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Thursday, October 22, 2009

Regulating Tax Return Preparers

The complexity of federal and state income taxes causes the majority of individuals to either hire a preparer or use tax prep software. Unfortunately, some paid preparers do not have a strong enough understanding of the tax law or they intentionally make mistakes that lower their client's tax bill. For a few years, the National Taxpayer Advocate and others have been calling for regulation of preparers in order to perhaps mandate a minimum educational preparation, mandatory annual continuing education and perhaps some type of registration, likely with a fee that could help fund the regulation program.

A few government agencies have conducted undercover reviews of some preparation office and found some egregious stuff. For example, here is an excerpt from a 2006 GAO study where 19 tax prep offices were visited for return preparation:

"In our site visits, paid preparers often prepared returns that were incorrect, with tax consequences that were sometimes significant. Their work resulted in unwarranted extra refunds of up to almost $2,000 in 5 instances, while in 2 cases they cost the taxpayer over $1,500. Some of the most serious problems involved preparers
• not reporting side income in 10 of 19 cases;
• not asking about where a child lived or ignoring our answer to the question and claiming an ineligible child for the EIC in 5 out of the 10 applicable cases;
• failing to take the most advantageous postsecondary education tax benefit in 3 out of the 9 applicable cases; and
• failing to itemize deductions at all or failing to claim all available deductions in 7 out of the 9 applicable cases. "

Here is another report from 2008 from the Treasury Inspector General (TIGTA) - here.

The IRS has held three public forums on regulation of preparers and expects to issue guidance by the end of the year. I have a short article on this topic - here.

Part of the problem is complexity. I think some preparers with little education on the tax law might not really even know just how complicated many rules are. Also, some rely on IRS publications for guidance and while they are useful to a layperson, they are not intended to provide enough detail to correctly file a return. Preparers should be expected to know how to look up information and have some type of tool, such as RIA Checkpoint, to have access to primary authority they'll likely need to know how to correctly file returns.

It will be interesting to see how stringent the upcoming IRS regulation rules are. What do you think?

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