Tax Preparers Make Big Mistakes

Results of GAO Undercover Tax Return Study

Tax Preparers Make Big Mistakes
April 7, 2016

How often would you expect paid tax return preparers to make mistakes in their client's returns? It would be unrealistic to expect 100% compliance — nobody is perfect. However, a 2014 study from the Government Accounting Office (GAO) should give you pause if you seek outside help with your tax submissions.

Using two taxpayer scenarios that represent common tax issues (a "waitress" and a "mechanic" scenario), undercover investigators from the GAO solicited tax returns from nineteen different paid preparers. How many got it right? Only two preparers correctly assessed the refund.

The correct refund amount for the waitress was $3,804, but the calculated refund amounts from the paid preparers ranged from $3,752 to $7,522. The correct refund amount for the mechanic was $2,351, but paid preparers filed refund values from $2,351 to $5,632. In seven of the nineteen cases, the calculated refund was more than $2,600 over the correct value!

In general, paid preparers tend to overstate refunds. That is not a terribly surprising outcome since advertising the highest possible refund is a selling point for many paid tax preparers. Unfortunately, that greater refund could come at the expense of correctly assessing a client's taxes and in some cases, potentially subjecting him or her to liabilities and IRS penalties.

Significant errors include failure to report income outside the W-2 form (for example, unreported cash tips), claiming an ineligible child to earn the Earned Income Tax Credit (EITC), and failing to ask the necessary questions to determine eligibility for the American Opportunity Tax Credit.

GAO personnel are probably not too surprised at the result. An earlier GAO study revealed to Congress in 2006 found errors in every one of the nineteen returns solicited by personnel at commercial tax preparation chains. Sadly, two out of nineteen correct refunds in the most recent survey represents a step in the right direction.

Groups other than the GAO found similar results. The National Consumer Law Center (NCLC) released a report in 2015 summarizing a similar undercover study in North Carolina and Florida using 29 mystery shoppers and 2 typical tax scenarios. In that case, 27 of 29 tax preparers failed to calculate the refunds correctly.

The IRS believes that regulation is the key, and developed a system to regulate paid tax preparers. They have a good point, given that attorneys and CPAs are authorized to prepare tax returns even though they may have no direct experience in tax law, and as of 2014, 55% of paid tax preparers are unenrolled preparers. Only four states require that tax preparers meet minimum competency standards (California, Oregon, Maryland, and New York).

According to IRS Commissioner, John Koskinen, about 80 million taxpayers use paid tax preparers, and studies such as the GAO and NCLC consistently suggest that 10% or less of the returns are completely accurate. Some of these mistakes are not significantly large, and almost all of them are slanted toward a higher refund — but the sheer number of errors shows why the IRS has been trying to acquire the means to regulate tax preparers straightaway. So far, the courts have disallowed IRS regulatory efforts as an overstepping of the IRS' authority, but expect the IRS to keep trying.

The real takeaway from these studies: vet your tax preparer very carefully and look over your tax return thoroughly before you sign it. If you have any questions or feel uneasy about certain deductions and other conclusions, seek a second opinion — because once you sign your tax form, the tax preparer's mistakes become your mistakes.


Photo ©iStock.com/StevenHeap

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Steffanie | 04.08.16 @ 16:01
Wow that's not very comforting. Thinking I should keep a closer eye on our taxes.
Erin | 04.08.16 @ 16:01
Wow, that's pretty shocking. I know mistakes happen, but 90% incorrect? That seems to be outrageous. I guess it really does pay to double and triple check your return.
Carla Truett | 04.08.16 @ 16:02
These statistics scare me. Our tax preparer is very thorough so I am at ease that they know what they are doing.
Beverly | 04.08.16 @ 16:03
Taxes are so confusing I'm surprised anyone can get them right.....even the IRS gets them wrong. I just want my CPA to be honest and do the best he can with the information given. This is why we need a simple tax code.
Stokes | 04.08.16 @ 16:03
This isn't even a little surprising. Our tax system is so convoluted. I can do my taxes 10 times and get 10 different outcomes.
brittany.martinez530 | 04.08.16 @ 16:04
Wow... I never realized just how HIGH the percentage is of people who make mistakes. that's crazy.
Jonathan | 04.08.16 @ 16:04
We've used Turbo Tax the past couple years and have been very satisfied.
Nancy | 04.08.16 @ 16:04
Unfortunately, this doesn't surprise me. So many tax preparers are minimally trained and work is temporary for them. Add to it the constantly changing tax codes and it's a climate for mistakes.
Alec | 04.08.16 @ 16:04
If I'm paying for somebody to prep my taxes, I expect them to do it right. This makes me nervous to ever trust the estimates given out by these tax prep people ever again.
Kailie | 04.08.16 @ 16:05
Oh wow! 90% is a bit insane when it comes to making mistakes on taxes. I knew it happened but wow!
Carla Truett | 04.08.16 @ 16:07
I can see how mistakes can be made when a person prepares so many forms a day. Although I'm confident with our tax guy, I will be a bit more nervous now that I've read the statistics.
$commenter.renderDisplayableName() | 12.09.16 @ 13:58
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