For taxpayers, a bigger threat than fraud
At the launch of tax season, a coalition of consumer groups is issuing a sobering warning to taxpayers: Hot dog vendors and hair stylists are regulated more strictly than paid tax preparers in many states. That can allow preparers to charge exorbitant fees for inaccurate -- even fraudulent -- returns that can ultimately cost consumers thousands of dollars.
"Errors on tax forms put consumers at risk of fines and lost refunds, yet few states have taken action to ensure that paid tax preparers are licensed, trained and disclose what are often high and unpredictable fees," said Tom Feltner, director of financial services at the Consumer Federation of America, in a statement.
Indeed, studies of tax return accuracy have shown an astounding number of errors. A 2014 mystery shopper test by the Government Accountability Office found that only 11 percent of the returns studied were accurate. A 2015 study by the National Consumer Law Center uncovered errors in 93 percent of the returns reviewed.
Calling for increased state regulation of the industry, representatives of 10 consumer groups said Wednesday that a survey of more than 1,000 adults found widespread support for licensing, testing and uniform disclosures in the tax preparation industry.
Only four states -- California, Oregon, Maryland and New York -- require tax preparers to be licensed and tested for a basic level of competence. However, the consumer groups found in a new poll that eight in 10 consumers support requiring tax preparers to be licensed and able to pass a test indicating that they have the knowledge and training to complete returns accurately. Nearly one in nine thought tax preparers ought to disclose their fees upfront, instead of revealing them after the fact, which is all too common in the industry.
"It's not surprising that American consumers have the common sense to know that tax preparers should be held to some standards -- what's surprising is that Congress has not come to the same conclusion," said Chi Chi Wu, staff attorney at the National Consumer Law Center.
In the absence of federal legislation, the consumer groups said that states should act.
"State legislatures have the authority to implement common sense protections for taxpayers," said Michael Best, senior policy advocate with the Consumer Federation of America. The coalition is urging state legislatures to pass a model law drawn up by the National Consumer Law Center that requires up-front fee disclosures, licensing, testing and continuing education for paid preparers.
But for this tax season, at least, consumers are on their own. How can you protect yourself from an incompetent or dishonest preparer?
First, know that while few states require licensing, any preparer that has the title of "enrolled agent," "certified public accountant" or that is also a tax attorney must conform with standards set up by their professional organizations, which already demand licensing, testing and continuing education. Ask if your preparer has one of these professional designations and inquire about his or her fees -- both how they're calculated and for an estimate of what your return will cost.
Can't afford a highly trained professional? Anyone earning less than $62,000 in 2015 can have their federal return prepared for free online via the Internal Revenue Service's Free File Alliance. State returns can also often be completed online for free at your state taxing authority's website. Volunteer Income Tax Assistance programs and Tax Counseling for the Elderly programs will also provide free in-person preparation for poor and elderly individuals. You can find VITA and TCE programs on the IRS website by plugging in your zip code.
In absence of state regulation, don't assume that anyone who hangs out a shingle offering tax preparation can be trusted, the consumer groups warn. Consumers, not their paid preparers, are on the hook for the accuracy of their tax returns. And the penalty for mistakes can be severe. If you claim the Earned Income Tax Credit when you're not eligible, for instance, you can lose the right to claim that credit for up to 10 years.
"You wouldn't give your Social Security number to your stylist or your bank account information to a hot dog vendor," said Ali Mickelson, director of tax and legislative policy for the Colorado Fiscal Institute. "Yet these people are more regulated than tax preparers who are entrusted with your most sensitive financial information."
Added Linda Sherry, national priorities director for Consumer Action: "The thought that consumers pay good money for bad advice is appalling. New consumer protections must be adopted to ensure that taxpayers can rely on the advice they are paying for."
