IF ONLY WHAT NINA WANTS, NINA GETS

National Taxpayer Advocate Nina E Olsen delivered one of her required semi-annual reports to Congress on June 30th that identified the priority issues the Office of the Taxpayer Advocate will address in the coming fiscal year.

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Among the key areas of focus will be working with the IRS to improve taxpayer services, enhancing oversight of federal tax return preparers, improving accessibility of the offer in compromise program, and working with the IRS to improve its ability to administer refundable tax credits effectively.

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Click here to read the IRS press release or here to download the complete report.

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Two ares are of special interest to me.

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First, her continued call for "oversight" of tax return preparers. I have posted extensively here at TWTP in support of the registration and licensing of "unenrolled tax preparers" (click here for a detailed listing of the blog debate).

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In discussing the issue Nina points out that -

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"However, 'shopping visits' conducted by the Government Accountability Office, the Treasury Inspector General for Tax Administration, and others suggest that a high percentage of preparers prepare inaccurate returns, fail to perform sufficient due diligence, and even take positions that they know are not supportable."

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Nina refers to 2 specific "undercover stings" in her statement.

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(1) In 2006 the GAO conducted an operation that resulted in a report to Congress titled "Paid Return Preparers: In A Limited Study Chain Preparers Made Serious Errors" (the emphasis is mine). The GAO sent undercover agents with two different tax scenarios to a total of 19 offices of 5 "fast-food" commercial tax chains, you know who I mean, in a metropolitan area. In only 2 instances was the correct refund calculated, but all 19 returns contained errors.

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This study was limited to the offices of Henry and Richard and their "ilk". The undercover agents did not visit office of independent "unenrolled" preparers. It came as no surprise to me that the employees of Henry and Richard and other chains were incompetent.

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(2) A few years later TIGTA issued a report "Most Tax Returns Prepared by a Limited Sample of Unenrolled Preparers Contained Significant Errors" based on a similar undercover operation. According to a memo to the IRS that appeared at the beginning of the report -

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"In February and March 2008, TIGTA auditors posed as taxpayers in a large metropolitan area and paid to have 28 tax returns prepared at 12 commercial chains and 16 small, independently owned tax return preparation offices. Auditors paid commercial chains approximately $2,800, averaging $234 per return, and independently owned offices approximately $2,100, averaging $132 per return.

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The preparers were unlicensed and unenrolled. That is, they were not practitioners (attorneys, certified public accountants, enrolled agents, or enrolled actuaries). Preparers made substantial errors when completing tax returns and correctly prepared only 11 (30 percent) of the 28 tax returns (i.e. the tax returns showed the correct amount of taxes owed or refunds due)."

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I could not find any information that identified how the errors were allocated between the two types of preparers tested - commercial chains and independently owned offices. But I have no doubt that the H+R types made more of the errors than the independent preparers.

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I would have been interested if, as a control, the study had also included CPAs and maybe other "enrolled" types in the mix. Doing so would not only help support my opinion that the average CPA is not a tax expert, but also help to indicate whether the real problem is that preparers are incompetent or that the tax law is such a mecking fuss that even the informed and educated can make errors.

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As an aside, it did not surprise me at all that the "fast-food" chain preparers charged on average $100 more than the independents. Henry and Richard and their colleagues need the money to pay for their many multi-million dollar lawsuits.

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Clearly the major "offenders" among the unenrolled preparer "community" are those who work for the commercial chains. Certainly independent preparers do make errors, as do all preparers. Hey, even I make errors (ha! ha!), as I am sure those with combined CPA/lawyer credentials do also. Tax preparers are only human. And, actually, when preparers use software additional errors can occur. But I firmly believe that the level of errors, and certainly the intent of the errors, made by the independent unenrolled preparer is small when compared to chain preparers.

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Unfortunately the category of unenrolled preparer lumps qualified, competent, and ethical independent preparers in with the chain hacks, the scam artists, and the uneducated amateurs. Anyone who charges a fee to prepare a return who is not an Enrolled Agent, a CPA, a lawyer, or an Enrolled Actuary is considered an "unenrolled" preparer.

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In calling for oversight Nina says -

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"The use of PTINs would provide data concerning the number of return preparers, shield the Social Security numbers or return preparers from identity theft, and make it easier for the IRS to identify return preparers who submit unreasonably high numbers of inaccurate returns."

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I would suspect that most serious tax preparers already have a PTIN for identity theft prevention purposes. I have said in my postings that this PTIN registry would be the start of the tax professional registration process.

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The second area that interested me was Nina's concerns about "refundable" credits. She points out -

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"The American Recovery and Reinvestment Act of 2009 temporarily increased the Earned Income Tax Credit (EITC) and the child tax credit and authorized several new refundable credits, including the 'Make Work Pay' credit, the 'American Opportunity' education credit (40 percent is refundable), the first-time home buyer credit (up to $8,000), and a credit for certain federal and state pensioners."

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Nina correctly states that ". . . refundable credits may present an increased risk of fraud". The TAS "intends to study this and other issues the IRS will have to address in order to administer refundable tax credits effectively and without undermining its ability to perform its core tax-collection function."

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I have been saying for years now that refundable credits = increased tax fraud. I am also against such credits as they are in most cases a federal welfare program forced to be administered by tax preparers and the IRS. I am not against Aid to Families With Dependent Children, or other forms of encouraging those who are "on the tit" to work - but I am strongly against doing it with the Tax Code. I also vehemently oppose using the tax return to redistribute wealth.

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So what do you think?

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TTFN