Once again, Americans are pulling out boxes and bags stuffed with receipts, mortgage documents, pay stubs and other documentation of the past year's income and spending. For many taxpayers, this year's filing is complicated considerably by layoffs or credit problems that could affect their tax liability — if they can decipher the relevant regulations.
Thus, this is also the time of year when accountants' families start to miss them at the dinner table. Tax-preparation kiosks have started popping up in discount stores and shopping malls, and it's hard to miss the barrage of ads and signs boasting low-cost tax services and quick refunds. The Internal Revenue Service estimates that 80 percent of taxpayers get some form of assistance in completing their annual returns, either from commercial software or a paid tax-preparation service.
But choosing someone to prepare a tax return poses some risk. Only a few states regulate paid tax preparers. Some professions, such as lawyers and certified public accountants, face professional regulation, but in most states, including Florida, anyone can take money to prepare tax returns, with no requirement for training or registration. In surveying paid tax preparers — particularly those offering high-interest "refund anticipation loans" — the IRS found tax services offered in a wide variety of locations, including shoe stores, payday lenders and auto-repair outlets. Often, the tax preparers had little training.
The Governmental Accountability Office did its own study in 2006, using secret shoppers to evaluate tax-prep services at 19 outlets of large tax-services chains. Given identical income and expense figures, only two of the outlets correctly calculated the tax liability and refund for the secret shoppers. Ten of the preparers didn't include income from sources other than wages — even though their customers told them about it. That mistake, if made on an actual return, would result in a lower tax bill than justified — but mistakes also hurt the supposed customers, as in 10 cases where tax preparers missed available deductions for child-care expenses.
A separate study by the Treasury Department found serious mistakes in 17 of the 28 returns it commissioned.
The IRS announced earlier this month that it planned "immediate action" to better regulate the tax-preparation industry. But for most of the proposed reforms, "immediate" means "next year or maybe the year after that." For this tax season, the IRS promises efforts to better educate tax preparers, and take enforcement action against those who consistently file erroneous or fraudulent returns.
But the real meat of the proposal — including training requirements and registration of anyone who takes money to sign a tax return on behalf of someone else — will wait until next year. The most powerful part of the proposal — competency exams for paid tax preparers — won't take full effect until 2013. That's disappointing, but not surprising, given the scope of the changes the IRS wants to make.
The IRS will have time to re-examine its proposal and correct flaws. For example, the proposed rules carefully identify those who sign tax returns. That creates a troublesome loophole; many tax-preparation firms use interviewers to meet with clients and prepare initial returns, which are then passed on to a central office to be finalized and "signed" by people who have never met the taxpayer or reviewed supporting documentation. The new rule should be extended to cover anyone who interviews clients or generates returns.
Still, the new rule is strongly supported by the giants in the income-tax preparation business, who see the benefit of increased accountability and consumer trust. For those consumers — many of whom conduct their biggest financial transaction of the year by filing their tax returns — the new oversight should be a welcome change.
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