IRS Cracks Down on Tax Preparers

BOSTON ( TheStreet) -- The Internal Revenue Service kicked off the 2010 tax-filing season with a stern warning for professional tax preparers and a promise of new registration, testing and education requirements.

As part of a crackdown, undercover sting operations in which IRS agents, posing as customers, will hit the streets to weed out unscrupulous preparers.

According to IRS estimates, more than 80% of American households use a professional preparer or software program to file taxes. Due to a lack of registration and inconsistent reporting, the number of tax-return preparers is unknown, but the IRS estimates there are as many as 1.2 million individuals who prepare tax returns for a fee, including certified public accountants and lawyers, both of whom are exempt from the new regulations.

Each year, hundreds of criminal investigations are initiated against preparers by revenue agents and the U.S. Department of Justice. In 2009, 124 people were sentenced to an average jail time of 18 months.

IRS Commissioner Doug Shulman on Monday described current and future efforts as a "monumental shift in the way the IRS will oversee tax preparers."

Currently, anyone can prepare a federal tax return and charge a fee. While some preparers are licensed by their states, many don't have to meet government or professionally mandated competency requirements before preparing a federal tax return for a fee.

The IRS will require: registering and obtaining a tax-identification number; passing competency tests, except for attorneys and certified public accountants; and continuing education. The agency will be able to suspend or discipline tax preparers who engage in unethical or disreputable conduct.

How the new regulations will play out for firms such as H&R Block ( HRB) and Jackson Hewitt Tax Service ( JTX) is unclear.

H&R Block has 13,000 U.S. locations, a third of which are franchises. Jackson Hewitt enters 2010 with 6,000 store-front and retail locations nationwide, including more than 1,800 in Wal-Mart ( WMT) stores as part of an exclusive arrangement. Liberty Tax Service, a privately owned company, has 3,400 offices and employs 15,000 preparers.

Sheila Cort, vice president of corporate communications for Jackson Hewitt, says her company supports the IRS initiative and has "tools in place to monitor our tax-preparer training and testing."

Stricter standards may be a drain on seasonal preparers. H&R Block, for example, has 9,200 full-time, year-round employees, a number that swells to 133,700 during peak tax season. Conversely, the changes could benefit well-known firms and their massive footprint at the expense of mom-and-pop shops that may have fewer resources for additional employee training.

The initiatives announced this week will take several years to implement and won't be in effect this year. There will, however, be immediate efforts.

Starting this week, the IRS will send letters to almost 10,000 tax-return preparers nationwide with a large volume of returns and frequent errors. Many of those who receive letters may get follow-up visits from revenue agents.

-- Reported by Joe Mont in Boston.

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