From the U.S. Government Accountability Office, www.gao.gov Transcript for: Watchdog Report: Regulation of Tax Preparation and Filing Audio interview by GAO staff with James White, Director, Strategic Issues Related GAO Work: GAO-11-336: Tax Preparer Regulation: IRS Needs a Documented Framework to Achieve Goal of Improving Taxpayer Compliance / GAO-11-344: Electronic Tax Return Filing: Improvements Can Be Made before Mandate Becomes Fully Implemented Released on: March 31, 2011 [ Background Music ] [ Narrator: ] Welcome to GAO's Watchdog Report, your source for news and information from the Government Accountability Office. It's March 31st, 2011. This tax season, 60 percent of individual tax returns will be prepared by paid tax preparers. The Internal Revenue Service is implementing new requirements for paid preparers intended to increase tax compliance and improve efficiency. Groups led by Jim White, a director in GAO's Strategic Issues team, recently reviewed IRS's implementation of these requirements for paid tax preparers. GAO's Jeremy Cluchey sat down with Jim to learn more. [Jeremy Cluchey:] IRS has recently begun implementing some new requirements for paid tax preparers. What prompted these requirements? [Jim White:] Let me start by saying the requirements are in two areas. One is regulation of paid preparers, and the other one is an e-filing mandate that also is imposed on paid preparers. But there's two different things going on there. First of all, with respect to paid preparer regulation, we'd done some work over the years showing that, while there are some very good preparers out there, many very good preparers out there, we also found a lot of cases, a surprising number of cases, of preparers making really egregious errors. And that ultimately led to IRS's new regulatory regime. [Jeremy Cluchey:] Can you elaborate a little bit on what the IRS is doing in this regard in the regulation area now? [Jim White:] Yes. It's several steps. One is just getting preparers registered with what's called a PTIN, an ID number for preparers. Up until now, IRS has not known the number of preparers who prepare tax returns every year. They had estimates that it's hundreds of thousands, but they did not have a count of how many preparers there were. So the first step is getting a number. And then what's going to be done is there's going to be a testing process, and this has yet to be put into place. But there'll be competency testing. They are doing background checks now on preparers. Taxpayers, because of the complexity of the code, have lots of questions, and so IRS has an opportunity to work through the preparer community to get taxpayer questions answered. It's very costly for IRS to deal with those questions, and IRS gets millions, tens of millions of phone calls from taxpayers every year. And when those taxpayers need to talk to a human assister at IRS, it's $25 a phone call on average is the cost of those. And you multiply that by tens of millions of phone calls, and it adds up. [Jeremy Cluchey:] You also mentioned recent efforts around the e-file program at IRS. Can you talk a little bit more about what that means? [Jim White:] Yes. There's a mandate now that preparers who file more than 100 returns have to e-file the returns. And next year it will go down to ten returns will be the threshold. And there's some opt-out provisions that taxpayers really don't want their return e-filed. But this is a new procedure. And this is something we've also pushed for in our work over the years. E-filing saves IRS money. More importantly for taxpayers, e-filing speeds up refunds. Taxpayers get their refunds faster if they e-file than if they file on paper. And, finally, e-filing does have the potential to improve IRS's compliance efforts down the road. For example, with complete information from a taxpayer's tax return, IRS might be better able to target its audits. [Jeremy Cluchey:] From the perspective of the paid tax preparers, what sort of impact could IRS's new efforts in this area have on how they do their jobs? [Jim White:] Well, there's several things. The hope is that some of the weaker paid preparers will either get weeded out or their performance will improve through the testing regime, for example. And as I've been saying, it also, I think, has the potential to change at least to some extent the relationship between this triangle of IRS, taxpayers, and preparers. IRS is beginning to think about a strategy for involving preparers in compliance, but they don't have anything documented on what that strategy is. And they do have a framework in place now. One of our recommendations was that they document the framework that they've got. It's a high-level framework. There's a lot of detail. It hasn't been worked out yet. But we think that by beginning the document, this might help get preparer buy-in. [ Background Music ] [ Narrator: ] To learn more, visit GAO's Web site at GAO.gov and be sure to tune in to the next edition of GAO's Watchdog Report for more from the congressional watchdog, the Government Accountability Office.