IRS to regulate paid tax preparation

The IRS said it plans to study the two issues further.

The new testing and education standards will exempt certified public accountants, lawyers, and tax practitioners known as "enrolled agents," who are cleared to represent taxpayers in dealing with the IRS and are already subject to professional or government requirements. The IRS said that it will take a closer look at the performance of those groups, and that it has not ruled out testing them in the future.

Tax prep giants H&R Block and Jackson Hewitt expressed support for the requirements announced Monday.

Under the new rules, H&R Block "won't be competing against people who aren't regulated and don't have the same standards as we do," said Kathryn Fulton, senior vice president for government relations.

Most of the company's preparers will be required to take the new test, but the company's continuing education requirements exceed those announced those by the IRS, she said.

Citing a gap in the agency's plan, Fulton said the IRS should impose the same rules on unpaid preparers of tax returns.

Jackson Hewitt said in a statement that all of its tax preparers must pass a company test.

In field tests, the IRS noted Monday, tax-return preparers often gave bad advice.

In a 2006 study in which employees of the Government Accountability Office posed as taxpayers and visited outlets of tax prep chains, all 19 preparers made mistakes, the IRS reported. Only two of the 19 arrived at the correct bottom line. Several did not ask about income from sources other than wages, and 10 of the 19 did not report such income even when they were told about it, the IRS said.

In a 2008 study, 17 of 28 preparers got the bottom line wrong.

It is unclear how much of the blame rests with the tax code's confusing nature, a perennial target of politicians' criticism. Do regulated professionals such as CPAs perform better than their unregulated counterparts?

The IRS commissioner said the agency does not have the data to answer that question.