FILING A CORRECT TAX RETURN – ARE YOU ON YOUR OWN?

Brian Wynne, CPA

In January of this year, two articles appeared in The Washington Post within 2 days of each other that shine a light on the present status of tax collection in this country and help depict a not-so-certain future.

The first, appearing on the front page on January 5, 2010, discusses plans by the Internal Revenue Service (IRS) to regulate people who are paid to prepare tax returns, “stepping into a virtually unregulated business on which millions of American depend for crucial financial services.”  The article describes the range of tax preparation choices, from “fly-by-night operators who can leave taxpayers on their own when the IRS finds fault with their returns” to the national brand-name tax preparation companies like H&R Block and Jackson Hewitt.  The plans to regulate preparers would exempt certified public accountants (CPAs), attorneys and enrolled agents.  CPAs are regulated by individual states, have passed the CPA exam and must fulfill continuing education requirements.  Enrolled agents (EAs) are tax professionals recognized by the IRS as eligible to represent taxpayers before the IRS—they must pass an exam provided by the IRS and must also fulfill continuing education requirements.

Why the focus on regulating preparers?  In a 2006 study by the Government Accountability Office, employees of the GAO went to 19 different return preparers with a fact set.  All 19 preparers made mistakes and only 2 arrived at the correct bottom line.  In a 2008 study, only 11 out of 18 preparers got the bottom line correct.  The IRS says it does not have the data to determine if CPAs perform better than unregulated preparers.

Another point mentioned in the article is the regulation of tax preparation software.  It is estimated almost 100 million returns were completed using tax software.  But the IRS has no ability to control the quality of these software programs to make sure they are producing correct returns.

The second article, appearing two days later, highlights some of the negatives mentioned in the 2009 National Taxpayer Advocate’s Annual Report to Congress.  The article points out the IRS’s stated goal of answering only 71 percent of calls to its toll-free help line in 2010.  The targeted average time spent on hold in 2010?  11 minutes, 38 seconds.  In 2005, 2006 & 2007, hold times averaged about 4 minutes and answer rates were over 80%.  In 2008, answer rates dropped to almost 50% and hold times spiked to 10 minutes.  In 2009, answer rates were at 70% and hold times at almost 9 minutes.  The IRS blames “unusual demand related to federal legislation, the recession and natural disasters such as Hurricane Katrina.”  The National Taxpayer Advocate’s concerns are that many taxpayers find service unacceptable and become frustrated and hang up, or worse yet do not file returns because they can’t get the answers they need.

Finally, in a report issued June 16, 2010, the Electronic Tax Administration and Advisory Committee (a committee formed by the IRS but made up of industry advisors) told Congress and the IRS that the IRS is “ill-suited” to certify tax preparation software for accuracy.  The Committee said that third-party groups should be established to ensure accuracy of tax preparation software.

I hope by now you can see the uncertainty present in the current system.  The IRS is having trouble serving its primary customer, the American taxpayer, and so it sets a goal to answer only 71% of calls from those taxpayers.  It is concerned about the quality of paid (and unpaid) tax preparers, so it proposes another set of regulations to add another piece of cloth to an already patchwork quilt of certifications and 3-letter designations.  It is concerned about the quality of tax software, but unable to do anything about it, except yield to the software makers to certify their own software.  I wonder who will make the cut!

We can only guess at the future of the tax system, but simplification is desperately needed.  The tax code’s last major reform was 24 years ago, and has since grown ever larger as more and more modifications are made.  I believe that there is almost always only one right answer in the tax code to any problem, but the issue is the expertise and the breadth of knowledge needed to arrive at that answer.  We strive at Bond Beebe to use our combined experience to always try to get that correct answer, but the ever-expanding complexity in the tax code does not serve the American taxpayer any better in the meantime.

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