The voices of Tax Policy Center's researchers and staff
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.
Although comprehensive data on the quality of paid preparers’ work is not available, many in Congress and elsewhere believe that the returns they prepare often contain significant errors. Evidence suggests that errors may be especially common on returns of low-income taxpayers. For example, a 2009 study in Alabama found errors on all of 13 returns prepared by unenrolled preparers for undercover taxpayers, and 11 of the returns contained misstatements that could be considered fraudulent.
The IRS advises on its website, “While most preparers provide honest service to their clients,” taxpayers should “be careful when choosing a preparer—as careful as they would be choosing a doctor or lawyer.” There is, however, a significant difference between tax preparers and doctors and lawyers. No one can practice medicine or law without a license obtainable only after extensive education and training. In most states, a tax preparer is not required to have any training, experience, or professional certification. Perhaps the IRS’ advice to taxpayers should be, “Be extra careful in choosing a preparer because we’re not doing much to protect you.”
Tax return preparers are, however, subject to some federal regulation. Current law gives the IRS three sets of tools to combat preparer incompetence and dishonesty.
First, every person who receives compensation for preparing a return must sign it and include his or her taxpayer identification number. This gives the IRS a way to identify the preparer of any questionable return. It may also serve notice to preparers that the IRS is watching, at least for some egregious practices. Second, the law contains penalties specially targeting preparers. For example, a preparer may face a penalty if a return takes an unreasonable position that he or she knew or should have known about. Generally, a position is considered unreasonable unless there is substantial authority for it. An unreasonable position can be a purposeful misstatement (e.g., claiming deductions for charitable contributions that the preparer knows the taxpayer did not make), or it can be a position that is arguably correct but for which authority is lacking (e.g., reporting an aggressive tax shelter as the promoter has recommended). The penalty is $1,000 for each return or, if more, half of the preparer’s compensation for doing the return. In the most egregious cases, a preparer may be criminally prosecuted. In 2008, 124 preparers were convicted of tax crimes, and 81.5 percent of them were sent to prison for terms averaging 18 months.
Third, the government may obtain injunctions against bad preparers, even barring them from practicing in any capacity. The government has utilized this authority with increasing frequency in recent years, but the number of cases is, at the most, in the hundreds, while the number of preparers is in the hundreds of thousands.
All of these remedies kick in only after the fact. None applies until a return is filed, and the penalties and injunctions only apply after the IRS has identified and investigated a preparer. Although the IRS does not separately report on the civil preparer penalties, the number of such penalties is probably not large in relation to the total number of preparers. Only a few preparers are hit with the most severe sanctions. Because of the lack of comprehensive data on the performance of preparers, it is not possible to know how effective the IRS’ efforts against bad preparers have been. The limited available evidence suggests, however, that the penalty and injunction programs are, at best, making a small dent in the problem.
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