There are undoubtedly many tax preparers who do a fine job, but some are not so good. The mistakes they make preparing their clients’ returns cost those clients millions of dollars in extra taxes every year. For example, the IRS estimates that each year as many as 1 million taxpayers who use paid preparers overpay their taxes by over $500 million because they claim the standard deduction instead of itemizing--an error no competent tax preparer should make.
Are errors such as these only made by individual preparers running small mom-and-pop operations? No. A few years ago staff members of the Government Accountability Office, posing as taxpayers, visited 19 outlets of several commercial chain preparers in one large city and asked them to prepare a relatively simple return. The results they obtained were not reassuring. They found serious mistakes in a majority of the returns they had prepared. The preparers' work resulted in unwarranted extra refunds of up to almost $2,000 in five instances, while in two cases they cost the taxpayer over $1,500.
In some cases, tax preparers' work passes from simply negligent to outright criminal. One preparer told his elderly client to provide him with the checks to make her quarterly estimated payments. Although he claimed these payments on the client’s tax return, he never gave the checks to IRS—he kept them for himself. After receiving notices from the IRS, the taxpayer visited the paid preparer who told her that IRS must have made a mistake. The preparer was sent to jail.
Why all the problems? One reason is that the tax preparation business is largely unregulated by federal or state government.
There are over one 1.2 million tax preparers in the United States (the exact number is unknown), and they come in all shapes and sizes. They range from licensed professionals, such as attorneys, certified public accountants, and enrolled agents, to people lacking formal training who complete tax returns part-time. Attorneys and certified public accountants are licensed and regulated by state boards of accountancy and bar associations. Enrolled agents are regulated by the IRS and must pass an exam.
However, there are 600,000 to 700,000 tax preparers who have no professional credentials at all. In the vast majority of states, anyone can hold himself or herself out as a tax preparer without having to take a competency exam, obtain a license, or comply with any other government regulation.
Starting in 2011, the IRS attempted to do something about these unregistered tax preparers. First, it required them to register with the IRS and take 15 hours of continuing education per year. By the end of 2013, they would have had to pass an IRS test establishing their minimal competency to prepare individual tax returns.
However, in February 2013 a federal court held the IRS did not have the legal authority to impose these requirements on tax preparers. The IRS is appealing this decision. But, at the moment, the requirements are in limbo.
Whether you hire a CPA, enrolled agent, large commercial tax preparer, or self-employed tax preparer, it's up to you to make sure your return is prepared properly.
You can protect yourself by taking these steps: