Will Your Tax Preparer Get You Into Trouble?

Filed under: Taxes, Income Tax, Tax Laws

If you're like the more than half of individuals, according to the GAO, a professional will prepare your tax return. Unfortunately, as the Consumerist blog noted, there's a significant chance that the preparer won't be competent and could leave you paying more taxes than you should or -- the bigger problem -- paying less and running the risk of penalties.

"Tens of millions of consumers will use paid tax preparers to fill out their most important financial document of the year, yet most of these preparers are not subject to any minimum educational, training or competency standards," National Consumer Law Center staff attorney Chi Chi Wu told Consumerist.

According to the center, over the years, nonprofits and government agencies have performed mystery shopper tests that have revealed "frequent examples of this incompetency and outright fraud." That becomes more disturbing when you realize the tests are usually small scale and, if done randomly, shouldn't consistently catch a significant number of people who don't know what they're doing -- unless the percentage that don't is uncomfortably high.

Undercover Investigation

For example, last year the General Accounting Office reported to Congress that undercover site visits to 19 randomly selected preparers showed that only two calculated the correct refund amount. Among the others, one said the return was $52 less than it should have been. Others calculated too much of a refund, with the amount varying from $1 to $3,718. Three preparers were at the high end, suggesting that there was something fundamental misunderstood or ignored. Some of the common errors:

• Not reporting cash tips on W-2 income.
• Claiming an ineligible child for the Earned Income Tax Credit.
• Not asking required eligibility questions for the American Opportunity Tax Credit.
• Not providing the correct preparer tax identification number.

A previous GAO analysis of IRS data from 2006 through 2009 showed that 50 percent of self-prepared returns had errors, but 60 percent of those from paid preparers did.

Other groups have found major errors in their own mystery shopping tours, including, according to the center:

• Intentional omission of income.
• Falsifying information to make taxpayers eligible for various credits and deductions.
• Inability to properly deal with education-related credits and income.
• Misclassifying filing status.
• Data entry errors.

But, surely there's some regulatory body overseeing the quality of tax preparation, right? Not really. As the center noted, there are "no minimum educational, training, competency or other standards" to be a paid tax preparer. Forty-six states have greater requirements for hairdressers than tax preparers.

Where Are the Standards?

There are no federal standards, either. The IRS wanted to implement regulations to cover tax preparers, separate from the testing it administers to qualify so-called enrolled agents, who can represent taxpayers before the IRS, but a federal court blocked the rules, and the D.C. Court of Appeals upheld that ruling last year. The states don't seem to be in a rush to do anything, which leaves Congress, and the chance of something happening there seems report.

In the meantime, it's a case of caveat emptor -- let the buyer beware, because if there is a problem, you're the one who will be talking to the IRS or a state revenue agency. Asking some serious questions about someone's training or relying on a certified public accountant -- they are regulated by the states -- might be a good idea.

 

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