What is FTB doing about questionable tax preparers?
The FTB 2006 Strategic Tax Gap Plan, and its supporting enforcement provisions, provides a framework for addressing the issue of questionable tax preparers. More than 65 percent of California taxpayers use tax professionals to prepare and e-file their tax returns. FTB is making professional practitioner misconduct unprofitable by identifying problem practitioners, auditing the returns they prepare, and assessing penalties.
Under California law preparers must be licensed or registered to prepare income taxes for a fee - otherwise, they are preparing returns illegally. CPAs, public accountants, enrolled agents, and attorneys are licensed by either the state or federal government, and may charge a tax preparation fee. All other tax preparers who charge a fee for their services must be registered with the California Tax Education Council, or CTEC. CTEC is a nonprofit organization established in 1997 by the California Legislature to protect the public, and promote competent tax preparation. Legislation passed in 2005 (Senate Bill 229 (Stat. 2005, Chap. 658)) designated FTB the enforcement arm of CTEC.
CTEC registration and requirements
Paid tax preparers not already regulated by the California Board of Accountancy, California State Bar, or the IRS' Office of Professional Responsibility must meet the following requirements:
- Sixty hours of training by a CTEC approved provider.
- $5,000 bond.
- $25 registration/annual renewal fee.
- Twenty hours of annual continuing education.
Tax preparers who charge fees for their services must be registered with CTEC, or they are subject to immediate enforcement of the Tax Preparer Penalty. The initial penalty is $2,500, and subsequent penalties are $5,000. To identify unregistered preparers, FTB staff:
- Visit preparers to find and identify those not registered.
- Follow up on complaints filed with CTEC or FTB.
- Follow up on preparers who are disbarred by the California Bar, become unenrolled by the IRS, or decertified by the California Board of Accountancy.
- Use internal information to identify potentially unregistered preparers.
FTB strategies for dealing with questionable preparers
We use modeling techniques to spot tax return trends, patterns in claimed credits, and overstatement of deductions on Schedules A and C. Penalties are assessed as warranted.
Here are some of our specific initiatives:
- We increased staff to verify the refundable Child and Dependent Care Expenses Credit to prevent and recover fraudulent claims.
- We verify withholding claims to prevent and recover fraudulent claims.
- We participate as a member of the Federation of Tax Administrator's (FTA) Suspicious Filer Group. California is one of 35 states that participate in the FTA's Suspicious Filer Information Exchange Program.
- We worked jointly with the IRS to:
- Develop a brochure on "How to Select an Income Tax Preparer."
- Create a return preparer selection model using FTB and IRS data.