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Senate Finance Committee Should Require Competence from Paid Tax Preparers

The Senate Finance Committee is scheduled tomorrow to consider Chairman Orrin Hatch’s bill to combat identity theft and tax refund fraud.  It should take this opportunity to restore a provision in a previous version of the bill that required paid tax return preparers to meet a basic standard of competence.  Tax returns can be complicated and there’s a lot of money involved; the people paid to fill them out need to know what they’re doing.  Right now, many don’t:

  • As U.S. Comptroller General Gene Dodaro recently told the committee:  “IRS found that paid preparers filed about 68 percent of the earned income tax credit [EITC] returns in a year or two-year period of time and about 48 to 53 percent over claimed the tax credit.  So I definitely think there needs to be authority given IRS to set minimum standards for paid preparers. . . .  We made recommendations several years ago, that IRS institute regulations on paid tax preparers, which they did do.  And then those regulations were overturned by the court because they didn’t have statutory authority to do this.”  Dodaro also reiterated the Government Accountability Office’s long-standing position that paid tax return preparers should meet a basic standard of competence.
  • Nina Olson, the IRS National Taxpayer Advocate, has explained that improving the accuracy of return preparers can strengthen EITC compliance.  “Unenrolled preparers — those who are neither attorneys, certified public accountants, nor enrolled agents — account for more than three-fourths of EITC returns that are prepared by a paid preparer,” she testified in 2014.  Unenrolled preparers not affiliated with a national tax preparation firm “are most prone to error,” she noted:  49 percent of the EITC returns they prepare contain errors that average 33 percent of the amount claimed. 
  • IRS research finds that about 400,000 preparers who prepare more than 13 million EITC claims each year never have to pass any test to certify that they know the tax rules or to take any training on changes in tax rules.  Community volunteers for the IRS-sponsored Volunteer Income Tax Assistance (VITA) program and Tax Counseling for the Elderly— who do have to demonstrate competence — have much higher accuracy rates. 

All the data point to a significant problem among a significant group of preparers, and any political hesitation about giving the IRS more authority doesn’t justify ignoring it.  The committee needs to act.