New York this month became the fourth U.S. state to regulate unlicensed tax return preparers, at a time when consumer advocates are pushing for more state oversight as a federal crackdown stalled.
Nearly 80 million Americans pay someone to prepare their tax returns. While most of this work goes smoothly, some does not.
Tax return preparation problems - some inadvertent and some deliberate - occur frequently among small, mom-and-pop tax return firms, according to government watchdogs.
About a third of the $9.4-billion tax preparation market is controlled by H&R Block Inc and three other large companies, with the remaining two-thirds split between licensed and unlicensed preparers, said research group IBISWorld Inc.
Seeking to regulate the business for the first time, the U.S. Internal Revenue Service earlier this year tried to impose new testing and continuing education requirements on the estimated 350,000 unlicensed preparers nationwide.
But that effort was blocked in January after a lawsuit was filed by a libertarian group opposed to the rules. The Obama administration has appealed. A decision is expected soon.
In the meantime, interest in state oversight is growing, said David Williams, chief tax officer at Intuit Inc, which sells tax preparation software.
"You're seeing the advocacy community step up and shift focus from the federal government to getting the states to do this," said Williams, former IRS tax preparer office director.
Joining California, Oregon and Maryland in imposing regulations, New York will require independent preparers to pass a competency test and take continuing education classes.
Among the new rules, New York tax preparers cannot charge "an unconscionable fee" and must adhere to "best practices" according to the New York Department of Taxation and Finance web site.
The state's rules, which became effective December 11, carry possible criminal penalties.
Eventually, New Yorkers will be able to look up their tax preparer on the department's web site to see if he or she is complying with the rules.
"We will be investigating complaints, assessing penalties seeking criminal prosecution," among other disciplinary actions, said Geoffrey Gloak, a spokesman for the department.
The New York rules may face a court challenge, as well, from the Institute for Justice, the group that sued over the IRS rules, said a lawyer with the group.
Dan Alban, who is representing the institute in its case against the IRS, said: "We're always concerned when states impose burdensome licensing schemes ... These regulations certainly raise those same concerns."
In November, The National Consumer Law Center, a consumer-advocacy group, reported on examples of unlicensed tax preparer problems and called for states to enact their own rules.
Chi Chi Wu, a lawyer and author of the NCLC report, said states lose tax revenue to fraudulent preparers. The institute's attack on preparer rules is a threat to consumers, she said.
"We shouldn't be sympathetic to a mom-and-pop shop if it's making a lot of mistakes or committing fraud," Wu said.