What is a State-Regulated Tax Return Preparer?

It can be stressing and confusing when you are working with complicated finances or even when you own a small business. This is why a lot of people resort to the services of tax return preparers. However, are all tax preparers that are regulated in the same way? There are restrictions placed on tax preparers that qualify them to work in certain states. These practitioners will be referred to as state-regulated tax return preparers.

What Does a Tax Return Preparer Do?

It is relevant to first learn the fundamental role of a tax preparer before we get into state regulations.

Job Duties

A tax return preparer helps individuals and businesses:

• File federal and state income tax returns, fully
• Optimize the number of deductions and credits
• Stay compliant with tax laws
• Respond to IRS or state tax agency notices

There are preparers who provide service all year round and those who are involved in tax season.

Types of Tax Preparers

There are different types of professionals who prepare taxes, including:

• Certified Public Accountants (CPAs)
• Enrolled Agents (EAs)
• Tax Attorneys
• Non-credentialed preparers

The licensing or other regulatory requirements of all these professionals do not apply across the board but, in particular, at the state level.

What Does “State Regulated” Mean?

A tax return preparer who is state regulated is a person who is required to fulfill certain requirements of the state to prepare tax returns in that state for compensation. These regulations do not correspond to federal regulations that are established by the IRS.

State vs. Federal Oversight

The IRS on the federal level has limited power to control tax preparers.

The IRS requires all paid preparers to:

• Possess a Preparer Tax Identification Number (PTIN)
• Adhere to ethical requirements, as stipulated in IRS Circular 230

Many non-credentialed tax preparers do not, however, have to be educated, tested, or licensed by the IRS, because of a 2013 court decision (Loving v. IRS).

It is at this point that state regulations come in.

Which States Regulate Tax Preparers?

Until this day, a small number of states in the U.S. have legislation that governs tax preparers directly.

These include:

California

California has a registration requirement of all non-exempt paid tax preparers with the California Tax Education Council (CTEC).

Requirements include:

• 60 hours of initial education
• Renewal of 20 hours of continuing education annually
• Background check
• $5,000 surety bond

Oregon

Preparers of tax in Oregon have one of the most stringent systems of tax preparer regulations in the country.

Requirements include:

• Passing a state licensing exam
• The completion of 80 hours of education
• 30 hours of continuing education, annually
• Renewed annually with Oregon Board of Tax Practitioners

Maryland

Maryland has registration and continuing education requirements on preparers, unless they are credentialed (CPA, EA, or attorney).

Requirements include:

• Registration in the Maryland Department of Labor
• 16 hours of continuing education on a bi-annual basis

New York

New York controls commercial tax preparers.

Requirements include:

• To be registered annually for preparers who prepare over 10 returns per year
• Adherence to state policies
• Ongoing education needs

Why Do States Regulate Tax Preparers?

State regulation aims to protect consumers against fraud, mistakes, and bad service.

Benefits of State Regulation

Better Accuracy: Preparers must satisfy education qualifications.

Protection to Consumers: Background screening and bonds secure clients.

Accountability: State agencies can research complaints or misconduct.

Preventing Fraud and Scams

The IRS gives thousands of claims of tax fraud every tax season. Unqualified or unscrupulous preparers who take advantage of clients are some of the worst violators.

States that have regulation systems are better placed to control, license, and discipline tax preparers to curb such abuse.

How Does It Affect You as a Taxpayer?

When you are contracting someone to prepare your taxes, knowing whether they are regulated by the state will allow you to make a better choice.

The following are some of the important questions to pose to your tax preparer:

• Are you registered or licensed by the state?
• What credentials do you hold?
• What are your years of experience?
• Do you provide audit support or year-round service?

The added benefit of hiring a preparer who is under your state regulation will give you the additional assurance that they are trained, regulated, and thus, meet professional standards.

What Happens If a Tax Preparer Isn’t Regulated?

Tax preparers are legally permitted to work in unregulated states with no formal education, licensing, or regulation at all, only with an IRS-issued PTIN. This poses a situation of buyer beware.

Although unregulated preparers are not always dishonest or incompetent, the risk of the following is increased:

• Mistakes resulting in audits or sanctions
• Overcharging
• Fraudulent refund claims
• Identity theft
• Locating a Preparer Regulated by a State

In many states, where tax preparers are regulated, it is usually easy to check the status of a preparer online.

Useful Resources:

• California: www.ctec.org
• Oregon: www.oregon.gov/obtp
• Maryland: www.dllr.state.md.us
• New York: www.tax.ny.gov

The Better Business Bureau, IRS Directory of Federal Tax Return Preparers, and user reviews can also be checked online.

Should You Always Choose a State-Regulated Preparer?

Although regulation provides more protection, it is not the only aspect that counts.

You should consider:

• Specialization and experience
• Professional qualification (CPA, EA or attorney)
• Reputation and reviews
• Cost of service
• Availability and customer service

Various CPAs and EAs adhere to high ethical and professional standards even in states where there is no regulation.