A hearing held before the Senate Committee on Finance on April 8th, 2014, titled “Protecting Taxpayers from Incompetent and Unethical Return Preparers”, quickly revealed fairly unanimous sentiment that taxpayers ought to be protected from the negative impact of unscrupulous tax professionals who prepare tax returns on behalf of taxpayers in a system where “confusion and errors flourish,” though opinions on the suitability of regulating tax preparers varied.
The hearing included statements from both Chairman Ron Wyden (D-OR) and ranking member Orrin Hatch (R-UT). Witness testimonies included statements from John A. Koskinen, Commissioner of the IRS, and Nina E. Olson of the Taxpayer Advocate Service of the IRS, James R. McTigue, Jr. of the Government Accountability Office, William Cobb, CEO of H&R Block, Janis Salisbury of the Oregon Board of Tax Practitioners, Dr. John Barrick, Associate Professor at Brigham Young University, Chi Chi Wu, Staff Attorney at the National Consumer Law Center, and Dan Alban, Attorney for the Insitute for Justice. A report on these statements follows.
Senator Wyden’s Opening Statement
Senator Wyden’s statements focused on how the lack of any “meaningful oversight” of professional tax preparers has been reported by the Government Accountability Office as a problem that harms the citizens of the United States, particularly those who are less able to afford more competent help with their taxes. Wyden also discussed the problem where many professionals will prepare a taxpayer’s return without signing the return (making the return seem a self-prepared tax return), then leaving the taxpayer with an artificial “boost” in their refund based on incorrect math, and leaving the taxpayer on their own to deal with the liability for their incorrect return.
Senator Wyden noted that his home state of Oregon already regulates tax preparers by requiring them to “pass an exam and keep up with the changing landscape of the tax code” in order to maintain their right to prepare tax returns professionally. He also cited the earlier passage of the EXPIRE Act and expressed his support of action to make “filing [taxes] a much quicker and simpler process.”
Senator Hatch’s Opening Statement
In his statement, Senator Hatch came out primarily in support of his belief that “the best way to protect tax filers from incompetent and unethical tax preparers is to implement a fair and simple tax system” in order to reduce taxpayers’ dependency on tax professionals. During the remainder of his statement, Senator Hatch primarily took his time commenting on the controversial and politically charged congressional investigation of the IRS related to its regulation of tax-exempt organizations. He took exception to Commissioner Koskinen’s claim that “no one had used the word ‘targeting’” to describe what happened in the IRS. In what would otherwise be a lengthy tangent that is irrelevant to the purpose of the hearing, Senator Hatch brought the issue in an apparent use of the opportunity during the hearing to hear testimony from the IRS Commissioner. Senator Hatch’s comments also briefly discussed his objection to proposed regulations by the IRS he believes would “silence grassroots organizations by categorizing a number of routine and long-accepted activities as political.”
Commissioner Koskinen’s Testimony
Commissioner Koskinen’s testimony outlined the recent efforts of the IRS, beginning in November of 2011, to begin regulating the tax preparer industry through administration of the Registered Tax Return Preparer program. This program was intended to to require registration for a Preparer Tax Identification Number (“PTIN”) by all tax professionals, and minimum competency exam and continuing education standards. After noting the D.C. Circuit Appellate Court’s decision to uphold an injunction against the IRS in all efforts to require competency exam and continuing education standards, Commissioner Koskinen reiterated his support of the provision in President Obama’s 2015 Fiscal Year Budget to “explicitly authorize the IRS to regulate all paid tax return preparers.”
Nina E. Olson’s Testimony
Ms. Olson’s testimony somewhat echoed Commissioner Koskinen’s notion of the importance of regulating tax preparers. She discussed her earlier days as a solo tax professional when she did not have the help of tax return preparation software, she “had no choice but to study and learn the tax law, rules, regulations, and publications.” She noted that with the proliferation of commercial tax return preparation software, “there is no assurance of competence” in the tax preparer industry. She stated that, in spite of the benefits of tax preparation software, their widespread availability and affordability has “eliminated barriers to entry into the industry,” allowing anyone with “good or ill intent,” and regardless of competence, to present themselves as a tax preparer. Ms. Olson therefore stated her support in giving the IRS authority to regulate tax preparers. In the absence of this regulation, Ms. Olson stated that the IRS should offer “paid unenrolled preparers the opportunity to voluntarily distinguish themselves from untrained preparers,” as well as restrict unenrolled prepares from participating in audits of or serve as third party designees for returns they prepare.
Subsequent questioning of Koskinen and Olson by the Finance Committee members focused on a range of issues, both relevant and irrelevant to the topic of the hearing, including the suitability of the Earned Income Credit, the IRS scandal, the taxability of scholarships for university student athletes, and reducing the national deficit. The remaining testimonies comprised another panel of witnesses and were separately questioned.
Testimony of James R. McTigue, Jr.
McTigue’s testimony focused on discussion of a study on the performance of professional tax preparers administered by the Government Accountability Office. The study found that tax preparers overwhelmingly overstate tax refunds on behalf of their clients, will often arbitrarily charge a wide variety of tax preparation fees, and prepare returns with errors approximately 60% of the time. A 2008 study also found that tax returns professionally prepared in Oregon (where tax preparers are already regulated by the state), returns prepared were more likely to be accurate than comparable returns prepared professionally in other states.
Testimony of William Cobb
Mr. Cobb’s testimony included support for establishing programs requiring tax preparers to meet minimum standards of competency, in order to allow “taxpayers to file more complete and accurate tax returns” and to reduce fraud, especially in relation to the Earned Income Credit. Mr. Cobb cited a study commissioned by H&R Block finding that “9 out of 10 taxpayers support requiring tax preparers to meet minimum standards.” Cobb also noted that H&R Block already requires their employees who prepare tax returns to meet “stringent” standards for competency and continuing education.
Finally, Mr. Cobb encouraged Congress to require all taxpayers (specifically those who self-prepare their tax returns) to answer the same questions regarding their eligibility for the Earned Income Credit as do those who have their tax returns professionally prepared.
Testimony of Janis Salisbury
Ms. Salisbury encouraged Congress in her testimony to emulate Oregon’s regulations and require all paid tax preparers to pass a competency exam and complete continuing education requirements annually. Salisbury cited the same study by the Government Accountability Office as Mr. McTigue, but specifically mentioning that the study found that “the odds that a return prepared by an Oregon paid preparer was accurate were about 72 percent higher than the odds for a comparable return filed by paid preparers in the rest of the country.”
Testimony of Dr. John Barrick
Dr. Barrick’s testimony included an anecdote of a low-income single father with two children who paid $800 for a tax return claiming a $8,000 refund that contained a false claim for three instances of the American Opportunity Tax Credit. The tax preparer did not sign the return, and the taxpayer was later stuck with paying the full amount of the refund back to the IRS while the tax preparer, nowhere to be found, was able to keep the $800 preparation fee. Dr. Barrick stated that everyone wants to keep this sort of thing from happening, but also warned that there are problems and “limits on regulation,” including: 1) that they’ll be unable to regulate “ghost preparers” (preparers who don’t sign their returns), 2) that regulation cannot prevent “lapses in ethical judgment” of tax preparers, and 3) that “small independent return preparers are disadvantaged” should they be required to comply with the proposed regulations.
Dr. Barrick’s proposed alternatives include voluntary registration and certification, eliminating or limiting refundable tax credits, and increased enforcement of the existing return preparer laws.
Testimony of Chi Chi Wu
Ms. Wu gave her testimony in support of either the federal or state governments to require “licensing and competency standards for paid tax preparers,” stating that the current regulatory scheme “breeds incompetence and fraud.” She stated, “it still astounds me that paid tax preparers are essentially unregulated in forty-six states … Contrast this with other professions that do require licensing in all or most states, such as hairdressers and landscape architects.” Wu stated that the IRS would have many of the elements in place to implement a program, and that Congress could “easily fix this problem with a single sentence giving the IRS authority.”
Testimony of Dan Alban
Mr. Alban gave testimony against regulating tax preparers, stating that tax preparers are already sufficiently regulated by the federal government. Alban’s contentions against regulating tax preparers included contentions that: 1) regulating tax preparers would be “protectionist” and “anti-competitive”, and would disproportionately harm “mom-and-pop preparers”; 2) required licensing would “reduce consumer choices” and increase prices of tax preparation; and 3) licensing regulations “cannot do much about fraud prevention that isn’t already achieved by the PTIN registration” and are “largely ineffective.” Alban stated that the “real problem is the complexity of the Tax Code.” He recommended reducing errors by reducing complexity.
Questioning by a much smaller group of Senators (including only Senators Wyden, Hatch and Casey (D-PA)) after this second panel of testimony focused on the notion of whether regulation of tax preparers would actually prove a disadvantage to smaller tax shops, as well as the true effectiveness of regulation in increasing the accuracy of professionally prepared tax returns. Senator Hatch notably asked Mr. McTigue regarding the problem of “ghost preparers” in the tax system and what is being done to combat the problem, to which McTigue answered that it would “help taxpayers with some assurance that their tax returns would be compliant” if the IRS can set a minimum competency level standard for tax preparers.
- Statement by Senator Ron Wyden (Apr. 8, 2014), http://www.finance.senate.gov/imo/media/doc/04082014%20Wyden%20Statement%20on%20Protecting%20Taxpayers%20from%20Incompetent%20and%20Unscrupulous%20Tax%20Preparers.pdf↵
- Senator Wyden noted that often these tax preparers will attempt to pocket the extra refund obtained by improperly preparing the taxpayer’s tax return.↵
- Senator Wyden Statement, supra note 1, pg. 2.↵
- Statement by Senator Orrin Hatch (Apr. 8, 2014), http://www.finance.senate.gov/imo/media/doc/04.08.2014%20Hatch%20Opening%20Statement%20on%20Tax%20Preparers.pdf↵
- Written Testimony of John A. Koskinen, Commissioner, Internal Revenue Service (Apr. 8, 2014), http://www.finance.senate.gov/imo/media/doc/Koskinen%20Testimony.pdf↵
- Written Statement of Nina E. Olson, National Taxpayer Advocate (Apr. 8, 2014), http://www.finance.senate.gov/imo/media/doc/Nina%20Olson%20Testimony.pdf↵