Tax Administration: Most Taxpayers Believe They Benefit from Paid
Tax Preparers, but Oversight for IRS Is a Challenge (31-OCT-03,
GAO-04-70).
Over 55 percent of the nearly 130 million taxpayers in tax year
2001 used a paid tax preparer. However, using a preparer may not
assure that taxpayers pay the least amount due. Last year, GAO
estimated that as many as 2 million taxpayers overpaid their 1998
taxes by $945 million because they failed to itemize deductions
and half of these used preparers. GAO was asked to (1) obtain the
views of taxpayers about paid preparers and examples of preparer
performance including any problems and (2) describe the Internal
Revenue Service's (IRS's) oversight of problem preparers; the
challenges facing IRS in dealing with problem preparers,
especially the Office of Professional Responsibility; and the
efforts to address those challenges. To obtain the views of
taxpayers who used preparers, GAO surveyed a national
representative sample of taxpayers.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-70
ACCNO: A08814
TITLE: Tax Administration: Most Taxpayers Believe They Benefit
from Paid Tax Preparers, but Oversight for IRS Is a Challenge
DATE: 10/31/2003
SUBJECT: Accountants
Federal taxes
Income taxes
Strategic planning
Tax administration
Taxpayers
Performance measures
Customer service
Surveys
******************************************************************
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GAO-04-70
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
a
GAO-04-70
Highlights of GAO-04-70, a report to the Chairman and Ranking Minority
Member, Committee on Finance, United States Senate
Over 55 percent of the nearly 130 million taxpayers in tax year 2001 used
a paid tax preparer. However, using a preparer may not assure that
taxpayers pay the least amount due. Last year, GAO estimated that as many
as 2 million taxpayers overpaid their 1998 taxes by $945 million because
they failed to itemize deductions and half of these used preparers.
GAO was asked to (1) obtain the views of taxpayers about paid preparers
and examples of preparer performance including any problems and (2)
describe the Internal Revenue Service's (IRS's) oversight of problem
preparers; the challenges facing IRS in dealing with problem preparers,
especially the Office of Professional Responsibility; and the efforts to
address those challenges. To obtain the views of taxpayers who used
preparers, GAO surveyed a national representative sample of taxpayers.
October 2003
TAX ADMINISTRATION
Most Taxpayers Believe They Benefit from Paid Preparers, but Oversight Is a
Challenge for IRS
GAO estimates that most of the taxpayers who used a paid preparer believe
they benefited from doing so. Many taxpayers told us they believed they
would have great difficulty filling out their own tax forms because they
do not understand their filing requirements. At the same time, some
taxpayers are poorly served when paid preparers make mistakes, causing
taxpayers to over-or underpay their taxes or pay for services, such as
short-term loans called Refund Anticipation Loans (RALs), without
understanding their costs and benefits. The evidence available does not
allow a precise estimate of the extent of problems caused by paid
preparers, but nothing suggests that the percentage of taxpayers affected
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 are potentially adversely affected.
IRS has several offices responsible for taking action against problem paid
preparers, including the newly formed Office of Professional
Responsibility. These offices sanction preparers for violating standards
of conduct; assess monetary penalties for violating tax laws when
preparing returns; monitor and, if justified, sanction problem preparers
offering electronic filing and RALs; and investigate fraudulent preparer
behavior. However, balancing resources devoted to such efforts against
those devoted to other IRS priorities is a challenge. In addition to IRS,
other federal agencies, state and local governments, and professional
organizations have a role in regulating paid preparers. At least two
proposals exist to expand IRS's oversight of paid preparers. Consideration
of such proposals is complicated by the difficulty 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 IRS's role is a policy matter and data to
determine the efficacy of current oversight efforts would be difficult to
develop, whether to expand IRS's role in regulating paid preparers is a
judgment that Congress and IRS must make and GAO is not making
recommendations in this report. In commenting on a draft of this report,
the IRS Commissioner generally concurred with our findings.
www.gao.gov/cgi-bin/getrpt?GAO-04-70
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Jim White at (202) 512-5594
or [email protected].
Percentage of Returns with a Paid Preparer's Signature 60 Percent
50
40
30
20
10
0
Tax year
Source: IRS.
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
1997 1998 1999 2000 2001
Contents
Letter
Results in Brief
Background
Taxpayers Believe They Benefit by Using Paid Preparers but Some
Are Poorly Served IRS and Others Act Against Problem Paid Preparers, but
Balancing
Taxpayer Protection Against Other Priorities Is a Challenge Concluding
Observations Agency Comments and Our Evaluation
1 2 3
4
13 24 25
Appendixes
Appendix I:
Appendix II: Appendix III: Appendix IV:
Objectives, Scope, and Methodology
Objective 1: Obtaining Taxpayer Views, Examples of Paid Preparer
Performance, and What Is Known about the Extent of Problems Caused by Paid
Preparers
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
Final Survey Results Weighted to the U.S. Population
Comments from the Internal Revenue Service
GAO Contacts and Staff Acknowledgments
GAO Contacts Acknowledgments 28
28
32
34
37
39 39 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: Figure 2:
Figure 3:
Figure 4: Figure 5: Figure 6:
Percentage of Returns with a Paid Preparer's Signature 4
Paid Preparer Users' Confidence That They Did Not
Overpay Taxes 5
Client Perceptions on Aspects of Paid Preparer
Performance 7
Example of Paid Preparer Fees 11
Visits and Actions by the ERO Monitoring Program 18
Paid Preparer Criminal Investigations for Calendar Years
2001 and 2002 20
Contents
Abbreviations
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.
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
1U.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).
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).
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.
Figure 1: Percentage of Returns with a Paid Preparer's Signature 60
Percent
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
1997 1998 1999 2000 2001
Tax year
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
paidThey Benefit by Using preparer in the future. Taxpayer surveys and
studies of returns suggest thatPaid Preparers but some taxpayers are
poorly served by their paid preparers, but they do not Some Are Poorly
allow a very precise estimate of the extent of the problem.
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 Paid Tax Preparers percent of
the taxpayers who used a paid preparer in 2002 were very or
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
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
No opinion
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.
3We 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.
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.
Figure 3: Client Perceptions on Aspects of Paid Preparer Performance
Percentage
100 90
80 70 60 50 40 30 20 10 0
accuracy Sawinformation for
documentationSigned return Gave a copyof return
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
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 Served by Paid Preparers
When paid preparers make mistakes or exhibit other problematic behavior,
the consequences for taxpayers may be significant. Examples provided by
low-income tax clinic4 representatives and paid preparers include:
o 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.
4Low-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.
5The 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.
o 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.
o 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.
o 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
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.
6National 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).
7New York City Council Investigative Division, Tax Preparers: Taking
Advantage By Not Disclosing (New York, N.Y.: February 2003).
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
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.
Little Authoritative Evidence Regarding Problematic Paid Preparers
A variety of evidence, including the above examples and our nationwide
survey, shows that some taxpayers are poorly served by their paid
preparers. While this evidence does not allow a precise estimate due to
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
8Consumers 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.
9GAO-02-509.
10Treasury Inspector General for Tax Administration, Analysis of
Statistical Information for Returns With Potentially Unclaimed Additional
Child Tax Credit (Washington, D.C.: January 2003).
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 Against Problem Paid Preparers, but Balancing Taxpayer
Protection Against Other Priorities Is a Challenge
Several IRS offices have responsibility for problem paid preparers, but
balancing resources devoted to taxpayer protection with resources devoted
to other priorities is a challenge. Proposals have been made for 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 problem
and the effectiveness of IRS's actions and by the involvement of other
agencies, state, and local governments as well as professional
organizations.
New Office of Professional Responsibility (OPR) Beginning to Address
Problems Overseeing Practioners
The newly formed OPR enforces professional standards for those paid
preparers authorized to represent taxpayers in matters before IRS. These
authorized preparers, called practitioners, include attorneys, certified
public accountants, and enrolled agents.
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:
11Department 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.
o 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.
o 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.
(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:
o enhance the visibility of OPR internally as well as externally,
o increase the capacity and capability of OPR,
o process the workload in a shorter time frame,
o ensure that Circular 230 sanctions are applied fairly and consistently,
o identify and implement organizational performance measures, and
o 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:
o hiring and training a significantly expanded staff of attorneys and
support personnel;
o improving and documenting operational practices and procedures;
o implementing performance measures;
o communicating the OPR mission and progress internally and externally
through speaking engagements, newsletters, and Web sites;
o working with IRS Chief Counsel and Treasury Department Tax Policy
personnel to make beneficial amendments to Circular 230; and
o 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 Balancing Paid Preparer Compliance Actions With
Other Enforcement Priorities
IRS's SB/SE division has responsibility for assessing and collecting
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 calendar years 2001 and 2002, and collected about $291,000 or 12
percent, including all or some portion of penalties from 44 percent of the
preparers 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
13Internal Revenue Manual, 4.10.6.8.2(1) (Washington, D.C.: May 14, 1999).
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 Who Offer Electronic Filing but Has Limited Role in
Monitoring RALS
IRS has broad authority to monitor and sanction Electronic Return
Originators (ERO) whom IRS authorizes to file tax returns electronically.
IRS's monitoring is to ensure ERO compliance with provisions of any
revenue procedures, publications, or notices that govern IRS's e-file
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.
Figure 5: Visits and Actions by the ERO Monitoring Program
1,600 Visits
1,412
IRS's CI division investigates paid preparers suspected of criminal or
fraudulent behavior and other related financial crimes. However, according
to CI officials, they have a system using indicators developed from prior
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
1,400 1,200 1,000 800 600 400 200
0
Referrals Visits Written reprimands
Recommended suspension
Immediate suspension Referral to CI
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 Criminal and Fraudulent Preparer Behavior
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.
Figure 6: Paid Preparer Criminal Investigations for Calendar Years 2001
and 2002
Number 600 574
500
400
300
200
100
0
evaluated Criminalinitiated prosecutionsIndictments Sentenced
Incarceratedinvestigations
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
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 Oversight Is Needed
While IRS provides some oversight of paid preparers, others believe that
it 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.
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.
15National Taxpayer Advocate, FY 2001 Annual Report to Congress
(Washington, D.C.: December 2001).
IRS Is Not Alone in Providing Some Preparer Oversight
Any consideration of whether to increase IRS paid preparer oversight or
consumer protection must also recognize that IRS is not alone in providing
such oversight. Other federal agencies, such as the Federal Trade
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.
1615 U.S.C. Sections 41-58.
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 Local
California x x
Illinois x
Minnesota x
North Carolina x x
Oregon x x x
Wisconsin x
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 Observations
Paid tax preparers are critical to the functioning of our tax system. Many
taxpayers do not understand their filing requirements and would have great
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
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 Our Evaluation
The Commissioner of Internal Revenue provided written comments on a draft
of this report in an October 28, 2003, letter, which is reprinted in
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
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.
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
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 Taxpayer Views, Examples of Paid Preparer
Performance, and What Is Known about the Extent of Problems Caused by Paid
Preparers
To obtain the views of taxpayers who used paid preparers about the quality
of service the preparers provided, we conducted (1) a representative
nationwide survey and (2) in-depth interviews with a small judgmental
sample of the individuals who participated in our nationwide survey. We
also searched for studies that talked about the extent of problems caused
by paid preparers.
Methodology for the Taxpayer Survey Regarding Use of Paid Preparers
To determine taxpayer views of their paid preparers, we contracted with
the Marist College Institute for Public Opinion of Poughkeepsie, New York
to include our questions at the beginning of their multisubject telephone
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
1Based 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).
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
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
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
Appendix I
Objectives, Scope, and Methodology
tax circumstances and asked for documentation. We interviewed 18 taxpayers
in-depth.
Studies Discussing the Extent of Problems Caused by Paid Preparers
To obtain studies discussing the extent of problems caused by paid
preparers, we relied upon studies mentioned in interviews with IRS
officials and through periodical searches. We also used a 1997 Consumer
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 IRS's Oversight of Problem Paid Preparers;
Management Challenges Facing IRS's Offices that Provide Oversight; and
Efforts to Address Management Challenges
To describe IRS's efforts to prevent, detect, and take action against
problem paid preparers, we interviewed officials from IRS offices
including OPR, SB/SE, CI, and the Taxpayer Advocate Service (TAS). IRS
officials said these offices interact the most with preparers. We also
reviewed various documents used by these offices to provide paid preparer
oversight.
To describe challenges facing IRS offices that interact with paid
preparers, especially OPR, and efforts to address those challenges, we
interviewed officials from OPR, including its new Director, as well as
officials from other IRS offices discussed above, such as SB/SE and CI. We
also used documents from OPR, including a consulting firm report on the
office of Director of Practice and documents from other IRS offices.
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
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.
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.
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
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)
Appendix III
Comments from the Internal Revenue Service
Appendix III
Comments from the Internal Revenue Service
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.
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