WASHINGTON (Reuters) - Tax preparers are chewing their pencils as the Internal Revenue Service gets ready to impose the first comprehensive program of fees and rules on the industry's 730,000 practitioners.

Some fear the IRS campaign against tax fraud could squeeze out small, independent businesses and allow large competitors such as H&R Block Inc and Jackson Hewitt Tax Service Inc to capture market share.

The IRS, which plans to finalize the new fees in coming months, recently said it was open to ways to mitigate costs.

To get certified, preparers will need to register and pass a competency test. Some will need to be finger-printed, pass a background check with the Federal Bureau of Investigation and take continuing education classes.

The IRS estimates the licensing fee for each tax preparer at between $250 and $275, but H&R Block expects the cost will be more than $400, including state fees and its own background-check expenses.

The IRS fees are "a touchy and sensitive topic," said Mark Steber, chief tax officer at Parsippany, New Jersey-based Jackson Hewitt. "The fees "do seem large, and they are large."

Practitioners say the fees, some still in flux, will trickle down to Americans who pay for personalized help with their taxes. Faced with a complex tax code, more than half of all U.S. taxpayers filed a return last year with the help of a preparer, according to the Government Accountability Office.

The tax-preparation business has traditionally been a free-wheeling industry. Only California and Oregon have laws regulating it. In the rest of the country, anyone can hang out a shingle and fill out tax returns.

The IRS wants to weed out illicit tax preparers who open for business in tax season and then disappear before they can be charged. Last month, for example, the Justice Department prosecuted a Florida woman who filed returns for homeless people claiming first-time-homebuyer tax credits.


In June 2009, IRS Commissioner Doug Shulman started an overhaul of the tax preparer system.

As the proposed rules stand now, fees would hit about 450,000 preparers particularly hard -- those lacking professional certifications as lawyers or certified public accountants, and those registered with the IRS as preparation supervisors.

Fees and competency tests could drive out honest preparers along with swindlers, said Chuck McCabe, chief executive officer of the Income Tax School Inc in Richmond, Virginia.

"The fees definitely do pose a barrier to entry," said McCabe, whose school offers tax-preparation classes. The certification requirements are "definitely a deterrent."

Tax preparation has been a valuable job opportunity for many older people and mothers with young children looking for part-time work, he said.

Older preparers might not want to pay the fees and might struggle with the competency test, McCabe said, predicting that the consequences "will create a vacuum" of preparers.

Meanwhile, analysts say big firms may pay for their staffs' certifications to retain experienced employees, and are poised to gain a competitive edge over small, independent preparers.

Jackson Hewitt preparers filed 2.6 million retail U.S. tax returns for the 2010 year, while H&R Block handled 14.7 million, or about 11 percent of the total.


H&R Block said it would cost about $8 million to get roughly 100,000 company employees certified. Its 1,733 corporate franchises will also have to pay fees.

"It's definitely going to add costs," especially for H&R Block's franchises, said Kartik Mehta, director of research at Northcoast Research Holdings LLC in Cleveland.

Still, Mehta added: "I don't think the costs are that onerous."

The IRS agrees. David Williams, director of the agency's return preparer office, said the costs bring the preparation business in line with the professional needs of the work.

"In virtually every service profession, there are basic, minimum standards for suitability," said Williams, who led the regulatory overhaul.

Most barbers and hair stylists must pass some suitability test. "You will see those licenses on the wall," he told Reuters, while tax preparers, who face no such requirements in most states, have access to an individual's "most intimate financial information."


At a hearing last week, industry groups raised their concerns with IRS and U.S. Treasury Department officials.

The American Institute of Certified Public Accountants said it supported certification, but disapproved of its costs.

"We have serious concerns regarding the level of burden that the user fee regulations will place on CPA firms, primarily small- and medium-size CPA firms," said Patricia Thompson, who chairs the AICPA tax executive committee.

H&R Block asked if the IRS would consider allowing firms to fingerprint their employees and forward the information to the


Williams said the IRS would take another look at the costs, especially for fingerprinting. "Maybe there is a viable alternative that would suffice in lieu of an FBI fingercheck," he said.

The public comment period on fingerprinting fees closes on October 26.

(Editing by Lisa Von Ahn)

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