CPAs, attorneys, and enrolled agents are tax practitioners. Generally, unenrolled preparers are not subject to these requirements. conducted a study of the quality of paid preparers and issued a report  recommending increased oversight of paid preparers. new testing and continuing professional education requirements. Although the District Court determined that IRS does not have the  authority to regulate unenrolled preparers, the decision did not affect the  requirement that all paid preparers obtain a Preparer Tax Identification  Number (PTIN) and renew their PTIN annually. Use of Paid Preparers Varied by Complexity of Tax Return, but Often Resulted in Larger Refunds

According to IRS’s SOI data, an estimated 81.2 million or 56 percent of  approximately 145 million individual tax returns filed for tax year 2011  were completed by a paid preparer. Limited Investigation and IRS Data Reveal Significant Errors in Returns Prepared by Paid Preparers

Taxpayers rely on paid preparers to provide them with accurate,  complete, and fully compliant tax returns; however, tax returns prepared  for us in the course of our investigation often varied widely from what we  determined the returns should and should not include, sometimes with  significant consequences. The  NRP’s review of tax returns from 2006 through 2009 also found many  errors on returns prepared by paid preparers, and some of those errors  were more common on paid prepared returns than on self-prepared  returns. Only 2 of 19 tax returns showed the correct refund amount. Paid preparer  errors generated during our 19 non-generalizeable visits resulted in  refund amounts that varied from giving the taxpayer $52 less to $3,718  more than the correct amount. Quality and Accuracy of Tax Preparation Varied Based on the Scenario and Specific Form or Line Number

A majority of the 19 paid preparers we visited made errors on common  tax return issues; on some lines of the tax return most paid preparers  were correct. Some of the most significant errors involved paid preparers  (1) not reporting non-Form W-2 income, such as unreported cash tips, in  12 of 19 site visits; (2) claiming an ineligible child for the EITC in 3 of 10  site visits; and (3) not asking the required eligibility questions for the  American Opportunity Tax Credit. Paid preparers completed the correct type of tax  return—the Form 1040—for 17 of 19 site visits. Dividend and capital gains income. Earned Income Tax Credit. Errors in this context changed either the tax due or  the amount to be refunded. NRP estimates show that both individuals and paid preparers make errors  on specific forms and lines of Form 1040, some of which we experienced  in our undercover visits. As of March 2014, 55  percent of paid tax preparers are unenrolled preparers, not regulated by  IRS. However, IRS data, which more broadly track compliance, show  preparers made serious errors, similar to the findings from our site visits. Matter for Congressional Consideration

If Congress agrees that significant paid preparer errors exist, it should  consider legislation granting IRS the authority to regulate paid tax  preparers.
Why GAO Did This Study

For tax year 2011, an estimated 56 percent of about 145 million individual tax returns were completed by a paid preparer. IRS has long recognized that preparers' actions have an enormous effect on its ability to administer tax laws effectively and collect revenue that funds the government. Likewise, many taxpayers rely on preparers to provide them with accurate, complete, and fully compliant tax returns.
GAO was asked to review the oversight and quality of paid preparers. This testimony examines (1) how preparers are regulated by IRS and (2) the characteristics of tax returns completed by preparers based on products GAO issued from April 2006 through August 2008 and work conducted from November 2013 to April 2014. GAO reviewed laws, regulations and other guidance and interviewed IRS officials. GAO analyzed IRS Statistics of Income data from tax year 2011, the most recent data available, and the NRP database, which broadly tracks compliance. To gain insight on the quality of service provided, GAO conducted 19 undercover site visits to commercial preparers in a metropolitan area. Criteria to select the metropolitan area included whether the state regulates preparers and levies an income tax.

What GAO Found

The Internal Revenue Service's (IRS) authority to regulate the practice of representatives before IRS is limited to certain preparers, such as attorneys and certified public accountants. Unenrolled preparers—those generally not subject to IRS regulation—accounted for 55 percent of all preparers as of March 2014. In 2010, IRS initiated steps to regulate unenrolled preparers through testing and education requirements; however, the courts ruled that IRS lacked the authority.
GAO found significant preparer errors during undercover site visits to 19 randomly selected preparers—a sample which cannot be generalized. Refund errors in the site visits varied from giving the taxpayer $52 less to $3,718 more than the correct refund amount. Only 2 of 19 preparers calculated the correct refund amount.
The quality and accuracy of tax preparation varied. Seventeen of 19 preparers completed the correct type of tax return. However, common errors included
not reporting non-Form W-2 income (e.g., cash tips) in 12 of 19 site visits;
claiming an ineligible child for the Earned Income Tax Credit in 3 of 10 site visits where applicable;
not asking the required eligibility questions for the American Opportunity Tax Credit; and
not providing an accurate preparer tax identification number
These findings are consistent with the results of GAO's analysis of IRS's National Research Program (NRP) database. GAO analysis of NRP data from tax years 2006 through 2009 showed that both individuals and preparers make errors on tax returns. Errors are estimated based on a sample of returns, which IRS audits to identify misreporting on tax returns. Tax returns prepared by preparers had a higher estimated percent of errors—60 percent—than self-prepared returns—50 percent. Errors refer to changes either to the tax due or refund amount.

What GAO Recommends

If Congress agrees that significant preparer errors exist, it should consider legislation granting IRS the authority to regulate paid tax preparers. Technical comments from IRS were incorporated into this report.