When you hear the words “tax preparer,” you may imagine a calculator-clutching accountant, carefully scrutinizing receipts beneath a green eyeshade. But the reality is that in most states nearly anyone can be a tax preparer. There’s no test to pass or code of ethics to follow. Walk around a low-income community and you’ll notice that check cashers, payday lenders, pawnbrokers and even furniture retailers offer tax-preparation services.
Of the 142 million individual income tax returns filed in 2011, 79 million were completed by paid preparers, and a majority of those, 42 million, were filled out by preparers who were neither licensed nor regulated.
With few barriers to entry, the field of tax preparation has drawn unscrupulous players. Many of them target low-income families who claim the earned-income tax credit, the nation’s single biggest antipoverty program.
The earned-income credit delivered more than $63 billion in refunds last year. It’s no surprise that unethical preparers have descended on low-income communities to get some share of this money. Preparers typically charge hundreds of dollars; federal investigators have found preparers charging as much as $1,000. They usually skim their fees off the top of their clients’ refunds, so taxpayers may not grasp just how much they’re losing.
The consequences of erroneous returns can be devastating: If the IRS finds fraud, the taxpayer not only has to reimburse the government, plus interest, but may also be barred from claiming the credit for up to 10 years. Meanwhile, the preparer has likely closed up shop and can’t be tracked down and penalized.
Undercover sting operations by consumer groups and government agencies have uncovered brazen fraud by untrained tax preparers. One investigation in New York State found fraud among roughly 40 percent of paid preparers. Even when preparers aren’t committing fraud or charging onerous fees, they are often incompetent.
Only four states – Oregon and California, which pioneered tax-preparation regulation in the 1970s, and New York and Maryland, which followed suit within the last decade – regulate tax preparers. A national solution is both necessary and appropriate, but it has been blocked by small-government activists.
In 2011, the Obama administration introduced regulations requiring tax preparers to pass a basic competency test, undergo a criminal-background check, pay an annual registration fee and keep current on tax law through continuing education. But the Institute for Justice, a libertarian group partly funded by the Koch brothers, challenged the regulations in court. The case is part of the institute’s continuing campaign against occupational licensing requirements, which they view as a threat to economic liberty.
In February, the Koch brothers won. A panel of Republican-appointed judges on the United States Court of Appeals for the District of Columbia Circuit struck down the rules as beyond the scope of the IRS’s legal authority. The court’s opinion revolved around – no joke – a law called the Horse Act of 1884. That act, which predates the modern federal income tax by nearly 30 years, allowed the Treasury Department to crack down on agents who fraudulently claimed reimbursement for veterans whose horses were lost or killed in the Civil War. The judges found that unscrupulous tax preparers, unlike the dead-horse fraudsters, were not “representatives of persons” and therefore could not be regulated.
Commentators have argued that tax-preparer regulations favor national chains like H&R Block and Jackson Hewitt at the expense of mom-and-pop businesses. But there’s no reason to assume that greater accountability would give an advantage to the big guys; even the chains have erred in filing for the earned-income credit.
The Obama administration has not decided whether to ask the Supreme Court to review the recent ruling. But it’s unlikely to do so, because the business-friendly court would almost certainly rule against the administration. A better solution is for Congress to make it explicit that tax preparers count as “representatives” under the 1884 law. President Obama called for this change in his most recent budget proposal; it would cost the government nothing, because higher collections from more accurate returns should more than make up for the costs of the regulations.
The new chairman of the Senate’s tax-writing committee, Ron Wyden, Democrat of Oregon, and the committee’s top Republican, Orrin G. Hatch of Utah, held a hearing last week on protecting taxpayers from “incompetent and unethical” preparers. Wyden understands the power of such oversight. A 2008 study by the Government Accountability Office found that his home state had among the most accurate returns in the country.
If anything can win bipartisan support in Congress, it should be this. Republicans have long been tough on fraud in the earned-income tax credit program. And Democrats should stand up for vulnerable families victimized by tax preparers. Perhaps someday Congress will simplify the tax code, and we’ll all be able to prepare our own returns with ease. Until that elusive day comes, however, Congress must act to protect low-income Americans from swindlers posing as tax professionals.
The New York Times
Alex H. Levy is a third-year law student at New York University.