Does a 90% error rate alarm anyone?
By CPA Trendlines Research
America needs tax preparers. Without them … well, it’s hard to imagine how people would calculate any more than the most rudimentary returns.
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The funding of the government would fall to a fraction of what is needed to sustain the nation. Tax preparers are an essential link between the government and those who fund it.
Last year, the Internal Revenue Service processed over 150 million individual returns. Over half of them – almost 80 million taxpayers – relied on paid professionals to calculate their taxes and fill out their returns.
But here’s another shocking fact: Of those paid professionals, more than half were neither CPAs nor Enrolled Agents nor attorneys. In other words, they were not subject to any IRS regulation whatsoever.
Anybody Can Do It
What does it take to be an “unenrolled” tax preparer? A pulse will suffice. A pen would be handy. Competence optional.
Unlike truck drivers, plumbers, cooks and hairdressers, tax preparers need no certification whatsoever. Anybody can do it … even if they don’t know how to do it.
That’s a scary thought – that more than half of all taxpayers rely on “professionals” who don’t necessarily know the difference between a 1040, a .40 and WD-40.
The problem is real. The Government Accountability Office confirmed this. It had some undercover auditors take a fake tax situation to 19 randomly selected tax preparation offices. These were local offices of chains that had at least 10 storefronts. Of the 19, only two calculated the correct amount of the refund. The National Consumer Law Center conducted similar “mystery shopper visits” and came up with similar results.
So 90 percent of them got it wrong. Now extrapolate those findings across these numbers. In 2017:
- 76,715,982 returns were filed through preparers.
- 39,252,790 were prepared by unenrolled preparers.
- 22,837,596 were prepared by CPAs.
- 9,509,999 were prepared by Enrolled Agents.
- 928,962 were prepared by attorneys.
- 4,186,635 were prepared by other certified professionals.
Enter the National Taxpayer Advocate
The IRS recognizes the problem. Several years ago, the Service embarked on a program to impose minimum competency requirements on the tax prep profession. But in 2013, the District Court of Washington, D.C., decided that the IRS did not have the legislated power to regulate tax preparers through testing and continuing education. A year later, a court of appeals upheld the decision, and the IRS pursued it no further.
Enter the National Taxpayer Advocate, Nina E. Olson. In her 2019 Annual Report to Congress, she points out that the court decision does not absolve the IRS from its responsibility to protect taxpayers’ legislatively mandated rights to a) quality service and b) a fair and just tax system.
Americans in general also recognize the problem. A poll conducted by the Consumer Federation of America found that 86 percent of respondents felt that tax preparers should at least pass a competency test. Sixty-eight percent think tax preparers should be licensed. Only seven states –
- New York and
– impose minimum competency requirements on unenrolled preparers.
Congress has proven less enlightened. It has the power to legislate competency exams, continuing education classes and background checks for unenrolled preparers. Such a law would effectively override the court decision that limits IRS powers. Indeed, laws to that effect have been proposed.
None have been enacted.
A Semblance of Control
In a typical mishmash of offices and organizations, the IRS does what it can to keep things under a semblance of control.
- The Return Preparer Office oversees preparer registration but has no disciplinary authority.
- The Office of Professional Responsibility interprets and applies the Treasury Department’s Circular 230, “Regulations Governing Practice before the IRS,” which regulates attorneys, CPAs, EAs and similarly certified practitioners – but not the unenrolled.
- The Wage and Investment division’s Return Integrity and Compliance Services oversees returns involving Earned Income Tax Credit. (Three-quarters of these returns are prepared by unenrolled preparers.)
- The Small Business and Self-Employed section can investigate questionable preparer actions.
- The Criminal Investigation division administers the Abusive Return Preparer Program for cases of the preparation and filing of false returns.
In 2018 the IRS convened these and other offices to develop a coordinated, cross-functional strategy. Incredibly, the Taxpayer Advocacy Service was not invited to participate, so from the sidelines, it can only make a few recommendations, among them:
- Rather than waiting for and then penalizing erroneous and fraudulent returns, the IRS should first try a) educating preparers and b) issuing firm but gentle notices.
- The IRS should reach out to preparers to promote competency.
- The IRS should communicate with the public – especially those most vulnerable to unscrupulous preparers – to inform them of the dangers of working with unenrolled preparers.
The Power to Penalize
The TAS also recommends that the IRS take its power to penalize a little more seriously. Besides finding that 17 out of 19 unenrolled tax preparers couldn’t file a return correctly, it found that 60 percent of all preparers couldn’t get it right, either.
In other words, opportunities for penalties abound. The IRS, however, uses that power sparingly. A recent report from the Treasury Department found that only 15 percent of referrals to an IRS return preparer coordinator resulted in an investigation, and of those investigated, 41 percent were closed without penalty assessment. Between 2012 and 2015, only 15 percent of penalties were actually collected.
The Treasury Department has the power to “suspend, disbar from practice, or censure representatives who are incompetent, are disreputable, violate regulations, or willfully and knowingly mislead or threaten the person being represented.” But in the first half of 2018, the IRS reported only
- one disbarment
- 34 suspensions
- zero censures
Those numbers are pretty low considering that out of 39,252,790 returns prepared by unrolled preparers, 35,327,511 (i.e., 90 percent) were probably wrong, an unknown number of them for reasons more serious than mere incompetence.
The TAS also recommended that the IRS institute a voluntary certification process, including an examination and training materials. A similar program already exists – the Annual Filing Season Program – but independent continuing education providers are responsible for testing. The tests do not necessarily address issues that the IRS feels are problematic.
The taxpayer advocate concluded her discussion of the problem with five low-cost recommendations:
- Invite representatives from TAS to the cross-functional team that was established to develop a coordinated strategy to provide effective oversight of return preparers.
- Develop a comprehensive plan to communicate the coordinated return preparer strategy to Circular 230 preparers and unenrolled preparers.
- Develop a community-based, grassroots communication strategy for educating vulnerable taxpayer populations about how to select a competent return preparer and the risk of return preparer fraud.
- Conduct analysis on the impact of penalty assessments and no change audits on preparers’ behavior in subsequent years, and publish the findings.
- Revise letters and notices (including Appeals Letter 3808) that reference the Directory of Federal Tax Return Preparers to ensure that appropriate caveats are clearly articulated.