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Report - Poor performance often tolerated by IRS

Wednesday, November 12, 2003

WASHINGTON -- The IRS has ordered $2.4 million in penalties against tax preparers in the past two years but has collected only $291,000, raising questions about toleration of poor performance, congressional auditors say.

Less than half the penalized preparers paid any fine, and the total collected was just 12 percent of the amount due, according to investigators from the General Accounting Office.

Tax officials told the auditors "they cannot afford to make these low-dollar paid-preparer cases a priority given their responsibility for addressing billions of dollars in uncollected taxes."

However, leaders of the tax-writing Senate Finance Committee said the GAO findings to be released later this week demonstrate that the Internal Revenue Service needs to reorder its priorities now that more than half the people filing tax returns use paid preparers.

"Clearly people benefit from paid preparers, but there are some bad apples in the bunch. The IRS and Congress need to do more to make sure the bad apples are tossed out of the basket," said the panel's chairman, Sen. Charles Grassley, R-Iowa.

In 2001 more than 72 million taxpayers used paid preparers. If even a small percentage of them get bad advice, millions may be ill-served, the congressional auditors said.

Collecting so little of the fines levied by the government sends "a mixed message about whether poor performance by preparers will be tolerated," their report said.

Last January the IRS reorganized what is now its Office of Professional Responsibility, doubled its staff and started work on a "national return preparer strategy." But agency officials told the auditors the office still has limited resources.

"The IRS needs to put some teeth into the Office of Professional Responsibility," said Montana Sen. Max Baucus, the senior Democrat on the Senate Committee. "It's time that we not only talk the talk, but walk the walk when it comes to tax compliance,"

Les Shapiro, a former head of the old IRS Office of Director of Practice, which used to oversee tax professionals, said bad advice can come in two forms. Some tax professionals make errors or use outdated laws when preparing returns, causing taxpayers to pay too much or too little and risk an IRS exam.

Worse, Shapiro said, are those he calls "card-table jockeys." Those tax preparers have little or no training in tax law and set up operations during the height of the filing season to profit from tax return preparation. They sometimes flout the law to secure a bigger tax return, and then disappear after April 15. If the IRS contests the return, the preparer may be impossible to find.

National Taxpayer Advocate Nina Olson, who helps taxpayers with difficult problems navigate the IRS, said the agency needs to change the way it deals with unscrupulous preparers. For example, while the IRS can fine a preparer for each illegally prepared return, it regularly limits those fines.

"That's ridiculous," she said.

Questionable tax preparation operations have proliferated since the IRS started a campaign to encourage tax preparers to file returns electronically, Olson said.

With very little tax training, a business can prepare tax returns, file them electronically and market the service to customers with incentives to use tax refunds to buy furniture, purchase electronics or put a down-payment on a car. The merchandise is often purchased with a "refund anticipation loan," an immediate loan for part of an expected refund that often comes at high costs.

Olson and others have proposed requiring tax preparers to register and take regular courses in tax law -- things she said most upstanding preparers do anyway. The IRS would certify preparers, giving consumers some assurance they know the basics of tax law.

Grassley said he is considering legislation that would require tax preparers to register with the IRS and help low-income taxpayers set up bank accounts to receive their tax refunds.

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