According to the  breakdown in table 2, one-third of taxpayers filing the simplest individual  tax form—the Form 1040EZ—used a paid preparer for tax year 2002, and  two-thirds of a low-income working group—those claiming the EIC—paid  someone to prepare their tax returns. However, only paid preparers who choose  to represent taxpayers before IRS are governed by IRS Circular No. Some Regulations Apply to All Paid Preparers

All paid preparers are subject to IRC penalties and the regulations that  implement them. Enrolled agent applicants must either pass an  examination on tax matters or have past IRS employment experience. In the section on diligence as to accuracy in Circular 230, a practitioner  will have been “presumed to have exercised due diligence for purposes of  this section if the practitioner relies on the work product of another  person and the practitioner used reasonable care in engaging, supervising,  training, and evaluating the person, taking proper account of the nature of  the relationship between the practitioner and the person.” According to  an IRS official, “another person” includes an unenrolled preparer, and  enrolled agents are responsible for ensuring that unenrolled preparers  working for them do high quality work. Taxpayers Using Paid Preparers May Receive Incorrectly Completed Tax Returns

Taxpayers relying on paid preparers to provide them with accurate,  complete, and fully compliant tax returns may not get what they pay for. The National Research Program’s review of 2001 tax returns also  found many errors on returns prepared by paid preparers, and some of  those errors were more frequent on paid prepared returns than on self- prepared returns. Identifying information. Of the 10 returns prepared for  the sales worker, 5 reported two children on Schedule EIC, Earned  Income Credit, instead of the one child who lived with the taxpayer in  2005 and was eligible for the EIC. Only  1 preparer asked all of the required questions. Refunds reported for the sales worker were  correct in 2 cases and overstated in the other 8 cases. IRS officials said that if the preparers had  been preparing tax returns to be actually filed, many of them would have  been subject to civil penalties for such things as negligence and willful or  reckless conduct. For example, as stated earlier in our testimony, if a paid  preparer encourages a taxpayer not to report or to erroneously report  transactions on his or her tax return, resulting in a tax-due understatement  or refund overstatement, the preparer could be assessed penalties of up to  $1,000 for willful or reckless disregard of tax rules and regulations. With their  important role in helping taxpayers meet their obligations, paid preparers  become a critical quality-control checkpoint for the tax system. While the preparer did not ask about side income, when the  taxpayer volunteered that he had non-W-2 income, the preparer included it  on the return without discussing whether to either change it or not report  it. Example of a Plumber Visit with Serious Problems

Costly issues for the taxpayer during this site visit were the paid preparer’s  failure to itemize deductions and the preparer’s decision to claim the  tuition and fees deduction instead of the Hope education credit.
Why GAO Did This Study

Despite the importance of paid tax return preparers in helping taxpayers fulfill their obligations, little data exist on the quality of services they provide. Paid preparers include, for example, enrolled agents, who are approved by the Internal Revenue Service (IRS) once they pass an examination on tax matters or demonstrate past IRS employment experience, and unenrolled preparers, who include self-employed individuals and people employed by commercial tax preparation chains. GAO was asked to determine (1) what the characteristics were of tax returns done by paid preparers, (2) what government regulation exists for paid preparers, and (3) what specific issues taxpayers might encounter in using paid preparers. To do its work, GAO analyzed IRS data, reviewed paid preparer regulatory requirements, and had tax returns prepared at 19 outlets of several tax preparation chains.

What GAO Found

Many taxpayers choose to pay others to prepare their tax returns rather than prepare their own returns. According to the most recent reliable data, about 56 percent of all the individual tax returns filed for tax year 2002 used a paid preparer, with higher paid preparer usage among taxpayers with more complicated returns such as those claiming the earned income credit (EIC). All paid preparers are subject to some IRS regulations and may be penalized if they fail to follow them. For example, all paid preparers must identify themselves on the returns they prepare and must not deliberately understate a taxpayer's tax liability. When the EIC is involved, paid preparers must also ask specific questions to determine a taxpayer's eligibility for the credit. In GAO visits to commercial preparers, 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 business income in 10 of 19 cases; not asking about where a child lived or ignoring GAO's answer to the question and, therefore, 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. GAO discussed these findings with IRS and referred to it problems that were found. Had these problems been discovered by IRS on real returns, IRS officials said that many of the preparers would have been subject to penalties for such things as negligence and willful or reckless disregard of tax rules.