The increased number of comments we have received tells me that there is great and passionate interest in the topic of unenrolled preparers and their relative qualifications.
Unfortunately, there is still a lot misinformation orbitting the taxosphere on this subject.
In order to clarify things a little I decided to resurrect an old case that I think illustrates some of the key issues very well.
On September 24, 2008, the Court of Appeals for the Eleventh Circuit ruled in Wright v. Everson that the IRS had good reason to limit the rights and powers of unenrolled tax preparers.
This case is particularly interesting to me because I happen to know the Plaintiff very well.
The Plaintiff, Patrick Wright
The Plaintiff, Patrick Wright, is an unenrolled preparer practicing in the Orlando and Central Florida areas.
That is where I practice.
Mr. Wright has solicited my assistance on numerous tax cases over the last fifteen years and we have butted heads on issues involving the legality of his representation of taxpayers in matters that are permitted only to licensed and enrolled preparers.
Mr. Wright is not your typical unenrolled practitioner.
Although I believe he prepares tax returns for his clients, he also attempts to do a great amount of what I call tax controversy work (i.e. resolving IRS disputes, handling IRS audits, appeals, preparing and filing CDP and CAP challenges, preparing and filing Offers in Compromise, etc.).
Patrick is very bright. He knows the tax code and the Internal Revenue Manual very well, especially as they pertain to the intricacies of IRS practice and procedure.
I have on several occasions encouraged Patrick to become an IRS Enrolled Agent, but for some reason unbeknownst to me he has neglected to do so.
Strict Limitations are Placed on Unenrolled Preparers
The law specifically prohibits unenrolled preparers from providing the types of services Mr. Wright wishes to provide to his taxpayer clients.
Here is a good description of the limited role of unenrolled preparers that I found on the Iowa State University website:
An unenrolled preparer’s ability to practice before the Service is very limited. Generally, it is limited to the examination function of the Service, and only with respect to a return he or she prepared.
Consequently, an unenrolled preparer cannot practice before appeals officers, revenue officers, and Counsel. Also, an unenrolled preparer cannot execute claims for refund, receive refund checks, execute consents to extend the statutory period for assessment or collection, execute closing agreements, or execute waivers of restriction on assessment or collection of a deficiency in tax.
Mr. Wright Sues the IRS and Loses
Sometime in 2008, the IRS stopped allowing Mr. Wright to practice before it.
He challenged the denial by filing a lawsuit against the then Commissioner of Internal Revenue, Mark Everson.
The district court found for the IRS and Mr. Wright appealed that decision to the 11th Circuit.
In a per curiam decision the 11th Circuit upheld the lower court (i.e. denied Patrick Wright’s claim) stating,
We conclude that 31 C.F.R. § 10.7, which limits the scope of representation by an unenrolled representative, is not arbitrary, capricious, or manifestly contrary to statute. The IRS has provided valid reasons for the limits on who may practice, noting that the regulation balances the need for a taxpayer to have affordable representation and to be able to choose his representative with the need for competent representation that protects the taxpayer, the IRS, and the general public.
The result is that Mr. Wright, like all other unenrolled preparers, cannot practice outside the very limited scope granted by law to unenrolled preparers.
The IRS Has Good Reason to Restrict Practice of Unenrolled Preparers?
The court specifically ruled that the IRS’s placing of severe restrictions on the rights of unenrolled preparers was not arbitrary.
This means that the IRS has a good reason for it.
And that reason is obvious to all but those who are completely blinded by bias and self-interest: Unenrolled preparers have not been required to prove even the most basic level of mathematical competence to anyone, anywhere at anytime.
Yet some unenrolled preparers continue to labor under the delusion that the mere pronouncement of their eminence in tax preparation makes them ipso facto more qualified than those tax preparers whose activities are not strictly limited by the IRS.
As Johnny Carson would say, “this is weird, wild, wacky stuff.”
Why Not Just Become an Enrolled Agent?
The Court made a point of noting that Mr. Wright could apply to become an Enrolled Agent and, if he met all the requirements, he would then be permitted to broaden the scope of his practice as he wished.
To become an enrolled agent, Mr. Wright (or any other unenrolled preparer) must file an application with the IRS Office of Professional Responsibility and pass a Special Enrollment Examination or present evidence of qualifying experience as a former IRS employee.
The IRS then performs a background check including a review of the applicant’s tax compliance record.
This brings me to a question that has been bugging me for a while now: Why wouldn’t an experienced unenrolled tax preparer do whatever it takes to become an Enrolled Agent?
If he truly is an experienced (and superior) tax preparer, the exam should be a piece of cake.
What gives?
As far as I can tell, there’s only an upside to becoming an Enrolled Agent. Just off the top of my head I can think of several benefits that would immediately redound as a result of the unenrolled preparer’s new enrolled status:
- He would have a competitive advantage over unenrolled preparers;
- He would no longer be associated in the mind of the public with unscrupulous and incompetent unenrolled preparers; and
- He would be able to expand his client base to include new areas of tax practice.
As I said, I don’t see a material downside to becoming an Enrolled Agent, but even it exists it has to be greatly outweighed by the benefits.
Until someone convinces me otherwise I will continue to assume that an unenrolled preparer who fails to become an Enrolled Agent does so for one of the following reasons.
- He does not wish to expend the time and money to apply for, study for and take the Special Enrollment Exam;
- He has a past that if disclosed would prohibit him from obtaining Enrolled status;
- He has already taken the exam and failed.
I recommend that taxpayers seeking to hire tax preparers proceed with this assumption as well.
5 responses so far ↓
1 Mary // Jul 19, 2009 at 10:09 am
I definitely agree with your position that an unenrolled preparer who seeks privileges to represent other taxpayers before the IRS should take the EA exam. It is not unreasonable for the IRS to require tax professionals who want such privileges to demonstrate a significant amount of expertise, because (a) a taxpayer has the right to expect some assurance of expertise from his representative before the IRS in audits, appeals, etc. and (b) all taxpayers who fund the IRS have the right to demand that some assurance that incompetent tax professionals representing taxpayers in proceedings that use a lot of IRS employee time (audits, appeals, etc.) will not waste those limited resources.
It does seem to me, however, that there is a role for credentialing preparers that falls short of the current EA status. To say that all unenrolled preparers should be willing to study and take the EA exam is a bit like saying, in the field of nursing, that all LPNs should be willing to go for the RN credential.
Not all unenrolled preparers have any desire to represent taxpayers before the IRS, just as not all LPNs want the extra privileges associated with being an RN.
Given the huge breadth and complexity of tax law, it seems to me that there is a rationale for a graduated system of credentials. In medicine, for example, there are nurse’s aides, LPNs, RNs, nurse-practitioners and physician’s assistants, primary care physicians, and board-certified specialist physicians in various specialties.
Tax practice probably does not need quite such a huge array of different certifications, but it seems to me that there’s a case to be made for some credentialing options that differ from the EA credential.
Your provocative arguments and the IRS work on drafting proposed regulations for preparers really got me thinking about alternative models, and how the experience of credentialling VITA volunteers might be a helpful model that could be adapted for paid preparers.
More thoughts along these lines are posted on my blog.
2 Mary // Jul 19, 2009 at 10:13 am
In my last post, I neglected to post a link to my own blog posts on preparer regulations. For anyone interested, my posts on tax preparers are collected here:
http://bedbuffalos.blogspot.com/search/label/tax%20preparers
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