It's 2016, and Hairdressers Are More Regulated Than Tax Preparers
Tax season just concluded, and as the post-season assessments begin, the tax preparation community is turning its collective attention to a troublesome and pervading issue: how do we protect low-income working families from unregulated and untrained paid preparers?
Tax time is one of the most critical moments in the financial lives of low- and moderate-income households, but these taxpayers often struggle to find quality tax preparers and avoid outright fraud. Without clear standards for preparers, credit products, fee structures and details about offerings and penalties, tax filers are at a severe disadvantage in selecting a tax preparer or a tax preparation service that will provide a sufficiently high level of accuracy. While this is unfortunately not a new problem, the percentage of Americans that utilize a tax professional has increased from 46% in 1985 to roughly 60% today. With tax refund fraud estimated to cost $21 billion over five years, there is a clear need for concrete actions to protect filers and improve the integrity of the filing process as a whole.
For-profit, paid tax preparers exist in many locations and sizes, and they largely operate in the regulatory shadows. In fact, 55% of paid preparers are untrained and unregulated and 46 states provide no rules or regulations for independent tax preparers. What this means is that when Marni, a hairdresser, visits Jim, a local paid preparer, it is likely that she has received more training and certification than he has.
An example of a high quality program that could serve as a model for these basic competency standards is the Volunteer Income Tax Assistance (VITA) program. VITA has effectively addressed the need to provide a high standard of tax preparation for decades using an IRS training and certification platform that has seen the program's accuracy rate increase from 85% in 2009 to 94% in 2015. VITA has proven the effectiveness of sensible and purposeful competency standards that protect tax filers from the burdensome penalties of correcting and amending returns while being susceptible to financially destabilizing IRS penalties.
The lack of basic paid preparer competency standards is a nationwide concern. Recently the state of Maryland stopped accepting tax returns from four groups of private tax preparers due to a high volume of suspicious returns and repeated compliance violations. South Carolina had to permanently ban a tax services provider due to fraudulent claims that federal authorities estimate cost the federal government $55 million.
This is why Congressional action on preparer standards are so desperately needed. Without Congressional action, there is little recourse for proponents of sensible standards since the District of Columbia Circuit Court ruled in Loving V. IRS that the IRS does not have the statutory authority to regulate paid preparers nationwide.
There have been public statements of bipartisan support for paid preparer standards, but this has not translated into votes of support. Last year, the top Republican and Democrat on the Senate Committee on Finance endorsed legislation regulating paid preparers. Action on that legislation was delayed because of concerns raised by the AICPAs, but their concerns were ultimately addressed in a new version of the legislation. The new legislation was endorsed by the CPAs, consumer advocate and anti-poverty groups, larger paid preparer organization, and low-income tax preparation groups from across the country. Even big tax preparation software providers and large tax preparation chains that provide training of their own are supportive.
Three weeks ago the Senate took up this widely supported legislation regulating paid preparers. The top Democrat on the Senate Finance Committee stated, "We can't fully protect taxpayers without cracking down on unscrupulous return preparers," and voted in favor of the paid preparer provisions. The top Republican on the Committee expressed support for paid preparer standards but voted against the legislation, stating that while these standards were needed, this was not the right time to address them. However, as long as millions of Americans in every state are vulnerable to predatory tax preparation practices, now is precisely the right time to act.
We have to show these Senators how essential these commonsense paid preparer competency standards are. To do this, Prosperity Now is calling on members of the tax preparation field to share real-world experiences of low-income workers victimized by unscrupulous tax preparers. The goal of this story collection is to highlight the issues taxpayers have faced in this unregulated environment and put pressure on the Senate to take action now.
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There is every incentive to collaboratively work towards providing these needed protections in the future. The goal must be to have a tax system that works for all taxpayers, allowing them to file tax returns cost-effectively, accurately and most importantly, confidently.