TIGTA Releases Report on Return Preparers and Refundable Credits

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Earlier this month TIGTA released a report discussing its review of compliance issues associated with refundable credit returns prepared by tax return preparers. The report is heavily redacted, but it has some interesting statistics and also provides further evidence as to how resource constraints limit IRS ability to do its job. The report also notes that IRS has not sufficiently referred egregious preparers to other functions, like Criminal Investigations or the Return Preparer Office.

Here are some of the report highlights:

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In processing year 2015 (I assume for 2014 tax returns) IRS identified 27.5 million returns with an EITC, and it approximates that 47%, or 13 million, were prepared by a return preparer. I note that EITC returns prepared by a return preparer have been decreasing, in part likely due to the growth of DIY software and also possibly due to a growth in ghost returns, where preparers fail to sign the return to avoid possible scrutiny and penalty.

Using its secret sauce scoring formula, the IRS was able to identify return preparer EITC returns that have potentially erroneous claims. TIGTA notes that IRS flagged 150,000 return preparers with characteristics that suggest they were preparing returns with errors relating to qualifying children or income misreporting, or both.

IRS has a robust tiered approach to return preparer compliance treatments; that includes phone calls, a variety of letters, “knock and talk” visits, due diligence audits, and even more severe treatment like injunctions or criminal referrals. (For a more detailed summary of IRS approach, see its EITC preparer toolkit summary.)

TIGTA notes that IRS selected 49,563 preparers for potential compliance treatments; due to resource constraints, IRS identification of a preparer needing treatment did necessarily not lead to that preparer getting treated.

In fact in FY 2016, the IRS completed various compliance treatments to address just over 24,000 return preparers identified as filing high rates of tax returns with characteristics of an erroneous EITC claim. The report breaks down the treatment and noted that IRS evaluates the success of its treatments. In part it does so by scoring the preparers’ future years’ returns and compares those to both a control group and the preparers’ past returns.

The TIGTA report not surprisingly found that a visit from an armed CID agent had a positive effect on future compliance (less so when an armed CID agent was not there); so did due diligence audits, and the audits that selected fewer returns had a similar effect as more expansive audits.

TIGTA knocked IRS for insufficiently documenting why certain preparers did not get treated; it also noted that about 39% of preparers who received a knock and talk visit or due diligence visit did not improve their compliance in the next year. TIGTA felt IRS needed a better job of putting in place written procedures discussing referrals to other functions, especially in light of the high number of preparers who apparently did not alter their behavior after the treatment; IRS pushed back a bit and said it did not think more procedures were needed but that there should be greater instances where a different function takes action.

The report also discusses the impact of letters and general contacts before the fact that were meant in a sense to nudge preparers to do the right thing. That is a topic I am keenly interested in; a paper that I and co-authors Dave Williams and Krista Holub (both of Intuit) wrote discusses possible ways that IRS can influence taxpayers and to a lesser extent preparers with behavioral economics techniques. For those with an interest, a draft is here; a final version will come out next year in the Virginia Tax Review.

I suspect that there is more work that IRS can do to examine the impact of letters and communication in general on return preparers. I am intrigued that IRS seems to have a different strategy for new preparers; it seems like reaching out and educating preparers before they develop entrenched bad practices is a good policy.

As Congress has recently expanded due diligence penalties to include CTC and AOTC, interest in preparers and compliance will likely increase. The TIGTA report is a useful reminder that IRS, while not able to regulate preparers in the way it sought before Loving, does have a variety of ways to influence and punish bad preparers. It seems IRS has a pretty good handle on finding preparers who are likely serving up erroneous returns; whether it has the resources or appetite to go after them fully is another issue.

 

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

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