Some Tax Preparers Don't Add Up

By Albert B. Crenshaw
Washington Post Staff Writer
Wednesday, April 5, 2006

Commercial tax preparers made errors, sometimes amounting to more than $1,000 in incorrect refunds and overpayments, in 100 percent of returns brought to them by a government agency seeking to test the accuracy of work done by large chain tax-preparation firms.

The study by the Government Accountability Office was small -- only 19 returns, which the GAO cautioned cannot be used to generalize to the entire commercial return-preparation industry -- but on only two returns did the preparer produce what the agency determined was the right amount. And even those two had mistakes, though they did not affect the final tax amount.

In five cases, paid preparers produced returns showing improper refunds of nearly $2,000 each, and in two cases, the returns would have had taxpayers paying more than $1,500 unnecessarily.

The agency reported its finding to the Senate Finance Committee at a hearing yesterday and urged taxpayers to be careful in choosing tax preparers.

GAO workers posed in nine cases as a plumber and his family and in 10 cases as a low-income single mother with wages from retail sales and side income from baby-sitting. The agency, with staff members from the Senate Finance Committee and Joint Tax Committee, went over both scenarios and agreed on what the correct refunds would be.

The preparers were not identified. They were described as outlets "of several commercial chain preparers scattered throughout a metropolitan area." All the preparers in the study were what the Internal Revenue Service calls "unenrolled preparers" who have not passed an examination or worked for the IRS. There are 300,000 to 600,000 such preparers. More than half of the 130 million returns filed each year are done by paid preparers, and in most states anyone can go into that business without special training or a license.

The GAO noted that several hundred thousand certified public accountants and lawyers are authorized to practice before the IRS and that another group of about 41,000, known as enrolled agents, must pass an examination or have worked for the IRS.

The GAO found that in 10 cases the preparers did not include business income. In five cases, the preparers did not ask where the taxpayers' children lived or ignored the GAO worker's explanation and incorrectly claimed the earned-income tax credit, meant to help low-income workers and their children.

In three of nine cases in which the taxpayer could have claimed a credit for higher education, the preparers did not do so, and in seven of nine cases in which itemizing would have helped, the preparers either did not do so or left off some deductible expenses. Seven of the 19 returns reported too many personal exemptions, while eight of 19 reported state tax refunds incorrectly.

"Had these problems been discovered by the IRS on real returns, IRS officials said that many of the preparers would have been subject to penalties for such things as negligence and willful or reckless disregard of tax rules," the GAO report said.

"Americans have a right to expect that when they hire a tax preparer they're going to get honest, straightforward advice," Finance Committee Chairman Charles E. Grassley (R-Iowa) said in a written statement. "Unfortunately, too often that isn't the case."

The GAO urged taxpayers to take "common-sense steps," such as checking with friends and relatives for recommendations and making sure that preparers understands their circumstances and reviews their tax documents.

The IRS Web site ( ) also has tips for choosing a tax preparer. Type "choosing a tax preparer" into the search field.

© 2006 The Washington Post Company