As I mentioned on Daily Finance, the IRS says that budget restraints are hurting its ability to process taxes. Yes, I know, you're crying a river over a smaller chance that someone might audit your return.
But audits still happen, and as it turns out, many professional tax preparers don't know what they're doing. According to the National Consumer Law Center, when given a secret shopper set of financials by consumer groups and government agencies, many fail to prepare the return correctly. Here are some of the problems that creep up:
- Intentional omission of income;
- Falsifying information to make the taxpayer eligible for various credits and deductions, such as charitable deductions, job-related or business expenses, and the Earned Income Tax Credit (EITC);
- Inability to properly deal with education-related credits and income; Misclassifying filing status; and
- Data entry errors resulting in incorrect refunds.
One example was a small study by the General Accounting Office. Last year, the GAO had people visit 19 randomly-chosen preparers, so this isn't statistically projectable. However, out of the 19, only two came up with the correct refund amount. The other 17 ranged from calculating an amount from $52 less to $3,718 more than it should have been.
Getting more back from the government may not sound like something terrible, unless you get audited or the government questions the calculation. Suddenly there might be the question of fines and interest on an overly large return. If you are self-employed and base quarterly payments on incorrectly calculated taxes, you could have problems going forward. Under tax regulations, it is the taxpayer, not the preparer, who is responsible.
There are federal regulations for many preparers (courts blocked an IRS attempt to institute some), and, according to the NCLC, most states have no requirements for preparers. In fact, in 46 states, according to the organization, hairdressers have more regulatory requirements.
So when you're choosing help on your taxes, be careful. Consider using a CPA or an enrolled agent (EA), which is a category of tax preparers that have passed tests that allow them to represent someone before the IRS. And in any case, double check the claims someone makes--that a CPA's license or EA's credentials are up to date. Better to spend a bit more today and avoid an audit and fines and penalties that could make the preparer's fee look small in comparison.