Here comes another April 15. Is your tax preparer competent?
Tax prep industry needs policing
To practice law, you need to pass a bar exam. To be a contractor or a hairdresser, you need a license. But being a professional tax preparer requires nothing.
This is an odd state of affairs given that the U.S. tax code would stump most brain surgeons and that taxpayers and the federal government have a lot riding on the preparer getting things right, particularly as the April 15 tax deadline nears.
Not unreasonably, the IRS wants to reduce the number of inaccurate or fraudulent returns filed by paid preparers. In 2010, it instituted a registration process. By next year, preparers who are not lawyers, certified public accountants or highly skilled tax experts, known as enrolled agents, will be required to take an exam and undergo 15 hours of continuing education annually. At some point in the future, the IRS will begin background checks to weed out preparers with criminal backgrounds.
These moves were not seen as particularly controversial. In fact, at different times during the past several years, both the House and the Senate passed legislation that would have required the IRS to police the tax prep business. But this month, a libertarian public interest law firm called the Institute for Justice filed suit on behalf of three small services. Since then, the issue has become something of a cause célèbre for conservatives determined to portray the Obama administration as overly regulatory (never mind that the IRS commissioner who launched the program, Doug Shulman, is a Bush appointee).
The need for change was shown in a pair of studies conducted by the Government Accountability Office in 2006 and the Treasury Department in 2008. Both sent testers into the field and asked preparers to figure out their taxes.
The results were ugly. The studies uncovered numerous errors and found preparers who coun- seled people to ignore outside income, failed to ask necessary questions, and refused (in about a quarter of the cases) to sign the returns as required by law. The Treasury Department study concluded that six out of 28 returns included misstatements or omissions deemed to be willful or reckless.
Of particular concern to the IRS is the Earned Income Tax Credit, a program that supplements the income of the working poor through refundable tax credits. The IRS estimates that 23% to 28% of the EITC checks it writes are in error, generally in the filer’s favor. It also strongly suspects that an industry of preparers willing to file fraudulent returns for a fee has emerged. But with no way of matching numerous questionable returns with a single preparer, its ability to police this industry is limited.
Both the government and millions of conscientious tax filers have a stake in cleaning up this mess. But so do the taxpayers who use shoddy services, because they can be exposed to financial penalties and additional headaches.
Opponents of the new requirements say they will limit competition by causing some small tax preparation services to get out of the business. That is no doubt true. Some of the 350,000 or so people required to take the test are part-timers who make a little extra money in the spring by doing taxes. Some of them will decide the hassles are not worth the time.
But the same could be said of lawyers. People would have more choices in preparing a will or managing an uncontested divorce if states weren’t so picky about those bar exams. Somehow, there hasn’t been a call for deregulating that business.
The obvious and the best possible solution to this problem would be a radically simplified federal tax code. Then, more than half of taxpayers wouldn’t have to hire other people to do their returns. But until that blessed day arrives, it makes sense to try to ensure that preparers know what they’re doing.