With the 2016 tax-filing season fast approaching, many Americans are now scrambling to find a trustworthy tax preparer. They want the biggest possible refund without trouble from the Internal Revenue Service.
But consumer advocates caution there are many reasons to be wary when choosing among preparers —given that they work in a largely unregulated field.
“With tax preparers, we see extremely disturbing levels of errors and fraud,” says Chi Chi Wu, an attorney with the National Consumer Law Center, a nonprofit advocacy group.
Every year, consumer advocates and government watchdogs conduct multiple rounds of “mystery shopper testing” to determine if taxpayers are receiving accurate returns from their preparers. And their findings are often shocking.
For example, the Government Accountability Office sent undercover investigators to 19 randomly selected tax preparer offices. Only two produced returns with the correct refund amount.
Inept or dishonest tax preparers who produce erroneous returns can hurt consumers in several ways. Bad returns can shortchange taxpayers on refunds, while returns that claim too many deductions or credits can trigger an IRS audit or worse.
“Errors on tax forms put consumers at risk of fines and lost tax refunds,” says Tom Feltner, director of financial services for the Consumer Federation of America, an umbrella organization representing 250 non-profit consumer organizations.
To make matters worse, consumers are finding it increasingly tough to get their tax questions answered through IRS offices, whose phone lines are often jammed and unable to handle all the incoming calls.
“With budget cuts at the IRS that limit customer service, more and more people will need to consult a paid tax preparer to get help with their taxes. The thought that consumers pay good money for bad advice is appalling,” says Linda Sherry, a director for Consumer Action, a nonprofit focused on financial education.
According to government estimates, paid tax preparers produce more than half the individual returns filed with the IRS each year and an even larger proportion of returns from low-income taxpayers eligible for the Earned Income Tax Credit.
Many taxpayers — including those with complicated circumstances—feel they must turn to paid preparers rather than attempting their own returns or trying to use a software product such as Turbo Tax. Yet many who hire preparers fear their returns will be flawed and think preparers should be more tightly regulated.
A new national poll conducted for the Consumer Federation of America (www.consumerfed.org) found that four out of five consumers believe paid tax preparers should be required to pass a competency test, be licensed by the state and provide a clear, upfront list of fees before completing a return. The poll, which involved interviews with 1011 adults, was conducted by ORC International (www.orcinternational.com).
Here are a few tips for taxpayers seeking paid help:
• Exercise caution when making your pick.
Only four states regulate tax preparers — California, Maryland, New York and Oregon. Because tax preparation often involves large monetary transactions, it’s ripe for fraud.
To steer clear of fraudsters, the IRS provides several common sense steps for consumers on its website (www.irs.gov). Never sign a blank return, always view your return before signing it, and make sure your preparer signs the form with his or her tax preparer identification number (PTIN).
• Consider hiring an “enrolled agent.”
Though few states regulate tax preparers, throughout the U.S., attorneys and certified public accountants are regulated. Also, the IRS tests and licenses a group of tax preparers known as “enrolled agents.” They’re not only trained to prepare returns but are also authorized to represent taxpayers for audits, collections and appeals.
Consumer advocates say choosing an enrolled agent to prepare your return could be a good bet. While their fees aren’t regulated, they must prepare returns correctly or risk losing their license. This is critical because taxpayers are always responsible for what’s on their return—even when someone else prepares it.
To find an enrolled agent in your area, go to the website of the National Association for Enrolled Agents:www.naea.org.
• Agree on a fee before the return is done.
Some tax preparers decline to disclose their fees upfront — which leaves their clients vulnerable to a rate shock after their return is done. Because refusing to disclose fees upfront is a red flag that problems could lie ahead, consumer advocates say you should avoid preparers who hide their fees.
Feltner says you should be especially wary of preparers who base their fee on a percentage of your refund or make claims they can get you a larger refund than rival preparers.
By agreeing on a set fee at the outset, taxpayers reduce their risk of getting hit with hidden fees later. They’re also less likely to be vulnerable to errors by dishonest preparers.
• Realize that a poor choice of preparer could put you at risk for identity theft.
The hazard of identity theft is a key reason to avoid unscrupulous tax preparers, says Ali Mickelson of the Colorado Fiscal Institute, a nonprofit consumer advocacy group.
“You wouldn’t give your Social Security number to your stylist or your bank account information to a hot dog vendor. So it’s a mistake to give this sensitive information to an unregulated tax preparer,” she says.