Should Convicted Felons Prepare Tax Returns?

If an individual is found guilty of a crime; like money laundering, should that individual be allowed to give financial tax advice, or prepare tax returns for others? Or should the IRS have the ability to stop tax preparation by convicted criminals? This is a situation that is currently being debated, and played out in the courts across America.

The IRS has a department dedicated to ensure professional standards amongst tax preparers and tax practitioners alike. This agency is known as the Office of Professional Responsibility or OPR. OPR was established to make certain that individuals who prepare taxes adhere to the laws, and provide their clients with high professional standards.

Up until recently, OPR kept a close eye on tax preparers and tax practitioners, and the department had the power to stop anyone they felt was unqualified from preparing the taxes of other individuals. Recently, there have been several cases brought before the courts that challenged OPR's power, and in many of those cases OPR has come out on the losing end of the battles in those courtrooms.

Some of the main losses that are changing the way OPR can enforce their regulations are as follows:

1. When a federal appeals court struck down the IRS's ability to regulate non-practitioners

In a recent court decision, a federal appeals court held that the IRS could establish regulations governing the behavior and practices of licensed tax preparers like CPAs and companies, such as H & R Block. See Loving v. IRS. However, when it comes to tax preparers who have no formal training in tax preparation, the court held that the IRS could not impose any regulations on these individuals.

The court reasoned that taxpayers have the right to have their taxes prepared by anyone of their choosing, and that the IRS could not force everyone who prepares taxes to prove that they have the minimum training necessary to competently do so.

While this allows people the freedom to choose whomever they wish, it nonetheless opens the door for fraudulent tax preparers to enter the scene and hold themselves out as reputable tax preparers. While you might be tempted to hire a non-practitioner to file your returns in light of the financial incentive (i.e., not surprisingly, many charge less than accounting professionals who carry professional licenses, such as CPAs and EAs), that could be a recipe for disaster.

There are a number of risks that you should be aware of. For starters, the perceived economic benefit often times comes at the expense of accuracy. Indeed, thousands of inaccurate tax returns are submitted every year, with a disproportionate number prepared by those without any formal training in tax preparation.

A less obvious risk is that the taxpayer may not receive a refund that he is entitled to. Very simply, non-practitioners may not be familiar enough with the tax laws to get their clients the refunds they deserve.

2. When a court ruled that the IRS can no longer prevent practitioners from charging contingent fees.

The IRS attempted to regulate contingent fees in order to reduce the number of taxpayers who might challenge decisions or take questionable positions concerning their refund claims. In Ridgely v. Lew, a federal appeals court held that the IRS could not prevent a tax practitioner from charging his or her clients a contingent fee.

In the eyes of the IRS, this decision will result in a torrent of people raising challenges to deficiencies, regardless of whether they have any merit. To taxpayers, this is a small victory because they will have legal services available to them at more affordable rates.

We can expect to see more taxpayers challenge the regulations that OPR has established for tax practitioners in the near future, and with the current trend in the courts, it appears that OPR is fighting a losing battle. Could this mean that money launderers, and people who have made it their business to defraud others are only a heartbeat away from being able to prepare your tax returns? Only time will tell.

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