Undercover investigators found pervasive incompetence, fraud and significant errors among a sample group of non-credentialed paid tax preparers visited in half a dozen states.
Processing Content
The
During the 2025 filing season, the center conducted a mystery shopping test in six different geographic regions to gauge the accuracy of the tax prep work performed by non-credentialed preparers. Many of the preparers visited by the undercover investigators didn’t seem to understand the basic aspects of filing status, refundable and other credit requirements, cash income reporting, and deductible business and home office expense rules, according to the report.
The group contracted with six partners to test three scenarios at three separate sites in their geographic area. The partners included Low Income Taxpayer Clinics and nonprofits in Alabama, Arizona, New Jersey, North Carolina, Oregon and Texas. The center also developed three scenarios to test issues that are the subject of high audit rates or high noncompliance. Two of the scenarios involved family status issues — qualifying child, qualifying relative, filing status including head of household status, and Earned Income Tax Credit and Child Tax Credit claims. The third scenario involved sole proprietorship income, including cash payments, expense documentation and the home office deduction.
“We need to enact requirements for anyone who is not otherwise licensed (attorney, CPA, EA, state-return prep program with CPE) and who prepares returns for a fee must register with the IRS and meet suitability standards and take a certain number of hours of continuing education each year,” said Nina Olson, executive director of the center and a former National Taxpayer Advocate at the IRS, who was the principal author of the report. “It’s not enough to just plug numbers into some software and think you are competent to prepare a return. You need to know basic tax law and how to find answers if you don’t know them.”
The testers made 53 shopping visits, mostly to small, independent tax preparers. One of the testers visited a tax prep chain site.
In the first scenario, which involved never-married parents living together in the same household with their two biological children, the preparers incorrectly computed the taxpayers’ filing status, Child Tax Credit and tax refund amount. In the second scenario, which involved a household of two adults and one young child, all the returns incorrectly claimed a qualifying child instead of a qualifying relative, and claimed incorrect refundable credits, and all the returns claimed an incorrect refund amount. In the third scenario, which involved a single person operating a sole proprietorship out of their home in addition to earning W-2 income, all the returns incorrectly reported sole proprietorship income, attributable in part to excessive home office and business deductions and not reporting cash income.
The preparers visited by the testers routinely failed to ask relevant questions about household composition and income. Even when the preparers asked relevant questions, their understanding or application of the tax laws was incorrect.
No one’s keeping track
The center submitted Freedom of Information Act requests to the IRS, and the responses indicated the agency doesn’t track the number of tax preparer misconduct complaints it receives via Form 14517-A, “Tax Return Preparer Fraud or Misconduct Affidavit,” so it has no sense of the scope of harm to taxpayers as a result of tax preparer actions, including stolen refunds.
“While the IRS has identified 87,000 ‘high-risk return preparers’ since 2005, and those preparers are disproportionately involved in improper claims for the EITC and other refundable credits, it rarely assesses preparer penalties and even more rarely collects on those penalties,” said the report.
The center recommended that Congress should authorize the IRS to establish a program to register and require minimum competency of federal income tax return preparers. Last month, the two leaders of the Senate Finance Committee — Chairman Mike Crapo, R-Idaho, and ranking member Ron Wyden, D-Oregon —
“This report is proof that Congress needs to pass the bipartisan Taxpayer Assistance and Service Act to protect Americans with minimum standards for the paid preparers who fill out their tax returns,” Wyden said in a statement Monday. “Congress has been waiting around for too long while crooked and incompetent tax preparers have been screwing up people’s taxes or outright stealing their money. My bill with Senator Crapo would protect taxpayers and fix this nationwide epidemic of tax prep gaffes and grifts.”
The report also recommended that the IRS should mount a comprehensive nationwide consumer education campaign to help taxpayers identify competent preparers and protect themselves against incompetent or unscrupulous ones. It also said the IRS should reinstate and expand its Direct File free tax prep program, which
In addition, the center recommended that the IRS should track and publish the number of complaints of tax preparer misconduct it receives, and that the agency should publish and regularly update the data relating to the assessment and collection of civil and criminal return preparer penalties and injunctions, by type of preparer. The report also said the IRS should prioritize the collection of civil preparer penalties it assesses.
“Some have cast establishing a scheme of registration, testing and continuing education for uncredentialed return preparers as anti-small business,” said the report. “But the results of our mystery shopping clearly demonstrate that many small and micro-businesses are actively harmed by the failure to ensure competent return preparation. … Further, establishing an actual credential for this category of preparers will enable many small business preparers to better distinguish themselves from and compete against unscrupulous and incompetent preparers.”
Credit: Source link
