More than half of all taxpayers pay someone to prepare their taxes, and most believe their preparers are doing a good job. But in some cases, that confidence may be misplaced.
A new report by the General Accounting Office, the investigative arm of Congress, says some tax preparers aren't up to the task. They're causing clients to overpay their taxes or underpay the IRS. In some cases, taxpayers are overpaying their tax preparers.
The report is scheduled to be released Tuesday by the Senate Finance Committee.
Most tax preparers try to get the best deal for their clients without running afoul of the IRS. But at a time when more than 71 million individuals pay someone to prepare their taxes, even a small percentage of bad actors can affect millions of taxpayers.
"I think most of us figure we'll get the best possible financial outcome by having professionals do our taxes," Senate Finance Committee Chairman Chuck Grassley said in a statement. "It's counterintuitive that professionals could actually make you worse off."
An earlier GAO study found that 2 million taxpayers who used a preparer took the standard deduction when they would have been better off itemizing their deductions.
Itemizing requires more effort than taking the standard deduction, but that's what you're paying a tax preparer to do.
If your tax preparer doesn't determine up front whether you have enough deductions to itemize, you're not getting your money's worth.
Similarly, an IRS study of tax returns that claimed the earned income tax credit in 1999 found taxpayers claimed $11 billion in credits for which they weren't eligible.
The study also found that eligible taxpayers failed to claim $710 million in credits. More than 65% of returns that claimed the earned income tax credit were filed by paid preparers.
Some preparers offered to file electronic returns at no charge, while one preparer said he charged $210 to $250 to e-file.
Others charged for unnecessary services, or charged exorbitant interest rates for refund-anticipation loans, a loan against an expected refund.
One preparer told the GAO he would charge $174 for an advance on a $700 refund, an annual interest rate of more than 900%.
In most states, anyone can go into the tax-preparation business, which worries some taxpayer advocates and legislators.
"While the majority of these preparers are qualified individuals who help make the tax system work, there are no laws or regulations guiding who can sell tax preparations services, and there is no specific training required," said Sen. Max Baucus, ranking minority member of the finance committee.
According to Nina Olson, national tax advocate for the IRS, used-car dealers in some cities offer to prepare customers' taxes if they promise to put their refund toward the purchase of a car. Olson has recommended requiring individuals who prepare more than five tax returns for a fee to register with the IRS and pass a competency exam.
In the meantime, there are steps you can take to ensure your preparer is thorough and honest. Ask for recommendations from co-workers and friends. Interview preparers about their qualifications and experience.
And don't expect top-notch tax advice from someone who sells used cars.
For more information, go to www.irs.gov.
By Sandra Block
USA Today (March 31, 2003)