The Midyear Meeting of the ABA Tax Section concluded last week. There were many terrific panels that I suspect will generate posts in the next few weeks. The Pro Bono and Tax Clinics Committee had an especially insightful panel entitled “Holding Unscrupulous Tax Preparers Accountable.” Moderated by Mandi Matlock, a federal tax litigator at Texas RioGrande Legal Aid, the panel included David Sieminski from Consumer Financial Protection Bureau, Karyna Lopez from Lone Star Legal Aid, and Laura Baek from Taxpayer Advocate Service.
David offered a consumer law perspective on preparers who often use the return filing process as an opening to sell high priced loan products that can carry outrageously high fees. Karyna discussed how taxpayers can use state law causes of action to go after preparers who violate taxpayers’ trust. Laura discussed TAS’s perspective, including summarizing a special research report that was included in the 2022 NTA’s Annual Report to Congress. That research report included a study that explores dividing the earned income tax credit (EITC) into a separate worker and child component.
Any panel considering unscrupulous preparers and the tax system invariably includes a discussion of the EITC.
read more...Splitting up its work and child component would likely make the IRS’s task of administering the credit more manageable, a primary consideration TAS has explored previously. For example, when I was Professor in Residence at IRS, we prepared a research report in the 2020 Objectives Report to Congress that recommended a similar bifurcation, though the 2022 study drills down deeper and explores seven possible options for a new structure of determining the EITC amount.
Also in this year’s NTA report to Congress was a recommendation in its Purple Book that Congress authorize the IRS to establish minimum competency standards for federal tax return preparers. At the panel, Laura mentioned that longstanding recommendation, and this year’s Purple Book recommendation includes many others who have similarly proposed that Congress explicitly give the IRS that authority.
This recommendation comes at around the ten-year anniversary of the IRS’s defeat in Loving v IRS, a date noted by Dan Alban at the Institute for Justice (IFJ), a group self-described as “fighting outrageous government abuse” (Dan was the lead attorney who represented Sabina Loving and two other preparers who successfully sued the IRS to shut down the IRS’s testing and continuing education for unlicensed preparers). Tackling what the IFJ believes is anti-competitive and anti-consumer occupational licensing is a core part of its work.
Among the tax community the almost universal support for mandatory continuing education and licensing for unenrolled preparers is met by IFJ’s claim that the IRS’s licensing, testing and education regime would have put some mom and pop preparers out of business or resulted in higher taxpayer preparation costs. IFJ also was skeptical that the regime would have an impact on improving the quality and accuracy of the returns. This policy issue is somewhat unrelated from the legal issue in the Loving case itself, which focused on whether the IRS had the authority to impose the regime rather than its merits.
There is a fair bit of data pointing to problems with non-credentialed preparers. At the panel, Laura referred to data discussed in the report’s Most Serious Problems #8 Return Preparer Oversight, which noted that “paid non-credentialed return preparers prepared almost 79 percent of the prepared 2020 individual income tax returns with Schedule EIC….compared to only 52 percent of the prepared individual income tax returns without a Schedule EIC.” Moreover, while paid “return preparers prepared about 79 percent of 2020 EITC returns…over 92 percent of the total amount of audit adjustments (in dollars) occurred on returns prepared by non-credentialed paid return preparers.”
In addition, the MSP discussed how over 75% of all return preparer penalties that the IRS assessed in calendar year 2021 were assessed against non-credentialed preparers. For good measure, DIF scores (suggestive of noncompliance) are higher for non-credentialed preparers: “non-credentialed paid return preparers prepared about 44 percent of 2020 individual income tax returns in the three highest deciles of DIF scores. This is compared to 36 percent of the returns in those same DIF score deciles prepared by credentialed preparers.”
MSP #8 also referred to a 2014 IRS study that showed that “unaffiliated unenrolled preparers (i.e., non-credentialed preparers who are not affiliated with a national tax return preparation firm) were responsible for “the highest frequency and percentage of EITC overclaims.” That 2014 study “found that half of the EITC returns prepared by unaffiliated unenrolled preparers contained overclaims, and the overclaims averaged between 33 percent and 40 percent.”
Going forward, one key data point that TAS or IRS may wish to explore in a future study is to examine taxpayer preparation costs, RAC/RAL usage and improper payment rates in the handful of states which themselves have regulated preparers. IRS could compare both improper payment rates and (if available) costs and RAL/RAC take-up in those states with other states that do not impose competency and disclosure requirements on unlicensed preparers. This helpful post from Kay Bell’s Don’t Mess With Taxes blog from 2018 summarizes state licensing/testing regimes as of that date. As Kay notes, California, Maryland, New York and Oregon have been at the lead in imposing requirements on preparers, and twenty other states imposed additional disclosure requirements when preparers offered or facilitated access to refund related products like RALs and RACs.
Conclusion
Even among those skeptical of occupational licensing generally, perhaps additional data can inform the debate. Kudos to TAS for focusing on the challenges IRS faces in administering the EITC; it is time to start meaningfully exploring ways to make things better for taxpayers and the IRS, especially as Congress shows no signs of reducing its reliance on IRS to administer credit-based social policy benefits.
An upcoming Inflation Reduction Act mandated study requires the IRS to work with independent third-party experts to explore the feasibility of an IRS-run “direct file” tax return system. I hope that study, to be released this spring, will generate momentum for a truly free and accessible option for taxpayers. That would likely reduce demand for preparers, including the unscrupulous ones that the ABA panel discussed.
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I think an important point is to create a database (for the IRS to do this) of EA’s. Right now there is NO verification of the license for EA’s that’s simple. Every state has that for a CPA but nothing for EA, you have to request and wait God knows how long. This should be solved first. I encourage in all my messaging that people use a CPA or EA for taxes. Because unlicensed people often don’t know what they don’t know and sometimes are just plain ignorant.
Tatiana, there IS a system for ALL practitioners holding a PTIN, but it’s somewhat clunky when there is no reason for it to be that way.
https://irs.treasury.gov/rpo/rpo.jsf
The IRS Return Preparer Directory is useful, but it can be easily fixed.
My other concern is there are thousands of unscrupulous preparers that don’t sign returns at all or enter false information as to their own identity.
Loving said that tax preparation wasn’t “practice before the IRS”, but did it or any other case say that tax preparation wasn’t “the practice of law”, which would require a law license? Limiting tax preparation to lawyers would obviously upend the system, but, I would argue (although it would probably behoove me to do a lot more research before opening my big mouth) that for at least some tax returns, the preparation of the return is in fact the practice of law. One example that occurs to me is returns in which a taxpayer received a 1099nec or cash but has no business expenses. That should raise the question of worker misclassification. I believe the question of whether a worker is an employee or an independent contractor is a question of law. Therefore, how can a tax return be prepared that undertakes, or purports to undertake, that analysis without “practicing law”. Could individual states not regulate tax return preparers (who may also also be doing state and local returns), whether through the concept of “practicing law” or through other licensing means?
Good point although I’m not sure I entirely agree. True tax professionals have to apply and interpret tax law when preparing a return. In your example a good taxpro would be looking at misclassification or maybe an IRC 183 issue. Or maybe it’s Augusta Rule (had a client rent their driveway for film production parking once). So, while I’m not sure return preparation is practicing law, it definitely requires understanding the law. And many so-called taxpros do what most of us are often accused of doing—“just putting numbers in boxes.” Preparer regulation with testing and mandatory CE requirements won’t fix all of the problems and there are always bad actors (ghost preparers, people who pencil whip their CE). Additionally, it will present additional barriers to entry for some people (but nothing like becoming a CPA or an attorney) but let’s not throw out a good step in the right direction in search of some perfect solution (because there isn’t one). Finally, with respect to fees increasing? They are increasing anyway. And while regulation may cause some high-volume, low price shops to increase prices, based on my (admittedly anecdotal) evidence the truly predatory shops are rarely the ones charging bargain basement prices. Two distinct problems exist (unknowledgeable people doing high-volume, low cost returns) and predatory shops who are often purposefully ignoring the law while charging prices higher than some small solo shops (including mine).