On June 5, 2012, the Internal Revenue Service (IRS) marked the third anniversary of its tax preparer initiative. The IRS also took the opportunity to renew its call for tax preparers to take and pass a new competency test as soon as possible.

Prior to the IRS Return Preparer Initiative, virtually anyone could enter the tax return business despite lack of adequate training or preparation. There were essentially no minimum qualifications to prepare tax returns. For years, this resulted in ill-equipped tax preparers making numerous errors that were costly to taxpayers and to the United States Treasury alike.

On June 4, 2009, IRS Commissioner Doug Shulman launched a six-month review focusing on the competency and conduct of paid tax return preparers. The review resulted from a recognition that paid tax return preparers were an important element in the integrity of the nation’s tax system. The review included a series of public hearings with the tax preparation community, consumer advocates, oversight groups and taxpayers.

On January 4, 2010, outgoing IRS Commissioner Shulman announced the results of the six-month study. The Return Preparer Review Final Report (IRS Publication 4832) outlined the increasing importance of the tax preparation industry as tax law becomes more complex and taxpayers seek help in preparing accurate tax returns.

Starting November 2011, the IRS launched a new competency test that certain preparers must take and pass by December 31, 2013. Certified Public Accountants (CPAs), attorneys and Enrolled Agents are exempt from the new competency test because they have other exam requirements. Supervised preparers, meaning those who do not sign returns, or who work for a firm owned by and are supervised by a CPA, attorney or enrolled agent are also exempt. This leaves approximately 340,000 preparers who must pass the test and become Registered Tax Return Preparers.

Some other highlights from the initiative include:

Mandatory registration and use of a Preparer Tax Identification Number (PTIN): Anyone who is paid to prepare, or help prepare, all or substantially all of a federal tax return now has to register with the IRS and obtain a PTIN, as do all enrolled agents. The PTIN is valid for a calendar year and must be renewed annually. Almost 850,000 preparers have registered since the requirement began.

Ethics and Tax Compliance: Ethical requirements that previously applied only to CPAs, EAs and attorneys now apply to all paid return preparers. All paid preparers also will undergo a tax compliance check and are subject to the standards for practice outlined in Treasury Department Circular 230.

Registered Tax Return Preparer: Preparers who pass the competency test and tax compliance check are given a new credential: Registered Tax Return Preparer. To date, over 4,800 people have become Registered Tax Return Preparers. Beginning in 2014, only Registered Tax Return Preparers, Enrolled Agents, Certified Public Accountants, and attorneys will be authorized to prepare individual income tax returns for compensation.

To read IR-2012-59, click here.