The preparer must depend on the information provided by the  taxpayer. IRS, California, and Oregon Differ Significantly in How Each Regulates Paid Tax Preparers

Only a few Internal Revenue Code provisions apply to all paid preparers  and only a small portion of paid preparers—enrolled agents—have any  federal registration, testing, or fee requirements. Oregon requires paid preparers who are not already licensed by the state  as CPAs or attorneys, or working for a CPA, to obtain a state license to  prepare tax returns. Table 2 provides an overview comparison of the California and  Oregon requirements with the Maryland requirements and the pending  legislation in the other states. Oregon’s Regulatory Regime May Lead to More Accurate Federal Tax Returns

When controlling for other factors likely to affect tax return accuracy, our  analysis of IRS data showed that tax year 2001 federal tax returns filed in  Oregon were more likely to be accurate than returns in the rest of the  country, which is consistent with but not sufficient to prove that Oregon’s  regulatory regime improves tax return accuracy. In Oregon, the average return required  approximately $250 less of a change in tax liability than the average return  in the rest of the country. With about 1.56 million individual tax filers in Oregon in 2001,  this translates into over $390 million more in income taxes paid in Oregon  than would have been paid if Oregon returns were prepared at the level of  accuracy seen on similar returns in the rest of the country. Although the differences we observed in the states’ regulatory programs  and in how likely California and Oregon returns were to be accurate  compared to the rest of the country are consistent with the Oregon regime  leading to some improved federal tax return accuracy, the analysis cannot  rule out that the regime did not have such an effect. Costs and Benefits of the California and Oregon Programs Provide Some Guidance for a National Program

Both California and Oregon support their programs almost entirely  through fees, with state program costs averaging about $29 and $123 per  year, respectively, per registered paid preparer. As noted previously, California’s program primarily requires unenrolled  preparers to register with the state and meet minimum education  requirements. We conservatively estimated the total costs associated  with Oregon’s regulation to be about $6 million in 2007. This estimate is conservative because it counts  preparer education time and expense for all licensees, including enrolled  agents, who have continuing education requirements under that program,  and employees of tax preparation chains that require similar education for  all of their preparers. A  California tax preparer association representative said that the costs to  obtain and maintain CRTP status are fairly low and likely do not have  much of an impact on prices consumers pay, and that the requirements to  become a paid preparer are not so great that the number of paid preparers  in the state is being held lower than it would be without any regulation. Program administrators and paid preparer community representatives in  California and Oregon also told us education requirements likely reduce  the number of incompetent paid preparers and have led to a more  professional tax preparation industry. Appendix I: Objectives, Scope, and Methodology

Our objectives were to answer the following questions: (1) How do IRS,  California, Oregon, and other states regulate paid preparers? (2) Using  available IRS data, how does the accuracy of federal tax returns in  California and Oregon compare to that of returns in the rest of the  country, after accounting for other factors that might influence accuracy? (3) What are the state-level costs and benefits of the paid preparer  programs in California and Oregon and what insights do they provide for  possible benefits if Congress were to enact national paid preparer  registration or licensing requirements? To answer the second objective, we analyzed data from IRS’s National  Research Program (NRP). Departing  Alien Income Tax Return, were less likely to be accurate.
Why GAO Did This Study

Millions of taxpayers use paid tax return preparers and many of these paid preparers are not subject to any qualification requirements. Paid preparers in California and Oregon are exceptions in that these states have set paid preparer qualification standards. Additionally, two bills before Congress would require national paid preparer regulations. To help Congress better understand the potential costs and revenue effects of regulating paid preparers, GAO was asked to study (1) how IRS, California, Oregon, and other states regulate paid preparers, (2) how the accuracy of federal tax returns from California and Oregon compare to other returns, and (3) state-level costs and benefits of the California and Oregon programs and insights they provide for a possible national program. GAO analyzed IRS research data on tax return accuracy; interviewed IRS officials, state administrators, and preparer community representatives; and reviewed relevant documents.

What GAO Found

No federal registration, education, or testing requirements apply to all paid preparers before they can prepare tax returns. California and Oregon have requirements that preparers must meet before preparing returns in those states. California paid preparers who are not attorneys, certified public accountants, enrolled agents (or employed by one of these types of tax practitioners) must complete an education requirement, obtain a bond, pay a fee, and register. In following years, they must complete continuing education requirements, and renew their registration. Oregon has similar, but more stringent requirements. Oregon has a two-tiered licensing system, with an education requirement and examination for Licensed Tax Preparers and work experience and a second examination for Licensed Tax Consultants. Oregon exempts certified public accountants and their employees, as well as attorneys, from these requirements. Oregon requires enrolled agents to take a shorter version of the consultant examination. Fifty-four percent of Oregon applicants passed the state's basic examination. Recently, Maryland enacted legislation to regulate paid preparers and at least three other states have similar pending legislation. According to GAO's analysis of the Internal Revenue Service's (IRS) tax year 2001 National Research Program data, Oregon returns were more likely to be accurate while California returns were less likely to be accurate compared to the rest of the country after controlling for other factors likely to affect accuracy. In dollar terms, the average Oregon return required approximately $250 less of a change in tax liability than the average return in the rest of the country. For Oregon's 1.56 million individual tax filers, this equates to over $390 million more in federal income taxes paid in Oregon than would have been paid if the returns were as accurate as similar returns in the rest of the country. These results are consistent with, but do not prove, that Oregon's regulations lead to some increased tax return accuracy. GAO's analysis could not account for all factors that might affect the accuracy of these tax returns. Because some states without preparer regulation also had tax returns that, on average, were more accurate than the national average, some portion of the increased accuracy of Oregon returns likely is due to other factors. The California and Oregon programs' costs varied with differences in the programs' scope. Both programs' administrative costs are funded primarily from program fees. California's costs were about $29 per preparer and Oregon's about $123. GAO estimates that the total annual cost of the ongoing Oregon program, including state costs and the cost to preparers for their time and expense in acquiring required education, likely is about $6 million. Officials in both states believe program benefits like reducing the number of incompetent preparers outweigh costs, although neither state had data on benefits. IRS officials said that a national program's costs likely would depend on the program's objectives and features.