommended that IRS conduct  research to determine the extent to which paid preparers file accurate and  complete tax returns. We also recommended that IRS develop a plan to  require stricter regulation of paid preparers and suggested Congress adopt  a nationwide paid preparer regulatory regime similar to Oregon’s paid  preparer regulatory regime if it judged that Oregon’s regulatory regime  accounted for at least a modest portion of the higher federal tax return  accuracy in the state.
In June 2009, the Commissioner of Internal Revenue initiated a review of  paid preparers to help IRS strengthen its partnerships with paid preparers  and ensure that paid preparers adhere to applicable professional standards  and follow tax laws. IRS recommended changes to the oversight of paid  preparers in its December 2009 Return Preparer Review report. These  recommended changes included mandatory registration for paid preparers  who are required to sign a federal tax return; competency testing and  continuing education for paid preparers who are required to register with  IRS and who are not attorneys, CPAs, or EAs; and holding all paid  preparers to Circular 230 standards of practice, regardless of whether or  not the preparers are required to sign a federal tax return. IRS intends  these new requirements to improve service to taxpayers, increase  confidence in the tax system, and increase taxpayer compliance.
section_title: IRS Has Implemented a Registration Requirement for Paid Preparers and Plans to Implement the Additional Requirements Gradually
paragraphs: IRS has implemented a requirement that paid preparers obtain a PTIN if  they prepare all or substantially all of a tax return filed after December 31,  2010. Figure 1 shows IRS’s tentative schedule for implementing the other  new requirements. In addition to the requirements shown in figure 1, IRS  will require all paid preparers to adhere to Circular 230 standards of  practice. Revisions to the Circular 230 regulations are currently being  reviewed by the Office of Management and Budget (OMB), according to an  official involved in the implementation of the new requirements. When the  revisions to the Circular 230 regulations have been finalized, paid  preparers will be required to adhere to its standards of practice.
The dates for implementing the competency testing and continuing  education requirements are tentative because OMB is currently reviewing  the proposed revisions to the Circular 230 regulations. Because these  proposed regulations are not final, IRS has not decided how it will  implement some details of the competency testing and continuing  education requirements. Nevertheless, the RPO Director discussed with us  his thoughts on approaches IRS might take.
Paid preparers may register for a PTIN online or on paper via Form W-12,  IRS Paid Preparer Tax Identification Number (PTIN) Application.  Paid preparers who currently have a PTIN must register in the new P registration system but in most cases can retain their old PTIN as long as  IRS can verify identifying information for the existing PTIN. Online  registrants are supposed to receive a provisional PTIN immediately while  paper registrants are supposed to receive a provisional PTIN in                   4-6 weeks.  As of March 20, 2011, according to an IRS official involved in  implementing the new requirements, IRS had issued 692,297 PTINs,  approximately 60 percent of which were issued to paid preparers with  existing PTINs and approximately 40 percent of which were issued to paid  preparers without existing PTINs.
Most, but not all, paid preparers were able to obtain a PTIN online.  According to an official involved in the implementation of the new  requirements, approximately 92 percent of paid preparers who attempted  to obtain PTINs by the start of the filing season got them online. The rest  either attempted to obtain a PTIN by paper or were directed to obtain a  PTIN by paper, likely as a result of an online authentication issue. Officials  and members of multiple paid preparer organizations stated that some  preparers have encountered technical problems when using the PTIN  registration system but also noted that IRS’s administration of the PTIN  registration system has improved. The RPO Director said that IRS has  worked to address problems with the registration system since it was  initiated. For example, married paid preparers with different last names  from their spouses who filed tax returns under the married filing jointly  status were experiencing difficulty obtaining a new PTIN. The RPO  director said that IRS solved this problem. For the 2011 tax filing season,  IRS will allow paid preparers who are able to demonstrate a good faith  effort to obtain a PTIN, but were unsuccessful, to use their old PTINs or  Social Security numbers on tax returns.
When applying for a PTIN, paid preparers are asked to self-disclose if they  are compliant with their personal and business taxes, under penalty of  perjury. The RPO Director said that IRS plans to initiate automated tax  compliance checks on all paid preparers. IRS plans to limit the checks to  whether the preparers have filed all federal tax returns and paid or entered  into an agreement to pay federal tax debts. Paid preparers are also asked if  they have been convicted of a felony in the past 10 years, under penalty of  perjury. The PTIN application includes space to write an explanation for  both tax compliance and felony information. The RPO Director said that  IRS plans to check the accuracy of registrants’ tax compliance and  background information by late 2011 and that registrants who provide  false information on their PTIN applications will have severely limited  appeal rights if IRS proposes to deny them PTINs. Paid preparers who are  attorneys, CPAs, or EAs are asked to self-identify their professional  credentials. The RPO Director said that IRS does not have a single-source  database through which it can verify these professional credentials (it only  has information on EAs). IRS plans to sample randomly attorneys and  CPAs for verification of their self identification, and the RPO Director said  that IRS is working toward developing a database that contains  information about attorneys and CPAs that will allow for automated  verification.
IRS plans to hold paid preparers to Circular 230 standards of practice and  will establish a new category of practitioner—registered tax return  preparer. These paid preparers will be limited in their practice before IRS  to preparing tax returns, claims for refund, and other documents for  submission to IRS but will be required to adhere to professional ethical  standards when doing so or face a penalty. Additionally, paid preparers  who are supervised by an attorney, CPA, EA, enrolled actuary, or enrolled  retirement plan agent at a law firm, CPA firm, or other recognized firm and  do not sign tax returns but obtain a PTIN, while not being granted rights to  practice before IRS, will be required to meet the same standards. The RPO  Director said that if paid preparers are denied a PTIN or have their PTIN  revoked, paid preparers will have the right to appeal this denial or  revocation in the same manner as other Circular 230 sanctions.
Applicability of the new paid preparer requirements will vary by type of  paid preparer, as shown in table 1:  According to the RPO Director, some types of paid preparers will be  exempt from the new competency testing and continuing education  requirements because they are subject to competency testing and  continuing education requirements set by their professional licensing  bodies.
IRS proposed regulations amending Circular 230 will require individuals  (see table 1 above) to pass a competency test to become an officially  registered tax return preparer. Paid preparers who have a valid PTIN  before competency testing is available will have until 2013 to pass a  competency test. Paid preparers who register for a PTIN after testing is  available must pass a competency test before obtaining a PTIN. The RPO  Director said that IRS is allowing this delay in testing for preparers who  register for a PTIN before testing is available to encourage paid preparers  to register for a PTIN as soon as possible while giving them time to  prepare for the competency test. The RPO Director also said that IRS  plans to develop and implement one competency test for individuals who  prepare returns from the individual tax return (Form 1040) series and will  assess whether IRS needs to add additional tests in the future. The RPO  Director also said that IRS plans to have the test available at national and  international locations, which will allow individuals to consult forms and  instructions during the test, and that individuals will pay a fee each time  they take the test. After completing the competency test, registered tax  return preparers will be subject to suitability checks, which IRS plans to  conduct to determine whether the individual has engaged in disreputable  conduct. According to the RPO Director, IRS plans to link suitability  checks for registered tax return preparers to the competency test so that  when paid preparers take the competency test they will be fingerprinted,  thereby submitting to a suitability check.
IRS plans to implement a continuing education requirement, whereby  registered tax return preparers (see table 1 above) will be required to take  15 hours of training annually—3 hours of federal tax law updates, 2 hours  of ethics, and 10 hours of additional federal tax topics. The RPO Director  said that IRS plans to approve continuing education providers and audit a  random sample of continuing education courses.
subsections: section_title: IRS Is Conducting an Outreach Campaign Consistent with Key Practices to Inform Paid Preparers of the New Requirements
paragraphs: In support of the new requirements for paid preparers, IRS established a  communications team and vested in it responsibility for educating paid  preparers and taxpayers about the new requirements. In prior reports, we  have discussed the importance of focusing on external communications as  a key internal control standard and identified key practices for  communicating with the public about a new initiative. In line with key  practices for communicating with the public about a new initiative, IRS’s  communications team, for example, prepared an action plan, identified  stakeholders to engage, and developed a standardized message that it  distributed in different formats—by presentations at IRS Nationwide Tax  Forums, executive talks to industry groups, and written correspondence  with tax professionals. Consistent with established criteria for improving  the usefulness of communication, the RPO Director said that IRS plans to  develop secure online mailboxes for paid preparers that will be used for  IRS-paid preparer communication.
The official leading IRS’s communications team said that IRS has not yet  developed a plan for how it will monitor and evaluate the success of its  outreach efforts, a key practice for communicating with the public. Since  the requirements are just beginning to be implemented, the effectiveness  of the outreach campaign will not be known until after the requirements  are implemented. Officials and members of paid preparer associations we  interviewed said that IRS has conducted an effective outreach campaign.  However, officials and members of one paid preparer association we  interviewed worry that some paid preparers remain unclear about the  applicability of the new requirements to certain types of paid preparers,  and officials and members of two paid preparer organizations we  interviewed said that some paid preparers have likely not heard of the new  requirements.
section_title: IRS Is Developing Strategies for How to Ensure Paid Preparer Compliance with the New Requirements
paragraphs: In its strategic plan for 2009-2013, IRS established strategies designed to  help it meet its objective of ensuring that paid preparers adhere to  Circular 230 standards of practice and follow the law, including  penalizing paid preparers who do not follow tax laws and leveraging  research to identify fraudulent and noncompliant paid preparers.  According to the RPO Director, IRS plans to implement initiatives  intended to ensure paid preparers’ compliance with the new requirements  but has yet to make many decisions because it is waiting for information  from the PTIN registration system that will allow it to implement effective  initiatives.
During the first year after the PTIN requirement has been implemented,  IRS plans to focus on bringing paid preparers into compliance and  improving its communications and outreach, and not on penalizing paid  preparers for noncompliance, according to the RPO Director. For  example, the RPO Director said that IRS plans to contact paid preparers  who file returns signed with an old PTIN, a SSN, or other identification  number after the filing season is over. The RPO Director said that IRS will  direct them to obtain a PTIN that will retroactively cover their practice  during the recently completed filing season. The RPO Director also said  that in cases of egregious noncompliance, such as paid preparers ignoring  an IRS contact directing them to use a PTIN, IRS plans to contact paid  preparers directly. IRS has the authority to penalize paid preparers who  are required to but fail to include a PTIN on a tax return.
IRS has undertaken one initiative for ensuring paid preparer compliance  with the new requirements and is evaluating other future compliance  initiatives. IRS sent letters in November 2010 to 10,000 paid preparers to  remind them of their responsibility to comply with requirements for paid  preparers, including registering for a PTIN. According to officials involved  in the implementation of the new requirements, IRS is visiting some of the  paid preparers who received letters to confirm their compliance based on  an analysis of IRS visits to paid preparers in 2010. An official involved with  the implementation of the new requirements also said that IRS plans to  evaluate the results of the visits. The RPO Director also said that IRS plans  to identify individuals who prepare tax returns for others but do not sign  the tax return as paid preparers, and is currently evaluating methods by  which it might do so. Additionally, the RPO Director said that IRS seeks to  develop a risk-based scoring model to maximize the efficacy of its  compliance efforts.
IRS plans to launch a publicly accessible database of all registered paid  preparers by January 31, 2014, so that taxpayers can check whether a paid  preparer has registered. The RPO Director said that the database will  likely include preparers’ contact information, whether or not preparers  have passed the competency test, professional credentials, and tax  preparation legal problems, if applicable. The RPO Director also said that  IRS will not launch the database until it is sure it has the capability to  rapidly respond to any associated problems with the data because paid  preparers mistakenly identified as noncompliant could be negatively  affected financially.
section_title: IRS Is Funding the New Paid Preparer Program through User Fees, Which IRS Is Setting Consistent with Established Criteria
paragraphs: IRS is funding the administration of the paid preparer requirements  through user fees for PTIN registration, competency testing, and  continuing education. IRS has only determined the user fee for PTIN  registration so far, which is $50 per PTIN. IRS contracted with a vendor  to establish and maintain the PTIN registration system, and the vendor will  charge a $14.25 fee, bringing the total fee for PTIN registration to $64.25.  In determining the level of the PTIN registration user fee, IRS has taken  actions or made plans consistent with established criteria for setting user  fees and using the resulting revenue. These criteria, which we identified in  prior reports, include a set of key questions that should be considered  when designing and implementing user fees and best practices for  developing cost estimates. Key questions to consider when designing and  implementing a user fee are contained within four primary components:  setting, collecting, using, and reviewing. Table 2 below shows key  questions to consider when setting a user fee, key criteria for establishing  a credible estimate of a program’s costs, and IRS’s actions in setting the  PTIN registration user fee.
IRS identified key costs associated with PTIN registration and grouped  them into five categories: (1) foreign paid preparer registration processing,  (2) paid preparer program compliance, (3) communications and customer  support, (4) IT, and (5) operations support.
Approximately 75 percent of the costs IRS plans to cover with the PTIN  registration user fee are variable and are contained within the two  categories of foreign paid preparer registration processing and paid  preparer program compliance, which includes tax compliance and  criminal background screenings for paid preparers. To calculate the cost  of foreign paid preparer registration processing, IRS estimated the number  of PTIN registrants who will be foreign paid preparers and the cost to  process each registration. To calculate the cost of screening paid  preparers for tax compliance and a criminal background, IRS extrapolated  to the paid preparer requirements the costs of screening individuals  applying to become IRS e-File providers for tax compliance and a  criminal background. The RPO Director acknowledged that these  estimates are uncertain and therefore the actual costs could be higher or  lower.
Approximately 25 percent of the costs IRS is planning to cover with the  PTIN registration user fee are fixed and are contained within the  remaining three categories: communications and customer support, IT,  and operations support. For these three categories, IRS estimated various  component costs, including staff salary and benefits. IRS developed these  cost figures assuming that as many as 1.2 million individuals will register  for a PTIN, an estimate based on the number of individuals who signed tax  returns as paid preparers in 2006 with a PTIN, SSN, or other identification  number. IRS has acknowledged that this estimate is uncertain. Because  these costs are fixed, their average will depend on the number of paid  preparers who register for a PTIN.
In addition to setting the user fee, there are key questions that should be  addressed when implementing a new user fee that cover collecting, using,  and reviewing the fee. Table 3 shows IRS’s actions to date, as well as  planned actions, to address these key questions.
An official who helped to estimate the PTIN registration user fee  acknowledged that the PTIN registration cost estimates are uncertain and  subject to change. The official stated that IRS plans to conduct a first  review of the PTIN registration user fee in the summer of 2011.  Additionally, the RPO Director said that IRS will be able to change the  user fee following the review if actual costs are higher or lower than  predicted.
section_title: IRS Has Not Documented a Framework for Using the Requirements to Improve Taxpayer Compliance and Measuring Their Effect
paragraphs: IRS has discussed but not documented a framework for how it plans to  develop service and enforcement efforts that leverage the new paid  preparer requirements to improve taxpayer compliance. Likewise it has  not developed a framework for evaluating the effect of any planned  service and enforcement efforts or the effect of the requirements  themselves on improving taxpayer compliance. One of IRS’s goals for the  paid preparer requirements is to better leverage the tax preparer  community to improve taxpayer compliance. The RPO Director shared  with us ideas on how to achieve that goal. For example, according to the  RPO Director, IRS plans to develop a comprehensive database containing  information on paid preparers and the tax returns they prepare. IRS plans  to use information from this database to test which strategies are most  effective for improving the quality of tax returns prepared by different  types of paid preparers. Likewise, IRS has discussed how to measure the  effect of the requirements, for example, the effects that requiring  continuing education and testing have on tax return accuracy. In planning,  the RPO has included other IRS divisions, such as the Small Business/Self- Employed division, which is responsible for examining tax returns, and  the Research, Analysis, and Statistics unit, which will help monitor and  evaluate whether the new requirements improve taxpayer compliance.  Although IRS discussed with us its planned approaches for using the  requirements to improve taxpayer compliance, it has not yet produced a  document that lays out this approach. Likewise, as discussed previously,  IRS has yet to decide how it will enforce paid preparers’ compliance with  the requirements.
Documenting a framework for using the requirements and measuring their  effect is consistent with three steps we found leading public sector  organizations take to increase the accountability of their initiatives:          (1) define clear missions and desired outcomes; (2) measure performance  to gauge progress; and (3) use performance information as a basis for  decision-making. IRS has defined an overarching desired outcome of  increasing taxpayer compliance and could increase its accountability by  including the next two steps in a documented framework. Likewise, we  have reported that it is important to develop assessment plans prior to full  project implementation in order to ensure that the data necessary for  evaluation are collected. We also previously reported that we were  unable to assess whether California’s and Oregon’s paid preparer  requirements led to improved return accuracy because data were not  available on return accuracy prior to the enactment of the requirements.  Both IRS and we have acknowledged the importance of measuring  performance, including using baseline data and having intermediate and  end outcomes. Since the PTIN registration requirement has been  implemented and IRS plans to implement the other requirements  gradually, it is important for IRS to identify and collect baseline data to  have a basis by which to measure the effect of the requirements, IRS’s  strategies to leverage the requirements to increase taxpayer compliance,  and the strategies’ relative costs. In addition, we have also reported that  establishing a timeline that includes critical phases and essential activities  that need to be completed by particular dates to achieve results is  important for accountability. The timeline can help pinpoint performance  shortfalls and gaps, suggest midcourse corrections, and demonstrate  progress toward goals.
The RPO Director stated that IRS decided to begin implementing the  requirements before determining how to use them to improve taxpayer  compliance and measure their impact because it would take less time than  waiting to implement all of the requirements until it documented its plans.
As noted above, IRS’s approach to implementing the requirements is  sequential, so the details of its compliance strategy will not be known for  some time. However, not documenting the basic framework being  followed may create problems.
The lack of a documented framework may have negative repercussions for  several reasons. First, without a documented framework, the various IRS  divisions and offices involved in implementing the new requirements may  have difficulty assessing whether there is a sound analysis plan and  whether adequate plans are in place to collect the data needed to carry out  the analysis. Without such assessments IRS is at risk of incurring  additional evaluation costs by, for example, conducting unplanned data  analyses, collecting irrelevant data, or failing to collect needed data in a  timely manner. Second, the RPO Director stated that IRS does not know  when the comprehensive database on paid preparers will be completed  because there are many competing priorities for IRS resources. A  documented framework with proposed steps and a timeline could help IRS  make more informed resource allocation decisions. Third, members and  officials from paid preparer associations whom we interviewed stressed  that it is essential for IRS to evaluate whether the requirements are  improving taxpayer compliance, and some stated that the requirements  will be worthwhile only if they result in an improvement. The impact of  these requirements depends on the compliance of paid preparers and paid  preparers bear the burden of complying with the requirements.  Demonstrating to paid preparers that IRS will evaluate whether the  requirements provide the benefit of improved taxpayer compliance could  improve preparers’ voluntary compliance with the requirements.
The framework will likely evolve over time and become more detailed.  Initially, the framework may be a high level road map for achieving  taxpayer compliance results sooner and perhaps at a lower cost and could  include information on IRS’s strategies and tactics for improving taxpayer  compliance and what data need to be collected now. The framework may  change as IRS assesses the effectiveness of the paid preparer requirements  and future strategies for using the requirements to improve taxpayer  compliance.
section_title: Conclusions
paragraphs: IRS has made much progress in starting to implement the new paid  preparer requirements, including educating paid preparers about the  requirements, implementing the PTIN requirement, and developing a PTIN  user fee. In order to launch this important initiative, IRS began  implementing the requirements before laying out strategies for how to  leverage them and measure their impact in an effort to realize benefits  sooner. Implementation is under way, but IRS has not documented a  framework for how to achieve the goal of improving taxpayer compliance.  Without such a documented framework to guide its overall effort, IRS may  not adequately or effectively identify and collect key baseline data now,  modify its strategies to improve outcomes, allocate its resources most  effectively given competing priorities, or maximize paid preparers’  compliance with the requirements. Initially, the framework may not be  detailed. Instead it may evolve as IRS develops and assesses additional  strategies.
section_title: Recommendation for Executive Action
paragraphs: We recommend that the Commissioner of Internal Revenue document a  strategic framework showing how IRS intends to use the paid preparer  requirements to improve taxpayer compliance and assess their  effectiveness.
section_title: Agency Comments
paragraphs: In a letter commenting on a draft of this report, IRS agreed with the  recommendation. IRS stated that it has begun working on a strategic  framework and plans for the final product to detail the overall mission,  vision, and overall goals to ensure return preparer oversight will ultimately  achieve improved taxpayer compliance and tax administration. IRS also  provided technical comments, which we incorporated as appropriate.  IRS’s comments are reprinted in appendix II.
We are sending copies of this report to the Commissioner of Internal  Revenue and other interested parties. The report is also available at no  charge on the GAO Web site at http://www.gao.gov. If you or your staff  have any questions about this report, please contact me at (202) 512-9110  or whitej@gao.gov. Contact points for our Offices of Congressional   Relations and Public Affairs may be found on the last page of this report.  Key contributors to this report are listed in appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: To describe IRS’s plans for implementing and ensuring compliance with  the new paid preparer requirements, we reviewed documents, including  Treasury’s proposed and final regulations containing the new  requirements. Additionally, we interviewed officials from IRS’s Return  Preparer Implementation Project Office and Return Preparer Office (RPO)  responsible for implementing the paid preparer requirements. To describe  IRS’s outreach campaign to inform paid preparers of the new  requirements, we reviewed IRS documents on communication with  external stakeholders and the public about the new requirements.  Additionally, we interviewed the official responsible for leading IRS’s  communication with external stakeholders and the public. We analyzed  this information against key communications internal control standards  we identified in GAO’s Internal Control Management and Evaluation  Tool and key practices for communicating with the public about a new  initiative that we identified in GAO’s Digital Television Transition:  Increased Federal Planning and Risk Management Could Further  Facilitate the DTV Transition.
To assess IRS’s resource estimates to develop and implement the new  requirements, we reviewed IRS documents on the preparer tax  identification number (PTIN) user fee that IRS is charging paid preparers  for obtaining a PTIN and interviewed officials from the Return Preparer  Implementation Project Office, RPO, and IRS’s Chief Financial Officer’s  office. We examined this information using key questions that agencies  should consider when developing and implementing user fees that we  identified in GAO’s Federal User Fees: A Design Guide and best practices  that agencies should follow when developing cost estimates that we  identified in GAO Cost Estimating and Assessment Guide. In table 2, we  examined key questions to consider when setting a user fee and key  criteria for establishing a credible estimate of a program’s cost, and IRS’s  actions in setting the PTIN registration user fee. In table 3, we examined  key questions to consider when collecting, using, and reviewing a user fee,  and IRS’s actions and planned actions in collecting, using, and reviewing  the PTIN registration user fee. We determined whether IRS had considered  the key questions and criteria and did not examine the appropriateness of  the specific program costs that IRS plans to fund with the PTIN user fee.
To assess IRS’s plans to use the requirements to improve taxpayer  compliance and evaluate the effect of the paid preparer requirements, we  reviewed IRS documents and interviewed Return Preparer Implementation  Project Office and RPO officials. We examined this information using IRS’s  plans in the December 2009 Return Preparer Review and its guidance on  measuring performance in the Internal Revenue Manual Exhibit 1.5.1-5,  Process to Create a Performance Model for New (or Revised) Programs.  We also examined this information using our past work on evaluating a  program in Agency Performance Plans: Examples of Practices That Can  Improve Usefulness to Decisionmakers; Executive Guide: Effectively  Implementing the Government Performance and Results Act; Tax  Administration: Planning for IRS’s Enforcement Process Changes  Included Many Key Steps but Can Be Improved; Designing Evaluations;  Results-Oriented Cultures: Implementation Steps to Assist Mergers and  Organizational Transformations; and Tax Preparers: Oregon’s  Regulatory Regime May Lead to Improved Federal Tax Return Accuracy  and Provides a Possible Model for National Regulation.
In addition, for all three objectives we interviewed members and officials  of paid preparer associations that IRS had convened as industry  stakeholders, which included the major types of paid preparers that IRS  intended the requirements to cover. These associations were the American  Bar Association, American Institute of Certified Public Accountants,  National Association of Enrolled Agents, National Society of Accountants,  and National Association of Tax Professionals. We also interviewed a  representative from H&R Block, a retail tax return preparation chain that  IRS consulted as part of an independent preparer panel and  representatives of two additional return preparer associations, the  American Payroll Association and American Society of Pension  Professionals and Actuaries, that included types of paid preparers that  IRS, at the time, intended the requirements to cover. IRS has since decided  that individuals who prepare only employee benefit plan returns are not  covered by the requirements. We summarized the members’ and officials’  responses to a variety of questions about the paid preparer requirements.
We shared the criteria on which we based our descriptions and  assessments in our three objectives with IRS during the course of our  audit work.
We conducted this performance audit from July 2010 to March 2011 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
section_title: Appendix II: Comments from the Internal Revenue Service
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact person named above, Jeff Arkin, Assistant  Director; Amy Bowser; Maya Chakko; Ellen Grady; Donna Miller; Cindy  Saunders; and Dan Webb made key contributions to this report.