Filing taxes can be complicated. As a result, many people get help from tax preparers. According to IRS data, 81.2 million Americans paid tax preparers to help them complete their returns in 2011. Some of these paid preparers base their fee on a refund percentage or claim that they can provide larger refunds than their competitors.
While one might assume that all paid tax preparers have special training that enables them to offer high-quality tax assistance—and an obligation to adhere to certain professional rules—neither is the case. In fact, the federal government currently lacks the authority to license or regulate most paid preparers.
The IRS has the authority to regulate tax practitioners. These include state-licensed attorneys and certified public accountants, as well as IRS-licensed “enrolled agents,” all of whom are subject to the U.S. Department of the Treasury’s standards of practice. The remaining paid tax preparers—who account for more than half of all tax preparers—are outside of the IRS’ reach. While these so-called unenrolled preparers are required to register with the IRS, the courts have held that under current law, the federal government lacks the authority to license or regulate them. Regulation at the state level is rare as well: Just four states currently regulate paid preparers. In most states, anyone can be a paid preparer, regardless of whether they have relevant training or experience. They can charge tax filers for their services but are not required to undergo training, meet even minimal standards for tax knowledge, or operate within any established code of professional ethics.
Congress should take action to close this loophole and protect American taxpayers for the following three reasons.
1. Regulating all preparers would boost accuracy in tax filing
According to a recent Government Accountability Office, or GAO, study, paid preparers often make errors in filing. And while many tax filers may believe that their preparer is on the hook for a mistake, they are in for a rude awakening. Willful or reckless tax preparers may pay fines if caught, but the taxpayer still has to pay the IRS the shortfall and is responsible for what is stated on the return.
The GAO study thus recommended that Congress pass legislation allowing the IRS to regulate paid tax return preparers in order to “promote high-quality services from paid preparers, … improve voluntary compliance, and … foster taxpayer confidence in the fairness of the tax system.” Oregon—one of the states that regulates paid tax preparers—offers an illustration of the difference that regulation of preparers can make. The same GAO study found that paid preparers in Oregon were 72 percent more likely to file accurate returns than preparers in the rest of the United States.
2. Low-income filers are especially vulnerable
Low-income individuals are especially likely to seek help from paid preparers in filing their taxes: For anyone who receives the Earned Income Tax Credit, or EITC, a refundable tax credit available to low- and moderate-income workers, paid preparers are their most common entry point to the tax system. Some 60 percent of EITC recipients use a paid preparer to complete their tax return, a figure that actually may be low, since many paid preparers do not sign the return, even though they are required by law to do so. And more than three-quarters of those preparers are unenrolled.
A National Taxpayer Advocate survey of individuals eligible for a Low-Income Taxpayer Clinic concluded that “the low-income population is vulnerable and more likely than the population at large to be taken advantage of by unskilled or unscrupulous tax return preparers.” In fact, citing another study conducted by the National Research Program, National Taxpayer Advocate Nina Olson testified before Congress that nearly half of EITC returns prepared by unenrolled preparers who are not affiliated with a national tax preparation firm contain overclaims that average one-third of the amount claimed.
The lack of standards for unenrolled paid preparers stands in stark contrast to the training and oversight required for many volunteer preparers. For example, individuals serving in the Volunteer Income Tax Assistance, or VITA, program, a free tax preparation service that helps low- and moderate-income taxpayers file their tax returns, must complete training courses before being certified, as well as annual training to make sure that they stay current on new tax laws.
3. Regulating paid preparers would increase transparency of fees
When it comes to the fees that paid preparers charge for tax assistance, it’s the Wild West: Standards and requirements to publicize or provide transparent fee structures upfront are lacking. What’s worse, mystery shopper testing from advocacy and consumer protection groups has uncovered tax preparation fees as high as $500—as well as myriad examples of paid preparers giving customers low-ball estimates or refusing entirely to provide quotes on the cost of their services. Standards requiring clear and transparent fee structures as well as professional responsibility to the tax system could ensure that taxpayers receive a clear estimate upfront and may reduce the number of preparers who take advantage of unknowing filers.
The above facts and data have convinced members of Congress across the political spectrum that all paid tax return preparers should have to meet minimum standards of tax knowledge and ethics. As National Taxpayer Advocate Olson has said:
[S]o long as anyone can purchase off-the-shelf software and hang out a shingle declaring him or herself a return preparer, without any demonstration of competency or any set of ethical rules to adhere to, we will not bring about significant change in EITC compliance.
Congress should take this common-sense step to protect American taxpayers and ensure accuracy in filing. It’s long overdue.
Alexandra Thornton is the Senior Director of Tax Policy on the Economic Policy team at the Center for American Progress. Rebecca Vallas is the Managing Director for the Poverty to Prosperity Program at the Center.
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Senior Director, Tax Policy