Why it’s time we regulate paid tax preparers

Ali Mickelson

Rhonda had gone to the same tax preparer year after year. Then, one day, she got a letter in the mail from the IRS telling her she was eligible for something called the “EITC.”

She’d never claimed the Earned Income Tax Credit before. As she learned later, though, she’d been eligible to take it for years. She asked her longtime tax preparer about it.  

“(He) told me that he didn’t know how to do the forms for the EITC,” she said. Despite the fact that this paid preparer caused Rhonda to miss out on thousands of dollars in tax refunds, he still charged her $75 for his services each year.

After receiving the notice from the IRS, Rhonda went to Tax Help Colorado’s free tax site at Front Range Community College to get help amending her prior-year tax returns. 

“I was able to claim back EITC credits for three years,” she said. “If I hadn’t gotten that letter from the IRS, I never would have known I was eligible.”

In addition to not helping her claim the EITC, the paid preparer made another error that caused Rhonda to question his abilities. 

“He made a big mistake one year. One of the numbers he inputted was wrong, so we ended up having to pay the state of Colorado a lot more money than we thought we owed,” she said. 

Rhonda’s story is not unique. Like most Americans, she relied on a paid tax preparer to assist her with filing her returns, and assumed her preparer was licensed and regulated, or, at the very least, qualified to do her taxes. Sixty-eight percent of taxpayers believe the state or federal government regulates tax preparers and helps to ensure that paid preparers are licensed and qualified to file your returns.  

Unfortunately, this is simply untrue. Only four states (Oregon, California, New York and Maryland) require any kind of mandatory standards for tax preparers that aren’t otherwise licensed as a CPA, attorney or enrolled agent. The majority of states, including Colorado, have no paid preparer regulations in place, let alone quality standards or minimum competency requirements.

This is becoming a real problem for taxpayers. A 2014 study by the U.S. Government Accountability Office (GAO) found that only 11 percent of returns that were completed by paid preparers were correct.  Similarly, advocacy groups in North Carolina and Florida checked returns done by paid preparers, finding that 90 percent were inaccurate. The Treasury Department also found that more than 20 percent of all returns completed by paid preparers had misstatements or omissions deemed to be willful or reckless.  

These statistics are unsettling. Taxpayers trust preparers with personal and financial information and count on them to accurately prepare their returns to avoid future troubles with the IRS. In light of the extremely sensitive information shared with a paid preparer — and the profound consequences that can follow when something goes wrong —it is essential that paid preparers be well-equipped to complete tax returns.    

Not surprisingly, most taxpayers overwhelmingly agree. A recent poll commissioned by the Consumer Federation of America shows broad-based support for reforms in the tax preparation industry. The poll found that 88 percent of respondents believe paid preparers should be subject to licensing requirements by a state agency, and 86 percent believe that paid preparers should pass a competency test showing they have the knowledge and training to complete tax returns.  

Colorado Fiscal Institute couldn’t agree more. We have been longtime advocates for licensure and regulation in the paid preparation industry. In 2014, we introduced legislation requiring paid preparers to disclose their education, qualifications and pricing schedule to customers. While that legislation narrowly lost, we have continued working to find additional options for paid preparer reform, and this poll further confirms that we are on the right track.  

As we like to say at CFI, you wouldn’t give your bank account information to your beauty salon or your social security number to your hot dog vendor. Yet in Colorado, your stylist and the guy selling hot dogs on the corner are more regulated than your paid preparer. It’s time we step up and protect Colorado taxpayers, like Rhonda, from unscrupulous and ill-trained paid preparers.  

Ali Mickelson, Esq. is the director of Tax and Legislative Policy at the Colorado Fiscal Institute, a partner and investee of Gary Community Investments.