IRS faulted for efforts to deter tax preparer misconduct
The Internal Revenue Service doesn’t have a coordinated strategy in place to deal with unregulated tax preparers, according to a government report.
The report, from the Treasury Inspector General for Tax Administration, pointed out that because the IRS’s effort to regulate preparers was invalidated as a result of litigation, tax return preparers are generally unregulated, and they can prepare returns without having any formal training or education. On top of that, there’s extensive evidence that some of them prey upon innocent taxpayers.
The TIGTA report comes amid a fresh legislative effort to regulate preparers. Last month, Sen. Rob Portman, R-Ohio, and Ben Cardin, D-Md., introduced a bipartisan bill called the Protecting Taxpayers Act, which includes a number of reforms to the IRS, including statutory authority to regulate paid tax return preparers “in a balanced way” (see Senators introduce bill to make IRS more responsive). The American Institute of CPAs expressed its support for the bill last week (see AICPA supports latest tax preparer regulation effort). The IRS introduced the Registered Tax Return Preparer program in 2012 to require registration, competency testing and continuing education of all preparers. But a federal court invalidated the RTRP program in 2013 after a lawsuit by three independent tax preparers in the case of Loving v. IRS. The court ruled that the IRS had exceeded its statutory authority and an appeals court later upheld the ruling. In response the IRS began offering a voluntary program known as the Annual Filing Season Program
The report noted that paid tax preparers handle approximately 60 percent of all tax returns filed. They include attorneys, CPAs, enrolled agents and unenrolled return preparers. Some tax professionals such as CPAs are subject to educational prerequisites, qualifying examinations and continuing professional education. “However, unenrolled tax return preparers can prepare returns without meeting any training and education requirements, and in some cases, they intend to defraud taxpayers and the government,” said the report.
While tax professionals are subject to oversight by the IRS’s Office of Professional Responsibility, as well as state licensing authorities in the case of attorneys and CPAs, the IRS itself lacks a similar oversight mechanism for unregulated preparers, and there’s little return preparer oversight among the states. Only four states regulate tax preparers: California, Maryland, New York and Oregon.
The IRS’s Deputy Commissioner for Services and Enforcement has designated the Small Business/Self-Employed Division to serve as the IRS’s lead function to address preparer misconduct, but TIGTA found no evidence of a coordinated strategy within the IRS to address tax preparer misconduct. Only a relatively small number of civil examinations are pursued against tax preparers each year, compared to the number of complaints about tax preparers. During fiscal year 2016, the IRS investigated only 140 out of 951 misconduct referrals (or just 15 percent). In addition, the SB/SE Division doesn’t have any specific goals for addressing preparer misconduct or track them in any meaningful way. Collection of tax preparer penalties isn’t effectively prioritized or worked on, according to the report, given that only about 15 percent of assessed penalties are being collected.
The IRS’s Return Preparer Office, which was originally set up to lead the now defunct regulatory effort, is still in existence, but now it mainly focuses its efforts on tax professionals and those few tax return preparers who volunteer to be subject to annual training under the Annual Filing Season Program. The Return Preparer Office checks tax compliance for tax professionals, but not for most unregulated preparers. More than 26,000 Preparer Tax Identification Number recipients acknowledged being tax noncompliant. In addition, while preparing tax returns without a PTIN is subject to a penalty, the penalties are assessed on a limited ad hoc basis. In processing year 2016, the IRS failed to assess $121,175,195 in PTIN penalties, although Mary Beth Murphy, commissioner of the IRS’s Small Business/Self-Employed Division, disagreed with that estimate in her response to the report.
Despite the availability of significant information about possible tax preparer misconduct, the IRS has yet to take full advantage of these capabilities. TIGTA identified suspicious behavior by more than 10,000 tax preparers who each filed at least 25 tax returns annually with tax refund claims on 100 percent of the tax returns they filed. TIGTA pointed out that the IRS could conduct similar analyses to identify additional possible unscrupulous tax preparers.
TIGTA made several recommendations in the report to improve the identification and deterrence of misconduct by unregulated tax preparers, including developing a preparer misconduct strategy and establishing goals for it. In response to the report, IRS officials agreed with eight of the nine recommendations and plan to make corrective actions. However, the IRS disagreed with one of the suggestions: to assess the priority and assignment of preparer misconduct penalties and track the results.
TIGTA said it believes more emphasis should be placed on the collection of return preparer penalties, and tracking the success of these efforts would help with collection function management in realizing a better collection rate.
“Our goal at the IRS is to address preparer noncompliance as quickly as possible and in the most efficient and effective manner,” Murphy wrote in response to the report. “We employ a multi-faceted and multi-functional approach to both support and monitor preparers to ensure the accuracy of the returns they prepare.”
Among them, she cited criminal investigations and injunctions, visits conducted before, during and after filing season, correspondence outreach and other enforcement actions.