One arguably good thing about the financial crisis is that it has broadened public understanding of the global financial system. One bit of exotica to grace the front pages of our newspapers is the credit default swap (CDS). These swaps brought insurance giant AIG to its knees, and precipitated a $100 billion U.S. government bailout of the company. More recently, it has been reported that hedge fund manager John Paulson made more than $3 billion using CDSs to bet against subprime mortgages. These things are obviously very powerful.
In a posting last week, I discussed the tools under existing law for curbing bad tax return preparers and suggested that these tools may not adequately address the problem. Too many returns are poorly done. Many taxpayers are victims, not only of incompetence, but fraud. The other victim is the government, which likely loses substantial tax revenue from those whose returns are poorly—or dishonestly—prepared.
In recent years, paid preparers have done more than half of all individual income tax returns. In 2006, the most recent year for which the IRS has released statistics, 81.9 million returns were signed by paid preparers. Low-income taxpayers, especially those claiming the earned income credit, hire paid preparers with even greater frequency than the general population of taxpayers.