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and in a deliberate effort to deceive the reader that the corporation has a greater tax impact than it really has.

Mr. SKINNER. I want to point out that I am not here as an expert on financial reporting, although I have some knowledge in this area. We are representing the tax division of the AICPA rather than the technical accounting and financial reporting experts in our profession and I would not want to mislead you or give you any erroneous impressions.

However, I would question whether there is any "fairytale," in the financial reporting by most companies. Certainly none is intended in our financial reporting. I think the taxation you mentioned may be expenses of the business as distinguished from taxes on the business. Their character is determined by the laws of our country.

Mr. VANIK. They collect the taxes on behalf of the treasury but to have it wrapped in as to their tax contribution

Mr. SKINNER. It would be shown as a liability.

Mr. VANIK. It would not be shown as a liability, it is shown as taxes collected by the corporation. I feel that the accounting profession has a very, very grave duty to the public to refine out the rules and prohibit some of these accounting procedures which I think have a purpose to distort facts.

Mr. SKINNER. I agree that our profession has a duty to help clarify and improve financial reporting. I think this is one of our objectives and we are moving in that direction. We are in an evolutionary process-moving toward the elimination of alternatives and toward the standardization of accounting principles applicable to the same types of transactions, but these things take time-custom and industry practices presently recognized in the code take a while to change, just as many other aspects of our system do.

Mr. VANIK. Your organization's leadership in this effort might forestall legislative action by the Congress. I think you have a very important role insofar as you can discipline higher standards of accountability and reporting you can exercise a great deal of leadership and discipline which might prevent even more harsh or more arbitrary legislation, by the Congress.

Mr. SKINNER. I think this is probably the highest priority area that our profession is working with today.

Mr. ULLMAN. Mr. Schneebeli.

Mr. SCHNEEBELI. I am gratified at how comprehensive your statement is as to specifics. Generally or quite often we get a lot of generalizations, but you are very specific. Coming from an organization of 90,000 professionals it is certainly very helpful to this committee.

Has your institute ever made any recommendations with regard to standards that should be adopted by companies that make out income tax forms for the public? I am thinking of a lot of national companies that are evolving. Has your institute ever made any recommendations with respect to standards that should be applied to these types of firms?

Mr. SKINNER. Yes. Of course, we are bound by our own code of professional ethics as are other tax return preparation people. We testified before the Monetary Affairs Subcommittee of the House Committee on Government Operations last year on this very specifically.

This testimony was published in our professional journal, "The Tax Adviser," last year.

Mr. SCHNEEBELI. I would think the members of this committee would also be interested in your recommendations. I wonder, Mr. Chairman, if the report is not too long, if there is a summary that could be incorporated in the record. I would be interested in knowing what standards we might be able to study.

Mr. SKINNER. We would be glad to put that in the record. I might add that we are very much in favor of a reporting procedure which would enable the Internal Revenue Service to identify those return preparers who are unethical and preparing erroneous and fraudulent returns so that they can be restrained.

Mr. SCHNEEBELI. I can see where this becomes an increasingly difficult problem for IRS without specific guidelines as to how to apply any penalties against such companies?

Mr. SKINNER. Our recommendations included thoughts on penalties. Possibly as a result of our testimony, the employer identification number of the return preparer in the 1972 array of tax forms gives the IRS the capability to code that into the computer processing of returns so that if a real bad looking return is found, others prepared by the same preparer can be withdrawn or retrieved by the system—and enhance the prospects that the quality of tax returns preparation services will be improved.

Mr. SCHNEEBELI. I would think this would be an area in which our committee members would be interested also because it is becoming a major problem at the present time.

Mr. ULLMAN. Without objection, the appropriate summary of the recommendations will be incorporated in the record. [The information referred to follows:]

STATEMENT OF DIVISION OF FEDERAL TAXATION OF THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS BEFORE THE LEGAL AND MONETARY AFFAIRS SUBCOMMITTEE OF THE HOUSE COMMITTEE ON GOVERNMENT OPERATIONS, APRIL 18, 1972

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REGULATION OF COMMERCIAL TAX RETURN PREPARERS IS NECESSARY

Mr. Chairman, you and the members of your Subcommittee are to be commended for the timeliness of these hearings and for your efforts to come to grips with a problem that threatens to undermine the integrity of our tax system. It is no secret that no one loves to pay taxes. Therefore, we must do all that we can to prevent or eliminate any situation which would lead to a widespread feeling among taxpayers that it is socially acceptable to cheat on taxes since everyone else is doing it and getting away with it. I fear that the recent revelations by IRS Commissioner Walters about substantial abuses by commercial tax return preparers could contribute greatly to the "it's OK to cheat on taxes" syndrome. We cannot allow this attitude to persist.

We believe, therefore, that some form of regulation of commercial tax return preparers is necessary. We must put a stop to improprieties associated with advertising by commercial tax return preparers and tax return preparers who are incompetent or unethical.

The problem is compounded as more and more taxpayers seek assistance in the preparation of tax returns. The high level of reliance by taxpayers on someone else to prepare their returns can be largely attributed to the complexity of our existing tax system. We believe that unless the tax system is greatly smplified, taxpayers will continue to rely on others to assist them in determining their tax obligations.

I hasten to add that we recognize that much of the existing complexity arises from the fact that the federal tax system is used not only to raise revenue, but also to influence the course of the economy and to promote social change. Complexities also arise by the very laudable effort to develop a tax system which is fair and equitable.

I do not wish to minimize the difficulty which Congress faces in its attempts to simplify our tax system. Congress has a tough job in reconciling the diverse points of view in its attempt to shape a tax system which is used to meet multitude of objectives. We know how difficultit is because we regularly make recommendations for tax simplification to your colleagues on the Ways and Means Committee. Regrettably, we have had the same limited success as everyone else. We also know how difficult it is to design simple tax forms since we work very closely with the Service's Tax Forms Coordinating Committee. Unfortunately, tax forms cannot reasonably be more simple than the complex laws on which they are based.

SUMMARY OF TAX DIVISION RECOMMENDATIONS

With this introduction, I will now summarize our recommendations for action to protect the public from incompetent and unethical tax return preparers. We recommend the following:

1. Preparer information returns. A procedure should be adopted to require commercial tax return preparers to file an information return containing the name and identification number of each taxpayer for whom a return is prepared. 2. Negligence penalties. Negligence penalties should be imposed on tax return preparers.

3. Judicial injunctions. The IRS should be authorized to seek judicial injunctions to prevent unethical tax return preparers from providing future services. 4. Penalty for misleading advertising. A monetary penalty should be imposed for each return prepared by a tax return preparer who engages in misleading advertising.

5. Penalty for failure of preparer to sign returns. A monetary penalty should be imposed for failure by tax return preparers to sign returns which are prepared for a fee.

6. Copies of tax returns. Copies of all returns prepared by tav return preparers should be retained for a period of three years. Also, preparers should give a copy of each return prepared to the taxpayer.

7. Expand publicity programs. The IRS should expand its publicity programs to inform taxpayers about the responsibilities of tax return preparers and to caution taxpayers to engage only qualified preparers.

8. Training of preparers. Cooperation between the IRS and established schools and universities should be expanded in presenting courses to train tax return preparers.

DISCUSSION OF RECOMMENDATIONS

At this time, I would like to provide you with more information about some of our recommendations.

1. Preparer information returns. Commercial tax return preparers should be required to file with the IRS an information return listing the name, address and identification number of each taxpayer for whom a return is prepared. The tax return preparer would file the information returns at a central IRS location by June 30 of each year.

We recommend this proposal as an effective and uncomplicated way to regulate the performance of commercial tax return preparers. Utilizing its computer capability, the IRS could process the information returns to identify all returns prepared by a particular tax return preparer. This would enable the IRS to determine whether the returns were done in a competent manner and whether any "pattern of abuse" exists. In addition, our recommendation would have the psychological effect of impressing on tax return preparers that a workable enforcement procedure is in effect and that improper practices could easily be detected.

We believe that a preparer information return procedure is superior to either a "licensing" or "registration" system. Under a licensing system, the IRS would be required to determine a tax return preparer's qualification, issue licenses, and regulate licensees. Under a registration system, a tax return preparer would merely file his name with the IRS to indicate his intention to prepare tax returns.

We believe that both the licensing and registration systems would be cumbersome, expensive and most importantly, ineffective. A signifiant defect in both systems is that the IRS would not automatically obtain information about the returns prepared by a licensee or registrant. Without this information, the IRS could not easily check on the competence or honesty of the return preparers. Moreover, unless a licensee or registrant could be legally prohibited from adver tising his status, the potential for promotional abuses could be great. For example, the issuance of licenses or registration cards might be regarded by the public as an endorsement by the IRS of the competence or integrity of tax return preparers, especially if a return preparer could advertise or hang out a shingle that he is "licensed" or "registered" by the IRS.

We believe that our recommendation for a preparer information return, together with our other recommendations, would provide the IRS with an effective regulatory and enforcement capability.

Let us keep in mind that the Service's effective audit program is a major reason why our tax system has worked so well to date. Similarly, procedures which would enable Service to regulate the quality standards and ethical behavior of tax return preparers should have the same beneficial effect. And while I am speaking about effective auditing, let me say that we view with great alarm any substantial curtailment of the Service's audit capability. We voiced our concern about this when in 1969 the Service's funds were to be cut by the Revenue expenditure and Control Act of 1968. Fortunately, Congress recognized the need to exempt the IRS from some of the expenditure controls.

We again voice our strong concern that the Service not be unwisely distracted from what it does best-tax audits. Please do not underestimate this auditing function, both for taxpayers and tax return preparers. It is an effective preventative medicine as well as a sharp surgical instrument.

2. Negligence penalties. Negligence penalties should be imposed on persons who prepare returns for compensation. The burden of proof, however, should be on the Service as distinguished from the burden on the taxpayer in negligence cases. Unless the burden of proof is on the Service, preparers could be placed in an extremely unreasonable position. For example, requiring the preparer to assume the burden of proof would:

Make is difficult for preparers to defend themselves against unwarranted claims;

Force preparers to take a defensive posture and in some cases to discontinue the practice of preparing returns; and

Lead to possible abuse and intimidation of preparers, thereby impairing their judgment in the preparation of returns.

3. Use of judicial injunction. The Service should seek authorization to obtain judicial injunctions to prevent future preparation of tax returns for compensation in cases of consistent or willful preparation of false or deficient returns. Consideration might be given to allowing for correction of deficiencies prior to the use of judicial restraint. In the case of commercial chain or franchise preparers, the authorization should provide the flexibility of enjoining only offending units of the preparer organization.

4. Penalties for misleading advertising. A penalty should be imposed of say, $1.00 to $5.00, for each return prepared if the tax return preparer misrepresents through public advertising, signs, etc., his qualifications, right to practice before the IRS, or the extent to which he will indemnify clients for errors on returns. Since tax return preparation is generally a high-volume business, we believe that a penalty up to $5.00 could prove to be very substantial when applied to a preparer's entire practice. Where a penalty is not overly harsh it is more likely to be applied by those responsible for administration.

We also recommend that the Service adopt some type of review procedure over material to be used for advertising purposes. The SEC already has such authority in the case of security advisors. Such authority could go a long way in avoiding legal disputes at a later time.

5. Penalty for failure of preparer to sign returns. A penalty should be imposed for failure of paid preparers to sign returns. A penalty could also be imposed for failure to file the information return with the taxpayer's name and identification number as discussed earlier.

6. Copies of returns. Tax return preparers should be required to make copies of all returns they prepare and retain them for at least three years. We suggest,

however, that safeguards be imposed to prevent government agencies, including the IRS, from conducting "fishing expeditions."

We also recommend that preparers give a copy of each return prepared to the taxpayer.

7. Expanded publicity programs. The Service should expand its publicity programs to make clear that taxpayers have the primary responsibility for filing accurate tax returns and that taxpayers should be cautious in their selection of tax return preparers. A better understanding by taxpayers of this aspect of our self-assessment tax system would make them less vulnerable to the abuses and excesses of some tax return preparers.

While many taxpayers should be able to prepare their own returns, caution should be exercised in aggressively urging that they do so. As I mentioned at the outset of my remarks, our tax structure is complex and even so-called simple tax returns could contain unexpected complications and elective procedures which taxpayers may well overlook.

8. Training of preparers. The level of competence of commercial tax return preparers should be upgraded. We believe that the Service should cooperate with established schools and universities in developing courses to upgrade the quality of return preparation.

We do not believe, however, that the Internal Revenue Service itself should undertake to provide training facilities for such preparers. We are concerned that any effective training program sponsored by the Service would strain the financial and personnel resources of the IRS. We are also concerned with the possibility that if a preparer is able to advertise successful completion of an IRS sponsored course or an IRS examination, it may conjure an image in the minds of many taxpayers of inside "know-how." We believe this result would be undesirable and not in the best interests of the taxpaying public.

REQUIREMENTS AND RESPONSIBILITIES OF CPA'S

To assist your Subcommittee in evaluating what action it should take in regulating commercial tax return preparers, with your permission, I would like to provide you with some background information which I believe points up the seriousness with which the Institute and its members view their responsibility to the public. For example:

1. Admission to the profession. Before an individual is awarded a CPA certificate, he must successfully complete the Uniform CPA Examination which is prepared and graded by the Institute. The Boards of Accountancy in 54 jurisdictions use the Uniform CPA Examination as one of the means to measure technical competency of CPA candidates. The Uniform CPA Examination is a demanding examination given twice a year and lasts for 21⁄2 days. The examination includes federal income taxation and is designed to test the CPA candidate's technical knowledge and his ability to apply with knowledge skillfully and with good judgment. One measure of the severity of this examination is that only about 10% of the candidates pass the entire examination the first time around. A higher percentage pass it on a part-by-part basis. With your permission, I offer for inclusion in the record of the hearings a booklet which provides information on the Uniform CPA Examination.

2. Basic and continuing education. In addition to the successful completion of the Uniform CPA Examination, a CPA candidate must have a college degree or its equivalent. Moreover, Council, the governing body of the Institute, recently adopted a resolution on continuing education which, if adopted by all 54 jurisdictions, would require a CPA to complete a minimum of 15 days of continuing education every three years.

While the resolution on continuing education is in the form of a requirement, it is significant to know what CPAs are doing to maintain their competency right now without such a requirement.

The Institute sponsors in its Professional Development Program some 70 courses in all areas of interest to CPAs. Of these, 25 deal with federal taxation. In 1971, there were approximately 26,000 enrollments in all Professional Development presentations. About 14,000 of these enrollments were in the tax programs. With your permission, I offer for inclusion in the record of the hearings, a booklet presenting all of the Professional Development programs available in 1972. 3. Code of Professional Ethics. The Institute has a strong Code of Professional Ethics. Members of the AICPA are required to abide by its rules and interpre

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