Paid  preparers prepared almost 60 percent of all federal tax returns filed in  2008 and 2009. 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. IRS Is Conducting an Outreach Campaign Consistent with Key Practices to Inform Paid Preparers of the New Requirements

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. Officials and members of paid preparer associations we  interviewed said that IRS has conducted an effective outreach campaign. IRS Is Developing Strategies for How to Ensure Paid Preparer Compliance with the New Requirements

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. IRS Is Funding the New Paid Preparer Program through User Fees, Which IRS Is Setting Consistent with Established Criteria

IRS is funding the administration of the paid preparer requirements  through user fees for PTIN registration, competency testing, and  continuing education. IRS Has Not Documented a Framework for Using the Requirements to Improve Taxpayer Compliance and Measuring Their Effect

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. 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. Likewise, as discussed previously,  IRS has yet to decide how it will enforce paid preparers’ compliance with  the requirements. 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. 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. Recommendation for Executive Action

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. Agency Comments

In a letter commenting on a draft of this report, IRS agreed with the  recommendation. 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.
Why GAO Did This Study

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.

What GAO Found

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.

What GAO Recommends

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.