oversight

Tax Administration: Most Taxpayers Believe They Benefit from Paid Tax Preparers, but Oversight for IRS Is a Challenge

Published by the Government Accountability Office on 2003-10-31.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               United States General Accounting Office

GAO            Report to the Committee on Finance, U.S.
               Senate



October 2003
               TAX
               ADMINISTRATION
               Most Taxpayers
               Believe They Benefit
               from Paid Tax
               Preparers, but
               Oversight for IRS Is a
               Challenge




GAO-04-70

               a

                                                October 2003


                                                TAX ADMINISTRATION

                                                Most Taxpayers Believe They Benefit
Highlights of GAO-04-70, a report to the        from Paid Preparers, but Oversight Is a
Chairman and Ranking Minority Member,
Committee on Finance, United States             Challenge for IRS
Senate




Over 55 percent of the nearly 130               GAO estimates that most of the taxpayers who used a paid preparer believe
million taxpayers in tax year 2001              they benefited from doing so. Many taxpayers told us they believed they
used a paid tax preparer. However,              would have great difficulty filling out their own tax forms because they do
using a preparer may not assure                 not understand their filing requirements. At the same time, some taxpayers
that taxpayers pay the least amount             are poorly served when paid preparers make mistakes, causing taxpayers to
due. Last year, GAO estimated that
as many as 2 million taxpayers
                                                over-or underpay their taxes or pay for services, such as short-term loans
overpaid their 1998 taxes by $945               called Refund Anticipation Loans (RALs), without understanding their costs
million because they failed to                  and benefits. The evidence available does not allow a precise estimate of the
itemize deductions and half of                  extent of problems caused by paid preparers, but nothing suggests that the
these used preparers.                           percentage of taxpayers affected is large. Nevertheless, even a small
                                                percentage of the over 72 million taxpayers who used paid preparers in 2001
GAO was asked to (1) obtain the                 translates into millions of taxpayers who are potentially adversely affected.
views of taxpayers about paid
preparers and examples of                       IRS has several offices responsible for taking action against problem paid
preparer performance including                  preparers, including the newly formed Office of Professional Responsibility.
any problems and (2) describe the               These offices sanction preparers for violating standards of conduct; assess
Internal Revenue Service’s (IRS’s)
oversight of problem preparers; the
                                                monetary penalties for violating tax laws when preparing returns; monitor
challenges facing IRS in dealing                and, if justified, sanction problem preparers offering electronic filing and
with problem preparers, especially              RALs; and investigate fraudulent preparer behavior. However, balancing
the Office of Professional                      resources devoted to such efforts against those devoted to other IRS
Responsibility; and the efforts to              priorities is a challenge. In addition to IRS, other federal agencies, state and
address those challenges. To obtain             local governments, and professional organizations have a role in regulating
the views of taxpayers who used                 paid preparers. At least two proposals exist to expand IRS’s oversight of paid
preparers, GAO surveyed a national              preparers. Consideration of such proposals is complicated by the difficulty
representative sample of taxpayers.             of developing reliable estimates of the number of taxpayers affected by
                                                problem preparers or the effectiveness of the actions taken against them.

Because making decisions about                  Percentage of Returns with a Paid Preparer’s Signature
IRS’s role is a policy matter and               60 Percent
data to determine the efficacy of
current oversight efforts would be
                                                50
difficult to develop, whether to
expand IRS’s role in regulating paid
preparers is a judgment that                    40
Congress and IRS must make and
GAO is not making                               30
recommendations in this report. In
commenting on a draft of this
report, the IRS Commissioner                    20

generally concurred with our
findings.                                       10



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To view the full product, including the scope        Tax year
and methodology, click on the link above.
For more information, contact Jim White at      Source: IRS.

(202) 512-5594 or Whitej@gao.gov.
Contents




Letter
                                                                                                 1
                             Results in Brief 
                                                         2
                             Background                                                                 3

                             Taxpayers Believe They Benefit by Using Paid Preparers but Some 

                               Are Poorly Served                                                        4
                             IRS and Others Act Against Problem Paid Preparers, but Balancing
                               Taxpayer Protection Against Other Priorities Is a Challenge             13
                             Concluding Observations                                                   24
                             Agency Comments and Our Evaluation                                        25


Appendixes
              Appendix I:    Objectives, Scope, and Methodology                                        28
                             Objective 1: Obtaining Taxpayer Views, Examples of Paid Preparer
                               Performance, and What Is Known about the Extent of Problems
                               Caused by Paid Preparers                                                28
                             Objective 2: Describe IRS’s Oversight of Problem Paid Preparers;
                               Management Challenges Facing IRS’s Offices that Provide
                               Oversight; and Efforts to Address Management Challenges                 32
             Appendix II:    Final Survey Results Weighted to the U.S. Population
                     34
             Appendix III:   Comments from the Internal Revenue Service
                               37
             Appendix IV:    GAO Contacts and Staff Acknowledgments
                                   39
                             GAO Contacts                                                              39
                             Acknowledgments                                                           39


Tables                       Table 1: Key Findings in the Office of Director of Practice               14
                             Table 2: Some Examples of Paid Preparer and RAL Oversight
                                      Efforts by State and Local Government                            24


Figures	                     Figure 1: Percentage of Returns with a Paid Preparer’s Signature           4

                             Figure 2: Paid Preparer Users’ Confidence That They Did Not 

                                       Overpay Taxes                                                    5

                             Figure 3: Client Perceptions on Aspects of Paid Preparer 

                                       Performance                                                      7

                             Figure 4: Example of Paid Preparer Fees                                   11

                             Figure 5: Visits and Actions by the ERO Monitoring Program                18

                             Figure 6: Paid Preparer Criminal Investigations for Calendar Years

                                       2001 and 2002                                                   20





                             Page i                                           GAO-04-70 Paid Tax Preparers
Contents




Abbreviations

CI           Criminal Investigation Division
EIC          Earned Income Credit
ERO          Electronic Return Originator
FTC          Federal Trade Commission
IRS          Internal Revenue Service
ODP          Office of Director of Practice
OPR          Office of Professional Responsibility
RAL          Refund Anticipation Loan
SB/SE        Small-Business/Self-Employed Division
TAS          Taxpayer Advocate Service

 This is a work of the U.S. government and is not subject to copyright protection in the
 United States. It may be reproduced and distributed in its entirety without further
 permission from GAO. However, because this work may contain copyrighted images or
 other material, permission from the copyright holder may be necessary if you wish to
 reproduce this material separately.




Page ii                                                     GAO-04-70 Paid Tax Preparers
A

United States General Accounting Office
Washington, D.C. 20548



                                    October 31, 2003


                                    The Honorable Charles E. Grassley 

                                    Chairman 

                                    Committee on Finance

                                    United States Senate


                                    The Honorable Max Baucus

                                    Ranking Minority Member

                                    Committee on Finance

                                    United States Senate


                                    Filing a correct tax return can be a daunting task for taxpayers. Many

                                    taxpayers do not understand their filing requirements and would have great 

                                    difficulty filling out their tax forms without the assistance of paid 

                                    preparers. IRS’s most recent estimates are that in tax year 2001 more than

                                    55 percent of the nearly 130 million individual filers paid someone to 

                                    prepare their tax returns, and in tax year 2000, taxpayers paid almost $15 

                                    billion for individual tax preparation services. However, using a paid

                                    preparer does not always assure that taxpayers will pay the least amount of 

                                    taxes that are legally due. For example, 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.1


                                    Concerned that some paid preparers might not be diligent when completing 

                                    tax returns, you asked us 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; the management challenges facing IRS 

                                    offices that interact with paid preparers, especially the Office of 

                                    Professional Responsibility; and the efforts to address those management 

                                    challenges.


                                    To address the objectives, we surveyed a nationwide random sample of 

                                    taxpayers who used paid preparers. While this sample is representative of 



                                    1
                                     U.S. General Accounting Office, Tax Deductions: Further Estimates of Taxpayers Who
                                    May Have Overpaid Federal Taxes by Not Itemizing, GAO-02-509 (Washington, D.C.: Mar.
                                    29, 2002).




                                    Page 1                                                   GAO-04-70 Paid Tax Preparers
                    all taxpayers who used paid preparers, it has some limitations and must be
                    interpreted carefully because it is based on taxpayer perceptions.
                    Taxpayers responding to our survey may not understand the tax laws well
                    enough to evaluate whether they received quality service from their paid
                    preparers, resulting in inflated satisfaction levels. In addition, we
                    conducted in-depth interviews with a smaller judgmental sample of
                    taxpayers who provided examples of paid preparer performance, but we
                    were unable to independently verify the facts in the taxpayers’ examples.
                    We also interviewed paid preparers, representatives of professional
                    organizations, various IRS officials, and low-income tax clinic directors. We
                    presented our survey and interview findings at a Finance Committee
                    hearing on April 1, 2003.2 In addition, we conducted a review of IRS’s closed
                    case files on paid preparers investigated for fraud or other misconduct and
                    reviewed IRS’s paid preparer penalty collection data. A more detailed
                    discussion of our scope and methodology, including the potential effect of
                    our taxpayer survey’s 46 percent response rate, may be found in appendix I.



Results in Brief	   Based on projections from our survey, most of the taxpayers who used a
                    paid preparer believe they benefited from doing so and would use a paid
                    preparer in the future. The taxpayers we interviewed in-depth identified a
                    variety of advantages in using paid preparers. Some said they did not
                    understand the tax laws or lacked the time or patience to complete returns
                    on their own. However, when paid preparers make mistakes or exhibit
                    other problematic behavior, the consequences for taxpayers can be
                    significant. While available evidence does not allow a precise estimate of
                    how extensive the problem is, none of the evidence suggests that the
                    percentage of poorly served taxpayers 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 potentially overpaid or
                    underpaid their taxes due to preparer mistakes or other problematic
                    behavior. In addition, IRS’s National Taxpayer Advocate—who heads the
                    program that helps resolve taxpayers’ tax problems with IRS and
                    recommends changes to mitigate taxpayer problems—and other
                    knowledgeable observers have concerns about how well taxpayers
                    understand the costs and benefits of the short-term Refund Anticipation
                    Loans (RALs) offered by some preparers.


                    2
                     U.S. General Accounting Office, Paid Tax Preparers: Most Believe They Benefit, but Some
                    Are Poorly Served, GAO-03-610T (Washington, D.C.: Apr. 1, 2003).




                    Page 2                                                     GAO-04-70 Paid Tax Preparers
              IRS has several offices responsible for taking action against problem paid
              preparers, but balancing resources devoted to such efforts against those
              devoted to other priorities is a challenge. The newly formed Office of
              Professional Responsibility (OPR) enforces professional standards and is
              beginning to address management problems that made its predecessor
              office ineffective. Many changes are still being implemented, so it is too
              soon to know the impact of the changes. IRS’s Small Business/Self-
              Employed (SB/SE) and Criminal Investigation (CI) divisions may penalize
              or recommend prosecuting problem preparers, but generally focus on only
              the most serious cases because of their other enforcement priorities. This
              is a challenge because of the lack of firm data about the extent of
              problematic paid preparer behavior and the effectiveness of actions to
              combat it.

              While most taxpayers may receive quality service from their preparers,
              problematic behavior by some preparers raises the question of whether IRS
              should be more active in overseeing paid preparers. Internal and external
              proposals have been made to expand IRS’s oversight of paid preparers.
              However, the lack of information on the overall extent of problems with
              paid preparers and the effectiveness of the actions taken against them
              make this a judgment that Congress and IRS management must make. We
              are not making any recommendations in this report.



Background	   Paid preparers aid taxpayers in the completion of their tax returns for a fee.
              They range from licensed professionals, such as attorneys, certified public
              accountants, and enrolled agents, to those lacking formal training who
              complete tax returns part-time. Paid preparers authorized to represent
              taxpayers in matters before IRS are called practitioners and include
              attorneys, certified public accountants, and enrolled agents. Preparers
              work for a variety of enterprises including accounting firms, large tax
              preparation services, and law firms. Some are self-employed. IRS estimates
              that in 1999 there were 1.2 million paid preparers, although the actual
              number is unknown because some paid preparers do not sign the returns
              they prepare. The percentage of returns with a paid preparer’s signature
              has been steadily increasing over the past 20 years, as shown in figure 1.




              Page 3                                              GAO-04-70 Paid Tax Preparers
Figure 1: Percentage of Returns with a Paid Preparer’s Signature
  60     Percent



  50



  40



  30



  20



  10



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        Tax year                                                                                               20

 Source: IRS.



                                                         Paid preparers provide a variety of tax-related services besides tax
                                                         preparation, including tax and estate planning and services that help clients
                                                         receive funds quickly, such as electronic filing and RALs.



Taxpayers Believe                                        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
They Benefit by Using                                    preparer in the future. Taxpayer surveys and studies of returns suggest that
Paid Preparers but                                       some taxpayers are poorly served by their paid preparers, but they do not
                                                         allow a very precise estimate of the extent of the problem.
Some Are Poorly
Served

Most Taxpayers Believe                                   Based on projections from our national survey, most taxpayers who used a
They Benefit From Using                                  paid preparer believe they benefit from doing so. We estimate that 77
                                                         percent of the taxpayers who used a paid preparer in 2002 were very or
Paid Tax Preparers
                                                         generally confident that they did not pay more in taxes than was legally
                                                         required, as shown in figure 2, and that 87 percent would use one again in



                                                         Page 4                                                     GAO-04-70 Paid Tax Preparers
the future.3 These data suggest that paid tax preparers are providing
needed services to taxpayers.



Figure 2: Paid Preparer Users’ Confidence That They Did Not Overpay Taxes

                                                                 5%
                                                                 Not at all confident

                                                                 7%
                                                                 A little confident




                                            12%                  No opinion


               49%

                                      28%                        Generally confident




                                                                 Very confident
    Source: GAO nationwide survey of taxpayers using a paid preparer in 2002.


Note: The estimates have a 95 percent confidence interval of plus or minus 5 percent or less.
Percentages total more than 100 percent due to rounding.


The results of our taxpayer survey must be interpreted carefully—it is
based on taxpayer perceptions, and taxpayers may not understand the tax
laws well enough to evaluate the performance of their paid preparers. For
example, most of the taxpayers we talked to in-depth said they used a paid
preparer because they found IRS tax forms and documents too
complicated or they were confronting an unusually complicated tax
situation. If taxpayers lack the technical expertise needed to identify
preparer errors, their survey responses may underestimate the extent of
problems caused by paid preparers.




3
 We are 95 percent confident that the percentage estimates of our survey are within +/- 5
percentage points or less of what we would have obtained if we had surveyed the entire
study population.




Page 5                                                                                  GAO-04-70 Paid Tax Preparers
With that caveat in mind, taxpayers in our nationwide survey said that their
preparers did sufficient probing or took other steps to ensure an accurate
return. We estimate that about 91 percent of taxpayers believe their
preparers had enough information about their personal circumstances to
accurately prepare their tax returns. We also estimate that 88 percent of
taxpayers using paid preparers were asked for supporting documentation.
Most of the preparers we talked to said they ask their clients to provide
documentation to support claimed income, deductions, and credits, such
as W-2 forms from employers or 1099 forms from financial institutions, to
ensure the accuracy and completeness of the information reported on
returns. In addition, paid preparers are required by law to take certain steps
when filling out returns for their clients, including signing the return and
giving their clients copies of the completed returns. We estimate that the
vast majority of taxpayers who used a paid preparer in 2002 were provided
a signed copy of their return, as shown in figure 3.




Page 6                                              GAO-04-70 Paid Tax Preparers
Figure 3: Client Perceptions on Aspects of Paid Preparer Performance
  Percentage

  100

   90

   80

   70

   60

   50

   40

   30

   20

   10

    0
        ac tion gh



           nta Saw




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  Response


                   Don’t know

                   No

                   Yes

  Source: GAO nationwide survey of taxpayers using a paid preparer in 2002.


Note: The estimates have a 95 percent confidence interval of plus or minus 5 percent or less.


Taxpayers choose to use paid preparers for a variety of reasons. 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. According to
the National Taxpayer Advocate, many taxpayers rely upon the expertise of
a paid preparer to complete their returns since they are faced with a
complex set of tax laws and a multitude of requirements for deductions,
exemptions, and credits. One taxpayer, for example, said she began using a
paid preparer 9 years ago to help her with estate tax issues following the
death of her father because she needed help from a tax professional in
dealing with complicated estate tax issues. Other taxpayers said they



Page 7                                                                        GAO-04-70 Paid Tax Preparers
                            lacked the time or patience to complete their returns on their own. For
                            example, a mother of four who operates her own business part-time and is
                            finishing her degree at night said she simply does not have the time to do
                            her own taxes. Other taxpayers stated that they paid someone to prepare
                            their taxes in hopes of obtaining a larger and/or quicker refund.

                            Some of the paid preparers we spoke to agreed that educating taxpayers
                            about the tax laws is an important component of their practice. For
                            example, one preparer who works primarily with immigrants said he and
                            his staff spend considerable time explaining to their clients that paying
                            taxes is part of the civic responsibilities they assumed in immigrating to
                            this country. Other preparers told us they often have to educate taxpayers
                            on more complex concepts, such as computing the basis (the investment
                            made in a property) to determine how much of a real estate sale would be
                            taxable. Another preparer told us he found that a taxpayer had overpaid his
                            taxes by more than $6,200 over a 3-year period because the taxpayer had
                            overlooked earned income and child tax credits. Still another preparer told
                            us how he helped a taxpayer receive a refund in excess of $19,000 when he
                            found out that the taxpayer, who had moved twice in less than 2 years, had
                            missed out on deductions for moving expenses due to job relocations.



Some Taxpayers Are Poorly   When paid preparers make mistakes or exhibit other problematic behavior,
Served by Paid Preparers    the consequences for taxpayers may be significant. Examples provided by
                            low-income tax clinic4 representatives and paid preparers include:

                            •	 A taxpayer who overpaid his taxes over a period of years by roughly
                               $3,500 to $5,000. The taxpayer had received notices for several years
                               from IRS stating that he may be eligible for the Earned Income Credit
                               (EIC).5 Each year, he took the notices to his preparer, but the preparer
                               took no action.




                            4
                             Low-income tax clinics are organizations that receive a matching grant from IRS to
                            represent low-income taxpayers involved in controversies with IRS or to provide tax
                            education and outreach to taxpayers who speak English as a second language or who have
                            limited English proficiency.
                            5
                              The EIC is a refundable federal income tax credit for low-income working individuals and
                            families. The credit reduces the amount of federal tax owed and can result in a refund check
                            when the EIC exceeds the amount of taxes owed.




                            Page 8                                                        GAO-04-70 Paid Tax Preparers
•	 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 IRS, the taxpayer
   visited the paid preparer who told her that IRS must have made a
   mistake. The preparer was sent to jail.

•	 Another preparer incorrectly advised a married couple with two
   children to each file separately as head of household so that they could
   claim two EICs. The couple ended up owing taxes, interest, and
   penalties.

•	 A paid preparer let a taxpayer file for the EIC for 2 years although the
   taxpayer lacked the appropriate documentation and was ineligible for
   the credit. The taxpayer received a tax refund he was not entitled to
   receive, resulting in a tax liability of $3,300.

As with all anecdotal evidence, these examples are not necessarily
representative of the kinds of problems taxpayers encounter when dealing
with problematic paid preparers. Also, taxpayers may have contributed to
these problems by either providing incomplete information to their
preparers or being actively complicit in avoiding taxes that are legitimately
owed.

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. The primary benefit of
RALs is that they allow clients to receive funds quickly, sometimes in just a
few minutes, rather than the 10 days it typically takes taxpayers who file
electronically to receive their tax refunds. The ability to quickly receive
funds makes RALs appealing to low-income taxpayers who often want or
need their refund quickly. In addition, as the National Taxpayer Advocate
pointed out in the fiscal year 2002 Annual Report to Congress, many low-
income clients who lack bank accounts find that RALs are the only way to
electronically file a return and receive their refunds quickly. For these and
other reasons, RALs are becoming more popular. Based on IRS data, the




Page 9                                              GAO-04-70 Paid Tax Preparers
National Consumer Law Center estimates that 12.1 million RALs were
taken out in 2001, up from 10.8 million in 2000.6

Although this suggests that many taxpayers find value in using RALs, IRS
officials and others have raised concerns about whether taxpayers are fully
aware of the costs involved and their tax filing alternatives. For example, a
recent New York City investigation found that some paid preparers fail to
disclose the costs of RALs and the availability of alternatives to the loans.7
The investigation found that only 27 of the 43 preparers visited mentioned
the annual percentage rate and other fees associated with RALs. New York
City’s investigation also found that electronic filing was not strongly
publicized as an alternative way for clients to receive their tax refunds
quickly. According to a low-income tax clinic director, many paid preparers
fail to fully explain to taxpayers that accepting a RAL carries a certain
risk—if refunds are delayed or denied, taxpayers may be liable for
additional charges and fees. Without clear information about the costs and
risks, taxpayers cannot always weigh the costs against the benefits that
they might receive.

Also, based on information we gathered, fees for RALs and other services
that accelerate the receipt of refunds vary widely. For example, while some
preparers charge nothing for electronic filing services, one preparer we
spoke to (while we were posing as a potential client) said he would charge
us between $210 and $250 to file electronically. Another preparer said he
would charge $174 for a RAL on a $700 refund, which equates to an annual
interest rate of over 900 percent, assuming a loan period of 10 days, while
another preparer quoted us a RAL fee of $130 on a $1,200 refund, which
equates to an annual interest rate of about 400 percent, assuming the same
loan period. These examples are not necessarily representative of all
preparer fees; the exact amounts of preparer fees for accelerated refunds
depend on various individual circumstances, such as the financial
institution the preparer uses to finance the loan and the amount of refund
due.




6
 National Consumer Law Center/Consumer Federation of America, The High Cost of Quick
Tax Money: Tax Preparation, ‘Instant Refund’ Loans, and Check Cashing Fees Target the
Working Poor (Boston, Mass.: January 2003).
7
New York City Council Investigative Division, Tax Preparers: Taking Advantage By Not
Disclosing (New York, N.Y.: February 2003).




Page 10                                                   GAO-04-70 Paid Tax Preparers
The RAL fees, when combined with tax preparation fees, may considerably
reduce a taxpayer’s refund. For example, the preparer mentioned above
who quoted a RAL fee of $130 on a $1,200 refund also quoted a tax
preparation fee of $190 in addition to the RAL fee. As shown in figure 4
below, the fees would have reduced the refund by more than 25 percent.



Figure 4: Example of Paid Preparer Fees


                 1
          Expected refund
               $1,200

                                            $1,200
                                                                                  2
                                                                     Refund minus preparation fees
                                                                       $1,200 – ($190) = $1,010




                                             $1,010

                                                   3
                                  Refund minus refund anticipation
                                          loan (RAL) fees
                                      $1,010 –   ($130) = $880a

                                                                                         4
                                                                                      Net refund
                                                                                        $880
                                                 $880

Source: GAO.


a
    The $130 RAL fee consists of $80 in financing charges and $50 in bank fees.


In another example, a low-income tax clinic director informed us of a
disabled taxpayer who was due a refund of $1,230 on a simple return. After
paying various fees, such as return preparation and a RAL, she received a
check from her preparer for $414—about 34 percent of her expected
refund.




Page 11                                                              GAO-04-70 Paid Tax Preparers
Little Authoritative         A variety of evidence, including the above examples and our nationwide
Evidence Regarding           survey, shows that some taxpayers are poorly served by their paid
                             preparers. While this evidence does not allow a precise estimate due to
Problematic Paid Preparers   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.

                             Taxpayer surveys show that some taxpayers had problems with the quality
                             of the service provided by their paid preparer. Based on the results of our
                             nationwide survey, we estimate that 5 percent of paid preparer users had
                             no confidence that they had not overpaid their taxes, and another 7 percent
                             had little confidence, as shown in figure 2. We also estimate that 3 percent
                             of paid preparer users did not believe that their preparer had enough
                             information to accurately complete their return, as shown in figure 2. Our
                             survey results are similar to a 1997 Consumer Reports nonrandom survey
                             of 26,000 of its readers, in which 6 percent said they discovered an error
                             made by their preparers.8 As discussed earlier, taxpayer survey results need
                             to be interpreted carefully because they reflect taxpayer perceptions and
                             may misstate the extent of the problem.

                             Studies of filed returns also suggest that some paid preparers do not
                             exercise due diligence in filing returns. 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.9 Similarly, a recent report
                             by the Treasury Inspector General for Tax Administration estimated that
                             there were approximately 230,000 returns filed by paid preparers where
                             taxpayers appeared eligible for but did not claim the Additional Child Tax
                             Credit.10 In addition, a 2002 IRS study of the EIC for tax year 1999 returns
                             estimated that some taxpayers claimed about $11 billion more than they


                             8
                              Consumers Union of U.S., Inc., “Tackling Your Taxes,” Consumer Reports, vol. 62. no. 3
                             (1997). This percentage represents Consumer Reports subscribers who responded to
                             the survey and is not necessarily representative of taxpayers in general.
                             9
                              GAO-02-509.
                             10
                               Treasury Inspector General for Tax Administration, Analysis of Statistical Information
                             for Returns With Potentially Unclaimed Additional Child Tax Credit (Washington, D.C.:
                             January 2003).




                             Page 12                                                     GAO-04-70 Paid Tax Preparers
                             were entitled to while others claimed $710 million less than they were
                             entitled to.11 The IRS reported that paid preparers filed more than 65
                             percent of all EIC returns. None of these studies tried to determine how
                             many errors were the fault of the preparer and how many were the fault of
                             the taxpayer. However, based on our earlier examples of paid preparer
                             performance, it seems likely that preparers bear responsibility for at least
                             some of the over- or underpayments. Taxpayers could be at fault if they
                             provide the preparer with incorrect information.



IRS and Others Act           Several IRS offices have responsibility for problem paid preparers, but
                             balancing resources devoted to taxpayer protection with resources
Against Problem Paid         devoted to other priorities is a challenge. Proposals have been made for
Preparers, but               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
Balancing Taxpayer           problem and the effectiveness of IRS’s actions and by the involvement of
Protection Against           other agencies, state, and local governments as well as professional
Other Priorities Is a        organizations.
Challenge

New Office of Professional   The newly formed OPR enforces professional standards for those paid
Responsibility (OPR)         preparers authorized to represent taxpayers in matters before IRS. These
                             authorized preparers, called practitioners, include attorneys, certified
Beginning to Address
                             public accountants, and enrolled agents.
Problems Overseeing
Practioners                  Treasury Department Circular No. 230 imposes standards of
                             professionalism and conduct for practitioners and authorizes IRS to
                             institute proceedings against practitioners who violate the regulations.12
                             Depending on the seriousness of the violation, OPR can sanction
                             practitioners through private reprimand, censure (a public reprimand),
                             suspension, or disbarment. For example:



                             11
                                Department of the Treasury, Internal Revenue Service, Compliance Estimates for Earned
                             Income Tax Credit Claimed on 1999 Returns (Washington, D.C.: Feb. 28, 2002).
                             12
                               Federal regulations, 31 CFR Part 10, published in pamphlet form as Treasury Department
                             Circular No. 23, delegate the Treasury Secretary’s authority over taxpayer representatives to
                             IRS. Circular 230 requires an administrative law judge to conduct some disciplinary
                             proceedings.




                             Page 13                                                       GAO-04-70 Paid Tax Preparers
•	 As a result of an OPR investigation, OPR accepted a practioner’s offer of
   consent to suspension for almost 3 years for violation of the
   requirement of due diligence as to accuracy in preparing corporate tax
   returns for 3 years. The practitioner underreported income by over
   $50,000 in 1 year, and claimed unsubstantiated expenses of over $25,000
   in the other 2 years. The practitioner also overstated a real estate tax
   deduction by over $30,000 in 1 year.

•	 In another case, a practitioner was disbarred from practice for giving
   false or misleading information to IRS. The practitioner signed a power
   of attorney as being licensed when the license had not been renewed,
   thereby making the practitioner ineligible to practice before IRS.

As part of IRS’s modernization effort, IRS hired an outside management
consulting firm to make high-level recommendations concerning the
staffing, organization, technology, and operating procedures of the Office
of Director of Practice (ODP), the office OPR replaced. Table 1 summarizes
the consultant’s findings.



Table 1: Key Findings in the Office of Director of Practice

Area                        Key findings
Mission and strategy        Office is not strategically focused.
                            Narrow interpretation of jurisdiction (covering practitioners
                            only) leaves major problems unaddressed and contradictions
                            within system.
                            Awareness and confidence in ODP processes within IRS is
                            low.
                            Operation of office is reactive to incoming workload.
Business processes          Business processes are lengthy.
                            Decision authority is not delegated to lead program staff.
                            Guidelines for business process decisions do not exist in a
                            written form.
                            Procedures emphasize practitioner rights.
                            Communication internally and externally is limited.
Organization and staffing   Organization lacks structure.
                            Relationships with external stakeholders are weak.
                            Staffing pattern and deployment does not align skills to
                            functions.
                            Management practices are underdeveloped.




Page 14                                                       GAO-04-70 Paid Tax Preparers
(Continued From Previous Page)
Area                      Key findings
Technology	               Information systems are separate, and do not provide
                          adequate functionality for administrative and program needs.
                          Systems are undocumented.
                          Staff is untrained to fully utilize existing functionalities.
Source: IRS consultant.


According to the OPR Director, IRS took the high-level findings of the
consultant’s report and drew on its management and staff’s expertise to
develop a plan to make needed improvements. For example, IRS
reorganized the office, renaming it OPR, and has started to implement
several other changes. As an initial step, OPR contacted various tax
professional organizations in January 2003 and laid out the following
priorities for the balance of 2003:

• enhance the visibility of OPR internally as well as externally,

• increase the capacity and capability of OPR,

• process the workload in a shorter time frame,

• ensure that Circular 230 sanctions are applied fairly and consistently,

• identify and implement organizational performance measures, and

•	 establish and maintain an effective working alliance with the tax
   professional organization community.

While IRS has already made some improvements, according to the OPR
Director, the following efforts are on-going:

•	 hiring and training a significantly expanded staff of attorneys and
   support personnel;

• improving and documenting operational practices and procedures;

• implementing performance measures;

•	 communicating the OPR mission and progress internally and externally
   through speaking engagements, newsletters, and Web sites;




Page 15                                                       GAO-04-70 Paid Tax Preparers
                          •	 working with IRS Chief Counsel and Treasury Department Tax Policy
                             personnel to make beneficial amendments to Circular 230; and

                          •	 maintaining an open door policy with respect to the practitioner
                             community in order to learn of their concerns and their suggestions.

                          Also, the OPR director said it is going to take some time to make all the
                          needed changes. We did not try to assess OPR’s on-going improvements
                          because some are not yet complete and others are too new to have
                          produced the desired improvements.



SB/SE Faces Challenges    IRS’s SB/SE division has responsibility for assessing and collecting
Balancing Paid Preparer   monetary penalties against any paid preparers who do not comply with tax
                          laws when filing returns. SB/SE assessed about $2.4 million in penalties in
Compliance Actions With
                          calendar years 2001 and 2002, and collected about $291,000 or 12 percent,
Other Enforcement         including all or some portion of penalties from 44 percent of the preparers
Priorities                penalized. According to IRS officials, collecting paid preparer penalties has
                          not been a priority in the division’s overall collection efforts due to other
                          higher priority work, such as abusive tax schemes.

                          According to an SB/SE representative, there are currently no plans for
                          SB/SE to make collecting paid preparer penalties a priority. The
                          representative stated that their priorities include abusive tax schemes, and
                          they cannot afford to make these low dollar paid preparer cases a priority
                          given their responsibility for addressing billions of dollars in uncollected
                          taxes. Also, IRS does not currently have a system in place to identify paid
                          preparer penalties separately from other assessments once a case is
                          assigned for collection, and to do so would require a labor-intensive
                          computer programming effort.

                          However, the monetary amounts of these penalties, which are small
                          relative to IRS’s other compliance efforts, may not reflect how important
                          the penalties are as a deterrent to problematic paid preparers. According to
                          the Internal Revenue Manual,13 penalty assertion is the key enforcement
                          vehicle for noncompliant preparers. As mentioned earlier, IRS has no data
                          on the extent of the problems with paid preparers or how effective its
                          enforcement efforts are in deterring problematic preparer behavior. In


                          13
                               Internal Revenue Manual, 4.10.6.8.2(1) (Washington, D.C.: May 14, 1999).




                          Page 16                                                         GAO-04-70 Paid Tax Preparers
                              assessing but not collecting these penalties, IRS may be sending preparers
                              a mixed message about whether poor performance by preparers will be
                              tolerated. For example, several paid preparers and low-income tax clinic
                              officials we interviewed said that IRS was not providing enough paid
                              preparer oversight and that it should be increased. IRS has made changes
                              to its fiscal year 2003 compliance program guidance to place a higher
                              priority on assessing penalties against problem preparers. However,
                              collecting paid preparer penalties will continue to be part of the regular
                              collection process because they are not to be given any special treatment
                              as a priority.



IRS Monitors Preparers        IRS has broad authority to monitor and sanction Electronic Return
Who Offer Electronic Filing   Originators (ERO) whom IRS authorizes to file tax returns electronically.
                              IRS’s monitoring is to ensure ERO compliance with provisions of any
but Has Limited Role in
                              revenue procedures, publications, or notices that govern IRS’s e-file
Monitoring RALS               program, including RALs. Through random and mandatory visits, the ERO
                              monitoring program offices monitor the activities of EROs to ensure
                              compliance with IRS’s e-file program and to investigate allegations and
                              complaints against EROs. In 2001, IRS established a goal of visiting 1
                              percent of all EROs each year. IRS met its goal in 2002, visiting more than
                              1,400 EROs and sanctioning 215 of them for violating IRS guidelines. Figure
                              5 shows the number of EROs visited and sanctions issued by degree of
                              seriousness, for fiscal year 2002, and for two thirds of fiscal year 2003,
                              based on the most recent data available through May 2003.




                              Page 17                                           GAO-04-70 Paid Tax Preparers
                           Figure 5: Visits and Actions by the ERO Monitoring Program
                           1,600 Visits
                                                           1,412
                           1,400


                           1,200

                                         1,001
                           1,000                                   884


                                800
                                                   577


                                600


                                400


                                200
                                                                         117   91
                                                                                             50        60
                                                                                        38                  15      16     14
                                   0
                                              Referrals      Visits        Written    Recommended     Immediate   Referral to CI
                                                                         reprimands    suspension    suspension
                                       Actions taken


                                                   2002

                                                   2003a

                               Source: IRS.

                           a
                               Cumulative through May 23, 2003.


                           However, while IRS does impose some requirements on paid preparers
                           offering RALs, its role is limited and the requirements serve in part to
                           ensure that RALs are presented to taxpayers as loans and not as an
                           accelerated tax refund. For example, IRS’s Publication 1345 prohibits EROs
                           from basing their fees on a percentage of the refund amount or computing
                           their fees using any figure from tax returns.



CI Division Investigates   IRS’s CI division investigates paid preparers suspected of criminal or
Criminal and Fraudulent    fraudulent behavior and other related financial crimes. However, according
                           to CI officials, they have a system using indicators developed from prior
Preparer Behavior
                           cases to identify and work only the most egregious cases due to overall
                           resource limitations, leaving some cases unworked. Nevertheless,
                           according to IRS, CI is increasing its investigations of criminal and
                           fraudulent paid preparers. For example, according to IRS it more than
                           doubled the number of paid preparer criminal investigations in 2002



                           Page 18                                                                GAO-04-70 Paid Tax Preparers
compared to 2001 and experienced a significant increase in the number of
investigations referred for prosecution in the first quarter of fiscal year
2003.

CI officials told us that to prioritize its work, CI identifies and investigates
the most egregious criminal behavior using a fraud ranking system that
determines which preparers should be investigated. Officials said the
ranking is based on information developed from individual returns
provided by fraud detection centers. Fraud detection centers are CI offices
collocated at IRS campuses that attempt to detect fraud by scanning paper
and electronic returns. The system ranks preparers by the number of
suspected fraudulent filed returns by applying criteria that have proven in
the past to be successful in prosecution of fraud cases. However, as
mentioned earlier, IRS has no data on the extent of the problem with paid
preparers, including those who are fraudulent, or the effectiveness of CI’s
deterrent actions against them.

Two programs provide much of the organizational framework for CI’s
actions against criminal paid preparer behavior. The division’s Return
Preparer Program identifies and investigates criminal paid preparers while
the Questionable Refund Program identifies fraudulent tax returns. Once
identified, the program stops payment on fraudulent tax refunds and refers
fraudulent tax schemes to CI field offices for further investigation. Figure 6
shows that in 2001 and 2002, CI evaluated 574 referrals of possible criminal
paid preparer behavior and initiated 395 criminal investigations against
paid preparers.




Page 19                                               GAO-04-70 Paid Tax Preparers
Figure 6: Paid Preparer Criminal Investigations for Calendar Years 2001 and 2002
 Number
 600      574



 500


                        395
 400



 300



 200                                181




 100
                                                   134         134
                                                                             119

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                                                                      arc
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                                                         Se
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                                                                     Inc
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 CI actions taken
 Source: IRS Division of Criminal Investigation.



According to CI, criminal paid preparer behavior varies. Some criminal
preparers create false forms such as W-2s and file returns on behalf of
deceased taxpayers. Others buy social security numbers and the names of
dependents from taxpayers with multiple children in order to allow others
to claim dependent related tax credits, such as the EIC. According to CI
officials, most criminal preparers are investigated for aiding and abetting a
false tax return. For example, during 2001 to 2002, more than 91 percent of
CI’s initiated investigations against paid preparers involved preparers who
helped prepare false or fraudulent tax returns. One investigation resulted in
a preparer pleading guilty for assisting in the preparation of false tax
returns and sentenced to 38 months in prison and assessed a $10,000 fine.
The preparer owned and operated a tax preparation business and among
her criminal activities regularly advised clients to claim fraudulent tax
credits for dependents and child care, even though the clients had no
dependents. The preparer’s actions from 1997 to mid-2000 resulted in a loss
to the Treasury of between $1.5 and $2.5 million. From 2001 to 2002, CI




Page 20                                                                            GAO-04-70 Paid Tax Preparers
                          investigations resulted in the indictment and sentencing of 13414 paid
                          preparers, of which 119 were incarcerated.

                          Anecdotally, several preparers we spoke to stated that publishing examples
                          of convictions against preparers may help deter future criminal preparer
                          behavior. However, IRS does not have quantitative information about the
                          size of the problem with paid preparers or the extent to which convictions
                          against paid preparers are a deterrent to other preparers. Information on
                          deterrence would be difficult, perhaps impossible to develop.



Others Believe More IRS   While IRS provides some oversight of paid preparers, others believe that it
Oversight Is Needed       should provide additional oversight. The Low Income Taxpayer Protection
                          Act of 2003, S. 685 proposed in the 108th Congress, would require the
                          licensing and registration of paid preparers and RAL providers. The
                          proposal would also require all preparers to abide by the rules of conduct
                          that currently govern practitioners and contains provisions aimed at
                          discouraging the use of RALs, including regulating the fees charged for
                          RALs.

                          The National Taxpayer Advocate recommended a similar proposal
                          requiring the registration of paid preparers in her 2002 Annual Report to
                          Congress. The proposal would require paid preparers to be registered with
                          IRS, pass a certification examination, and maintain annual educational
                          requirements. In a previous report to the Congress, the National Taxpayer
                          Advocate stated that while paid preparers are subject to monetary
                          penalties if they prepare returns negligently, many preparers are not
                          subject to standards of conduct, licensed by any state regulatory agency, or
                          required to participate in continuing education programs. Thus, according
                          to the Advocate, the only course of action that can be taken to enjoin a paid
                          preparer is the initiation of a civil action by the Secretary of the Treasury
                          against the preparer in A District Court of the United States. According to
                          the Advocate, such action is costly, time consuming, and leaves
                          questionable income tax preparers free to remain in business and




                          14
                            The 134 preparers indicted are not necessarily the same preparers sentenced. Some
                          preparers indicted were not sentenced during the period and some of those sentenced may
                          have been indicted in a prior period.




                          Page 21                                                    GAO-04-70 Paid Tax Preparers
potentially harm taxpayers if they continue to prepare income tax returns
during the legal process of the civil action.15

Some of the paid preparers and officials from low-income tax clinics and
professional organizations we interviewed said that IRS could provide
additional oversight of paid preparers, although several said that it would
be difficult for IRS to undertake such efforts. Several of the preparers we
interviewed said that IRS’s current oversight of paid preparers needed
improvement and most of the paid preparers, low-income tax clinics, and
professional organizations we interviewed told us they supported the
licensing or registration of paid preparers as a way to provide additional
oversight of paid preparers. For example, one preparer said he felt paid
preparer oversight was not in IRS’s order of priorities and that paid
preparers should be licensed so that IRS could enforce education and
conduct standards. Others told us that IRS should impose a registration or
licensing requirement on paid preparers although some expressed
reservations. For example, a representative from the National Society of
Accountants said that it would be an arduous task for IRS to create a
system to license hundreds of thousands of people and then set up the
mechanisms to discipline them. Officials from a low-income tax clinic also
expressed concerns, saying that such a proposal may increase the cost of
tax preparation by reducing the supply of available preparers.

Any consideration of whether to change IRS’s responsibilities for
overseeing paid preparers would likely take into account several factors.
One, obviously, is the benefits and costs to taxpayers who use paid
preparers. However, as highlighted in this report, data are lacking about the
extent of problematic paid preparer behavior and the effectiveness of
existing IRS actions, which makes it difficult to assess the tradeoff between
benefits and costs. Another factor is that regulating the paid preparer
industry, a private sector industry, is a form of consumer protection. IRS’s
major functions, which include processing tax returns, responding to
taxpayer questions, and enforcing compliance with the tax laws, give it
little experience in providing consumer protection. Still another factor is
the implication for IRS resources. Recently we have reported on declines in
IRS’s enforcement programs, including declines in resources allocated to
those programs. We have also reported that needs in other IRS programs
have often been met at the expense of resources devoted to enforcement.


15
 National Taxpayer Advocate, FY 2001 Annual Report to Congress (Washington, D.C.:
December 2001).




Page 22                                                  GAO-04-70 Paid Tax Preparers
IRS Is Not Alone in       Any consideration of whether to increase IRS paid preparer oversight or
Providing Some Preparer   consumer protection must also recognize that IRS is not alone in providing
                          such oversight. Other federal agencies, such as the Federal Trade
Oversight                 Commission (FTC), state and local governments, and professional
                          organizations engage in efforts to prevent, detect, and take action against
                          problem paid preparers. For example, FTC has taken action against paid
                          preparers pursuant to its authority to enforce the provisions of the Federal
                          Trade Commission Act.16 FTC’s primary mission is to protect consumers by
                          enforcing federal consumer protection laws that prevent fraud, deception,
                          and unfair business practices. This protection extends to taxpayers using
                          paid preparers for tax preparation and other related services.

                          In addition, at least six states and one city have laws that provide paid
                          preparer oversight or consumer protection regarding RALs. These laws
                          range from requiring registering or licensing of paid preparers to requiring
                          disclosure statements for RALs. For example, the City of New York
                          requires a separate disclosure statement for RAL agreements that must be
                          provided in English or Spanish. New York City’s law also requires paid
                          preparers to provide an oral explanation of the law’s required written
                          disclosure in language understood by the taxpayer. In addition to
                          government entities, professional organizations, such as the American
                          Institute of Certified Public Accountants and the American Bar
                          Association, also impose general standards of conduct on the actions of
                          their members, including those representing taxpayers before the IRS and
                          preparing tax returns. We did not attempt to identify all federal, state, and
                          local governments or professional organizations that have a paid preparer
                          or RAL oversight role in addition to IRS. Table 3 shows examples of some
                          tax preparation and RAL oversight in addition to that provided by IRS.




                          16
                               15 U.S.C. Sections 41-58.




                          Page 23                                             GAO-04-70 Paid Tax Preparers
Table 2: Some Examples of Paid Preparer and RAL Oversight Efforts by State and Local Government



                                               Tax preparation oversight                            RAL oversight
                                               Exam to be
                        License/ register      licensed/          Continuing education
Government              preparers              registered         required                    Register      Disclose
State
 California             x                                         x
 Illinois                                                                                                   x
 Minnesota                                                                                                  x
 North Carolina                                                                               x             x
 Oregon                 x                      x                  x
 Wisconsin                                                                                                  x
Local
 New York City                                                                                              x
Source: GAO


                                            Three of these seven oversight efforts shown in the table above were
                                            passed or enacted within the past year. To date, none of the state or local
                                            governments responsible for the efforts has evaluated the effectiveness of
                                            these efforts. The absence of such data further complicates any
                                            consideration about changing IRS’s role. Without data, IRS management
                                            cannot determine how much these other government entities will provide
                                            paid preparer oversight or consumer protection.



Concluding                                  Paid tax preparers are critical to the functioning of our tax system. Many
                                            taxpayers do not understand their filing requirements and would have great
Observations                                difficulty filling out their tax forms without the assistance of paid
                                            preparers.

                                            While most taxpayers may receive quality services from their preparers,
                                            problematic behavior by some preparers raises the question of whether IRS
                                            should be more active in overseeing paid preparers. Since paid tax
                                            preparation is a private sector industry, this can be viewed as a question
                                            about the extent to which the nation’s tax administrator ought to be
                                            involved in consumer protection. On the one hand, the complexity of the
                                            tax code is at least partly responsible for the existence of the paid tax
                                            preparation industry. As a consequence, IRS might be viewed as properly



                                            Page 24                                            GAO-04-70 Paid Tax Preparers
                      having some responsibility for oversight of the industry. On the other hand,
                      IRS’s mission is tax administration and the agency may not have the
                      expertise or the regulatory culture for successfully carrying out consumer
                      protection responsibilities. In addition, unless given a budget increase IRS
                      would have to divert resources from other priorities in order to carry out
                      expanded industry oversight responsibilities. In recent years IRS has often
                      met such resource needs by decreasing staffing of its enforcement
                      activities.

                      At least two proposals exist for legislative action, one from the Taxpayer
                      Advocate and the other, the Low Income Taxpayer Protection Act of 2003,
                      S. 685, proposed in the108th Congress. Unfortunately, there is not much
                      reliable information about the tradeoffs associated with changing IRS’s
                      role. 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. Such data
                      would be needed to properly evaluate proposals for changing IRS’s role.
                      While the federal government and some state and local governments have
                      taken actions intended to address problematic preparer behavior, the
                      effectiveness of the actions is not known. Because making decisions about
                      IRS’s role is a policy matter and because data are not available to determine
                      the efficacy of IRS’s current oversight efforts, whether to expand IRS’s role
                      in ensuring taxpayers receive quality service from paid preparers is a
                      judgment that Congress and IRS management must make. We are not
                      making recommendations in this report.



Agency Comments and   The Commissioner of Internal Revenue provided written comments on a
                      draft of this report in an October 28, 2003, letter, which is reprinted in
Our Evaluation        appendix III. The Commissioner agreed with the information presented in
                      our report and noted that IRS will continue its efforts to provide oversight
                      of paid tax preparers and is developing new initiatives to ensure the ethical
                      responsibility of preparers. These efforts include continuing to develop the
                      Office of Professional Responsibility, considering changes to Circular 230,
                      coordinating with professional tax associations, increasing compliance
                      efforts, forming a multifunctional work group to improve communications
                      within IRS, and developing a national paid preparer strategy.

                      The Commissioner said that, based on the information in our report, IRS
                      will undertake an analysis of whether IRS can take additional steps to
                      increase the impact of its efforts to assess penalties against paid tax
                      preparers. In response to our observation that penalties assessed against



                      Page 25                                             GAO-04-70 Paid Tax Preparers
paid preparers are not a collection priority, the Commissioner noted, and
we agree that preparer penalty cases are included in IRS’s collection
priority system. Our point is that they are not a collection priority because
of their relatively low dollar value and we noted that IRS collected only 12
percent of the penalties assessed in calendar years 2001 and 2002. The
Commissioner commented that it might be a better reflection of IRS’s
collection efforts to point out that during this period, the agency collected
all or some portion of penalties from 44 percent of the SB/SE preparers
who were assessed a penalty and we changed our draft to show the
percentage collected. We were aware that some paid preparers voluntarily
pay the penalties assessed against them but, as indicated by the
Commissioners’ response, more than half of paid preparers paid nothing.
Since uncollected preparer penalties represent about 88 percent of the
value of penalty assessments, we said that IRS may be sending the paid
preparer community a mixed message about whether poor performance by
preparers will be tolerated. At the same time, we recognize that collecting
paid preparer penalties has not been a priority due to other higher priority
work, such as abusive tax schemes.


As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from its
date. At that time we will send copies to the Secretary of the Treasury, the
Commissioner of Internal Revenue, and other interested parties. We will
also make copies available to others on request. In addition, the report will
be available at no charge on the GAO Web site at http://www.gao.gov.




Page 26                                             GAO-04-70 Paid Tax Preparers
This report was prepared under the direction of Jonda Van Pelt, Assistant
Director. Other major contributors are acknowledged in appendix IV. If you
have any questions about this report, contact me on (202) 512-9110.




James R. White
Director, Tax Issues




Page 27                                           GAO-04-70 Paid Tax Preparers
Appendix I

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.



Objective 1: Obtaining      To obtain the views of taxpayers who used paid preparers about the quality
                            of service the preparers provided, we conducted (1) a representative
Taxpayer Views,             nationwide survey and (2) in-depth interviews with a small judgmental
Examples of Paid            sample of the individuals who participated in our nationwide survey. We
                            also searched for studies that talked about the extent of problems caused
Preparer Performance,       by paid preparers.
and What Is Known
about the Extent of
Problems Caused by
Paid Preparers

Methodology for the         To determine taxpayer views of their paid preparers, we contracted with
Taxpayer Survey Regarding   the Marist College Institute for Public Opinion of Poughkeepsie, New York
                            to include our questions at the beginning of their multisubject telephone
Use of Paid Preparers       survey of the United States conducted between February 5 and 24, 2003.
                            Interviews were completed with 917 of the estimated 1,996 eligible sampled
                            individuals for a response rate of 46 percent.1 The results presented in our
                            report are based on the 429 interviews with respondents who reported they
                            paid someone to prepare their federal personal tax returns for their 2001
                            income.



Study Population and        We sought to obtain information about the views of the adult population of
Sample Design               the United States. The study procedures yield a sample of members of the


                            1
                             Based on the RR3 response rate convention defined by the American Association of Public
                            Opinion Research
                            (http://www.aapor.org/default.asp?page=survey_methods/standards_and_best_practices/sta
                            ndard_definitions).




                            Page 28                                                    GAO-04-70 Paid Tax Preparers
                    Appendix I

                    Objectives, Scope, and Methodology





                    noninstitutional population of the United States (50 states and the District
                    of Columbia) who are 18 years or older, speak English, and reside in a
                    household with a land-based telephone (cellular telephone numbers were
                    not included in the sample).

                    Random Digit Dial Equal Probability Selection Methods were followed to
                    identify households. Survey Sampling International (SSI) of Fairfield,
                    Connecticut provided the probability sample of telephone numbers. These
                    were drawn from active telephone blocks of telephone exchanges with
                    listed numbers and excluded numbers that SSI identified as being business
                    numbers or not in service (e.g., disconnected). At least eight calls were
                    made to each telephone number to attempt to identify a respondent.

                    A member within each household was initially randomly chosen by
                    selecting the individual whose birthday most recently preceded the date of
                    the telephone contact. Once the selection of a household member was
                    made, two attempts were made to complete the interview with that
                    individual. If, after two contacts, including scheduled appointments, the
                    selected member could not be reached or refused to complete the survey, a
                    second adult member of the household was asked to participate. If a
                    household refused twice, it was not contacted until the final week of data
                    collection at which time a monetary incentive was offered for completion
                    of the interview.

                    Survey respondents are weighted in our analyses so that age, gender, and
                    regional estimates from our survey will match U.S. data on these
                    demographic characteristics. The U.S. data come from county-level
                    estimates from Census 2000 that were projected forward by SCAN/U.S.,
                    Inc. to July 1, 2002.



Sources of Error	   As with all sample surveys, this survey is subject to both sampling and
                    nonsampling errors. The effects of sampling errors, due to the selection of
                    a sample from a larger population, can be expressed as confidence
                    intervals based on statistical theory. The effects of nonsampling errors,
                    such as nonresponse and errors in measurement, may be of greater or
                    lesser significance but cannot be quantified on the basis of the available
                    data.

                    Sampling errors arise because we used a sample of individuals to draw
                    conclusions about the much larger population. The study’s sample of
                    telephone numbers is based on a probability selection procedure. As a



                    Page 29                                            GAO-04-70 Paid Tax Preparers
Appendix I

Objectives, Scope, and Methodology





result, the sample was only one of a large number of samples that might
have been drawn from the total telephone exchanges from throughout the
country. If a different sample had been taken, the results might have been
different. To recognize the possibility that other samples might have
yielded other results, we express our confidence in the precision of our
particular sample’s results as a 95 percent confidence interval. For all the
percentages presented in this report, we are 95 percent confident that
when only sampling errors are considered the results we obtained are
within +/- 5 percentage points or less of what we would have obtained if we
had surveyed the entire study population. In addition to the reported
sampling errors, the practical difficulties of conducting any survey
introduce other types of errors, commonly referred to as nonsampling
errors. For example, questions may be misinterpreted, some types of
people may be more likely to be excluded from the study, errors could be
made in recording the questionnaire responses into the computer-assisted
telephone interview software, and the respondents’ answers may differ
from those who did not respond.

To test the understanding of the questions, we pretested the survey by
conducting 57 interviews. To ensure that responses were correctly
recorded in the computer-assisted telephone interview software, trained
interviewers were used who had been specifically briefed on the study, and
interviewer supervisors regularly monitored, evaluated, and provided
feedback to the interviewing staff who worked from a centralized
telephone facility.

For this survey, the 46 percent response rate is a potential source of
nonsampling error; we do not know if the respondents’ answers are
different from the 54 percent who did not respond. Both GAO and Marist
took steps to maximize the response rate—the questionnaire was carefully
designed, at least eight telephone calls were made at different times of day
on different days of the week to try to contact each telephone number, the
interview period extended over 20 days, respondents were informed that
their responses were anonymous, suspended interviews and refusals were
recontacted at least once, and respondents were provided with a toll-free
number to either call back at a more convenient time or to obtain further
information about the survey.

Because we did not have information on those taxpayers who chose not to
participate in our survey, we could not estimate the impact of the
nonresponse on our results. Our findings will be biased to the extent that
the people at the 54 percent of the telephone numbers that did not yield an



Page 30                                            GAO-04-70 Paid Tax Preparers
                           Appendix I

                           Objectives, Scope, and Methodology





                           interview have different experiences with paid tax preparers than did the
                           46 percent of our sample who responded. Knowing that the survey would
                           concern tax issues could not have created large biases because only about
                           1.6 percent of the eligible households in the sample (31 individuals) refused
                           after the interview began (i.e., after they could have known the interview
                           would address tax issues.) The remaining nonresponding units (about 52
                           percent of the sample) did not know that the interview would address tax
                           issues. The 52 percent is comprised of about 18 percent (356) who refused
                           before the interview could be started, about 14 percent (274) where an
                           eligible respondent was identified in the household, and about 21 percent
                           (estimated 418) where no one was contacted at the telephone number but
                           the household was assumed to be eligible. This estimate of 418
                           uncontacted, but eligible, households is derived assuming that the
                           percentage of eligible households among all our 704 uncontacted
                           households would be the same (59.14 percent) as the percentage of eligible
                           households among households for which the eligibility status was
                           determined.

                           To obtain examples of paid preparer performance, we conducted in-depth
                           interviews with 18 taxpayers from our nationwide survey of taxpayers. In
                           addition, we discussed paid preparer performance and received examples
                           of paid preparer performance from various IRS offices, some paid
                           preparers, some low-income tax clinics, and IRS’s Taxpayer Advocate
                           Service. To obtain information on the fees charged by paid preparers for
                           electronic filing and refund anticipation loans we contacted seven
                           preparers posing as potential clients and also gathered loan cost schedules
                           from the Web sites of two lenders. We also reviewed closed case files in IRS
                           offices, including the Office of Professional Responsibility (OPR), Small
                           Business/Self-Employed (SB/SE) division, and Criminal Investigation (CI)
                           division.

                           A copy of the survey is in appendix II.



In-depth Interviews with   As part of our nationwide survey of taxpayers, we asked the individuals we
Taxpayers	                 contacted if they would be willing to participate in an in-depth interview
                           regarding their experiences with paid tax preparers. For those taxpayers
                           who agreed, we used a structured questionnaire that covered, for example,
                           how taxpayers found their paid preparers and investigated the credentials
                           of the preparer, the type of preparer used, why the taxpayer used a paid
                           preparer, and how extensively the preparer probed the taxpayers’ personal




                           Page 31                                             GAO-04-70 Paid Tax Preparers
                            Appendix I

                            Objectives, Scope, and Methodology





                            tax circumstances and asked for documentation. We interviewed 18
                            taxpayers in-depth.



Studies Discussing the      To obtain studies discussing the extent of problems caused by paid
Extent of Problems Caused   preparers, we relied upon studies mentioned in interviews with IRS
                            officials and through periodical searches. We also used a 1997 Consumer
by Paid Preparers           Reports survey of their readership concerning paid preparers, a report by
                            the Treasury Inspector General for Tax Administration regarding
                            potentially unclaimed child tax credits, a Department of Treasury study
                            regarding earned income tax credits, and a previous GAO report that
                            estimated the number of taxpayers eligible to itemized deductions who
                            used the standard deduction instead.



Objective 2: Describe       To describe IRS’s efforts to prevent, detect, and take action against
                            problem paid preparers, we interviewed officials from IRS offices including
IRS’s Oversight of          OPR, SB/SE, CI, and the Taxpayer Advocate Service (TAS). IRS officials
Problem Paid                said these offices interact the most with preparers. We also reviewed
                            various documents used by these offices to provide paid preparer
Preparers;                  oversight.
Management
Challenges Facing           To describe challenges facing IRS offices that interact with paid preparers,
                            especially OPR, and efforts to address those challenges, we interviewed
IRS’s Offices that          officials from OPR, including its new Director, as well as officials from
Provide Oversight; and      other IRS offices discussed above, such as SB/SE and CI. We also used
Efforts to Address          documents from OPR, including a consulting firm report on the office of
                            Director of Practice and documents from other IRS offices.
Management
Challenges                  To examine IRS’s efforts to assess and collect penalties against paid
                            preparers, we interviewed officials from IRS’s SB/SE division, reviewed
                            collection data, and examined division documents. To determine the
                            percentage of assessed fines collected and uncollected by SB/SE we relied
                            upon a SB/SE analysis of collections data extracted from IRS’s
                            Enforcement Revenue Information System. To assess the reliability of
                            these data, we reviewed existing documentation related to the data sources
                            and interviewed officials knowledgeable about the data. We determined
                            that the data were sufficiently reliable for the purposes of this report.

                            To obtain information about IRS’s efforts to register and monitor Electronic
                            Return Originators (ERO), we interviewed officials from SB/SE’s ERO



                            Page 32                                            GAO-04-70 Paid Tax Preparers
Appendix I

Objectives, Scope, and Methodology





Monitoring Program and reviewed IRS Publication 1345 covering
requirements for EROs. To determine the number of EROs, monitoring
visits, and sanctions issued, we relied upon IRS’s e-file Provider Monitoring
Report. In addition, we reviewed various other documents including a
recent report by the Treasury Inspector General for Tax Administration.

To describe IRS’s efforts to investigate criminal and fraudulent paid
preparer behavior, we interviewed officials from CI and reviewed case file
information. We used data from the CI Management Information System
and interviewed CI officials to determine statistics on the cases worked. To
assess the reliability of these data, we reviewed existing documentation
related to the data sources and interviewed officials knowledgeable about
the data. We determined that the data were sufficiently reliable for the
purposes of this report.

To examine efforts suggested by IRS’s Taxpayer Advocate Service to
provide additional IRS oversight of paid preparers or provide more
consumer protection, we interviewed officials from the Advocate’s office
about a proposal to license paid preparers. We also reviewed the 2001 and
2002 National Taxpayer Advocate’s reports to Congress where the
Advocate’s proposals are explained and discussed.

To provide examples of actions taken against problem paid preparers by
other federal, state, and local governments, we relied upon interviews and
reports from a variety of sources including paid preparers, professional and
consumer organizations, officials from several states, and some federal
agency representatives. Based on these interviews and reports, we
examined state and local laws that create oversight of certain aspects of
paid preparer behavior. We did not attempt to identify all federal, state, and
local governments or professional organizations that have a paid preparer
or RAL oversight role. Those discussed are only examples of what we
found during our research and there may be others.

The data cited from IRS for the estimated number of individual filers in
2001 that paid someone to prepare their tax returns, the amount paid in
2000 for tax preparation, the number of paid preparers in 1999, and the
number of RALs taken out in 2001 and 2000 are considered background
information. As such, we did not verify these numbers.

We conducted our work from April to October 2003 in accordance with
generally accepted government auditing standards.




Page 33                                             GAO-04-70 Paid Tax Preparers
Appendix II

Final Survey Results Weighted to the U.S.
Population


Survey Results1
                                                “We have a few questions about your experiences last year in completing
                                                your federal income tax return. We are interested in whether or not you
                                                paid someone last year to fill out your 2001 income tax return.”

“Did you pay someone to prepare your tax return last year?”

                                                __47__ YES (Continue with Question 2) 


                                                __51__ NO (Stop)


                                                ___1 NOT SURE


                                                ___1__ REFUSED


“For the rest of the questions, we’ll refer to this person as the paid preparer. Was the paid preparer who filled out your tax return: A) A tax
preparation service such as H & R Block or Jackson-Hewitt, B) An accountant, CPA or lawyer, C) Someone else, or D) do you not know?”

                                                __35__ A. A TAX PREPARATION SERVICE

                                                __52__ B. AN ACCOUNTANT, CPA, OR LAWYER

                                                __ 9__ C. SOMEONE ELSE

                                                 _ _4__ D. DON’T KNOW

“Who worked directly with the paid preparer, was it only yourself, both yourself and someone else, or only someone else?”*

                                                __46_ ONLY YOURSELF


                                                __35_ BOTH YOURSELF AND SOMEONE ELSE


                                                __17_ ONLY SOMEONE ELSE


                                                ___1_ NOT SURE/REFUSED 




1
 We are 95 percent confident that the percentage estimates of our survey are within +/- 5 percentage points or less of what we would have
obtained if we had surveyed the entire study population.




                                                Page 34                                                         GAO-04-70 Paid Tax Preparers
                                               Appendix II

                                               Final Survey Results Weighted to the U.S. 

                                               Population





                                               * Percents do not add to 100 due to rounding.

“Next, we ask about some of the practices that paid preparers sometimes follow. For each one, please tell me whether you know if it is
something your paid preparer did do or did not do or whether you do not know.”

                                               “First, did your paid preparer give you a copy of your completed tax return,
                                               not give you a copy or do you not know?”

                                               __95__ YES, GAVE COPY

                                               ___1__ NO, DIDN’T GIVE COPY (skip to 4c)

                                               ___4_ DON’T KNOW (skip to 4c)

“Did your paid preparer sign your copy of your completed tax return as the preparer, not sign your copy, or do you not know?”

                                               ___83_ YES, SIGNED COPY

                                               ____3_ NO, DIDN’T SIGN COPY

                                               ___14_ DON’T KNOW

“Did your paid preparer see any documents that showed the income you received or any deductions or tax credits that you might have
claimed? That is, did the paid preparer see the documents, not see them, or do you not know?”

                                               __88__ YES, SAW DOCUMENTS

                                               ___2__ NO, DIDN’T SEE DOCUMENTS

                                               __10__ DON’T KNOW

“For the next question, I want you to think about everything about you that affects the amount of taxes you pay, such as whether or not you
have children at home, earn interest from a bank account, or pay a mortgage. Do you believe that your paid preparer had enough
information about your situation to accurately prepare your income tax return, didn’t have enough information, or don’t you know?”

                                               __91__ YES, HAD ENOUGH INFORMATION

                                               ___3__ NO, DIDN’T HAVE ENOUGH INFORMATION

                                               ___6__ DON’T KNOW




                                               Page 35                                                       GAO-04-70 Paid Tax Preparers
                                               Appendix II

                                               Final Survey Results Weighted to the U.S. 

                                               Population





“How confident are you that you did not pay more in taxes than was legally required last year? Would you say that you are very confident,
generally confident, a little confident, not at all confident or that you have no opinion?”*

                                               ___49_ VERY CONFIDENT

                                               ___28_ GENERALLY CONFIDENT

                                               ____7_ A LITTLE CONFIDENT

                                               ____5_ NOT AT ALL CONFIDENT

                                               ___12_ NO OPINION

                                               * Percents do not add to 100 due to rounding.

“Has the IRS sent you any type of notice saying that any part of your tax return from last year had to be changed, or has the IRS not
contacted you, or do you not know whether you have been contacted?”

                                               ____8 YES, IRS SENT NOTICE

                                               ___86_ NO, IRS NOT CONTACTED

                                               ____6_ DON’T KNOW

“Now think about your new 2002 tax return that is due soon. Do you think you will use a paid preparer again or not use a paid preparer for
this new tax return?”

                                               __87_ YES, USE A PREPARER AGAIN

                                               ___7_ NO, NOT USE A PREPARER (stop)

                                               ___6_ DON’T KNOW (stop)

“The U. S. General Accounting Office is doing research on peoples’ opinions and experiences with their paid preparers. Would it be okay
with you if someone from the General Accounting Office telephoned you in the next month for a research interview?”

                                               __45_ YES (NOT REWEIGHTED TO U.S.

                                               __54_ NO (stop) POPULATION)




                                               Page 36                                                      GAO-04-70 Paid Tax Preparers
Appendix III

Comments from the Internal Revenue Service





               Page 37           GAO-04-70 Paid Tax Preparers
Appendix III

Comments from the Internal Revenue Service





Page 38                                       GAO-04-70 Paid Tax Preparers
Appendix IV

GAO Contacts and Staff Acknowledgments




GAO Contacts	      James White (202) 512-9110
                   Jonda Van Pelt (415) 904-2186



Acknowledgments	   In addition to those named above, Vince Balloon, Larry Dandridge,
                   Katherine Davis, Michele Fejfar, Evan Gilman, Tre Forlano, Brittni Milam,
                   Libby Mixon, Cheryl Peterson, and Peter Rumble made key contributions
                   to this report.




(450210)           Page 39                                           GAO-04-70 Paid Tax Preparers
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