* About 340,000 preparers must pass IRS test
* Stress may squeeze out elderly preparers
* Dec. 31, 2013 deadline for passing exam
WASHINGTON, Oct 18 (Reuters) - These are testing times for tax preparers.
The U.S. Internal Revenue Service is urging about 340,000 preparers of annual returns to take the agency's new proficiency exam.
The test is part of a regulatory shake-up to the tax return preparation business. The IRS started an overhaul in 2009 to weed out illicit tax preparers who opened for business in tax season and then disappeared before they could be prosecuted for refund fraud.
About 84 million tax returns were filed by paid preparers in 2011, according to IRS data. Every year, more than half of all taxpayers pay someone else to do their taxes. The agency said it prevented $14 billion in fraudulent tax refunds in 2011.
The test, which is a first of its kind, is required for any tax preparer who is not a lawyer, a certified public accountant, or an enrolled agent (a person certified to represent taxpayers before the IRS).
An IRS spokesman said in a statement on Wednesday the agency has no plans to extend the Dec. 31, 2013, deadline for taking the test. The agency sent a letter on Sept. 28 urging preparers to take the exam.
Preparers need to pass the test whether they are working independently or for big tax preparation companies such as H&R Block and Jackson Hewitt. A return preparer can be fined for filing returns without certification.
About 6 percent of tax preparers who need to pass the test by the end of next year had done so as of Oct. 1, according to IRS figures. The test debuted last November.
Test-takers have 2 1/2 hours to finish 120 multiple choice or true-or-false questions. The test costs $116.
The concern among tax professionals is that taxpayers might find their return preparers either giving up voluntarily or being squeezed out because of the test requirement. Some tax preparation professionals said test-taking anxiety is driving preparers away.
"The quality of tax preparation will go down" as less-experienced preparers replace the seasoned tax veterans, said Paul LaMonaca, vice president of the National Society of Tax Professionals and a tax preparer in Falls Church, Virginia.
The IRS has not said how many test-takers are passing the exam, but tax professionals said they are seeing more than 80 percent of test-takers prevail. The test can be retaken.
The low participation rate stems in part from the demographics of the tax return preparation business. The industry has been bolstered by older individuals, including retired seniors who are math whizzes eager for some part-time cash.
For these older tax preparers, many in their 70s or 80s, "they just decided they are going to get through this next tax season and then give it up rather than take the exam," said Chuck McCabe, chief executive of the Income Tax School Inc. in Richmond, Virginia.
The other challenge is scheduling a time and place to take the test at one of 260 national locations. By next year, test-takers in rural Western states may have trouble finding nearby testing locations. Tax preparers in urban areas may need to leave town to take the test for lack of openings in their cities.
H&R Block said it is covering the cost for its company-owned preparer stores, while about 1,700 franchise-owned stores will either cover the costs or their employees will pay for the test themselves.
Jackson Hewitt's franchise employees will also need to pay for the test.
H&R Block and Jackson Hewitt said they were encouraging their preparers to take the test to be certified for the coming tax season that starts in January.