Report: Error-prone tax preparers put consumers at risk

Consumers face a number of threats to their financial well-being, including fraud and abuse, when they use paid tax preparers to file their taxes, according to a recent report from the National Consumer Law Center (NCLC). According to the report, more than half of American consumers use tax preparers every year.

The report, Riddled Returns, How errors and fraud by paid tax preparers put consumers at risk and what states can do, cites these examples of "incompetency and outright fraud":

  • Intentional omission of income
  • Falsifying information to make the taxpayer eligible for various credits and deductions, such as charitable deductions, job-related or business expenses or the Earned Income Tax Credit (EITC)
  • Inability to properly deal with education-related credits and income
  • Misclassifying filing status
  • Data-entry errors resulting in incorrect refunds

Consumer and advocacy groups and government agencies conducted 127 tests of tax preparers from 2008 through 2012 and found instances of serious errors and fraud 72 of the cases.

For a consumer, an incorrectly prepared tax return can trigger serious economic problems or even criminal sanctions.

Incorrect tax filings can be especially damaging to low-income families, for whom a tax return can be the single largest amount of money they will receive in a year. In Colorado, 1.04 million residents used tax preparers in the 2102 filing season. Of these, 176,822 filers had income low enough to qualify for the federal Earned Income Tax Credit.

The report is based on data collected using mystery-shopper tests conducted in small and large states and rural and urban areas. The mystery shopper test is a method used to measure the quality of service or compliance with regulation. The tests were conducted by consumer and advocacy groups, as well as the NCLC, U.S. Treasury's Inspector General for Tax Administration, Government Accountability Office and First Nations Development Institute.

NCLC argues that there is lack of minimum standards for education, training or competency for the tax preparers.

"In 47 states, there are more regulatory requirements for hairdressers than tax preparers," the report states.

Because of the significant percentage of fraud and incompetence found during the tests, NCLC determined that the problem needs urgent regulation to protect both taxpayers and public treasuries. The Internal Revenue Service has made attempts to regulate tax preparers, but these attempts were blocked by a federal court in 2013. The NCLC suggests that it is therefore up to Congress or the states to institute preparer regulations.

It recommends registration of all tax preparers, standardized disclosure of preparation fees and a basic competency exam with 60 hours of initial education and 15 hours per year of continuing education. Along with the report, NCLC provides a Model Individual Tax Preparer Act with specific language that states can use to implement the recommendations. The act is based on state laws of the three states that regulate tax preparers (Maryland, Oregon and California), as well as the IRS regulations.

– George Awuor


Article posted on December 13, 2013