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Report to the Committee on Finance, U.S. Senate:

October 2003:

TAX ADMINISTRATION:

Most Taxpayers Believe They Benefit from Paid Tax Preparers, but 
Oversight for IRS Is a Challenge:

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-70] GAO-04-70:

GAO Highlights:

Highlights of GAO-04-70, a report to the Chairman and Ranking Minority 
Member, Committee on Finance, United States Senate 

Why GAO Did This Study:

Over 55 percent of the nearly 130 million taxpayers in tax year 2001 
used a paid tax preparer. However, using a preparer may not assure 
that taxpayers pay the least amount due. Last year, GAO estimated that 
as many as 2 million taxpayers overpaid their 1998 taxes by $945 
million because they failed to itemize deductions and half of these 
used preparers.

GAO was asked to (1) obtain the views of taxpayers about paid 
preparers and examples of preparer performance including any problems 
and (2) describe the Internal Revenue Service’s (IRS’s) oversight of 
problem preparers; the challenges facing IRS in dealing with problem 
preparers, especially the Office of Professional Responsibility; and 
the efforts to address those challenges. To obtain the views of 
taxpayers who used preparers, GAO surveyed a national representative 
sample of taxpayers

What GAO Found:

GAO estimates that most of the taxpayers who used a paid preparer 
believe they benefited from doing so. Many taxpayers told us they 
believed they would have great difficulty filling out their own tax 
forms because they do not understand their filing requirements. At the 
same time, some taxpayers are poorly served when paid preparers make 
mistakes, causing taxpayers to over-or underpay their taxes or pay for 
services, such as short-term loans called Refund Anticipation Loans 
(RALs), without understanding their costs and benefits. The evidence 
available does not allow a precise estimate of the extent of problems 
caused by paid preparers, but nothing suggests that the percentage of 
taxpayers affected is large. Nevertheless, even a small percentage of 
the over 72 million taxpayers who used paid preparers in 2001 
translates into millions of taxpayers who are potentially adversely 
affected. 

IRS has several offices responsible for taking action against problem 
paid preparers, including the newly formed Office of Professional 
Responsibility. These offices sanction preparers for violating 
standards of conduct; assess monetary penalties for violating tax laws 
when preparing returns; monitor and, if justified, sanction problem 
preparers offering electronic filing and RALs; and investigate 
fraudulent preparer behavior. However, balancing resources devoted to 
such efforts against those devoted to other IRS priorities is a 
challenge. In addition to IRS, other federal agencies, state and local 
governments, and professional organizations have a role in regulating 
paid preparers. At least two proposals exist to expand IRS’s oversight 
of paid preparers. Consideration of such proposals is complicated by 
the difficulty of developing reliable estimates of the number of 
taxpayers affected by problem preparers or the effectiveness of the 
actions taken against them.

What GAO Recommends:

Because making decisions about IRS’s role is a policy matter and data 
to determine the efficacy of current oversight efforts would be 
difficult to develop, whether to expand IRS’s role in regulating paid 
preparers is a judgment that Congress and IRS must make and GAO is not 
making recommendations in this report. In commenting on a draft of 
this report, the IRS Commissioner generally concurred with our 
findings. 

www.gao.gov/cgi-bin/getrpt?GAO-04-70

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Jim White at (202) 
512-5594 or Whitej@gao.gov.

[End of section]

Contents:

Letter: 

Results in Brief: 

Background: 

Taxpayers Believe They Benefit by Using Paid Preparers but Some Are 
Poorly Served: 

IRS and Others Act Against Problem Paid Preparers, but Balancing 
Taxpayer Protection Against Other Priorities Is a Challenge: 

Concluding Observations: 

Agency Comments and Our Evaluation: 

Appendixes:

Appendix I: Objectives, Scope, and Methodology: 

Objective 1: Obtaining Taxpayer Views, Examples of Paid Preparer 
Performance, and What Is Known about the Extent of Problems Caused by 
Paid Preparers: 

Objective 2: Describe IRS's Oversight of Problem Paid Preparers; 
Management Challenges Facing IRS's Offices that Provide Oversight; and 
Efforts to Address Management Challenges: 

Appendix II: Final Survey Results Weighted to the U.S. Population: 

Appendix III: Comments from the Internal Revenue Service: 

Appendix IV: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Acknowledgments: 

Tables: 

Table 1: Key Findings in the Office of Director of Practice: 

Table 2: Some Examples of Paid Preparer and RAL Oversight Efforts by 
State and Local Government: 

Figures: 

Figure 1: Percentage of Returns with a Paid Preparer's Signature: 

Figure 2: Paid Preparer Users' Confidence That They Did Not Overpay 
Taxes: 

Figure 3: Client Perceptions on Aspects of Paid Preparer Performance: 

Figure 4: Example of Paid Preparer Fees: 

Figure 5: Visits and Actions by the ERO Monitoring Program: 

Figure 6: Paid Preparer Criminal Investigations for Calendar Years 2001 
and 2002: 

Abbreviations: 

CI: Criminal Investigation Division:

EIC: Earned Income Credit:

ERO: Electronic Return Originator:

FTC: Federal Trade Commission:

IRS: Internal Revenue Service:

ODP: Office of Director of Practice:

OPR: Office of Professional Responsibility:

RAL: Refund Anticipation Loan:

SB/SE: Small-Business/Self-Employed Division:

TAS: Taxpayer Advocate Service:

Letter October 31, 2003:

The Honorable Charles E. Grassley: 
Chairman: 
Committee on Finance: 
United States Senate:

The Honorable Max Baucus: 
Ranking Minority Member: 
Committee on Finance:	 
United States Senate:

Filing a correct tax return can be a daunting task for taxpayers. Many 
taxpayers do not understand their filing requirements and would have 
great difficulty filling out their tax forms without the assistance of 
paid preparers. IRS's most recent estimates are that in tax year 2001 
more than 55 percent of the nearly 130 million individual filers paid 
someone to prepare their tax returns, and in tax year 2000, taxpayers 
paid almost $15 billion for individual tax preparation services. 
However, using a paid preparer does not always assure that taxpayers 
will pay the least amount of taxes that are legally due. For example, 
last year we estimated that as many as 2 million taxpayers overpaid 
their 1998 taxes by $945 million because they claimed the standard 
deduction when it would have been more beneficial to itemize, and half 
of these taxpayers used a paid preparer.[Footnote 1]

Concerned that some paid preparers might not be diligent when 
completing tax returns, you asked us to (1) obtain the views of 
taxpayers who used paid preparers and provide examples of paid preparer 
performance, including what is known about the extent of problems 
caused by paid preparers and (2) describe IRS's efforts to prevent, 
detect, and take action against problem paid preparers; the management 
challenges facing IRS offices that interact with paid preparers, 
especially the Office of Professional Responsibility; and the efforts 
to address those management challenges.

To address the objectives, we surveyed a nationwide random sample of 
taxpayers who used paid preparers. While this sample is representative 
of all taxpayers who used paid preparers, it has some limitations and 
must be interpreted carefully because it is based on taxpayer 
perceptions. Taxpayers responding to our survey may not understand the 
tax laws well enough to evaluate whether they received quality service 
from their paid preparers, resulting in inflated satisfaction levels. 
In addition, we conducted in-depth interviews with a smaller judgmental 
sample of taxpayers who provided examples of paid preparer performance, 
but we were unable to independently verify the facts in the taxpayers' 
examples. We also interviewed paid preparers, representatives of 
professional organizations, various IRS officials, and low-income tax 
clinic directors. We presented our survey and interview findings at a 
Finance Committee hearing on April 1, 2003.[Footnote 2] In addition, we 
conducted a review of IRS's closed case files on paid preparers 
investigated for fraud or other misconduct and reviewed IRS's paid 
preparer penalty collection data. A more detailed discussion of our 
scope and methodology, including the potential effect of our taxpayer 
survey's 46 percent response rate, may be found in appendix I.

Results in Brief:

Based on projections from our survey, most of the taxpayers who used a 
paid preparer believe they benefited from doing so and would use a paid 
preparer in the future. The taxpayers we interviewed in-depth 
identified a variety of advantages in using paid preparers. Some said 
they did not understand the tax laws or lacked the time or patience to 
complete returns on their own. However, when paid preparers make 
mistakes or exhibit other problematic behavior, the consequences for 
taxpayers can be significant. While available evidence does not allow a 
precise estimate of how extensive the problem is, none of the evidence 
suggests that the percentage of poorly served taxpayers is large. 
Nevertheless, even a small percentage of the over 72 million taxpayers 
who used paid preparers in 2001 translates into millions of taxpayers 
who potentially overpaid or underpaid their taxes due to preparer 
mistakes or other problematic behavior. In addition, IRS's National 
Taxpayer Advocate--who heads the program that helps resolve taxpayers' 
tax problems with IRS and recommends changes to mitigate taxpayer 
problems--and other knowledgeable observers have concerns about how 
well taxpayers understand the costs and benefits of the short-term 
Refund Anticipation Loans (RALs) offered by some preparers.

IRS has several offices responsible for taking action against problem 
paid preparers, but balancing resources devoted to such efforts against 
those devoted to other priorities is a challenge. The newly formed 
Office of Professional Responsibility (OPR) enforces professional 
standards and is beginning to address management problems that made its 
predecessor office ineffective. Many changes are still being 
implemented, so it is too soon to know the impact of the changes. IRS's 
Small Business/Self-Employed (SB/SE) and Criminal Investigation (CI) 
divisions may penalize or recommend prosecuting problem preparers, but 
generally focus on only the most serious cases because of their other 
enforcement priorities. This is a challenge because of the lack of firm 
data about the extent of problematic paid preparer behavior and the 
effectiveness of actions to combat it.

While most taxpayers may receive quality service from their preparers, 
problematic behavior by some preparers raises the question of whether 
IRS should be more active in overseeing paid preparers. Internal and 
external proposals have been made to expand IRS's oversight of paid 
preparers. However, the lack of information on the overall extent of 
problems with paid preparers and the effectiveness of the actions taken 
against them make this a judgment that Congress and IRS management must 
make. We are not making any recommendations in this report.

Background:

Paid preparers aid taxpayers in the completion of their tax returns for 
a fee. They range from licensed professionals, such as attorneys, 
certified public accountants, and enrolled agents, to those lacking 
formal training who complete tax returns part-time. Paid preparers 
authorized to represent taxpayers in matters before IRS are called 
practitioners and include attorneys, certified public accountants, and 
enrolled agents. Preparers work for a variety of enterprises including 
accounting firms, large tax preparation services, and law firms. Some 
are self-employed. IRS estimates that in 1999 there were 1.2 million 
paid preparers, although the actual number is unknown because some paid 
preparers do not sign the returns they prepare. The percentage of 
returns with a paid preparer's signature has been steadily increasing 
over the past 20 years, as shown in figure 1.

Figure 1: Percentage of Returns with a Paid Preparer's Signature:

[See PDF for image]

[End of figure]

Paid preparers provide a variety of tax-related services besides tax 
preparation, including tax and estate planning and services that help 
clients receive funds quickly, such as electronic filing and RALs.

Taxpayers Believe They Benefit by Using Paid Preparers but Some Are 
Poorly Served:

Based on projections from our national survey, most taxpayers who used 
a paid preparer believe they benefited from doing so and would use a 
paid preparer in the future. Taxpayer surveys and studies of returns 
suggest that some taxpayers are poorly served by their paid preparers, 
but they do not allow a very precise estimate of the extent of the 
problem.

Most Taxpayers Believe They Benefit From Using Paid Tax Preparers:

Based on projections from our national survey, most taxpayers who used 
a paid preparer believe they benefit from doing so. We estimate that 77 
percent of the taxpayers who used a paid preparer in 2002 were very or 
generally confident that they did not pay more in taxes than was 
legally required, as shown in figure 2, and that 87 percent would use 
one again in the future.[Footnote 3] These data suggest that paid tax 
preparers are providing needed services to taxpayers.

Figure 2: Paid Preparer Users' Confidence That They Did Not Overpay 
Taxes:

[See PDF for image]

Note: The estimates have a 95 percent confidence interval of plus or 
minus 5 percent or less. Percentages total more than 100 percent due to 
rounding.

[End of figure]

The results of our taxpayer survey must be interpreted carefully--it is 
based on taxpayer perceptions, and taxpayers may not understand the tax 
laws well enough to evaluate the performance of their paid preparers. 
For example, most of the taxpayers we talked to in-depth said they used 
a paid preparer because they found IRS tax forms and documents too 
complicated or they were confronting an unusually complicated tax 
situation. If taxpayers lack the technical expertise needed to identify 
preparer errors, their survey responses may underestimate the extent of 
problems caused by paid preparers.

With that caveat in mind, taxpayers in our nationwide survey said that 
their preparers did sufficient probing or took other steps to ensure an 
accurate return. We estimate that about 91 percent of taxpayers believe 
their preparers had enough information about their personal 
circumstances to accurately prepare their tax returns. We also estimate 
that 88 percent of taxpayers using paid preparers were asked for 
supporting documentation. Most of the preparers we talked to said they 
ask their clients to provide documentation to support claimed income, 
deductions, and credits, such as W-2 forms from employers or 1099 forms 
from financial institutions, to ensure the accuracy and completeness of 
the information reported on returns. In addition, paid preparers are 
required by law to take certain steps when filling out returns for 
their clients, including signing the return and giving their clients 
copies of the completed returns. We estimate that the vast majority of 
taxpayers who used a paid preparer in 2002 were provided a signed copy 
of their return, as shown in figure 3.

Figure 3: Client Perceptions on Aspects of Paid Preparer Performance:

[See PDF for image]

Note: The estimates have a 95 percent confidence interval of plus or 
minus 5 percent or less.

[End of figure]

Taxpayers choose to use paid preparers for a variety of reasons. As 
already noted, many of the taxpayers we interviewed in-depth told us 
they used a paid preparer because they did not understand the tax laws. 
According to the National Taxpayer Advocate, many taxpayers rely upon 
the expertise of a paid preparer to complete their returns since they 
are faced with a complex set of tax laws and a multitude of 
requirements for deductions, exemptions, and credits. One taxpayer, for 
example, said she began using a paid preparer 9 years ago to help her 
with estate tax issues following the death of her father because she 
needed help from a tax professional in dealing with complicated estate 
tax issues. Other taxpayers said they lacked the time or patience to 
complete their returns on their own. For example, a mother of four who 
operates her own business part-time and is finishing her degree at 
night said she simply does not have the time to do her own taxes. Other 
taxpayers stated that they paid someone to prepare their taxes in hopes 
of obtaining a larger and/or quicker refund.

Some of the paid preparers we spoke to agreed that educating taxpayers 
about the tax laws is an important component of their practice. For 
example, one preparer who works primarily with immigrants said he and 
his staff spend considerable time explaining to their clients that 
paying taxes is part of the civic responsibilities they assumed in 
immigrating to this country. Other preparers told us they often have to 
educate taxpayers on more complex concepts, such as computing the basis 
(the investment made in a property) to determine how much of a real 
estate sale would be taxable. Another preparer told us he found that a 
taxpayer had overpaid his taxes by more than $6,200 over a 3-year 
period because the taxpayer had overlooked earned income and child tax 
credits. Still another preparer told us how he helped a taxpayer 
receive a refund in excess of $19,000 when he found out that the 
taxpayer, who had moved twice in less than 2 years, had missed out on 
deductions for moving expenses due to job relocations.

Some Taxpayers Are Poorly Served by Paid Preparers:

When paid preparers make mistakes or exhibit other problematic 
behavior, the consequences for taxpayers may be significant. Examples 
provided by low-income tax clinic[Footnote 4] representatives and paid 
preparers include:

* A taxpayer who overpaid his taxes over a period of years by roughly 
$3,500 to $5,000. The taxpayer had received notices for several years 
from IRS stating that he may be eligible for the Earned Income Credit 
(EIC).[Footnote 5] Each year, he took the notices to his preparer, but 
the preparer took no action.

* One preparer told his elderly client to provide him with the checks 
to make her quarterly estimated payments. Although he claimed these 
payments on the client's tax return, he never gave the checks to IRS--
he kept them for himself. After receiving notices from IRS, the 
taxpayer visited the paid preparer who told her that IRS must have made 
a mistake. The preparer was sent to jail.

* Another preparer incorrectly advised a married couple with two 
children to each file separately as head of household so that they 
could claim two EICs. The couple ended up owing taxes, interest, and 
penalties.

* A paid preparer let a taxpayer file for the EIC for 2 years although 
the taxpayer lacked the appropriate documentation and was ineligible 
for the credit. The taxpayer received a tax refund he was not entitled 
to receive, resulting in a tax liability of $3,300.

As with all anecdotal evidence, these examples are not necessarily 
representative of the kinds of problems taxpayers encounter when 
dealing with problematic paid preparers. Also, taxpayers may have 
contributed to these problems by either providing incomplete 
information to their preparers or being actively complicit in avoiding 
taxes that are legitimately owed.

In addition to over-or underpaying their taxes, IRS officials and 
others told us that sometimes taxpayers are poorly served by paying for 
services that accelerate the receipt of refunds, including RALs. The 
primary benefit of RALs is that they allow clients to receive funds 
quickly, sometimes in just a few minutes, rather than the 10 days it 
typically takes taxpayers who file electronically to receive their tax 
refunds. The ability to quickly receive funds makes RALs appealing to 
low-income taxpayers who often want or need their refund quickly. In 
addition, as the National Taxpayer Advocate pointed out in the fiscal 
year 2002 Annual Report to Congress, many low-income clients who lack 
bank accounts find that RALs are the only way to electronically file a 
return and receive their refunds quickly. For these and other reasons, 
RALs are becoming more popular. Based on IRS data, the 
National Consumer Law Center estimates that 12.1 million RALs were 
taken out in 2001, up from 10.8 million in 2000.[Footnote 6]

Although this suggests that many taxpayers find value in using RALs, 
IRS officials and others have raised concerns about whether taxpayers 
are fully aware of the costs involved and their tax filing 
alternatives. For example, a recent New York City investigation found 
that some paid preparers fail to disclose the costs of RALs and the 
availability of alternatives to the loans.[Footnote 7] The 
investigation found that only 27 of the 43 preparers visited mentioned 
the annual percentage rate and other fees associated with RALs. New 
York City's investigation also found that electronic filing was not 
strongly publicized as an alternative way for clients to receive their 
tax refunds quickly. According to a low-income tax clinic director, 
many paid preparers fail to fully explain to taxpayers that accepting a 
RAL carries a certain risk--if refunds are delayed or denied, taxpayers 
may be liable for additional charges and fees. Without clear 
information about the costs and risks, taxpayers cannot always weigh 
the costs against the benefits that they might receive.

Also, based on information we gathered, fees for RALs and other 
services that accelerate the receipt of refunds vary widely. For 
example, while some preparers charge nothing for electronic filing 
services, one preparer we spoke to (while we were posing as a potential 
client) said he would charge us between $210 and $250 to file 
electronically. Another preparer said he would charge $174 for a RAL on 
a $700 refund, which equates to an annual interest rate of over 900 
percent, assuming a loan period of 10 days, while another preparer 
quoted us a RAL fee of $130 on a $1,200 refund, which equates to an 
annual interest rate of about 400 percent, assuming the same loan 
period. These examples are not necessarily representative of all 
preparer fees; the exact amounts of preparer fees for accelerated 
refunds depend on various individual circumstances, such as the 
financial institution the preparer uses to finance the loan and the 
amount of refund due.

The RAL fees, when combined with tax preparation fees, may considerably 
reduce a taxpayer's refund. For example, the preparer mentioned above 
who quoted a RAL fee of $130 on a $1,200 refund also quoted a tax 
preparation fee of $190 in addition to the RAL fee. As shown in figure 
4 below, the fees would have reduced the refund by more than 25 
percent.

Figure 4: Example of Paid Preparer Fees:

[See PDF for image]

[A] The $130 RAL fee consists of $80 in financing charges and $50 in 
bank fees.

[End of figure]

In another example, a low-income tax clinic director informed us of a 
disabled taxpayer who was due a refund of $1,230 on a simple return. 
After paying various fees, such as return preparation and a RAL, she 
received a check from her preparer for $414--about 34 percent of her 
expected refund.

Little Authoritative Evidence Regarding Problematic Paid Preparers:

A variety of evidence, including the above examples and our nationwide 
survey, shows that some taxpayers are poorly served by their paid 
preparers. While this evidence does not allow a precise estimate due to 
methodological limitations, none of it suggests that the percentage of 
poorly served taxpayers is large. However, even a small percentage of 
the more than 72 million taxpayers who used paid preparers in 2001 can 
translate into millions of affected taxpayers.

Taxpayer surveys show that some taxpayers had problems with the quality 
of the service provided by their paid preparer. Based on the results of 
our nationwide survey, we estimate that 5 percent of paid preparer 
users had no confidence that they had not overpaid their taxes, and 
another 7 percent had little confidence, as shown in figure 2. We also 
estimate that 3 percent of paid preparer users did not believe that 
their preparer had enough information to accurately complete their 
return, as shown in figure 2. Our survey results are similar to a 1997 
Consumer Reports nonrandom survey of 26,000 of its readers, in which 6 
percent said they discovered an error made by their preparers.[Footnote 
8] As discussed earlier, taxpayer survey results need to be interpreted 
carefully because they reflect taxpayer perceptions and may misstate 
the extent of the problem.

Studies of filed returns also suggest that some paid preparers do not 
exercise due diligence in filing returns. For example, we have already 
mentioned that last year we estimated that as many as 2 million 
taxpayers overpaid their 1998 taxes by $945 million because they 
claimed the standard deduction when it would have been more beneficial 
to itemize, and half of these taxpayers used a paid preparer.[Footnote 
9] Similarly, a recent report by the Treasury Inspector General for Tax 
Administration estimated that there were approximately 230,000 returns 
filed by paid preparers where taxpayers appeared eligible for but did 
not claim the Additional Child Tax Credit.[Footnote 10] In addition, a 
2002 IRS study of the EIC for tax year 1999 returns estimated that some 
taxpayers claimed about $11 billion more than they were entitled to 
while others claimed $710 million less than they were entitled 
to.[Footnote 11] The IRS reported that paid preparers filed more than 
65 percent of all EIC returns. None of these studies tried to determine 
how many errors were the fault of the preparer and how many were the 
fault of the taxpayer. However, based on our earlier examples of paid 
preparer performance, it seems likely that preparers bear 
responsibility for at least some of the over-or underpayments. 
Taxpayers could be at fault if they provide the preparer with incorrect 
information.

IRS and Others Act Against Problem Paid Preparers, but Balancing 
Taxpayer Protection Against Other Priorities Is a Challenge:

Several IRS offices have responsibility for problem paid preparers, but 
balancing resources devoted to taxpayer protection with resources 
devoted to other priorities is a challenge. Proposals have been made 
for expanding IRS's oversight of the paid preparer industry. 
Consideration of such proposals is complicated by a lack of data on the 
extent of the problem and the effectiveness of IRS's actions and by the 
involvement of other agencies, state, and local governments as well as 
professional organizations.

New Office of Professional Responsibility (OPR) Beginning to Address 
Problems Overseeing Practioners:

The newly formed OPR enforces professional standards for those paid 
preparers authorized to represent taxpayers in matters before IRS. 
These authorized preparers, called practitioners, include attorneys, 
certified public accountants, and enrolled agents.

Treasury Department Circular No. 230 imposes standards of 
professionalism and conduct for practitioners and authorizes IRS to 
institute proceedings against practitioners who violate the 
regulations.[Footnote 12] Depending on the seriousness of the 
violation, OPR can sanction practitioners through private reprimand, 
censure (a public reprimand), suspension, or disbarment. For example:

* As a result of an OPR investigation, OPR accepted a practioner's 
offer of consent to suspension for almost 3 years for violation of the 
requirement of due diligence as to accuracy in preparing corporate tax 
returns for 3 years. The practitioner underreported income by over 
$50,000 in 1 year, and claimed unsubstantiated expenses of over $25,000 
in the other 2 years. The practitioner also overstated a real estate 
tax deduction by over $30,000 in 1 year.

* In another case, a practitioner was disbarred from practice for 
giving false or misleading information to IRS. The practitioner signed 
a power of attorney as being licensed when the license had not been 
renewed, thereby making the practitioner ineligible to practice before 
IRS.

As part of IRS's modernization effort, IRS hired an outside management 
consulting firm to make high-level recommendations concerning the 
staffing, organization, technology, and operating procedures of the 
Office of Director of Practice (ODP), the office OPR replaced. Table 1 
summarizes the consultant's findings.

Table 1: Key Findings in the Office of Director of Practice:

Area: Mission and strategy; Key findings: Office is not strategically 
focused.

Key findings: Narrow interpretation of jurisdiction (covering 
practitioners only) leaves major problems unaddressed and 
contradictions within system.

Key findings: Awareness and confidence in ODP processes within IRS is 
low.

Key findings: Operation of office is reactive to incoming workload.

Area: Business processes; Key findings: Business processes are 
lengthy.

Key findings: Decision authority is not delegated to lead program 
staff.

Key findings: Guidelines for business process decisions do not exist in 
a written form.

Key findings: Procedures emphasize practitioner rights.

Key findings: Communication internally and externally is limited.

Area: Organization and staffing; Key findings: Organization lacks 
structure.

Key findings: Relationships with external stakeholders are weak.

Key findings: Staffing pattern and deployment does not align skills to 
functions.

Key findings: Management practices are underdeveloped.

Area: Technology; Key findings: Information systems are separate, and 
do not provide adequate functionality for administrative and program 
needs.

Key findings: Systems are undocumented.

Key findings: Staff is untrained to fully utilize existing 
functionalities.

Source: IRS consultant.

[End of table]

According to the OPR Director, IRS took the high-level findings of the 
consultant's report and drew on its management and staff's expertise to 
develop a plan to make needed improvements. For example, IRS 
reorganized the office, renaming it OPR, and has started to implement 
several other changes. As an initial step, OPR contacted various tax 
professional organizations in January 2003 and laid out the following 
priorities for the balance of 2003:

* enhance the visibility of OPR internally as well as externally,

* increase the capacity and capability of OPR,

* process the workload in a shorter time frame,

* ensure that Circular 230 sanctions are applied fairly and 
consistently,

* identify and implement organizational performance measures, and:

* establish and maintain an effective working alliance with the tax 
professional organization community.

While IRS has already made some improvements, according to the OPR 
Director, the following efforts are on-going:

* hiring and training a significantly expanded staff of attorneys and 
support personnel;

* improving and documenting operational practices and procedures;

* implementing performance measures;

* communicating the OPR mission and progress internally and externally 
through speaking engagements, newsletters, and Web sites;

* working with IRS Chief Counsel and Treasury Department Tax Policy 
personnel to make beneficial amendments to Circular 230; and:

* maintaining an open door policy with respect to the practitioner 
community in order to learn of their concerns and their suggestions.

Also, the OPR director said it is going to take some time to make all 
the needed changes. We did not try to assess OPR's on-going 
improvements because some are not yet complete and others are too new 
to have produced the desired improvements.

SB/SE Faces Challenges Balancing Paid Preparer Compliance Actions With 
Other Enforcement Priorities:

IRS's SB/SE division has responsibility for assessing and collecting 
monetary penalties against any paid preparers who do not comply with 
tax laws when filing returns. SB/SE assessed about $2.4 million in 
penalties in calendar years 2001 and 2002, and collected about $291,000 
or 12 percent, including all or some portion of penalties from 44 
percent of the preparers penalized. According to IRS officials, 
collecting paid preparer penalties has not been a priority in the 
division's overall collection efforts due to other higher priority 
work, such as abusive tax schemes.

According to an SB/SE representative, there are currently no plans for 
SB/SE to make collecting paid preparer penalties a priority. The 
representative stated that their priorities include abusive tax 
schemes, and they cannot afford to make these low dollar paid preparer 
cases a priority given their responsibility for addressing billions of 
dollars in uncollected taxes. Also, IRS does not currently have a 
system in place to identify paid preparer penalties separately from 
other assessments once a case is assigned for collection, and to do so 
would require a labor-intensive computer programming effort.

However, the monetary amounts of these penalties, which are small 
relative to IRS's other compliance efforts, may not reflect how 
important the penalties are as a deterrent to problematic paid 
preparers. According to the Internal Revenue Manual,[Footnote 13] 
penalty assertion is the key enforcement vehicle for noncompliant 
preparers. As mentioned earlier, IRS has no data on the extent of the 
problems with paid preparers or how effective its enforcement efforts 
are in deterring problematic preparer behavior. In assessing but not 
collecting these penalties, IRS may be sending preparers a mixed 
message about whether poor performance by preparers will be tolerated. 
For example, several paid preparers and low-income tax clinic officials 
we interviewed said that IRS was not providing enough paid preparer 
oversight and that it should be increased. IRS has made changes to its 
fiscal year 2003 compliance program guidance to place a higher priority 
on assessing penalties against problem preparers. However, collecting 
paid preparer penalties will continue to be part of the regular 
collection process because they are not to be given any special 
treatment as a priority.

IRS Monitors Preparers Who Offer Electronic Filing but Has Limited Role 
in Monitoring RALS:

IRS has broad authority to monitor and sanction Electronic Return 
Originators (ERO) whom IRS authorizes to file tax returns 
electronically. IRS's monitoring is to ensure ERO compliance with 
provisions of any revenue procedures, publications, or notices that 
govern IRS's e-file program, including RALs. Through random and 
mandatory visits, the ERO monitoring program offices monitor the 
activities of EROs to ensure compliance with IRS's e-file program and 
to investigate allegations and complaints against EROs. In 2001, IRS 
established a goal of visiting 1 percent of all EROs each year. IRS met 
its goal in 2002, visiting more than 1,400 EROs and sanctioning 215 of 
them for violating IRS guidelines. Figure 5 shows the number of EROs 
visited and sanctions issued by degree of seriousness, for fiscal year 
2002, and for two thirds of fiscal year 2003, based on the most recent 
data available through May 2003.

Figure 5: Visits and Actions by the ERO Monitoring Program:

[See PDF for image]

[A] Cumulative through May 23, 2003.

[End of figure]

However, while IRS does impose some requirements on paid preparers 
offering RALs, its role is limited and the requirements serve in part 
to ensure that RALs are presented to taxpayers as loans and not as an 
accelerated tax refund. For example, IRS's Publication 1345 prohibits 
EROs from basing their fees on a percentage of the refund amount or 
computing their fees using any figure from tax returns.

CI Division Investigates Criminal and Fraudulent Preparer Behavior:

IRS's CI division investigates paid preparers suspected of criminal or 
fraudulent behavior and other related financial crimes. However, 
according to CI officials, they have a system using indicators 
developed from prior cases to identify and work only the most egregious 
cases due to overall resource limitations, leaving some cases unworked. 
Nevertheless, according to IRS, CI is increasing its investigations of 
criminal and fraudulent paid preparers. For example, according to IRS 
it more than doubled the number of paid preparer criminal 
investigations in 2002 compared to 2001 and experienced a significant 
increase in the number of investigations referred for prosecution in 
the first quarter of fiscal year 2003.

CI officials told us that to prioritize its work, CI identifies and 
investigates the most egregious criminal behavior using a fraud ranking 
system that determines which preparers should be investigated. 
Officials said the ranking is based on information developed from 
individual returns provided by fraud detection centers. Fraud detection 
centers are CI offices collocated at IRS campuses that attempt to 
detect fraud by scanning paper and electronic returns. The system ranks 
preparers by the number of suspected fraudulent filed returns by 
applying criteria that have proven in the past to be successful in 
prosecution of fraud cases. However, as mentioned earlier, IRS has no 
data on the extent of the problem with paid preparers, including those 
who are fraudulent, or the effectiveness of CI's deterrent actions 
against them.

Two programs provide much of the organizational framework for CI's 
actions against criminal paid preparer behavior. The division's Return 
Preparer Program identifies and investigates criminal paid preparers 
while the Questionable Refund Program identifies fraudulent tax 
returns. Once identified, the program stops payment on fraudulent tax 
refunds and refers fraudulent tax schemes to CI field offices for 
further investigation. Figure 6 shows that in 2001 and 2002, CI 
evaluated 574 referrals of possible criminal paid preparer behavior and 
initiated 395 criminal investigations against paid preparers.

Figure 6: Paid Preparer Criminal Investigations for Calendar Years 2001 
and 2002:

[See PDF for image]

[End of figure]

According to CI, criminal paid preparer behavior varies. Some criminal 
preparers create false forms such as W-2s and file returns on behalf of 
deceased taxpayers. Others buy social security numbers and the names of 
dependents from taxpayers with multiple children in order to allow 
others to claim dependent related tax credits, such as the EIC. 
According to CI officials, most criminal preparers are investigated for 
aiding and abetting a false tax return. For example, during 2001 to 
2002, more than 91 percent of CI's initiated investigations against 
paid preparers involved preparers who helped prepare false or 
fraudulent tax returns. One investigation resulted in a preparer 
pleading guilty for assisting in the preparation of false tax returns 
and sentenced to 38 months in prison and assessed a $10,000 fine. The 
preparer owned and operated a tax preparation business and among her 
criminal activities regularly advised clients to claim fraudulent tax 
credits for dependents and child care, even though the clients had no 
dependents. The preparer's actions from 1997 to mid-2000 resulted in a 
loss to the Treasury of between $1.5 and $2.5 million. From 2001 to 
2002, CI investigations resulted in the indictment and sentencing of 
134[Footnote 14] paid preparers, of which 119 were incarcerated.

Anecdotally, several preparers we spoke to stated that publishing 
examples of convictions against preparers may help deter future 
criminal preparer behavior. However, IRS does not have quantitative 
information about the size of the problem with paid preparers or the 
extent to which convictions against paid preparers are a deterrent to 
other preparers. Information on deterrence would be difficult, perhaps 
impossible to develop.

Others Believe More IRS Oversight Is Needed:

While IRS provides some oversight of paid preparers, others believe 
that it should provide additional oversight. The Low Income Taxpayer 
Protection Act of 2003, S. 685 proposed in the 108TH Congress, would 
require the licensing and registration of paid preparers and RAL 
providers. The proposal would also require all preparers to abide by 
the rules of conduct that currently govern practitioners and contains 
provisions aimed at discouraging the use of RALs, including regulating 
the fees charged for RALs.

The National Taxpayer Advocate recommended a similar proposal requiring 
the registration of paid preparers in her 2002 Annual Report to 
Congress. The proposal would require paid preparers to be registered 
with IRS, pass a certification examination, and maintain annual 
educational requirements. In a previous report to the Congress, the 
National Taxpayer Advocate stated that while paid preparers are subject 
to monetary penalties if they prepare returns negligently, many 
preparers are not subject to standards of conduct, licensed by any 
state regulatory agency, or required to participate in continuing 
education programs. Thus, according to the Advocate, the only course of 
action that can be taken to enjoin a paid preparer is the initiation of 
a civil action by the Secretary of the Treasury against the preparer in 
A District Court of the United States. According to the Advocate, such 
action is costly, time consuming, and leaves questionable income tax 
preparers free to remain in business and 
potentially harm taxpayers if they continue to prepare income tax 
returns during the legal process of the civil action.[Footnote 15]

Some of the paid preparers and officials from low-income tax clinics 
and professional organizations we interviewed said that IRS could 
provide additional oversight of paid preparers, although several said 
that it would be difficult for IRS to undertake such efforts. Several 
of the preparers we interviewed said that IRS's current oversight of 
paid preparers needed improvement and most of the paid preparers, low-
income tax clinics, and professional organizations we interviewed told 
us they supported the licensing or registration of paid preparers as a 
way to provide additional oversight of paid preparers. For example, one 
preparer said he felt paid preparer oversight was not in IRS's order of 
priorities and that paid preparers should be licensed so that IRS could 
enforce education and conduct standards. Others told us that IRS should 
impose a registration or licensing requirement on paid preparers 
although some expressed reservations. For example, a representative 
from the National Society of Accountants said that it would be an 
arduous task for IRS to create a system to license hundreds of 
thousands of people and then set up the mechanisms to discipline them. 
Officials from a low-income tax clinic also expressed concerns, saying 
that such a proposal may increase the cost of tax preparation by 
reducing the supply of available preparers.

Any consideration of whether to change IRS's responsibilities for 
overseeing paid preparers would likely take into account several 
factors. One, obviously, is the benefits and costs to taxpayers who use 
paid preparers. However, as highlighted in this report, data are 
lacking about the extent of problematic paid preparer behavior and the 
effectiveness of existing IRS actions, which makes it difficult to 
assess the tradeoff between benefits and costs. Another factor is that 
regulating the paid preparer industry, a private sector industry, is a 
form of consumer protection. IRS's major functions, which include 
processing tax returns, responding to taxpayer questions, and enforcing 
compliance with the tax laws, give it little experience in providing 
consumer protection. Still another factor is the implication for IRS 
resources. Recently we have reported on declines in IRS's enforcement 
programs, including declines in resources allocated to those programs. 
We have also reported that needs in other IRS programs have often been 
met at the expense of resources devoted to enforcement.

IRS Is Not Alone in Providing Some Preparer Oversight:

Any consideration of whether to increase IRS paid preparer oversight or 
consumer protection must also recognize that IRS is not alone in 
providing such oversight. Other federal agencies, such as the Federal 
Trade Commission (FTC), state and local governments, and professional 
organizations engage in efforts to prevent, detect, and take action 
against problem paid preparers. For example, FTC has taken action 
against paid preparers pursuant to its authority to enforce the 
provisions of the Federal Trade Commission Act.[Footnote 16] FTC's 
primary mission is to protect consumers by enforcing federal consumer 
protection laws that prevent fraud, deception, and unfair business 
practices. This protection extends to taxpayers using paid preparers 
for tax preparation and other related services.

In addition, at least six states and one city have laws that provide 
paid preparer oversight or consumer protection regarding RALs. These 
laws range from requiring registering or licensing of paid preparers to 
requiring disclosure statements for RALs. For example, the City of New 
York requires a separate disclosure statement for RAL agreements that 
must be provided in English or Spanish. New York City's law also 
requires paid preparers to provide an oral explanation of the law's 
required written disclosure in language understood by the taxpayer. In 
addition to government entities, professional organizations, such as 
the American Institute of Certified Public Accountants and the American 
Bar Association, also impose general standards of conduct on the 
actions of their members, including those representing taxpayers before 
the IRS and preparing tax returns. We did not attempt to identify all 
federal, state, and local governments or professional organizations 
that have a paid preparer or RAL oversight role in addition to IRS. 
Table 3 shows examples of some tax preparation and RAL oversight in 
addition to that provided by IRS.

:

Table 2: Some Examples of Paid Preparer and RAL Oversight Efforts by 
State and Local Government:

Government: State:

Government: California; Tax preparation oversight: License/ 
register preparers: Yes; Tax preparation oversight: Exam to be licensed/ 
registered: No; Tax preparation oversight: Continuing education 
required: Yes; RAL oversight: Register: No; RAL oversight: 
Disclose: No.

Government: Illinois; Tax preparation oversight: License/ 
register preparers: No; Tax preparation oversight: Exam to be 
licensed/ registered: No; Tax preparation oversight: Continuing 
education required: No; RAL oversight: Register: No; 
RAL oversight: Disclose: Yes.

Government: Minnesota; Tax preparation oversight: License/ 
register preparers: No; Tax preparation oversight: Exam to be 
licensed/ registered: No; Tax preparation oversight: Continuing 
education required: No; RAL oversight: Register: No; 
RAL oversight: Disclose: Yes.

Government: North Carolina; Tax preparation oversight: 
License/ register preparers: No; Tax preparation oversight: Exam 
to be licensed/ registered: No; Tax preparation oversight: 
Continuing education required: No; RAL oversight: 
Register: Yes; RAL oversight: Disclose: Yes.

Government: Oregon; Tax preparation oversight: License/ 
register preparers: Yes; Tax preparation oversight: Exam to be licensed/ 
registered: Yes; Tax preparation oversight: Continuing education 
required: Yes; RAL oversight: Register: No; RAL oversight: 
Disclose: No.

Government: Wisconsin; Tax preparation oversight: License/ 
register preparers: No; Tax preparation oversight: Exam to be 
licensed/ registered: No; Tax preparation oversight: Continuing 
education required: No; RAL oversight: Register: No; 
RAL oversight: Disclose: Yes.

Government: Local: 

Government: New York City; Tax preparation oversight: License/ 
register preparers: No; Tax preparation oversight: Exam to be 
licensed/ registered: No; Tax preparation oversight: Continuing 
education required: No; RAL oversight: Register: No; 
RAL oversight: Disclose: Yes.

Source: GAO:

[End of table]

Three of these seven oversight efforts shown in the table above were 
passed or enacted within the past year. To date, none of the state or 
local governments responsible for the efforts has evaluated the 
effectiveness of these efforts. The absence of such data further 
complicates any consideration about changing IRS's role. Without data, 
IRS management cannot determine how much these other government 
entities will provide paid preparer oversight or consumer protection.

Concluding Observations:

Paid tax preparers are critical to the functioning of our tax system. 
Many taxpayers do not understand their filing requirements and would 
have great difficulty filling out their tax forms without the 
assistance of paid preparers.

While most taxpayers may receive quality services from their preparers, 
problematic behavior by some preparers raises the question of whether 
IRS should be more active in overseeing paid preparers. Since paid tax 
preparation is a private sector industry, this can be viewed as a 
question about the extent to which the nation's tax administrator ought 
to be involved in consumer protection. On the one hand, the complexity 
of the tax code is at least partly responsible for the existence of the 
paid tax preparation industry. As a consequence, IRS might be viewed as 
properly having some responsibility for oversight of the industry. On 
the other hand, IRS's mission is tax administration and the agency may 
not have the expertise or the regulatory culture for successfully 
carrying out consumer protection responsibilities. In addition, unless 
given a budget increase IRS would have to divert resources from other 
priorities in order to carry out expanded industry oversight 
responsibilities. In recent years IRS has often met such resource needs 
by decreasing staffing of its enforcement activities.

At least two proposals exist for legislative action, one from the 
Taxpayer Advocate and the other, the Low Income Taxpayer Protection Act 
of 2003, S. 685, proposed in the108th Congress. Unfortunately, there is 
not much reliable information about the tradeoffs associated with 
changing IRS's role. Examples of problematic preparer behavior are easy 
to find but reliable estimates of the number of taxpayers affected by 
the problems do not exist and would be difficult, perhaps impossible, 
to develop. Such data would be needed to properly evaluate proposals 
for changing IRS's role. While the federal government and some state 
and local governments have taken actions intended to address 
problematic preparer behavior, the effectiveness of the actions is not 
known. Because making decisions about IRS's role is a policy matter and 
because data are not available to determine the efficacy of IRS's 
current oversight efforts, whether to expand IRS's role in ensuring 
taxpayers receive quality service from paid preparers is a judgment 
that Congress and IRS management must make. We are not making 
recommendations in this report.

Agency Comments and Our Evaluation:

The Commissioner of Internal Revenue provided written comments on a 
draft of this report in an October 28, 2003, letter, which is reprinted 
in appendix III. The Commissioner agreed with the information presented 
in our report and noted that IRS will continue its efforts to provide 
oversight of paid tax preparers and is developing new initiatives to 
ensure the ethical responsibility of preparers. These efforts include 
continuing to develop the Office of Professional Responsibility, 
considering changes to Circular 230, coordinating with professional tax 
associations, increasing compliance efforts, forming a multifunctional 
work group to improve communications within IRS, and developing a 
national paid preparer strategy.

The Commissioner said that, based on the information in our report, IRS 
will undertake an analysis of whether IRS can take additional steps to 
increase the impact of its efforts to assess penalties against paid tax 
preparers. In response to our observation that penalties assessed 
against paid preparers are not a collection priority, the Commissioner 
noted, and we agree that preparer penalty cases are included in IRS's 
collection priority system. Our point is that they are not a collection 
priority because of their relatively low dollar value and we noted that 
IRS collected only 12 percent of the penalties assessed in calendar 
years 2001 and 2002. The Commissioner commented that it might be a 
better reflection of IRS's collection efforts to point out that during 
this period, the agency collected all or some portion of penalties from 
44 percent of the SB/SE preparers who were assessed a penalty and we 
changed our draft to show the percentage collected. We were aware that 
some paid preparers voluntarily pay the penalties assessed against them 
but, as indicated by the Commissioners' response, more than half of 
paid preparers paid nothing. Since uncollected preparer penalties 
represent about 88 percent of the value of penalty assessments, we said 
that IRS may be sending the paid preparer community a mixed message 
about whether poor performance by preparers will be tolerated. At the 
same time, we recognize that collecting paid preparer penalties has not 
been a priority due to other higher priority work, such as abusive tax 
schemes.

:

As agreed with your offices, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
from its date. At that time we will send copies to the Secretary of the 
Treasury, the Commissioner of Internal Revenue, and other interested 
parties. We will also make copies available to others on request. In 
addition, the report will be available at no charge on the GAO Web site 
at [Hyperlink, http://www.gao.gov.] http://www.gao.gov.

This report was prepared under the direction of Jonda Van Pelt, 
Assistant Director. Other major contributors are acknowledged in 
appendix IV. If you have any questions about this report, contact me on 
(202) 512-9110.

James R. White: 
Director, Tax Issues:

Signed by James R. White: 

[End of section]

Appendixes: 

Appendix I: Objectives, Scope, and Methodology:

The objectives of this report were to (1) obtain the views of taxpayers 
who used paid preparers and provide examples of paid preparer 
performance, including what is known about the extent of problems 
caused by paid preparers and (2) describe IRS's efforts to prevent, 
detect, and take action against problem paid preparers; challenges 
facing IRS offices that interact with paid preparers, especially the 
Office of Professional Responsibility; and efforts to address those 
challenges.

Objective 1: Obtaining Taxpayer Views, Examples of Paid Preparer 
Performance, and What Is Known about the Extent of Problems Caused by 
Paid Preparers:

To obtain the views of taxpayers who used paid preparers about the 
quality of service the preparers provided, we conducted (1) a 
representative nationwide survey and (2) in-depth interviews with a 
small judgmental sample of the individuals who participated in our 
nationwide survey. We also searched for studies that talked about the 
extent of problems caused by paid preparers.

Methodology for the Taxpayer Survey Regarding Use of Paid Preparers:

To determine taxpayer views of their paid preparers, we contracted with 
the Marist College Institute for Public Opinion of Poughkeepsie, New 
York to include our questions at the beginning of their multisubject 
telephone survey of the United States conducted between February 5 and 
24, 2003. Interviews were completed with 917 of the estimated 1,996 
eligible sampled individuals for a response rate of 46 
percent.[Footnote 17] The results presented in our report are based on 
the 429 interviews with respondents who reported they paid someone to 
prepare their federal personal tax returns for their 2001 income.

Study Population and Sample Design:

We sought to obtain information about the views of the adult population 
of the United States. The study procedures yield a sample of members of 
the noninstitutional population of the United States (50 states and the 
District of Columbia) who are 18 years or older, speak English, and 
reside in a household with a land-based telephone (cellular telephone 
numbers were not included in the sample).

Random Digit Dial Equal Probability Selection Methods were followed to 
identify households. Survey Sampling International (SSI) of Fairfield, 
Connecticut provided the probability sample of telephone numbers. These 
were drawn from active telephone blocks of telephone exchanges with 
listed numbers and excluded numbers that SSI identified as being 
business numbers or not in service (e.g., disconnected). At least eight 
calls were made to each telephone number to attempt to identify a 
respondent.

A member within each household was initially randomly chosen by 
selecting the individual whose birthday most recently preceded the date 
of the telephone contact. Once the selection of a household member was 
made, two attempts were made to complete the interview with that 
individual. If, after two contacts, including scheduled appointments, 
the selected member could not be reached or refused to complete the 
survey, a second adult member of the household was asked to 
participate. If a household refused twice, it was not contacted until 
the final week of data collection at which time a monetary incentive 
was offered for completion of the interview.

Survey respondents are weighted in our analyses so that age, gender, 
and regional estimates from our survey will match U.S. data on these 
demographic characteristics. The U.S. data come from county-level 
estimates from Census 2000 that were projected forward by SCAN/U.S., 
Inc. to July 1, 2002.

Sources of Error:

As with all sample surveys, this survey is subject to both sampling and 
nonsampling errors. The effects of sampling errors, due to the 
selection of a sample from a larger population, can be expressed as 
confidence intervals based on statistical theory. The effects of 
nonsampling errors, such as nonresponse and errors in measurement, may 
be of greater or lesser significance but cannot be quantified on the 
basis of the available data.

Sampling errors arise because we used a sample of individuals to draw 
conclusions about the much larger population. The study's sample of 
telephone numbers is based on a probability selection procedure. As a 
result, the sample was only one of a large number of samples that might 
have been drawn from the total telephone exchanges from throughout the 
country. If a different sample had been taken, the results might have 
been different. To recognize the possibility that other samples might 
have yielded other results, we express our confidence in the precision 
of our particular sample's results as a 95 percent confidence interval. 
For all the percentages presented in this report, we are 95 percent 
confident that when only sampling errors are considered the results we 
obtained are within +/-5 percentage points or less of what we would 
have obtained if we had surveyed the entire study population. In 
addition to the reported sampling errors, the practical difficulties of 
conducting any survey introduce other types of errors, commonly 
referred to as nonsampling errors. For example, questions may be 
misinterpreted, some types of people may be more likely to be excluded 
from the study, errors could be made in recording the questionnaire 
responses into the computer-assisted telephone interview software, and 
the respondents' answers may differ from those who did not respond.

To test the understanding of the questions, we pretested the survey by 
conducting 57 interviews. To ensure that responses were correctly 
recorded in the computer-assisted telephone interview software, trained 
interviewers were used who had been specifically briefed on the study, 
and interviewer supervisors regularly monitored, evaluated, and 
provided feedback to the interviewing staff who worked from a 
centralized telephone facility.

For this survey, the 46 percent response rate is a potential source of 
nonsampling error; we do not know if the respondents' answers are 
different from the 54 percent who did not respond. Both GAO and Marist 
took steps to maximize the response rate--the questionnaire was 
carefully designed, at least eight telephone calls were made at 
different times of day on different days of the week to try to contact 
each telephone number, the interview period extended over 20 days, 
respondents were informed that their responses were anonymous, 
suspended interviews and refusals were recontacted at least once, and 
respondents were provided with a toll-free number to either call back 
at a more convenient time or to obtain further information about the 
survey.

Because we did not have information on those taxpayers who chose not to 
participate in our survey, we could not estimate the impact of the 
nonresponse on our results. Our findings will be biased to the extent 
that the people at the 54 percent of the telephone numbers that did not 
yield an interview have different experiences with paid tax preparers 
than did the 46 percent of our sample who responded. Knowing that the 
survey would concern tax issues could not have created large biases 
because only about 1.6 percent of the eligible households in the sample 
(31 individuals) refused after the interview began (i.e., after they 
could have known the interview would address tax issues.) The remaining 
nonresponding units (about 52 percent of the sample) did not know that 
the interview would address tax issues. The 52 percent is comprised of 
about 18 percent (356) who refused before the interview could be 
started, about 14 percent (274) where an eligible respondent was 
identified in the household, and about 21 percent (estimated 418) where 
no one was contacted at the telephone number but the household was 
assumed to be eligible. This estimate of 418 uncontacted, but eligible, 
households is derived assuming that the percentage of eligible 
households among all our 704 uncontacted households would be the same 
(59.14 percent) as the percentage of eligible households among 
households for which the eligibility status was determined.

To obtain examples of paid preparer performance, we conducted in-depth 
interviews with 18 taxpayers from our nationwide survey of taxpayers. 
In addition, we discussed paid preparer performance and received 
examples of paid preparer performance from various IRS offices, some 
paid preparers, some low-income tax clinics, and IRS's Taxpayer 
Advocate Service. To obtain information on the fees charged by paid 
preparers for electronic filing and refund anticipation loans we 
contacted seven preparers posing as potential clients and also gathered 
loan cost schedules from the Web sites of two lenders. We also reviewed 
closed case files in IRS offices, including the Office of Professional 
Responsibility (OPR), Small Business/Self-Employed (SB/SE) division, 
and Criminal Investigation (CI) division.

A copy of the survey is in appendix II.

In-depth Interviews with Taxpayers:

As part of our nationwide survey of taxpayers, we asked the individuals 
we contacted if they would be willing to participate in an in-depth 
interview regarding their experiences with paid tax preparers. For 
those taxpayers who agreed, we used a structured questionnaire that 
covered, for example, how taxpayers found their paid preparers and 
investigated the credentials of the preparer, the type of preparer 
used, why the taxpayer used a paid preparer, and how extensively the 
preparer probed the taxpayers' personal tax circumstances and asked for 
documentation. We interviewed 18 taxpayers in-depth.

Studies Discussing the Extent of Problems Caused by Paid Preparers:

To obtain studies discussing the extent of problems caused by paid 
preparers, we relied upon studies mentioned in interviews with IRS 
officials and through periodical searches. We also used a 1997 Consumer 
Reports survey of their readership concerning paid preparers, a report 
by the Treasury Inspector General for Tax Administration regarding 
potentially unclaimed child tax credits, a Department of Treasury study 
regarding earned income tax credits, and a previous GAO report that 
estimated the number of taxpayers eligible to itemized deductions who 
used the standard deduction instead.

Objective 2: Describe IRS's Oversight of Problem Paid Preparers; 
Management Challenges Facing IRS's Offices that Provide Oversight; and 
Efforts to Address Management Challenges:

To describe IRS's efforts to prevent, detect, and take action against 
problem paid preparers, we interviewed officials from IRS offices 
including OPR, SB/SE, CI, and the Taxpayer Advocate Service (TAS). IRS 
officials said these offices interact the most with preparers. We also 
reviewed various documents used by these offices to provide paid 
preparer oversight.

To describe challenges facing IRS offices that interact with paid 
preparers, especially OPR, and efforts to address those challenges, we 
interviewed officials from OPR, including its new Director, as well as 
officials from other IRS offices discussed above, such as SB/SE and CI. 
We also used documents from OPR, including a consulting firm report on 
the office of Director of Practice and documents from other IRS 
offices.

To examine IRS's efforts to assess and collect penalties against paid 
preparers, we interviewed officials from IRS's SB/SE division, reviewed 
collection data, and examined division documents. To determine the 
percentage of assessed fines collected and uncollected by SB/SE we 
relied upon a SB/SE analysis of collections data extracted from IRS's 
Enforcement Revenue Information System. To assess the reliability of 
these data, we reviewed existing documentation related to the data 
sources and interviewed officials knowledgeable about the data. We 
determined that the data were sufficiently reliable for the purposes of 
this report.

To obtain information about IRS's efforts to register and monitor 
Electronic Return Originators (ERO), we interviewed officials from SB/
SE's ERO Monitoring Program and reviewed IRS Publication 1345 covering 
requirements for EROs. To determine the number of EROs, monitoring 
visits, and sanctions issued, we relied upon IRS's e-file Provider 
Monitoring Report. In addition, we reviewed various other documents 
including a recent report by the Treasury Inspector General for Tax 
Administration.

To describe IRS's efforts to investigate criminal and fraudulent paid 
preparer behavior, we interviewed officials from CI and reviewed case 
file information. We used data from the CI Management Information 
System and interviewed CI officials to determine statistics on the 
cases worked. To assess the reliability of these data, we reviewed 
existing documentation related to the data sources and interviewed 
officials knowledgeable about the data. We determined that the data 
were sufficiently reliable for the purposes of this report.

To examine efforts suggested by IRS's Taxpayer Advocate Service to 
provide additional IRS oversight of paid preparers or provide more 
consumer protection, we interviewed officials from the Advocate's 
office about a proposal to license paid preparers. We also reviewed the 
2001 and 2002 National Taxpayer Advocate's reports to Congress where 
the Advocate's proposals are explained and discussed.

To provide examples of actions taken against problem paid preparers by 
other federal, state, and local governments, we relied upon interviews 
and reports from a variety of sources including paid preparers, 
professional and consumer organizations, officials from several states, 
and some federal agency representatives. Based on these interviews and 
reports, we examined state and local laws that create oversight of 
certain aspects of paid preparer behavior. We did not attempt to 
identify all federal, state, and local governments or professional 
organizations that have a paid preparer or RAL oversight role. Those 
discussed are only examples of what we found during our research and 
there may be others.

The data cited from IRS for the estimated number of individual filers 
in 2001 that paid someone to prepare their tax returns, the amount paid 
in 2000 for tax preparation, the number of paid preparers in 1999, and 
the number of RALs taken out in 2001 and 2000 are considered background 
information. As such, we did not verify these numbers.

We conducted our work from April to October 2003 in accordance with 
generally accepted government auditing standards.

[End of section]

Appendix II: Final Survey Results Weighted to the U.S. Population:

[See PDF for image]

[End of figure]

[End of section]

Appendix III: Comments from the Internal Revenue Service:

COMMISSIONER:

DEPARTMENT OF THE TREASURY 
INTERNAL REVENUE SERVICE 
WASHINGTON, D.C. 20224:

October 28, 2003:

Mr. James R. White Director, Tax Issues 
United States General Accounting Office 
Washington, D.C. 20548:

Dear Mr. White:

I reviewed your report entitled, "Tax Administration: Most Taxpayers 
Believe They Benefit From Paid Tax Preparers, But Oversight For IRS Is 
A Challenge" (GAO-04-70). We appreciate your recognition of our efforts 
to regulate paid preparers, and we recognize the importance of our 
role. Although you did not provide recommendations, we are continuing 
our efforts in this area by developing initiatives to ensure the 
ethical responsibility of preparers.

We agree with your observations regarding IRS efforts to revitalize and 
refocus the Office of Professional Responsibility. We are moving 
rapidly towards realizing our authorized staffing level for this 
office. Performance measures have been established and implemented, and 
a clear agenda has been defined. We consider members of the tax 
professional community to be partners in tax administration. As such, 
it is important that they adhere to the standards of practice outlined 
in Treasury Circular 230, which the Office of Professional 
Responsibility administers.

As I explained in recent Congressional testimony, some of our 
accountants, lawyers, investment bankers and other professionals, 
including individuals from our country's very best firms, have lost 
track of some fundamental professional obligations they owe to 
shareholders, employees, and the general public. Circular 230 
establishes standards of ethical conduct required of professionals who 
practice before the IRS. The Treasury and the IRS believe that changes 
should be made to Circular 230, pursuant to our existing authority, to 
help curb abusive tax shelters. Among the subjects we are closely 
examining are the standards used in legal opinions that are used by 
taxpayers in connection with abusive tax shelters.

To leverage our efforts in this area, the Office of Professional 
Responsibility will coordinate its efforts with the associations of tax 
professionals in dealing with representatives who fail to meet the 
standards of professional conduct. Tax professional organizations are 
close working partners with the IRS, and they understand the problems 
that result when members abuse the tax system. The creation of this 
office is a direct result of the concerns of the professional 
organizations.

Additionally, we formed a multi-functional work group to improve 
communications between functions and develop a national return preparer 
strategy. The group includes 
the Office of Professional Responsibility, SB/SE Division, Wage and 
Investment (W&I) Division, Criminal Investigation Division, and the 
Campus Lead Development Centers. Each function will share information 
on actions taken and results achieved in the Return Preparer Program 
(RPP). These meetings will be conducted on a regular basis.

The Small Business/Self Employed (SB/SE) Division also recently issued 
comprehensive guidance to SB/SE Division Area Directors and Planning 
and Special Programs (PSP) Managers on program objectives and 
initiatives. The memorandum addressed the priority of increasing RPP 
compliance efforts. As a part of our RPP strategy, we will continue our 
efforts in the Electronic Return Originator (ERO) Monitoring Program. 
Starting in Fiscal Year 2004, we will also be responsible for 
conducting Earned Income Tax Credit (EITC) due diligence compliance 
visits.

Your report states that IRS does not include penalties assessed against 
paid preparers as a Collection priority. Preparer Penalty cases are 
part of the Master File Transcript (MFT) 55 assessments and the 
assessment and collection of these penalties are included in our 
Collection priority system. All MFT 55 assessments are currently being 
worked in the compliance centers and in the Automated Collection System 
(ACS) work streams in both the W&I and SB/SE Divisions.

Your report references that 12 percent of the preparer penalties 
assessed in calendar years 2001 and 2002 by SB/SE are collected. 
However, the percentage of preparers from whom we collect may be a 
better reflection of the collection results than is the percentage of 
penalties collected. This is because a small number of preparers are 
assessed large penalty amounts. We collect all or some portion of 
penalties from 44 percent of all SB/SE preparers who are assessed a 
preparer penalty. Based on information you provided in your report, we 
will be performing analyses to determine whether additional steps can 
be taken to improve our performance.

The IRS has several efforts underway to better align its casework to 
the most appropriate work streams. Assessing the feasibility of the 
systemic identification of preparer penalty cases on ACS is part of the 
proposal that will be considered in the workload realignment effort.

If you have any questions, or if you would like to discuss this 
response in more detail, please contact Joseph R. Brimacombe, Deputy 
Director, Compliance Policy, at (202) 283-2200.

Sincerely,

Signed for:

Mark W. Everson: 

[End of section]

Appendix IV: GAO Contacts and Staff Acknowledgments:

GAO Contacts: 

James White (202) 512-9110 Jonda Van Pelt (415) 904-2186:

Acknowledgments:

In addition to those named above, Vince Balloon, Larry Dandridge, 
Katherine Davis, Michele Fejfar, Evan Gilman, Tre Forlano, Brittni 
Milam, Libby Mixon, Cheryl Peterson, and Peter Rumble made key 
contributions to this report.

(450210):

FOOTNOTES

[1] U.S. General Accounting Office, Tax Deductions: Further Estimates 
of Taxpayers Who May Have Overpaid Federal Taxes by Not Itemizing, GAO-
02-509 (Washington, D.C.: Mar. 29, 2002).

[2] U.S. General Accounting Office, Paid Tax Preparers: Most Believe 
They Benefit, but Some Are Poorly Served, GAO-03-610T (Washington, 
D.C.: Apr. 1, 2003).

[3] We are 95 percent confident that the percentage estimates of our 
survey are within +/-5 percentage points or less of what we would have 
obtained if we had surveyed the entire study population.

[4] Low-income tax clinics are organizations that receive a matching 
grant from IRS to represent low-income taxpayers involved in 
controversies with IRS or to provide tax education and outreach to 
taxpayers who speak English as a second language or who have limited 
English proficiency. 

[5] The EIC is a refundable federal income tax credit for low-income 
working individuals and families. The credit reduces the amount of 
federal tax owed and can result in a refund check when the EIC exceeds 
the amount of taxes owed.

[6] National Consumer Law Center/Consumer Federation of America, The 
High Cost of Quick Tax Money: Tax Preparation, 'Instant Refund' Loans, 
and Check Cashing Fees Target the Working Poor (Boston, Mass.: January 
2003).

[7] New York City Council Investigative Division, Tax Preparers: Taking 
Advantage By Not Disclosing (New York, N.Y.: February 2003).

[8] Consumers Union of U.S., Inc., "Tackling Your Taxes," Consumer 
Reports, vol. 62. no. 3 (1997). This percentage represents Consumer 
Reports subscribers who responded to the survey and is not necessarily 
representative of taxpayers in general. 

[9] GAO-02-509.

[10] Treasury Inspector General for Tax Administration, Analysis of 
Statistical Information for Returns With Potentially Unclaimed 
Additional Child Tax Credit (Washington, D.C.: January 2003).

[11] Department of the Treasury, Internal Revenue Service, Compliance 
Estimates for Earned Income Tax Credit Claimed on 1999 Returns 
(Washington, D.C.: Feb. 28, 2002).

[12] Federal regulations, 31 CFR Part 10, published in pamphlet form as 
Treasury Department Circular No. 23, delegate the Treasury Secretary's 
authority over taxpayer representatives to IRS. Circular 230 requires 
an administrative law judge to conduct some disciplinary proceedings.

[13] Internal Revenue Manual, 4.10.6.8.2(1) (Washington, D.C.: May 14, 
1999). 

[14] The 134 preparers indicted are not necessarily the same preparers 
sentenced. Some preparers indicted were not sentenced during the period 
and some of those sentenced may have been indicted in a prior period.

[15] National Taxpayer Advocate, FY 2001 Annual Report to Congress 
(Washington, D.C.: December 2001). 

[16] 15 U.S.C. Sections 41-58.

[17] Based on the RR3 response rate convention defined by the American 
Association of Public Opinion Research (http://www.aapor.org/
default.asp?page=survey_methods/standards_and_best_practices/
standard_definitions).

[18] We are 95 percent confident that the percentage estimates of our 
survey are within +/-5 percentage points or less of what we would have 
obtained if we had surveyed the entire study population. 

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