Recently, the U.S. Senate Committee on Finance held a hearing on the issue of paid tax return preparers and whether Congress should explicitly give the IRS (through legislation) the authority to regulate them. As part of the hearing process, the Government Accountability Office (GAO) testified and provided information from its recently completed study, Paid Tax Return Preparers.
In tax year 2011, paid preparers completed approximately 56 percent of all individual tax returns filed. The GAO noted that “unenrolled” preparers accounted for 55 percent of all preparers as of March 2014. This GAO study and an earlier one in 2006 showed tax returns prepared by paid preparers had a higher estimated percentage of errors – 60 percent – than self-prepared returns – 50 percent. Of course, most people self-preparing normally have fairly simple returns.
In this limited study, the GAO found significant preparer errors during undercover site visits to 19 randomly selected preparers. None of the preparers included in the study could have been from Texas, as the IRS said the sample did not include any preparers “located in a state that does not levy an income tax.”
Due to the limited sample size of the study, it cannot be used to generalize about the entire retail tax preparation industry. However, the GAO also noted that the results of this study were comparable to one they did in 2006, which also showed a significant error rate by paid preparers. You can read the entire GAO report here.
This GAO study did not include any CPAs, attorneys or enrolled agents in the sample. CPAs, attorneys and enrolled agents are defined by the IRS as “tax practitioners” and are differentiated from “unenrolled preparers,” who were the subject of the report. Tax practitioners differ from unenrolled preparers in that they can practice before the IRS and are subject to standards of practice under Department of Treasury Circular No. 230. Tax practitioners (CPAs, attorneys and enrolled agents) also complete appropriate examinations, have CPE requirements and are regulated.
The GAO report noted that only four states currently regulate paid preparers – Oregon, Maryland, California and New York. In a GAO analysis of 2001 tax data, Oregon returns were more likely to be accurate compared to the rest of the country, while California returns were less likely to be accurate. In fact, over time California preparers have ranked consistently high on the inaccuracy list, so obviously not all regulatory regimes seem to work well.
In the conclusion of its report, the GAO stated that a robust regulatory regime involving paid preparer registration, qualifying education, testing, and continuing education may help facilitate improved tax compliance. The GAO also noted that the courts have recently determined that the IRS does not have sufficient legal authority to regulate unenrolled preparers.
So it’s up to Congress now. Will they provide the IRS with the necessary authority for increased oversight and regulation of the paid preparer community? Like everything else in Washington, D.C., these days, I am sure there will be a lot of debate on the issue, so stay tuned.