GAO calls for stricter IRS oversight of tax preparers

Paid tax preparers can make serious errors on tax returns, according to a new report from the Government Accountability Office, which recommends the Internal Revenue Service beef up its oversight of the profession.

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The report, released Tuesday by the GAO, noted that paid tax return preparers have varying levels of skills, education and expertise. They include enrolled agents, CPAs, attorneys and other individuals who have some level of qualification or credentials issued by either the Internal Revenue Service or states. All other paid preparers without professional credentials are considered to be unenrolled preparers. While all paid tax preparers are required to have and use a Preparer Tax Identification Number and are subject to various requirements in the Internal Revenue Code, only the IRS has the authority to regulate their practice. Generally, unenrolled preparers aren’t subject to IRS regulation, including testing and education requirements.

That can lead to problems. “Unqualified preparers can make serious errors that can cause taxpayers to lose out on benefits or subject them to audits or penalties,” said the report. “These errors can also lead to billions of dollars in improper payments and reduce federal revenue. But [the] IRS only has the legal authority to oversee the credentialed preparers.”

During fiscal year 2024, over half of all individual taxpayers used a paid preparer, according to IRS data. The IRS briefly had a Registered Tax Return Preparer Program during the Obama administration that required unenrolled tax preparers to undergo testing and complete continuing education requirements, but it was invalidated in 2013 by federal courts that ruled the IRS lacked the statutory authority. In response, the IRS introduced a voluntary education program known as the Annual Filing Season program in 2014. Periodically members of Congress have introduced legislation to regulate tax preparers, but have failed to pass it.

In a previous report from 2014, the GAO found that paid preparers can make serious errors on the tax returns they prepare. Unenrolled preparers tend to make errors at a higher rate than taxpayers who prepare their own returns or who use other categories of paid preparers, the GAO has found. When paid preparers make errors, taxpayers can overpay and lose out on tax benefits. On the other hand, when tax preparers understate a client’s tax liabilities, taxpayers may be subject to penalties and the government may collect less revenue.

The GAO has previously reported the IRS uses various tools, including outreach and education, civil and criminal investigations, as well as penalties to oversee all paid tax preparers and bring them into compliance. For example, the IRS’s Refundable Credits Return Preparer Strategy program identifies tax preparers who were potentially noncompliant with due diligence requirements and encourages them to comply. 

IRS actions can range from issuing warning letters and phone calls to preparers to more serious actions such as audits of their clients and IRS staff visits to preparers. The IRS also carries out civil and criminal investigations of abusive tax schemes, including those involving paid preparers. Paid preparers may be subject to penalties for noncompliance with certain requirements in the Internal Revenue Code.

The GAO noted that it previously recommended Congress take various actions to improve federal oversight of all paid preparers. These include granting the IRS the authority to establish professional requirements for paid preparers; providing the IRS with explicit authority to establish security requirements for the information systems of paid preparers and authorized e-file providers.

The GAO said it has also made numerous recommendations to the IRS to improve its oversight of paid preparers that remain unimplemented and are described in the report. 

The National Association of Tax Professionals offered support for improved education of tax professionals. “NATP supports the notion, not so much of regulating tax preparers, but making sure that tax preparers are educated and they have a minimum level of competency in order to be able to prepare returns for compensation,” said Tom O’Saben, the NATP’s director of tax content and government relations, during a news conference Tuesday when asked by Accounting Today to respond to the GAO report. “We support the notion that tax preparers should not be able to prepare returns just by buying software and the software doing all the work. It’s always amazing to me that if you’re getting your hair cut or you’re getting a manicure or you’re using a travel agent, all those people need a license, but you don’t need a license to get a tax professional. Now, there are some states that do regulate tax preparers, but we are in favor of education of tax preparers. If they’re going to have a PTIN … requiring a minimum level of continuing education, ethics and responsibilities is a good thing for the consumer.”