A paid tax return preparer is anyone who is paid to prepare, assist in preparing, or review a taxpayer’s tax return. In this report, we refer to two categories of paid preparers—tax practitioners and unenrolled preparers. CPAs, attorneys, and enrolled agents are tax practitioners. Tax practitioners can practice before IRS; practicing before IRS includes the right to represent a taxpayer before the IRS, to prepare and file documents with IRS for the taxpayer, and to correspond and communicate with IRS. Individuals can become enrolled agents by passing a 3-part examination; IRS waives the examination requirement for people with specific prior work experience at IRS. Department of the Treasury Circular 230, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, and Appraisers before the Internal Revenue Service, applies to tax practitioners and governs their duties, restrictions, sanctions, and disciplinary proceedings. IRS’s Office of Professional Responsibility (OPR) has responsibility for administering and enforcing Treasury Circular 230. We use the term unenrolled preparer to describe the remainder of the paid preparer population. In most states, anyone can be an unenrolled preparer regardless of education, experience, or other standards. Paid preparers are a critical part of the nation’s tax administration system because of the wide variety of services they offer and their unique relationship with taxpayers. Paid preparers may combine several taxpayer services, including help understanding tax obligations, answering tax law questions, and providing tax forms and publications, return preparation, and electronic filing. IRS regards tax professionals as a critical link between taxpayers and the government. For example, IRS has a section of its Web site dedicated to providing information directly to tax professionals. IRS also sponsors the Nationwide Tax Forums, annual conferences in several cities every year to provide tax education to paid preparers. The Web site of the National Association of Tax Professionals also points out the shared responsibility of paid preparers to represent their clients while respecting the law, listing among its professional standards one that says “Should the client insist upon item being stated on the return incorrectly, the member should withdraw and refuse to prepare the return.” The number of active paid preparers is unknown. In 1999, IRS estimated there were up to 1.2 million paid preparers, but IRS officials acknowledge that the actual number could be significantly higher or lower. The total number of active paid preparers is unknown because only a small portion of all paid preparers—enrolled agents—are licensed directly by IRS to practice before the IRS. As of June 2008, about 43,000 tax preparers were actively enrolled to practice before the IRS. IRS officials said that the number of new enrolled agent applications and the number of people taking the examination have declined in recent years. They noted that these declines followed increases in enrolled agent application and examination fees. Similarly, the number of attorneys and accountants who make tax return preparation a part of their practice is unknown. Millions of tax returns prepared by paid preparers have serious compliance problems, which often leave taxpayers owing or overpaying by hundreds or thousands of dollars. As we have previously reported, IRS’s tax year 2001 NRP data indicate that tax returns prepared by paid preparers had a higher error rate—56 percent—than returns prepared by taxpayers—47 percent. In 2002, we estimated that on as many as 2.2 million tax returns, taxpayers claimed the standard deduction when their potential itemized deductions were greater, and that about half of these taxpayers had returns prepared by another person. In 2005, we reported that many tax returns included claims for one of three available postsecondary education tax preferences that resulted in higher overall tax liability than if one of the other preferences had been taken, and that over half of these returns were prepared by paid preparers. However, the fact that errors were made on a return done by a paid preparer does not necessarily mean the errors were the preparer’s fault; the taxpayer may be to blame. The preparer must depend on the information provided by the taxpayer. On the other hand, some mistakes are clearly the fault of the preparer. In 2006 we reported on the results of an investigation where we identified mistakes in 19 out of 19 visits to paid preparers working in preparer chain offices. Some of the mistakes were significant, either exposing the taxpayers to serious IRS enforcement action or costing taxpayers over $1,500 in overpaid taxes. In 2007, the Department of Justice took action against corporations operating franchises of a major tax preparation chain. The government complaints alleged that the franchisee corporations created and fostered a business environment “in which fraudulent tax return preparation is encouraged and flourishes.” The corporations that owned the franchises agreed to sell the franchises to new owners and to be permanently barred from preparing federal income tax returns. When mistakes or deliberate noncompliance by paid preparers result in taxpayers underreporting their tax liabilities, it adds to the tax gap. The net tax gap is an estimate of the difference between the taxes owed— including individual income, corporate income, employment, estate, and excise taxes—and what was eventually paid for a specific year. IRS most recently estimated the net tax gap to be $290 billion in 2001. In March 2008, we recommended that IRS develop a plan to require a single identification number for paid preparers, including assessing the feasibility of options, their benefits and costs, as well as their usefulness for enforcement and research, on paid preparer behavior. Also, as of July 2008 there were similar bills pending before Congress calling for national paid preparer regulation. Senate Bill 1219 and House of Representatives Bill 5716 would require members of the current community of unenrolled paid preparers to pass an initial qualifying examination and meet continuing annual education requirements. Support for legislation such as this can be found in the National Taxpayer Advocate’s 2002 and 2003 Annual Reports to Congress, which recommended Congress create a designation called a “Federal Tax Return Preparer,” defined as someone other than an attorney, CPA, or enrolled agent, who prepares more than five federal tax returns in a calendar year and satisfies registration, examination, and certification requirements. Only a few Internal Revenue Code provisions apply to all paid preparers and only a small portion of paid preparers—enrolled agents—have any federal registration, testing, or fee requirements. All paid preparers are subject to a few Code provisions and may be penalized if they fail to follow them. For example, the Internal Revenue Code imposes monetary penalties on paid preparers who (1) understate a taxpayer’s liability due to a position that fails to meet the applicable legal standard, (2) fail to provide a copy of the return to the taxpayer, or (3) fail to identify themselves on the returns they prepare. Additionally, for returns that include the Earned Income Credit (EIC), paid preparers must ask specific questions to determine a taxpayer’s eligibility for the credit. Also, all paid preparers who choose to file electronically are subject to IRS Electronic Return Originator rules. Both California and Oregon began to regulate paid preparers in the 1970s. California’s program was first administered by the state’s Department of Consumer Affairs, and legislation transferred oversight responsibility to CTEC in 1997. Oregon’s program was established by the 1973 Oregon Legislative Assembly after representatives of the state’s paid preparer community recommended that the legislature regulate the profession. According to a preparer involved at the time, the Oregon Legislative Assembly was responding to a report that there were many dishonest or incompetent paid preparers working in the state. The main features of California’s paid preparer program are qualifying and continuing education and registration. To become a CRTP, individuals initially register with CTEC by completing a 60-hour qualifying education course, purchasing a $5,000 surety bond, completing an application, and paying a $25 registration fee. CTEC may waive some of the qualifying education requirements for individuals with 2 recent years experience in the preparation of personal income tax returns. In each subsequent year, CRTPs must complete 20 hours of continuing education, ensure their bond remains in full force, submit a renewal application, and pay a $25 renewal fee. As of June 6, 2008, 41,755 paid preparers were registered with CTEC. CPAs, attorneys, enrolled agents, and employees of any of these types of tax practitioners are exempt and not required to register. California does not require prospective CRTPs to pass a criminal background check or to report past criminal convictions or current legal issues. This means that prior questionable or illegal conduct is not known to program administrators. Moreover, CTEC does not have the authority to deny a preparer’s registration application based on known illegal conduct, nor does the California Code include provisions for refusing to renew a CRTP’s registration as long as the CRTP meets the continuing education requirement and pays the annual registration fee. The 60-hour qualifying education requirement is intended to ensure paid preparers have a basic knowledge of federal and California tax laws. According to the CTEC policy manual, the intent of the annual continuing education requirement is to enhance the paid preparer’s skill in tax matters above the basic knowledge they have already acquired. CTEC approves an education provider’s curriculum based on an independent review of one of the prospective provider’s courses at least once every 3 years. People who are not one of the types of exempt tax practitioners who prepare tax returns in California without becoming CRTPs can be fined. Under a Memorandum of Understanding between CTEC and the California Franchise Tax Board (FTB), the FTB is reimbursed by CTEC for providing staff to identify unregistered tax preparers. In 2007, FTB provided one full-time and one part-time employee and CTEC reimbursed FTB $270,000. Persons suspected of illegally preparing tax returns are first issued penalty letters and encouraged to become registered.