Policy Recommendations to Help Hard-Working Taxpayers Claim the Credits They Deserve
Tax time is one of the most critical moments in the financial lives of low- and moderate-income households. Tax refunds, boosted by vitally important tax credits, can account for 30% or more of a family’s annual income. The importance of this moment makes it essential that tax returns are prepared accurately, to ensure low-income taxpayers receive the full benefit of the credits to which they’re entitled. This highlights the need for trustworthy and competent tax preparers—and yet only a minority of paid tax preparers are “enrolled,” which means that most are not required to meet basic competency standards. To help ameliorate the risk associated with this flawed system, Prosperity Now has issued a recommendation for the regulation of paid tax preparers, which you can learn more about in our hot-off-the-presses-brief.
Currently, only four states—Oregon, California, Maryland and New York—require basic competency standards for paid tax preparers. The absence of these standards opens the door for increased filing errors and, worse, predatory practices like hidden fees, which are especially damaging to tax filers with limited incomes, who are disproportionately likely to be taxpayers of color. Mystery shopper tests have found inaccuracies in as many as 90% of returns completed by paid preparers. At the same time, IRS-certified volunteers in the Volunteer Income Tax Assistance (VITA) program are held to a much higher standard: their accuracy rate was 94% in 2015.
Because we believe that all taxpayers should enjoy the peace of mind that they’re receiving the credits they’ve earned and deserve, our new policy brief proposes a “three-legged stool” of mutually reinforcing policies that are necessary to create strong regulations at the state level. Of course, we know there are clear steps Congress can take to grant the IRS authority to address these issues on a national level, but because we believe such legislation is unlikely to pass anytime soon, we instead recommend that states:
Support the prevention of disreputable conduct through education requirements.
Enforce standards of practice to support transparent fee structures and services.
Ensure accountability for the quality of tax returns.
These three key principles—education, transparency and accountability—are critical to protecting consumers, and all three must work together to be effective. For example, several states have focused on transparency by requiring that paid tax preparers include identification numbers the returns they prepare, but such a move only makes preparers trackable—it doesn’t ensure accountability.
Our new brief provides case-making research about the cascading consequences of not holding paid tax preparers accountable, as well as clear steps states can take, drawing on lessons from advocates in Maryland as a model. As the next legislative season rolls around, please consider using the brief to add paid tax preparer regulations to your state policy agenda. As you do, Prosperity Now’s State & Local Policy team is at your service if you have any questions or requests for support.
Looking to advocate on this issue at the federal level? See our federal policy brief on paid tax preparer regulations.