The Senate Finance Committee held a hearing Tuesday on the subject of incompetent and unethical tax preparers and heard testimony on how the Internal Revenue Service should deal with them.
The committee heard testimony from IRS commissioner John Koskinen, National Taxpayer Advocate Nina Olson, an official with the Government Accountability Office, tax preparers and advocates from across the country, as well as the attorney who represented the tax preparers whose lawsuit ended the IRS’s tax preparer regulatory program.
“Taxpayers today face a double burden: crooked or incompetent tax preparers, along with an overgrown and complicated tax code. We should put an end to both,” said Senate Finance Committee chairman Ron Wyden, D-Ore. “I’m proud to say my state gets this issue right. While Oregon and a few other states are already leading in this area, we need to restore federal standards to protect all American taxpayers.”
Wyden said that unlike many other industries, paid tax preparers don’t have to meet any standards for competence in order to prepare someone else’s return.
“In some egregious cases, preparers calculate a taxpayer’s refund in person and skip the line that shows who did the work,” said Wyden. “Then after the taxpayer leaves, the preparer falsifies the math to boost the refund, files the return and pockets the difference. And worst of all, unless the taxpayer can prove what happened, they’re on the hook for the money when the IRS finds out.”
At the hearing, the GAO released the results of a new investigation involving undercover site visits in which 17 of 19 randomly selected, paid tax preparers failed to complete a tax return accurately, either due to significant mistakes or willful negligence. The new GAO investigation reported findings similar to those of a 2006 GAO investigation that identified preparer mistakes in 19 of 19 uncover visits.
Tax refund errors in the site visits varied from giving the taxpayer $52 less to $3,718 more than the correct refund amount. Only two out of 19 preparers calculated the correct refund amount. The full report can be found here.
GAO director of tax issues James R. McTigue Jr., told the Senate committee that tax returns prepared by a paid preparer showed a higher estimated error rate of 60 percent, compared to an error rate of 50 percent for tax returns that were self-prepared by the taxpayer.
IRS commissioner John Koskinen told the senators that the tax preparer community is a key ally in the agency’s efforts to fulfill its dual mission of providing taxpayer service and ensuring tax compliance. “We view our relationship with tax professionals as a partnership, one that has enabled a system that interacts with hundreds of millions of taxpayers to nimbly adjust to new tax laws, speed the average time for refunds, and encourage the voluntary compliance of taxpayers,” he said. “Return preparers are a vital link between the IRS and taxpayers, especially given that the vast majority of people seek help in doing their taxes.”
Koskinen noted that each year, paid preparers are called upon by taxpayers to complete about 80 million returns, or about 56 percent of the total individual income tax returns filed, while another 34 percent of taxpayers use tax preparation software, for a total of 90 percent who seek some form of assistance.
“Competent preparers make our job easier by helping their clients properly report their taxes and pay what they owe,” said Koskinen. “Given the crucial role that return preparers play in our tax system, the IRS believes it is critical to ensure a basic competency level for tax return preparers and to focus our enforcement efforts on identifying and stopping unscrupulous preparers.”
Last year, he noted, the U.S. District Court for the District of Columbia issued an injunction last year in the case of Loving v. IRS that prevented the IRS from enforcing the regulatory requirements it had tried to impose for competency testing and continuing education, and the decision was upheld by a federal appeals court this year. “The IRS is continuing to assess the scope and impact of the court’s decision while consideration is given to options for appeal,” he added.
Koskinen noted that the Obama administration’s fiscal 2015 budget includes a proposal to explicitly authorize the IRS to regulate all paid tax preparers. He asked Congress to provide that authorization and said the IRS might offer a voluntary form of certification to tax preparers in the meantime.
“Following the court decision, the IRS remains concerned about protecting taxpayers and ensuring they receive quality assistance in preparing their tax returns,” said Koskinen. “While we urge Congress to quickly enact the proposal described in the President’s Budget, we are taking a close look at the possibility of an interim step involving a program of voluntary continuing education. The idea of a voluntary program is under consideration because we believe it is important to maintain the momentum for regulation and oversight of unregulated preparers that has built up over the last five years, and to lessen the risks to taxpayers resulting from the lack of federal education requirements. Before moving forward on this idea, however, we will solicit feedback from a wide range of external stakeholders as to whether such an interim step would be useful and appropriate.”
National Taxpayer Advocate Nina Olson reiterated her support for requiring competency exams for tax preparers, pointing out that she had been an unenrolled tax preparer at one time. “Shortly after I graduated from college in the mid-1970s, I hung out a shingle and held myself out as a return preparer,” she said. “I had been a Fine Arts major, so to say the least, I was not a tax expert. But in that period, tax software was not yet widely available, so an individual wanting to prepare tax returns had to learn the basics. I took this endeavor seriously, and ultimately, I believe I did a good job for my clients. Even then, however, taxpayers would have been better served if return preparers were required to demonstrate basic competency in tax return preparation.”
However, Olson noted that tax prep software makes it easy for anyone to claim they are tax preparers. “With the advent of tax preparation software and the Q&A format, a person can hold himself out as a return preparer with almost no knowledge or skill by simply sitting with a taxpayer and working through the software’s prompts,” she said. “As many undercover shopping visits’ to return preparers have found, preparing returns with software and little knowledge typically does not produce accurate results.”
She pointed out that unscrupulous tax preparers are able to take advantage of clients and charge high fees for services such as pay-stub loans and refund anticipation checks, which have largely replaced refund anticipation loans in recent years.
“In tax year 2012, 56 percent of 142 million individual taxpayers paid preparers to complete their returns for them,” said Olson. “Very simply, the absence of minimum competency standards for return preparers leaves these taxpayers vulnerable to inadvertent errors that could cause them to overpay their tax or to underpay their tax and face IRS collection action. It also leaves some taxpayers open to unscrupulous preparers, many of whom would be weeded out if the return preparation industry were professionalized. At present, we require volunteers who help prepare returns for elderly, disabled, and low-income taxpayers through the VITA and TCE programs to pass a competency test. Yet we ask nothing of hundreds of thousands of persons who make their living off tax preparation. That makes little sense to me.”
H&R Block president and CEO William Cobb told the senators about his company’s support for tax preparer regulation. “H&R Block employs more than 70,000 highly trained tax professionals across the country and 80,000 professionals worldwide,” he said. “A typical client is served by an H&R Block tax professional with more than a decade of experience and hundreds of hours of training. Our tax professionals progress through a 14-level certification program, culminating in master tax advisor status. To be re-hired, H&R tax professionals must complete at least 15 hours of continuing education annually. H&R Block’s tax professionals are trained on systems, policies and procedures that require an additional 35 hours of education annually.”
Wyden touted Oregon’s tax preparer licensing standards and pointed out that a 2008 study by the GAO found that tax returns from Oregon were 72 percent more likely to be accurate than returns from the rest of the country.
Janis Salisbury, an IRS enrolled agent who chairs the Oregon Board of Tax Practitioners, told the senators about Oregon’s success in regulating the tax preparer profession, overseeing nearly 4,000 licensed tax preparers and licensed tax consultants. “We recommend that Congress emulate Oregon’s regulation of tax return preparers and provide the IRS with the authority to require individuals to demonstrate minimum competency in tax return preparation, either by passage of a state board examination or by an IRS examination and to impose continuing education requirements after passage of such examination,” she said. “Initial training and registration is essential before anyone can begin your tax returns. Oregon’s track record proves that.”
Salisbury noted that Oregon requires paid preparers who are not already licensed by the state as CPAs or attorneys to obtain a state license to prepare tax returns. To become a licensed preparer, a person must have a high school diploma or the equivalent, complete 80 hours of approved qualifying education, pass a state-administered exam and pay a registration fee. Annual renewal requires proof of at least 30 hours of continuing education.
Chi Chi Wu, a staff attorney at the National Consumer Law Center, told the senators that she favors the state licensing approach. “This issue is critically important, not just for taxpayers as consumers of preparation services, but also to protect the integrity of the tax system and the coffers of the United States Treasury,” she said. “Simply put, there needs to be licensing and competency standards for paid tax preparers. Either Congress needs to give the Internal Revenue Service the authority to regulate paid preparers, or the states need to enact such laws. Indeed, mindful of the difficulty in getting federal legislation passed, we at NCLC have issued a model act to encourage states to adopt such laws.”
Dan Alban, an attorney at the Institute for Justice, who represented the independent tax preparers who successfully sued the IRS in the Loving v. IRS case, disagreed with the need to give the IRS the authority to re-impose the tax preparer licensing requirements.
“Tax preparers are already regulated by numerous federal statutory requirements imposing both civil and criminal penalties for everything from failing to keep a list of the returns they’ve prepared for the past three years to actual tax fraud,” he said. “Tax preparers are also required to register with the IRS to obtain an individualized number known as a PTIN that they must include on every return they prepare so that the IRS can track and analyze their returns. These tools already provide the IRS with what it needs to identify, track, and penalize the few bad apples without unnecessarily burdening the vast majority of law-abiding preparers.”
Alban argued that tax preparer licensing is protectionist and anti-competitive, would raise prices and reduce choice for consumers, and would offer a false promise on which it would fail to deliver. “As an initial matter, licensing regulations cannot do much about fraud prevention that isn’t already achieved by the PTIN registration combined with existing criminal penalties,” he said. “Dishonest preparers can take exams and sit through continuing education courses just as well as honest preparers. Moreover, licensing and IRS-mandated training are largely ineffective. For example, IRS trained-and-certified preparers in the VITA volunteer program were found by the Treasury Inspector General for Tax Administration to have a 61 percent error rate in 2011. Similarly high error rates have been found over the years in TIGTA studies of IRS employees answering just a single tax question. Likewise, in California, one of just four states that licenses tax preparers, an IRS study found that California preparers had the third highest error rates in the country for two years in a row despite the state’s longstanding licensing program.”
Instead, Alban recommended a voluntary certification program that would allow both consumers and preparers to decide if they value certification. He also recommended simplifying the tax code to reduce error rates, and that the IRS should enforce its existing laws without imposing substantial costs on law-abiding tax preparers.
Sen. Orrin Hatch, R-Utah, ranking Republican member of the committee, acknowledged that the complexity of the U.S. tax system requires the majority of Americans to seek the services of a paid preparer in order to navigate through and comply with the tax code.
“Our income tax system relies heavily on good faith voluntary compliance, which, in turn, requires the services of paid preparers that are both competent and ethical,” he said. “The IRS attempted to implement regulations in 2011 that, for the first time, imposed both ethical and competency standards on any person who sought to prepare tax returns for compensation. The D.C. Circuit Court of Appeals, however, has since prevented IRS from enforcing those regulations when it upheld the Loving decision on appeal. Among the approaches to solving the problem of incompetent and unethical paid preparers that we will hear about today is government regulation. However, there are other approaches worthy of thoughtful consideration. One approach is comprehensive tax reform that results in a much simpler and straightforward tax system with fewer compliance and administrative burdens. A less complex tax system that allows for simpler compliance rules will reduce taxpayer and preparer errors associated with complexity, decrease the need for complex tax filings, and eliminate opportunities to cheat the system through unethical behavior.”
John Barrick, an associate professor of accounting at Brigham Young University, also testified before the Senate committee, noting that he is a CPA and tax preparer.
“Return preparer regulation should be allowed if we can protect taxpayers from incompetent and unethical return preparers, and if the benefits of regulation outweigh the costs,” he said. “However, if regulation cannot protect taxpayers from these types of incompetent and unethical preparers, or if the costs of regulation exceed the benefits received, then you must find alternatives.”
He gave an example of a taxpayer who visited one of his colleagues after being serviced by an unscrupulous preparer who had charged an $800 fee for an inflated $8,000 tax refund that the IRS later ended up denying. The tax preparer had not signed the tax return and had vanished when the taxpayer tried to later trace him, making him a so-called “ghost preparer.”
“The tax law is large and complex,” said Barrick. “For these reasons, the majority of taxpayers seek the help of return providers. Regulation will not deter the most unscrupulous and unethical return providers. They are ghost preparers that attempt to defraud the income tax system. Nor will regulation increase return preparers’ ethics without enforcement. Regulation clearly creates winners and losers. Don’t allow states to regulate out-of-state tax return preparers. There are enough taxpayers that are required to file in multiple jurisdictions that it makes it difficult, if not impossible, for return preparers to provide the help they require. Rather than regulate, please take steps to protect taxpayers from unscrupulous and unethical taxpayers: encourage voluntary disclosure, eliminate refundable credits, enforce existing return preparer laws, and educate taxpayers. However, if you must regulate, exclude those who are already regulated, including attorneys, CPAs and enrolled agents. If you must regulate, in addition to knowledge you must make sure that ethics are in place. In training future CPAs, we always start with a foundation of ethics.”