During undercover site visits to 19 randomly selected commercial tax-preparation businesses in states that do not regulate paid tax return preparers, only two preparers calculated the correct refund amount on a taxpayer’s return, according to a new study released by the US Government Accountability Office (GAO) on Tuesday.
The results of the study were announced by James McTigue Jr., GAO director of tax services, during a Senate Finance Committee hearing yesterday that focused on regulating the nation’s paid tax return preparers. The GAO found that 17 of 19 paid preparers made refund errors, ranging from giving the taxpayer $52 less to $3,718 more than the correct amount.
“Clearly, taxpayers were not well-served by the preparers who we visited,” McTigue told the Senate Finance Committee on Tuesday.
Investigators posed as taxpayers during the site visits and asked paid preparers to prepare – but not file – their federal tax returns. According to McTigue, two scenarios were used for the study. One scenario was a single mother who is employed as a waitress. She receives wage income and unreported cash income from tips. She has one child who qualifies for the Earned Income Tax Credit (EITC) and one child who does not.
In the second scenario, a mechanic earns the majority of his family’s wages. He and his wife also have some side income from car repair work and child care. They have three children who live at home, one of whom is in college.
Law firms, CPA firms, and single-office tax-preparation businesses were not visited by investigators.
According to the study, other common errors that were made by paid preparers included:
- Not reporting non-Form W-2 income (such as cash tips) in 12 of 19 site visits.
- Claiming an ineligible child for the EITC in three of 10 site visits where applicable.
- Not asking the required eligibility questions for the American Opportunity Tax Credit.
- Not providing an accurate Preparer Tax Identification Number (PTIN).
McTigue also noted that the undercover investigators paid a lot of money for mostly incorrect tax preparation. In the mechanic scenario, fees ranged from approximately $300 to $600. The average fee for the waitress scenario was nearly $300, more than 80 percent of her weekly pay, he said. Also, higher fees did not translate into more accurate returns: The fee charged for the correct mechanic return was one of the lowest at $311.
“Undoubtedly, many paid preparers do their best to provide clients with returns that are accurate and fully compliant. However, poor performance can result in taxpayers being audited, having to pay back taxes and interest, and possibly even penalties,” McTigue said during the hearing.
McTigue agreed with IRS Commissioner John Koskinen that Congress should give the IRS authority to regulate paid tax preparers. According to the GAO, 55 percent of all paid preparers in the United States are not subject to testing or education requirements. The only preparers regulated are tax attorneys, CPAs, and enrolled agents.
In 2010, the IRS rolled out the Registered Tax Return Preparers (RTRP) program that required paid preparers to obtain a PTIN, pass a competency test, pay an annual application fee, and complete fifteen hours of continuing education annually.
But the IRS suffered a blow in federal appeals court on February 11 when a panel of three judges upheld a lower court’s ruling early last year that the agency did not have the legal authority to regulate tax return preparers in the United States, which invalidated the RTRP program’s testing and education requirements. However, paid preparers are still required to obtain a PTIN yearly and pay a fee ($64.25 for first-time applicants; $63 to renew annually).
Only four states regulate paid tax preparers: California, Maryland, New York, and Oregon.
“Taxpayers today face a double burden – crooked or incompetent tax preparers along with an overgrown and complicated tax code. We should put an end to both,” Senate Finance Committee Chairman Ron Wyden (D-OR) said in a written statement following yesterday’s hearing. “I’m proud to say my state gets this issue right. While Oregon and a few other states are already leading in this area, we need to restore federal standards to protect all American taxpayers.”