"The IRS currently is not able to track, monitor or control preparers' activities and compliance, or even determine the total number of paid tax return preparers," said J. Russell George, the Treasury inspector general for tax administration. "As a result, the IRS currently is not capable of ensuring that paid preparers adhere to professional standards and follow the law."
The IRS has acknowledged problems overseeing tax preparers, announcing in June that it intends to propose new rules by the end of the year. The rules, which could come as regulations or proposed legislation, could include licensing and training requirements.
The IRS is scheduled to hold its first public forum to gather input on the new rules July 30 in Washington. About 60 percent of taxpayers pay someone to prepare their returns, according to the IRS. An additional 20 percent or so buy computer software. However, tax preparers don't have to be licensed, unless they represent clients in proceedings before the Internal Revenue Service.
From 2006 through 2008, the IRS initiated more than 600 investigations of fraud among tax preparers. During that time, 356 tax preparers were convicted, with more than 80 percent of them sentenced to prison, home confinement or electronic monitoring.
Industry leaders, including H&R Block and the National Association of Tax Professionals, have said they would welcome better oversight of tax preparers.
The IG report said paid tax preparers should be required to use unique ID numbers when filing returns, so the IRS can better track those with problems. Currently, preparers can use one of several numbers to identify themselves on returns, making it impossible to accurately track them.
IRS data on preparers are stored on 22 different computer systems, which are not integrated, the report said.
In response, the IRS said it agreed that the agency needs to develop a comprehensive system for identifying and tracking paid tax preparers. The agency said its upcoming rules would address the issue.