TIGTA auditors go undercover to determine reliability of unlicensed tax preparers

A growing number of U.S. taxpayers are relying on tax preparers to file their returns. For the 2007 tax year, that meant 83 million returns, or more than half of all taxpayers.

What troubles the Treasury Inspector General for Tax Administration (TIGTA) is, there is no federal standard regulating this profession. No specific training or education is required and only two states – California and Oregon demand that tax preparers be licensed and have continuing education. That's why legislation has been proposed in Congress that will provide oversight of tax preparers. It's also why, as part of its 2008 Annual Audit Plan, TIGTA auditors posed as ordinary taxpayers seeking assistance.

Auditors in a large metropolitan area visited 12 commercial chain tax preparers and 16 independently owned tax preparer offices. All of the tax preparers involved were unlicensed and unenrolled.

Altogether auditors presented 28 returns for completion. Those 28 returns encompassed five different scenarios, and none of them was complex. The variables included taxpayer status, the number of children, and their status as dependents. Some of the returns showed wages while others showed self-employment income (with incomes ranging from $16,000 to $85,000).

The firms also addressed issues such as early distribution of retirement funds, Earned Income Credit, Child Tax Credit, savings interest, Saver's credit, education credits, and business expenses.

Out of 28 returns, only 11 were filed correctly. Seventeen returns contained errors, 11 of which, the IRS says might've been human error or misinterpretation of tax law. The remaining six returns were deemed to contain misstatements that were both willful and reckless. Taken together, the net effect of the inaccuracies was an understatement of tax liability of $12,828.

In each case, wages, self-employment income, and savings interest were handled correctly.

The most common errors involved business expenses (none of the preparers who handled returns involving business expenses handled these items correctly), Child Tax Credits, education credits, and Saver's Credits.

In one case, the auditor presented a 1099-R for an early distribution, the tax preparer failed to include it in income. That omission caused the auditor to qualify for an Earned Income Tax Credit. It also led to a miscalculated Child Tax Credit and an improper claiming of an Additional Child Tax Credit. And, the tax preparer failed to properly claim a dependency exemption. If the return had been prepared accurately, it would've resulted in a tax bill of $500. Instead, it reflected a tax refund of $4,600.

In another case, the tax preparer changed the auditor's filing status from single to head of household, and reported that the auditor's children lived with him or her for the entire year, even though the auditor stated that they lived with him or her less than half the year. These inaccuracies qualified the auditor for dependency exemptions, the Child Tax Credit, and the Earned Income Credit, turning a $100 refund into a $6,000 refund. That, said the tax preparer, is what the auditor was entitled to.

None of the seven preparers who filed returns involving the Earned Income Tax Credit followed the Internal Revenue Code requirement of diligence in determining taxpayer eligibility.

In some of the EIC returns, tax preparers also:

  • Failed to sign the return
  • Failed to provide his or her identification number
  • Neglected to take ordinary steps to protect the identity of the taxpayer, exposing the taxpayer's Social Security number to the view of other customers. In one case the tax preparer loudly repeated the Social Security number within earshot of other patrons and preparers.

Fees charged for the returns prepared ranged from $74 to $271 and higher fees did not guarantee greater care or accuracy. Collectively, through the course of the normal tax season, the tax preparers worked on 973 returns. Of those, one preparer was responsible for 733. TIGTA has presented the information collected from the auditors to the IRS.

What should be done? Currently the IRS does not maintain a list of preparers who are unlicensed and unenrolled and is not able to determine the level of compliance and competency among this group of tax preparers. The tax agency states that they have no way to know how many individuals are operating as unenrolled, unlicensed tax preparers.

TIGTA recommends that the IRS develop a single form of identification that tax preparers must use in order to provide better oversight and monitoring of tax preparers, rather than relying on one of three (SSN, EIN, or tax practitioner number).

TIGTA also advises taxpayers to ask questions about licensing, education, and experience before turning over their personal indentifying and financial information to a tax preparer. Taxpayers can also check with the Better Business Bureau to determine if complaints have been filed.

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