Nina E. Olson, the national taxpayer advocate, keeps track of the unlikeliest places people can get their taxes prepared. There was the time someone showed her a photo of a dog groomer advertising tax services. A few years ago when she was in Texas to make a speech, Olson spotted a massage parlor offering to prepare people's tax returns.
"It could be that the person at the massage parlor is a very, very qualified return preparer. But I have no idea," said Olson. "And that's my point: I have no idea. In many states there are regulations of massages. The massage part of what that person does is subject to testing and hygiene visits. But the preparing of taxes? There's no regulation."
Out of 79 million individual tax returns prepared by professionals in 2011, more than half were completed by unregulated tax preparers, according to Internal Revenue Service records. These tax professionals are not licensed lawyers or accountants. Rather, it turns out that anyone -- with no need for a license or particular degree -- can announce they're preparing tax returns, and then start doing it.
"A lot of people think a tax preparer is an accountant or someone who has special training, but that's not necessarily true," said Chi Chi Wu, an attorney with the National Consumer Law Center. "My middle school-aged son could set up a card table and prepare taxes. There's nothing to stop him."
While many of these tax preparers have been making an honest living for years, others are frequently making errors, charging exorbitant fees or committing outright fraud. And the most vulnerable tax payers tend to be those with lower incomes -- especially people who rely heavily on benefits like the Earned Income Tax Credit (EITC) and who otherwise would not need to file or who would have very simple returns.
Of the more than 27 million taxpayers who claimed the EITC in 2011, 59 percent relied on a preparer to do their taxes for an average credit of $2,270, according to data from the IRS. Below are other examples of credits; for all of them, more than half of the taxpayers claiming them turned to outside help. And the sheer array illustrates how the tax code has become not just a way to collect tax revenues but to also enact major social and economic policies.
"As long as the U.S. tax code is so overgrown and complicated that most Americans have to seek out help to file, they shouldn’t have to worry about crooked or incompetent tax preparers," Sen. Ron Wyden (D-Ore.) said Tuesday at a Senate Finance Committee hearing on unregulated tax preparers.
The IRS has tried to regulate the tax preparation business by proposing new rules that would force tax preparers to be licensed and certified. But in 2012, three tax preparers filed suit in federal court saying the agency did not have the authority to issue the new regulations. The courts have agreed. In February, the U.S. District Court of Appeals affirmed a 2013 ruling that the IRS does not in fact have the power to license tax preparers.
The Institute for Justice, a libetarian public interest law firm, joined the lawsuit to block the IRS's effort to regulate. Dan Alban, an attorney with the Institute for Justice, has argued that the rules would put small tax preparers out of business in favor of big companies like H&R Block. He has also said that the root problem with tax preparation has to do with the byzantine nature of the country's tax code -- not a lack of regulation. "The sheer complexity of the federal tax code makes it notoriously difficult to prepare tax returns without any errors," said Alban at the Senate hearing on Tuesday.
Alban also argues that the IRS already had enough tools to keep track of tax preparers by requiring them to have an individualized number, called a PTIN. This solution, he says, allows the government to easily identify bad actors--and at a lower cost to everyone compared to requiring classes and licensing.
Instead of regulating, the government has turned to prosecuting. In a recent case against Instant Tax Service (ITS), once the fourth-largest tax preparation business in the United States, prosecutors alleged that the company prepared phony W-2s, falsely claimed education and child credits that customers should not have qualified for, reported made-up income figures and even filed income returns without the taxpayer's permission. The behavior was so egregious that a federal court judge ordered the company to shut down its operations immediately, which was "necessary to protect the public and the Treasury," according to U.S. District Judge Timothy S. Black.
These problems are surprisingly widespread, according to a report released in April by the Government Accountability Office. In undercover site visits to 19 randomly selected preparers, only two calculated the right refund amount, according to the report. The errors ranged from giving the taxpayer $52 less to calculating $3,718 more than what they should have received.
The world of tax returns wasn't always so wild. Oddly enough, the advent of software designed to make tax returns easier helped spawn the rise of unscrupulous tax preparers, argues Olson.
Olson, who herself started as an unlicensed tax preparer in 1975, said that back when she entered the business, you had to study the law and take courses to know how to do someone's taxes. "You couldn't just sit down and type in some answers on a machine and have the machine crunch out the numbers," said Olson.
Electronic filing, which sped up how soon people could get refunds, also played a role in changing the culture of tax returns, creating the expectation that people could get refunds immediately, added Olson. Suddenly, people could apply their refunds toward new purchases of televisions, refrigerators or furniture.
Because the IRS does not have the ability to regulate, Olson said there now is interest in allowing tax preparation businesses to voluntarily qualify for a good housekeeping seal of approval that consumers can look out for. Another possibility is that more states will step in and add rules. But advocates warn that having the states intervene could leave tax preparers more confused by a dizzying patchword of rules. And they worry that asking the IRS to catch the errors after the fact is not an option given the extreme budget constraints on the agency.
"You can’t audit your way out of this problem," said Olson.