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Is your tax preparer actually prepared?

April 5, 2014 at 12:00 AM EDT
Each year about 42 million tax returns are prepared by tax professionals who are unaccredited and unregulated by the IRS. After a plan to regulate them was struck down by a federal court last year, there's more regulation on hairdressers in most of the country. Critics say this leaves low-income taxpayers particularly vulnerable. But does licensing tax preparers mean tax preparation will improve?
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STACEY TISDALE: It’s tax time, and here in Philadelphia there’s no shortage of storefronts offering fast refunds, instant cash, and low prices. But for the taxpayer trying to decide where to go, it can be surprisingly hard to figure out how qualified your tax preparer is.

NINA OLSON: Anybody, today, can hang up a shingle and be a tax return preparer.

STACEY TISDALE: Nina Olson is the National Taxpayer Advocate. She heads an independent office created by Congress to represent the voice of the taxpayer inside the IRS.

NINA OLSON: If you get your hair cut, if you go to a locksmith. There’s all sorts of professional certifications, but not for return preparation.

STACEY TISDALE: So there’s no exam to pass?

NINA OLSON: No exam.

STACEY TISDALE: There’s no requirement that you even have to be educated on tax law?

NINA OLSON: No. You can just hang up your shingle, or not. Just do it on your kitchen table. And we are at our peril. We are harming taxpayers by not insisting that these people have some basic level of competency.

STACEY TISDALE: In 46 states, including right here in Pennsylvania, there is practically no regulation on unenrolled tax preparers – those are the hundreds of thousands of tax professionals who are not CPAs, not attorneys, nor enrolled agents.

All together, unenrolled tax preparers completed over 42 million tax returns in 2012 – that’s about 30 percent of all tax returns.

As National Taxpayer Advocate, Olson has been pushing to regulate these unenrolled tax preparers for more than a decade.

NINA OLSON: I come at this– I started out as an unenrolled return preparer. In 1975, I hung up a shingle, and I started preparing returns. I had no experience whatsoever. I bought a textbook on accounting. And I read the IRS rules, and the publications. Today, with the advent of software, it’s brought in all sorts of people and they just plug in numbers with the return and they don’t know anything about the tax law.

STACEY TISDALE: And for taxpayers, going to wrong preparer can be a costly mistake.

SHARON SHANTZ: I went traveling around and found this place, just walk-in.

STACEY TISDALE: Sharon Shantz is a 42-year old student in Philadelphia. Last year, she says a preparer at a storefront tax service told her she could claim her godchildren for an estimated refund of $1100.

SHARON SHANTZ: They said, “All we need was insurance cards, the medical cards, birthdays, and did all that.”

STACEY TISDALE: But they’re not your children.

SHARON SHANTZ: Right. Exactly. Exactly. And she said, well, did I help take care of them part of the year? I said, yes, I did, financially, but that was it. It wasn’t like they were living with me at all.

STACEY TISDALE: What Shantz says she didn’t realize was that to add dependents, they had to live with the taxpayer for more than six months. And before she got her refund, a letter arrived from the IRS asking for more information. Puzzled, she returned to her tax preparer.

SHARON SHANTZ: She was, like, “Oh, this happens to everybody. Don’t worry. Your money’ll come through. You know, we– we get this all the time.

STACEY TISDALE: And Shantz says the tax preparer wanted $100 dollars more to fix the mistake.

STACEY TISDALE: So what happened?

SHARON SHANTZ: I took it– I had to take it in my own hands and I had to contact the IRS, do all the paperwork. I was very honest with them about the kids not living with them and that I was not related and I could not prove that to them. So I did not get penalized for that.

STACEY TISDALE: In the end, Shantz says she ended up getting a $400 dollar refund. But she paid her tax return preparer $500.

STACEY TISDALE: How did all this make you feel?

SHARON SHANTZ: Irritable, frustrated. I wanted to punch somebody, like I really did, like I was really angry. Nobody is out there helping you. Nobody wants to rectify the situation, whether they’re wrong or right. They don’t– the tax places won’t do it. It’s just– it just happens that they’re trying to get you for more money.

STACEY TISDALE: Instant tax service, the preparer that did Sharon Shantz’s taxes last year declined an on-camera interview, but a manager said that if any clients had issues they were welcome to come back to the office.

IRS Taxpayer Advocate Olson says the lack of regulation leaves low-income taxpayers, like Shantz, particularly vulnerable.

NINA OLSON: You know, the low-income population is the population that is least equipped to prepare their own returns. And they also have some of the most complicated provisions in the code that affect them.

STACEY TISDALE: That means poor people who depend on one of the nation’s biggest anti-poverty programs, the Earned Income Tax Credit or EITC, can lose a big refund they depend on. And the federal government has lost billions because of incorrectly filed tax returns.

Over the past decade legislation to regulate tax return preparers has been introduced repeatedly in Congress with bipartisan support, but failed to pass.

So in 2011, the IRS started implementing regulations on its own to try and remedy the situation.

Tax preparers would be required to take an initial certification exam, pay annual fees, and complete at least 15 hours of continuing education each year.

The plan was supported by big tax prep chains like Jackson Hewitt and H.R. Block, both of which already have tax training programs.

It was also supported by groups representing accountants, tax attorneys, and enrolled agents – all of whom were exempted from the new rules.

But in 2013 the regulatory plan hit a snag.

STACEY TISDALE: You were so against this, you sued the IRS–

JOHN GAMBINO: Yes–

STACEY TISDALE: –tell me about that.

JOHN GAMBINO: Yeah, a lot of people thought I was– didn’t think I had a chance of succeeding.

STACEY TISDALE: John Gambino, a certified financial planner in Hoboken, New Jersey who does taxes for many of his clients would have been subject to the new test and education requirements.

He was a plaintiff in a federal lawsuit brought by a libertarian, public interest law firm. The suit challenged the IRS’s authority to impose what it called [a] “tax preparer licensing scheme.” And in January of 2013 a federal district court judge sided with Gambino and halted the IRS’s program. Ruling the agency lacked “statutory authority.” This past February a federal appeals court agreed, leaving the new regulations dead.

But despite the legal victory, Gambino remains concerned about the potential for regulation, which he believes would be anti-competitive and increase costs for consumers.

JOHN GAMBINO: Right now they’re free to choose. I have nothing against CPAs or attorneys who– who practice tax prep. I think right now consumers are free to go see these people if they– if they prefer that. But they also– lots and lots of them prefer to use preparers like myself who are not licensed– because they think they’re getting good value for the services that we provide.

STACEY TISDALE: Does it worry you that there’s no basic standard of competency to be a tax preparer. In 46 states, you can just hang up a shingle and a PIN number and say, “Hey, I can do your taxes.”

JOHN GAMBINO: It doesn’t worry me because, I think consumers are smarter than– than a lot of politicians give ‘em credit for. They know if they’re getting– you know, a raw deal or not. I think people need to be free to engage in an honest living. And I think the regulations– you’re punishing people for a few bad apples, before they’ve even done anything wrong.

STACEY TISDALE: What’s more, Gambino says people should be skeptical that mandating a test will improve the quality of tax preparation.

JOHN GAMBINO: If you have someone who’s– who’s not ethical or doesn’t know what they’re doing, they’d have even more incentive to not sign a tax return and kind of just operate in the shadows. And also, anyone can study and prepare for an exam, but it’s not necessarily going to make them a good tax preparer either.

STACEY TISDALE: The IRS does support two large free volunteer tax prep programs, tax counseling for the elderly and the volunteer income tax assistance program, or vita.

Mary Arthur is the director of the campaign for working families, which runs 18 vita sites in Philadelphia. She says free tax prep means more money returning to the community.

MARY ARTHUR: Over the past 12 years, we’ve brought back over $200 million to the community. So, you know, this work is vital. And the dollars that come back to the families, I mean, in some cases, that’s their lifeline to getting through the year.

STACEY TISDALE: Even without a regulatory plan in place, the government does have ways to go after tax preparers who they allege commit fraud.

The Department of Justice has gotten permanent injunctions against more than 60 preparers over the last year, out of an estimated 900,000 or more.

But IRS Taxpayer Advocate Nina Olson says making sure all tax preparers meet a minimum level of competency is a more efficient approach than going after fraudulent individual preparers.

In the absence of federal oversight, IRS Taxpayer Advocate Nina Olson does agree with John Gambino that the exam and tax education should be voluntary.

Find out about a free, IRS-sponsored tax assistance program

Find out about a free, IRS-sponsored tax assistance program