Maryland raises the bar for individual tax preparers

For years, anyone in Maryland could prepare tax returns for money, so it wasn't unheard of to find tax services offered at laundromats, car dealerships or palm-reader shops.

The industry is no longer unregulated.

Starting this year, individual tax preparers in Maryland must register with the state before they can fill out a return for a fee. They will have to undergo continuing education if they want to stay registered. And consumers now have a place to go to find out if there have been complaints or disciplinary action against a local tax preparer.

"Before this, tax preparers didn't have to show that they had any qualifications," says Douglas Blackstone, executive director of the Maryland Board of Individual Tax Preparers, which was established two years ago to register and oversee preparers.

Now, he says, "someone who is doing your taxes needs to have at least a certain level of education. Anyone would demand that, just like you would demand that from a doctor or lawyer."

It's been a long time coming. In 2008, Maryland became the third state in the country to require individuals preparing returns for money to be registered. A lack of funding delayed the process, and the state began registering preparers only last year. More than 3,000 have registered.

This is an improvement in consumer protection, but taxpayers will still want to do some homework before hiring a preparer. After all, you will be ultimately responsible for whatever claims a preparer makes on your return.

"The tax return is the No. 1 financial document in our lives today," says Robin McKinney, director of the Maryland CASH Campaign, which provides free tax help for lower-income households. "Make sure the person who is preparing that tax return has the utmost adherence to quality and is keeping abreast of tax law, which changes every single year."

Tax preparation has evolved. It used to be a year-round profession that required preparers to know the ins and outs of tax law, McKinney says. The advent of tax software changed all that.

Anyone who bought software could open up shop as a paid preparer during the tax season, McKinney says, and many did at all sorts of unlikely locations.

These preparers, who often disappeared once the tax season was over, were unregulated. Quality suffered, says McKinney, who lobbied for registration.

Surveys by government workers posing as customers seeking tax assistance from preparers uncovered a high rate of errors. The Treasury Inspector General for Tax Administration, for instance, reported in 2008 that of the 28 returns prepared by commercial chains and small tax offices, 65 percent had mistakes and 35 percent had "willful or reckless" misstatements or omissions.

These sorts of problems moved Maryland, and more recently the Internal Revenue Service, to start raising the standards for preparers.

Maryland's registration covers only individual preparers. Lawyers, certified public accountants and enrolled agents who represent taxpayers before the IRS are exempt. (They already have professional standards to meet.)

Some preparers, Blackstone says, ask why Maryland bothers to register them now that the IRS is taking similar measures.

"The main purpose is to protect the public," says Blackstone, noting that it will be easier for Marylanders to check on local tax preparers through the state than through the IRS.

"It does, however, add credibility to the tax preparer," he adds.

Registration doesn't guarantee a good or honest preparer. The state relies on preparers to be truthful on applications, such as divulging whether they have ever been convicted of a crime.

To register, preparers must be at least 18 years old and have a high school diploma or equivalent education. They also must have an IRS Preparer Tax Identification Number.

Maryland won't test preparers on their tax knowledge, but it will require that they pass a new IRS exam by the end of 2013.