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Judge says IRS doesn't have authority to regulate tax preparers

Eileen Ambrose

12:48 PM EST, January 23, 2013

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A federal judge has ruled that the IRS doesn’t have the authority to regulate tax preparers. This stunning ruling, though, is unlikely to have much impact in Maryland, which also regulates this group.

“Maryland law was passed before the IRS regulations. We’re still registering tax preparers and (they’re) still in violation of Maryland law without being registered,” said Douglas Blackstone, executive director of the Maryland Board of Individual Tax Preparers. The state has about 3,700 registered preparers.

However, Maryland law requires preparers to pass an exam by the end of this year and undergo continuing education. To fulfill that, Maryland recognizes a similar exam and education requirements by the IRS. The court ruling, Blackstone said, could mean some changes in this area.

Maryland might devise its own exam or it might stick with the IRS exam that is offered through private companies, he said. Or, the state might suspend its testing requirement and wait to see the outcome of an IRS appeal, which is likely to happen.

Blackstone said his board will take up the issue at its next meeting in February.

For years, consumer advocates complained about the lack of IRS oversight on preparers. During tax season, preparers would spring up all over the place and not all of them were honest or competent. The result was that some taxpayers’ returns would be flagged by the IRS, and they could end up owing back taxes, interest and penalties because of a preparer’s shoddy or dishonest work.

Finally, the IRS agreed to regulate preparers, which includes an exam and continuing education.

But three tax preparers balked and sued, saying they would lose business by having to comply. A judge for the U.S. District Court in the District of Columbia sided with them last week, saying the IRS doesn’t have the authority to regulate preparers under an 1884 statute the agency had been relying on.

The IRS responded on its website, saying: “The Internal Revenue Service, working with the Department of Justice, continues to have confidence in the scope of its authority to administer this program. It is considering how best to address the court’s order and will take further action shortly.”

“It was a surprise,” said Cindy Hockenberry, a manager with the National Association of Tax Professionals, which represents tax preparers and others who fill out returns for consumers. But Hockenberry doesn’t expect the IRS to give up without a fight.

 “They will probably appeal it. They could go right to Congress and say we need some legislation that does give us the authority to do this,” she said. “I don’t see this going away.”

The judge’s ruling is bad news for consumers. Consumer advocates say fraud by tax preparers has been increasing. Last year, I wrote a story about the growing problem of preparers changing returns after customers leave their office so refunds are inflated. Then these shady preparers have part of the refund directed into their bank accounts.

“We saw problems with the industry,” said Robin McKinney, director of the Maryland CASH Campaign, who early on lobbied for Maryland to regulate preparers.

She added that she also saw really good tax preparers having to compete with others who didn’t have high standards of competency, integrity or professionalism.

“That’s not fair to the people following rules and doing the right thing,” she said.