Taxpayers Believe They Benefit by Using Paid Preparers but Some Are Poorly Served

Based on projections from our national survey, most taxpayers who used a  paid preparer believe they benefited from doing so and would use a paid preparer in the future. As already  noted, many of the taxpayers we interviewed in-depth told us they used a  paid preparer because they did not understand the tax laws. In addition to over- or underpaying their taxes, IRS officials and others told  us that sometimes taxpayers are poorly served by paying for services that  accelerate the receipt of refunds, including RALs. While this evidence does not allow a precise estimate due to  methodological limitations, none of it suggests that the percentage of  poorly served taxpayers is large. However, even a small percentage of the  more than 72 million taxpayers who used paid preparers in 2001 can  translate into millions of affected taxpayers. For example, we have already  mentioned that last year we estimated that as many as 2 million taxpayers  overpaid their 1998 taxes by $945 million because they claimed the  standard deduction when it would have been more beneficial to itemize,  and half of these taxpayers used a paid preparer. IRS and Others Act Against Problem Paid Preparers, but Balancing Taxpayer Protection Against Other Priorities Is a Challenge

Several IRS offices have responsibility for problem paid preparers, but  balancing resources devoted to taxpayer protection with resources  devoted to other priorities is a challenge. Proposals have been made for  expanding IRS’s oversight of the paid preparer industry. Consideration of  such proposals is complicated by a lack of data on the extent of the  problem and the effectiveness of IRS’s actions and by the involvement of  other agencies, state, and local governments as well as professional  organizations. Many  taxpayers do not understand their filing requirements and would have great  difficulty filling out their tax forms without the assistance of paid  preparers. Examples of problematic preparer behavior are easy to find but  reliable estimates of the number of taxpayers affected by the problems do  not exist and would be difficult, perhaps impossible, to develop. Objectives, Scope, and Methodology

The objectives of this report were to (1) obtain the views of taxpayers who  used paid preparers and provide examples of paid preparer performance,  including what is known about the extent of problems caused by paid  preparers and (2) describe IRS’s efforts to prevent, detect, and take action  against problem paid preparers; challenges facing IRS offices that interact  with paid preparers, especially the Office of Professional Responsibility;  and efforts to address those challenges.
Why GAO Did This Study

Over 55 percent of the nearly 130 million taxpayers in tax year 2001 used a paid tax preparer. However, using a preparer may not assure that taxpayers pay the least amount due. Last year, GAO estimated that as many as 2 million taxpayers overpaid their 1998 taxes by $945 million because they failed to itemize deductions and half of these used preparers. GAO was asked to (1) obtain the views of taxpayers about paid preparers and examples of preparer performance including any problems and (2) describe the Internal Revenue Service's (IRS's) oversight of problem preparers; the challenges facing IRS in dealing with problem preparers, especially the Office of Professional Responsibility; and the efforts to address those challenges. To obtain the views of taxpayers who used preparers, GAO surveyed a national representative sample of taxpayers.

What GAO Found

GAO estimates that most of the taxpayers who used a paid preparer believe they benefited from doing so. Many taxpayers told us they believed they would have great difficulty filling out their own tax forms because they do not understand their filing requirements. At the same time, some taxpayers are poorly served when paid preparers make mistakes, causing taxpayers to over-or underpay their taxes or pay for services, such as short-term loans called Refund Anticipation Loans (RALs), without understanding their costs and benefits. The evidence available does not allow a precise estimate of the extent of problems caused by paid preparers, but nothing suggests that the percentage of taxpayers affected is large. Nevertheless, even a small percentage of the over 72 million taxpayers who used paid preparers in 2001 translates into millions of taxpayers who are potentially adversely affected. IRS has several offices responsible for taking action against problem paid preparers, including the newly formed Office of Professional Responsibility. These offices sanction preparers for violating standards of conduct; assess monetary penalties for violating tax laws when preparing returns; monitor and, if justified, sanction problem preparers offering electronic filing and RALs; and investigate fraudulent preparer behavior. However, balancing resources devoted to such efforts against those devoted to other IRS priorities is a challenge. In addition to IRS, other federal agencies, state and local governments, and professional organizations have a role in regulating paid preparers. At least two proposals exist to expand IRS's oversight of paid preparers. Consideration of such proposals is complicated by the difficulty of developing reliable estimates of the number of taxpayers affected by problem preparers or the effectiveness of the actions taken against them.