TaxVox Congress May Be About To Miss a Chance to Fix A Tax Prep Problem
Howard Gleckman
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The Senate Finance Committee is about to miss an opportunity to fix a problem Congress has been complaining about for years. Tomorrow, the panel is planning to mark up a multi-part IRS bill. But it will leave out an important provision that would allow the agency to set minimum standards for paid tax preparers.

By dropping the measure, Congress will allow unregulated preparers to continue to file tax returns for unwitting customers, as well as those looking to cheat the IRS. The Government Accountability Office estimates that about half of all paid preparers are unregulated (that is, not certified accountants, lawyers, or enrolled agents—who must meet minimum standards). Many of these preparers are perfectly capable of preparing returns, but many are not. In 2014, the GAO preformed a “secret shopper” test on 19 paid preparers and found widespread errors. It also reported that preparers in states that regulated tax firms, such as Oregon, were less likely to make mistakes than those that were unregulated. 

In 2014, the D.C. Circuit Court ruled the IRS did not have statutory authority to set professional standards for preparers. The IRS tried to circumvent that ruling by developing a voluntary education program, but the industry has pushed back, arguing that the program would, in effect, be mandatory.

Ever since the 2014 ruling, some lawmakers have been trying to clean up the mess with federal legislation to give the IRS renewed power to regulate paid preparers. But to no avail.

It looked for a while as if the Finance panel would tackle the issue as part of a bipartisan IRS anti-fraud bill. But word is chairman Orrin Hatch dropped the preparer provision in the face of opposition from some fellow Republicans.

These may be the same lawmakers who constantly harp about the tax gap. “If only people paid what they owed,” goes their mantra, “we could cut taxes for everyone.” Well, here is an opportunity to improve the quality of paid preparers—a step that at least increases the chances that people will pay what they owe. And Congress seems to be walking away.  

Here’s a specific example: Lawmakers have made bashing alleged fraud in the Earned Income Tax Credit a favorite indoor sport. Much of the misinformation on EITC returns may be due to mistakes rather than fraud. But either way, many returns claiming the credit are incorrect. By some estimates, between one-quarter and one-third of EITC returns have errors.

The IRS estimates that about half of EITC returns are filed by paid preparers (if you’ve ever tried to figure out the 37 pages of instructions for the credit, you’d understand why).  And at least some of these preparers are expert at, let us say, maximizing the credit for their customers. Others just mess up the return—often to the benefit of the taxpayer but sometimes to the benefit of the Treasury.

Better training and uniform standards may not end the problem of EITC errors, but they would likely reduce it.  Families would have more confidence that they are getting the proper credit. Those looking to game the system would face more roadblocks. And Treasury would be more likely to pay the proper amounts.

But that would help fix a problem. Congress, it seems, would prefer to complain.  

Tags IRS low income households senate finance committee
Primary topic Individual Taxes
Research Area Current legislative proposals Low-income households Tax administration (individual)