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California Legislation Would Discriminate Against California Registered Tax Return Preparers (CRTPs)

by
Lee Reams and Philip Storrer
on
2/2/2020
California Legislation Would Discriminate Against California Registered Tax Return Preparers (CRTPs)

Assembly Bill 1140 (AB-1140) is a bill working its way through the California legislature that would adversely impact California tax return preparers directly, as well as their clients indirectly. If enacted, this bill would infringe upon free trade and impose requirements that discriminate against a small but very important portion of the California tax preparation community known as California registered tax preparers (CRTPs).

These new requirements would apply to CRTPs while exempting a much larger portion of the tax preparation community that includes certified public accountants, enrolled agents and attorneys. If enacted, AB-1140 would provide precedent for the California legislature to impose similar requirements on other forms of service businesses including financial planners, real estate and insurance brokers, dentists, attorneys and CPAs, just to mention a few.

AB-1140 requires CRTPs (not CPAs, EAs or attorneys) to provide potential clients with two disclosures, one before preparing the tax return and one after preparing the tax return.

Notice Before: A written notice would be required before preparing the potential client’s return that includes all of the following information:

  • A standardized disclosure statement informing a potential client with income below sixty-six thousand dollars ($66,000) that they may be eligible for free online tax preparation services, and that an individual with income below fifty-six thousand dollars ($56,000) may be eligible for free in-person tax preparation services through the IRS’s Volunteer Income Tax Assistance (VITA) program. The statement shall also identify the IRS’s internet websites where an individual may find additional information on each program and the Franchise Tax Board’s CalFile internet website.
  • A list of costs and fees charged by the CRTP for usual and customary tax preparation services, including, but not limited to, California Form 3514 and federal Schedule EIC (Form 1040).
  • The CRTP’s federal PTIN number.

Notice After: After completing a tax return, a CRTP would be required to provide a written disclosure signed and dated by the CRTP including:

  • The total cost charged by the tax preparer
  • The CRTP’s contact information and federal preparer number (PTIN)
  • Whether others were involved in preparing the return, their names, contact information and PTINs

Both statements must be signed and dated by the client and retained by the CRTP for a minimum period of three years.

A CRTP who repeatedly violates these provisions will be subject to a $750 penalty.

Here’s what’s wrong with this legislation:

1. DISCRIMINATORY – First and foremost, this legislation is discriminatory in that it only applies to CRTPs, while other tax preparers in the state (the majority of preparers) who are certified public accountants, enrolled agents and attorneys are exempt from the provisions. This is grossly unfair and discriminates against CRTPs. Is there a hidden motive? AB-1140 must certainly invite legal action on behalf of CRTPs for injury to competition that will result. AB-1140 will cause CRTPs to experience increased costs of compliance and decreased revenue from clients.

2. DEFINITION OF INCOME – AB-1140 requires the notice to be provided to potential clients with income of a certain amount or less. However, the legislation does not define income. Does “income” here mean gross income, net income, or taxable income? The authors of this legislation failed to consider this aspect.

3. WHAT COMES FIRST, THE CHICKEN OR THE EGG? – The way AB-1140 is written, it is impossible to comply with, as it requires the statement to be given to a potential tax client before preparing his or her tax return. However, before engaging a client and preparing a return, the CRTP will not know the potential client’s income level.

4. MEANS-BASED QUALIFICATION – The fact that AB-1140 specifies a single income level as a means basis for determining eligibility for free help is totally inappropriate for several reasons: 1) A single young adult earning $66,000 per year may very well be able to afford commercial tax return preparation fees; 2) A taxpayer with $100,000 of annual income supporting a family of 8 should be qualified. These income levels come from income restrictions imposed by the IRS in their Volunteer Income Tax Assistance program (VITA). Any income limit should be much more nuanced, making the required pre-engagement notice even more problematic.

5. INCREASES PREPARATION COSTS – If the intention of this legislation is to save lower-income taxpayers the cost of having their tax returns prepared, those who choose to use a CRTP rather than an unregulated volunteer preparer will probably see the tax return cost increase due to the additional regulatory burdens imposed by this legislation on CRTPs. CRTPs typically provide tax return preparation services to moderate-income taxpayers at a more moderate cost than their CPA & EA competitors.

6. DUE PROCESS & ADMINISTRATIVE RESTRAINT OF TRADE – Treating one segment of the tax preparation industry to cost-increasing and revenue-decreasing legislation certainly invokes governmental restraint of trade and due process concerns. By subjecting CRTPs to its provisions, AB-1140 bestows economic privilege to CPAs, EAs and tax-preparing attorneys.

7. FREE FILE MAY NOT BE FREE – The IRS VITA program uses unregulated volunteers with no continuing education requirements and with different degrees of expertise to prepare returns. These volunteers have no financial liability for the returns they prepare or any obligation to respond to federal or state inquiries related to the returns they prepare. CRTPs, meanwhile, are required by sections 22250 – 22259 of the California Professions and Business Code to annually complete 20 hours of continuing tax education composed of 15 hours of federal and 5 hours of California tax law. They are required by the California Professions and Business Code to be responsible for the returns they prepare and are required to be bonded. The bottom line is that a free file error could cost far more than tax preparation by a legally registered tax return preparer (CRTP). This extra cost does not include the headaches of dealing with the FTB or IRS to straighten out a preparation error.

8. FEDERAL ID VERIFICATION – A tax preparer cannot engage a potential client until he or she has first complied with the IRS-mandated identification protocol, which helps protect against returns being filed with fraudulent or stolen IDs. This means a CRTP must perform preliminary work required by that protocol before he or she can even determine a potential client’s income level. Thus, a CRTP under AB-1140 would be expected to perform services without payment.

9. AB-1140 USES FEDERAL PTIN RATHER THAN CTEC NUMBER – California Business and Professions Code Chapter 14, Sections 22250 – 22259 includes the requirement that all tax preparers except CPAs, EAs and attorneys must be registered with the California Tax Education Council before preparing returns. A CRTP cannot be registered without a PTIN. However, the legislation requires a CRTP to disclose his or her federal PTIN rather than CTEC registration number. This does not help ferret out preparers who are not in compliance with the California Business and Professions Code.

10. CRTPs WORKING FOR EXEMPT PREPARERS – AB-1140 does not provide guidance on how its provisions apply in situations where a CRTP is employed by a CPA, EA or Attorney to assist in the preparation of returns. If an employee is a CRTP, does this mean the provisions of AB-1140 now apply to CPAs, EAs and attorneys?

This bill has already passed the State Assembly. If you are a CRTP or other stakeholder, contact both your state assemblyperson and state Senator and voice your disapproval. Feel free to send them a copy or link to this article.

Important: please voice your opposition by signing this petition and sharing it with your network!

The author of this legislation is Assembly Member Mark Stone, in case you would like to contact him directly. You can call him at (916) 319-2029 or (831) 425-1503.

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Lee Reams and Philip Storrer

Lee Reams and Philip Storrer

Lee Reams, BSME, EA An owner and Chief Technology Officer of ClientWhys, CountingWorks and TaxBuzz. Author of the Big Book of Taxes and numerous CPE courses for tax professions. Founded and oversees CW Connect - a tax forum for tax professionals, and speaker for ClientWhys tax seminars. Author of bi-weekly tax blogs, Lee is a former founding Board Member of the California Tax Education Council, is a past President of the San Fernando Valley Chapter of Enrolled Agents, Member and past Director for the California Society of Enrolled Agents and a former Director of Blackline Systems. Philip Storrer, CPA Professor Emeritus, California State University East Bay (Hayward) 1973-2004, founder and Director of graduate tax program, Chair, Department of Accounting & Computer Information Systems 2000 – 2004, author of numerous articles and manuscript length pieces on tax including one article quoted by a Tax Court judge as authority in the subject area. A Certified Public Accountant tax consultant largely, litigation support, and currently a pro bono advocate. Education and tax consultant to the California Tax Education Council (CTEC) 1997-present. Internal Revenue Agent, instructor and manager, 1969-1973.

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