United States Government Accountability Office

GAO Testimony 

Before the Committee on Finance, 

U.S. Senate

PAID TAX RETURN 

PREPARERS 

In a Limited Study, Chain 

Preparers Made Serious 

Errors 

Statement of Michael Brostek, Director 

Strategic Issues 

For Release on Delivery

Expected at 10:00 a.m. EDT 

Tuesday, April 4, 2006

 

GAO-06-563T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

April 4, 2006

PAID TAX RETURN PREPARERS

In a Limited Study, Chain Preparers Made 

Highlights of GAO-06-563T, a statement Serious Errors 

before the Committee on Finance, U.S. 

Senate 

Despite the importance of paid tax 

return preparers in helping

taxpayers fulfill their obligations, 

little data exist on the quality of 

services they provide. Paid 

preparers include, for example, 

enrolled agents, who are approved 

by the Internal Revenue Service 

(IRS) once they pass an 

examination on tax matters or 

demonstrate past IRS employment

experience, and unenrolled 

preparers, who include selfemployed individuals and people 

employed by commercial tax 

preparation chains. 

GAO was asked to determine 

(1) what the characteristics were of 

tax returns done by paid preparers, 

(2) what government regulation 

exists for paid preparers, and 

(3) what specific issues taxpayers 

might encounter in using paid 

preparers. To do its work, GAO

analyzed IRS data, reviewed paid

preparer regulatory requirements, 

and had tax returns prepared at 19

outlets of several tax preparation 

chains. 

What GAO Recommends

GAO recommends that the 

Commissioner of Internal Revenue 

conduct necessary research to

determine the extent to which paid

preparers live up to their 

responsibility to file accurate and 

complete tax returns based on 

information they obtain from their 

customers. 

Many taxpayers choose to pay others to prepare their tax returns rather than 

prepare their own returns. According to the most recent reliable data, about 

56 percent of all the individual tax returns filed for tax year 2002 used a paid 

preparer, with higher paid preparer usage among taxpayers with more 

complicated returns such as those claiming the earned income credit (EIC). 

All paid preparers are subject to some IRS regulations and may be penalized 

if they fail to follow them. For example, all paid preparers must identify 

themselves on the returns they prepare and must not deliberately understate 

a taxpayer’s tax liability. When the EIC is involved, paid preparers must also

ask specific questions to determine a taxpayer’s eligibility for the credit. 

In GAO visits to commercial preparers, paid preparers often prepared 

returns that were incorrect, with tax consequences that were sometimes 

significant. Their work resulted in unwarranted extra refunds of up to 

almost $2,000 in 5 instances, while in 2 cases they cost the taxpayer over 

$1,500. Some of the most serious problems involved preparers 

• not reporting business income in 10 of 19 cases; 

• not asking about where a child lived or ignoring GAO’s answer to the 

question and, therefore, claiming an ineligible child for the EIC in 5 

out of the 10 applicable cases; 

• failing to take the most advantageous postsecondary education tax 

benefit in 3 out of the 9 applicable cases; and 

• failing to itemize deductions at all or failing to claim all available 

deductions in 7 out of the 9 applicable cases. 

GAO discussed these findings with IRS and referred to it problems that were 

found. Had these problems been discovered by IRS on real returns, IRS 

officials said that many of the preparers would have been subject to 

penalties for such things as negligence and willful or reckless disregard of 

tax rules. 

Refund Amounts over or under Correct Amount in 19 Cases 

-2,000

-1,600

-1,200

-800

-400

0

400

800

1,200

1,600

$2,000

Refund error

Source: GAO.

Unique locations

0 0

www.gao.gov/cgi-bin/getrpt?GAO-06-563T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Michael 

Brostek at (202) 512-9110 or 

brostekm@gao.gov. 
Mr. Chairman and Members of the Committee: 

I appreciate the opportunity to testify on the services offered by paid tax 

return preparers. Every year tens of millions of taxpayers pay someone to 

prepare their tax returns. According to Internal Revenue Service (IRS) 

officials, several hundred thousand certified public accountants (CPA) and 

attorneys were authorized to practice before it as of March 2006, and there 

were about 41,000 active enrolled agents. Enrolled agents are approved by 

IRS once the agents pass an examination on tax matters or demonstrate 

past IRS employment experience. In 2003, the National Taxpayer Advocate 

said the number of unenrolled preparers—those not enrolled with IRS—

ranged from 300,000 to 600,000. On the basis of scanning major 

preparation company Web sites, we know the major preparation 

companies have thousands of offices nationwide. Despite the importance 

of paid tax return preparers in helping taxpayers fulfill their obligations, 

little data exist on the quality of services they provide. 

In most states, anyone can be a paid preparer regardless of education, 

training, or licensure. However, there are different types of preparers. Paid

preparers who hold professional certification include CPAs and attorneys. 

CPAs and attorneys are licensed through state agencies, although 

licensure is not focused on their role as tax preparers. CPAs, attorneys, 

and enrolled agents are referred to collectively as practitioners. Other 

preparers are called unenrolled preparers. This population of preparers is 

very diverse, ranging from many of the individuals employed by 

commercial tax preparation companies to those who are self-employed. 

Some have extensive training and experience and others do not. 

In 2003, we reported to this Committee that while many taxpayers who 

used paid preparers believed they benefited from doing so, some were 

poorly served. We said that the available evidence did not allow a precise 

estimate of the percentage of taxpayers affected, but none of it suggested 

that the percentage was large. We reported that preparer mistakes can 

cause taxpayers to over- or underpay their taxes, and that taxpayers may 

pay for certain services, such as short-term loans called Refund

Anticipation Loans (RAL), without understanding their costs and benefits.

1

In an April 2003 hearing of this Committee, we testified that taxpayers can

 1

GAO, Tax Administration: Most Taxpayers Believe They Benefit from Paid Tax 

Preparers, but Oversight for IRS Is a Challenge, GAO-04-70 (Washington, D.C.: Oct. 31, 

2003). 

Page 1 GAO-06-563T 
take common sense steps when choosing or working with a paid preparer, 

such as: 

• when searching for a preparer, obtain recommendations from people you 

trust; 

• check out your preparer’s qualifications; 

• make sure you understand the services you will be getting, how much they 

cost, and how they will benefit you; 

• make sure your preparer understands your personal circumstances and

reviews your official tax documents; and 

• review your completed return before you sign it.2

Although taxpayers should take these common sense steps, IRS also notes 

on its Web site under “Tips for Choosing a Tax Preparer” that no matter 

who prepares a tax return, the taxpayer is legally responsible for all of the 

information on that tax return. 

My statement today is based on recent work we have done at the request 

of the Committee. Our objectives were to determine (1) what the 

characteristics were of tax returns done by paid preparers, (2) what 

government regulation exists for paid tax return preparers, and (3) what 

specific issues taxpayers might encounter in using paid preparers. 

In preparing this statement, we did the following work: 

• We analyzed IRS’s Statistics of Income (SOI) individual taxpayer database 

for tax year 2002, the most recent reliable data available, to determine the

 2

GAO, Paid Tax Preparers: Most Taxpayers Believe They Benefit, but Some Are Poorly 

Served, GAO-03-610T (Washington, D.C.: Apr. 1, 2003). 

Page 2 GAO-06-563T 
income levels of users of paid preparers and characteristics of the tax 

returns that these users filed.3

• We reviewed laws, regulations, and other guidance and interviewed IRS 

officials to determine regulatory requirements that apply to different types 

of paid preparers. 

• We had tax returns prepared for us at 19 outlets of several commercial 

chain preparers scattered throughout a major metropolitan area. We chose 

a large metropolitan area in which several chain preparers were 

represented so that we could do our investigation in different sections of 

the area. Our staff posed as taxpayers and asked the paid preparers to 

prepare, but allow us to file, our federal tax returns under two scenarios. 

In one scenario, a plumber and his wife, with one of their children in 

college, derived almost all of their income from his job, some work on the 

side, and a mutual fund. They had enough deductions of various kinds to 

make it advantageous for them to itemize tax deductions using Schedule 

A. We had 9 returns prepared for this scenario. In the second scenario, a 

low-income single mother was a retail sales worker who had side income 

from babysitting. She had one child who lived with her and one who did 

not. We had 10 returns prepared for this scenario. In general, we used each 

scenario twice when visiting individual chain preparers but at different 

outlets. Our 19 site visits cannot be used to generalize our findings to the 

retail tax preparation community. We did not visit any law firms, CPA 

firms, or single-office tax return preparation businesses. 

To arrive at correct returns for the two scenarios, our staff and staff from 

the Senate Committee on Finance and the Joint Committee on Taxation 

(JCT) completed the tax returns and agreed on (1) what should and should 

 3

As part of this and other work we have done, we tested this SOI database by comparing 

record counts and selected totals in the files provided to us by IRS to published amounts,

finding that the required data elements were sufficiently reliable for the purposes of our 

work. We used the 2002 database rather than the 2003 database that was the most recent 

available because IRS officials told us that some 2003 preparer information had been 

miscoded and would not be fixed until after we needed the information. Because the SOI 

individual file and the National Research Program files to be discussed later are created 

following a probability procedure based on random selections, each sample is only one of a

large number of samples that might have been drawn. Since each sample could have

provided different estimates, we express our confidence in the precision of our particular

sample’s results as a 95 percent confidence interval (e.g., plus or minus 5 percentage 

points). This is the interval that would contain the actual population value for 95 percent of 

the samples that could have been drawn. As a result, we are 95 percent confident that each 

of the confidence intervals in this statement will include the true values in the study

population. 

Page 3 GAO-06-563T 
not be reported on the returns and (2) the correct refund amount for each 

scenario. For each of the 19 visits, we then compared the tax returns 

produced with the consensus mock returns. In doing its mock returns, JCT 

noted that it relied on the facts we provided and discussions in which we 

participated. JCT cautioned that a paid preparer might reach a reasonable

conclusion different from JCT’s on certain issues or on the basis of actual 

questions asked or answers given during a site visit. To minimize any 

potential for preparers to have legitimately different results from our 

returns, we trained our staff to answer preparers’ questions consistently 

with the facts we used in preparing our mock returns. Although we are 

defining the mock returns as correct, we recognize that the final 

determination of the accuracy of a return is subject to IRS and court 

interpretation. 

• We analyzed IRS’s National Research Program (NRP) database to compare 

the compliance found on returns that used paid preparers and returns that 

did not.4

We did our work in February and March 2006 in accordance with generally 

accepted government auditing standards and the quality standards for 

investigations as set forth by the President’s Council on Integrity and 

Efficiency. 

My statement today will make the following points: 

• Many taxpayers choose to pay others to prepare their tax returns rather 

than prepare their own returns. About 56 percent of about 130 million 

individual tax returns filed for tax year 2002 used a paid preparer, with 

higher paid preparer usage among taxpayers with more complicated 

returns, that is, those using the Form 1040 as opposed to the Form 1040EZ, 

those claiming itemized deductions and not the standard deduction, and

those claiming the earned income credit (EIC). 

• All paid preparers are subject to some IRS regulations and may be 

penalized if they fail to follow them. For example, all paid preparers must 

identify themselves on the returns they prepare and must not deliberately 

 4

NRP is a detailed IRS study of taxpayer compliance for tax year 2001. As part of other 

work we have done or are doing, we tested the NRP database by interviewing 

knowledgeable agency officials, finding that the required data elements were sufficiently 

reliable for the purposes of our work. See the earlier footnote on the SOI file for a 

discussion of NRP confidence intervals. 

Page 4 GAO-06-563T 
understate a taxpayer’s tax liability. When the EIC is involved, paid 

preparers must also ask specific questions to determine a taxpayer’s 

eligibility for the credit. Lawyers, certified public accountants, and certain

tax professionals are also subject to additional requirements. 

• In our site visits, paid preparers often prepared returns that were 

incorrect, with tax consequences that were sometimes significant. Their 

work resulted in unwarranted extra refunds of up to almost $2,000 in 5 

instances, while in 2 cases they cost the taxpayer over $1,500. Some of the

most serious problems involved preparers 

• not reporting side income in 10 of 19 cases; 

• not asking about where a child lived or ignoring our answer to the 

question and claiming an ineligible child for the EIC in 5 out of the 10

applicable cases; 

• failing to take the most advantageous postsecondary education tax 

benefit in 3 out of the 9 applicable cases; and 

• failing to itemize deductions at all or failing to claim all available 

deductions in 7 out of the 9 applicable cases. 

We discussed these issues with IRS. Had these problems been discovered 

by IRS on real returns, IRS officials said that many of the preparers would 

have been subject to penalties for such things as negligence and willful or 

reckless disregard of tax rules. We have referred matters we encountered

to IRS so that any appropriate follow-up actions can be taken. 

As shown in table 1, according to SOI data, somewhat over half of the 

approximately 130 million individual tax returns filed for tax year 2002 

were done by a paid preparer. This filing breakdown was true for all 

income levels we analyzed, although the income level exceeding $100,000 

had the highest percentage—64 percent.5

 As not all paid preparers provide 

preparer information on returns they prepare, the percentages of returns 

that actually were prepared by another person for pay is probably 

somewhat higher. 

More than Half of 

Taxpayers Used a 

Paid Preparer, but 

Use Varied by Tax 

Return Complexity 

and Often Involved 

Larger Refunds 

 5

All percentage estimates from the SOI files have margins of error of plus or minus 5 

percentage points or less, unless otherwise noted. All numerical estimates other than 

percentages have margins of error of plus or minus 5 percent or less of the value of those 

numerical estimates, unless otherwise noted. 

Page 5 GAO-06-563T 
Table 1: Estimated Percentage of Individual Taxpayers’ Returns Prepared by a Paid

Preparer for Tax Year 2002, by Adjusted Gross Income Level 

Adjusted gross income level Estimate (percent)

$0–20,000 53

 20,001–40,000 56 

 40,001–60,000 57

 60,001–80,000 58

 80,001–100,000 55

Over 100,000 64

All adjusted gross income levels 56

Source: GAO analysis of IRS SOI data. 

As table 2 shows, this consistency of use did not hold for other groupings 

of individual tax returns prepared by paid preparers. Use of paid preparers 

differed among different types of returns, taxpayers of different filing 

statuses, filers taking different types of deductions, and claimants and 

nonclaimants of the earned income tax credit. According to the 

breakdown in table 2, one-third of taxpayers filing the simplest individual

tax form—the Form 1040EZ—used a paid preparer for tax year 2002, and

two-thirds of a low-income working group—those claiming the EIC—paid 

someone to prepare their tax returns. 

Page 6 GAO-06-563T 
Table 2: Estimated Percentage of Individual Taxpayers Using a Paid Preparer for 

Tax Year 2002, by Various Groupings 

Grouping and subgrouping Estimate (percent)

Type of return 

Form 1040EZ 33

Form 1040A 50

Form 1040 64

Filing status 

Single 48

Married filing jointly 61

Head of household 65

Type of deductions 

Itemized 62

Standard 52

Earned income credit 

Claimed 67

Not claimed 54

Source: GAO analysis of IRS SOI data. 

Table 3 shows that whether taxpayers prepared their own returns or paid 

a preparer, their tax returns showed a median of hundreds of dollars in tax 

refunds for tax year 2002.6

 However, overall and at the four lowest income 

categories, those using paid preparers had a higher median at statistically 

significant levels. 

Table 3: Estimated Median Tax Year 2002 Refunds on Returns Filed by Individual

Taxpayers Using Paid Preparers and Those Preparing Their Own Returns 

Income level Using a paid preparer Preparing own return

$0–20,000 $751 $365

20,001–40,000 1,324 846

40,001–60,000 1,436 1,224

60,001–80,000 1,611 1,359

All adjusted gross income groups 1,118 674

Source: GAO analysis of IRS SOI data. 

 6

The median is the middle value in a distribution, with an equal number of values above it

and below it. 

Page 7 GAO-06-563T 
At the $0–20,000 income level, a major part of the reason why refunds are 

so different for those who used paid preparers versus those who prepared 

their own returns appears to be the EIC. As table 4 shows, those who 

claimed the EIC and used a paid preparer had tax returns showing a 

median more than $900 higher in refunds than those who claimed the EIC 

and prepared their own returns. 

Table 4: Estimated Median Tax Year 2002 Refunds on Returns Filed by Low-income

Individual Taxpayers Using Paid Preparers and Those Preparing Their Own

Returns, by Whether They Claimed the EIC 

Taxpayer category Using a paid preparer Preparing own return

All taxpayers $751 $365

Taxpayers claiming the EIC 2,675 1,754a

Taxpayers not claiming the EIC 367 273

Source: GAO analysis of IRS SOI data. 

a

The 95 percent confidence interval surrounding this estimate ranges from $1,596 to $1,944. 

Different types of paid preparers are governed by different regulations. All 

are subject to Internal Revenue Code (IRC) penalties, and all paid 

preparers who choose to file electronically are subject to IRS Electronic 

Return Originator (ERO) rules. However, only paid preparers who choose 

to represent taxpayers before IRS are governed by IRS Circular No. 230 

regulations.7

 In addition, California and Oregon have their own regulations 

that apply to all paid preparers. Table 5 summarizes how different types of 

paid preparers are covered by different regulations. 

Regulation of Tax 

Preparers Varies by 

Type of Preparer 

 7

Department of the Treasury, Circular No. 230, Regulations Governing the Practice of

Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, and

Appraisers before the Internal Revenue Service (Washington, D.C.: June 20, 2005). 

Page 8 GAO-06-563T 
Table 5: Summary of Paid Preparer Regulation

Preparers covered

Regulation Practitioners

Unenrolled

preparers Description of regulation

IRC 

penalties 

X X Address such areas as fraud, 

negligence, due diligence, and 

unauthorized disclosure 

ERO rules X X Apply to all entities in IRS’s e-file 

program and their principals and 

responsible officials and include 

application requirements and rules for 

participating in electronic filing

Circular 230 X Applies to CPAs, attorneys, and enrolled 

agents and governs duties and 

restrictions, sanctions, and disciplinary 

proceedings 

State 

regulations 

X Contain licensing and usually continuing 

education requirements for CPAs and 

attorneys with only California and Oregon 

having these requirements for unenrolled 

tax preparers 

Source: GAO.

All paid preparers are subject to IRC penalties and the regulations that 

implement them. According to the Internal Revenue Manual, penalties are 

IRS’s key tools against noncompliant preparers. Table 6 lists civil penalties 

that apply specifically to preparers and some of the criminal penalties 

(sections 7206, 7207, and 7216) that apply to paid preparers. 

Table 6: Internal Revenue Code Penalties 

Some Regulations Apply to 

All Paid Preparers 

Code section Description Penalty 

6694(a) Understatement of taxpayer’s liability due to an 

unrealistic position 

$250 per return

6694(b) Understatement of taxpayer’s liability due to 

willful or reckless conduct 

$1,000 per return 

6695(a) Failure to provide copy of return to taxpayer $50 per failure

6695(b) Failure to sign return $50 per failure

6695(c) Failure to furnish identifying number $50 per failure

6695(d) Failure to retain a copy or list of returns filed $50 per failure

6695(e) Failure of employers to file correct information

on each tax preparer employed 

$50 per failure

Page 9 GAO-06-563T 
Code section Description Penalty 

6695(f) Negotiation of taxpayer’s refund check $500 per check 

6695(g) Failure to be diligent in determining earned 

income tax credit eligibility 

$100 per failure 

6701 Aiding and abetting understatement of tax 

liability 

$1,000 

6713 Improper disclosure or use of return information $250 per disclosure, up 

to a maximum of 

$10,000 

7206 Willful preparation of a false or fraudulent return 

or other document 

Up to $100,000, 3 

years imprisonment, or 

both 

7207 Knowingly providing fraudulent returns or other 

documents to IRS 

Up to $10,000, 1 year 

imprisonment, or both 

7216 Knowingly or recklessly disclosing or using 

return information 

Up to $1,000, 1 year 

imprisonment, or both 

7407 Authority to enjoin income tax preparers 

Source: Internal Revenue Code. 

Some civil penalties for preparers who engage in improper conduct are 

found in IRC sections 6694 and 6701. These include a $1,000 per return 

penalty if the understatement of the taxpayer’s liability was due to the 

preparer’s willful attempt to understate liability or reckless or intentional 

disregard for the rules. They also include a $1,000 penalty on preparers 

who help taxpayers understate their liability. In addition, they include a 

$250 per return penalty if the preparer knew or reasonably should have 

known that the understatement of a taxpayer’s liability was due to a 

position that had no realistic possibility of being sustained. 

IRC section 6695 contains many identification penalties that apply to 

preparers. For instance, a preparer must sign the return after it is 

completed but before the taxpayer signs it and provide the taxpayer a

copy of the return. The preparer must also put his or her social security 

number or other number issued by IRS on the return. The penalty for 

failing to meet these requirements is $50 per failure but cannot annually 

exceed $25,000 per person for each type of failure. Most penalties in this 

section are not to be assessed if the preparer shows that the violation was 

due to reasonable cause or not due to willful neglect. All penalties in this 

section can be assessed in conjunction with other penalties. 

IRC section 6695 includes requirements specific to the EIC. It requires paid

preparers to take certain actions in determining the taxpayer’s eligibility 

for the EIC and the amount of EIC claimed. For instance, preparers are 

Page 10 GAO-06-563T 
required to complete an eligibility checklist to determine if a child is a 

“qualifying child” by meeting residency, age, and relationship 

requirements. Of particular importance in our investigation, a qualifying 

child must have lived with the taxpayer for over half of the year. 

Preparers are also subject to criminal sanctions arising from improper 

conduct. Civil and criminal penalties can be imposed for the same 

violation. Preparers who help taxpayers prepare false or fraudulent 

returns may be liable and could receive a prison term and a fine of up to 

$100,000. 

Other penalties, both civil and criminal, protect taxpayers from paid 

preparers improperly disclosing the information they provide for their tax 

return. Section 6713 imposes a civil penalty on preparers who improperly 

use or disclose taxpayer information. Section 7216 imposes a criminal 

penalty on preparers who knowingly or recklessly disclose or use return 

information. 

IRS’s Small Business/Self Employed Division has responsibility for 

assessing and collecting monetary penalties against any paid preparers 

who do not comply with civil tax laws when filing returns. Under section 

7407, IRS may also bring a civil action in District Court to seek an 

injunction prohibiting preparers from preparing taxes. IRS’s Criminal 

Investigation Division investigates paid preparers suspected of violating

criminal tax laws. In fiscal year 2005, Criminal Investigation conducted 248 

investigations under its Return Preparer Program, with 140 of these 

resulting in recommended prosecutions. 

Some IRS rules and regulations apply only to paid preparers in certain 

circumstances. For example, ERO rules apply to preparers who are 

EROs—entities that IRS has approved to file electronic returns. EROs may 

or may not be preparers. ERO rules also apply to ERO principals and 

responsible officials. Circular 230 regulations apply to enrolled agents, 

attorneys, and CPAs. 

IRS has broad authority to monitor and sanction any paid preparer who is 

authorized to file tax returns electronically. To participate in the IRS e-file

program, applicants must pass an IRS suitability check that may include a 

background check, a credit history check, a tax compliance check, and a 

check for prior e-file noncompliance. An IRS official told us that although

some EROs do not provide preparation services, most do. 

Additional Regulations 

Apply Only to Some Paid 

Preparers

Page 11 GAO-06-563T 
IRS monitors EROs to ensure compliance with revenue procedures and 

publications that govern IRS’s e-file program. For instance, according to 

an IRS official, IRS continues to see if program participants are suitable to

participate. It also suggests that EROs verify the identity and taxpayer 

identification number of taxpayers to protect the e-file program from fraud 

and abuse. Violation of provisions in either a revenue procedure or an IRS 

publication could lead to sanctions. IRS sanctions range from a letter of 

reprimand for a relatively minor infraction to expulsion from the e-file 

program for more severe infractions. According to IRS, in 2005 it 

conducted 1,104 monitoring visits for the e-file program resulting in 322 

sanctions or proposed sanctions. 

Circular 230 imposes standards on enrolled agents, attorneys, and CPAs. 

According to the Circular, in general, only practitioners may represent 

taxpayers before IRS; however, unenrolled preparers may represent 

taxpayers in certain situations.8

 An attorney or CPA may represent 

taxpayers before IRS by filing a written declaration with IRS that he or she 

is licensed as either an attorney or a CPA. Under Circular 230, tax 

preparers who are not attorneys or CPAs but who wish to have the 

unrestricted privilege of representing taxpayers must be approved as 

enrolled agents with IRS. Enrolled agent applicants must either pass an 

examination on tax matters or have past IRS employment experience.

They are also required to meet continuing education requirements. 

Circular 230 describes the standards of conduct that practitioners must 

follow to maintain the right to represent taxpayers before IRS. There are 

generally three categories of misconduct covered under Circular 230: (1) 

misconduct while representing a taxpayer, (2) misconduct while preparing 

a taxpayer’s return, and (3) misconduct not directly involving IRS 

representation. In terms of the second category—tax preparation—one 

standard is the realistic possibility standard. This standard restricts 

practitioners from signing tax returns if the position does not have a 

realistic possibility of being sustained by IRS. In addition, practitioners are 

required to advise taxpayers of any noncompliance issue or omission from

tax returns submitted to IRS, advise taxpayers of the consequences of this

noncompliance or omission, and exercise due diligence to ensure 

 8

Unenrolled preparers may only represent those taxpayers before IRS whose returns they

prepared and only during examination of the return. When unenrolled preparers represent

taxpayers before IRS, they are governed by IRS Revenue Procedure 81-38, which contains 

standards of conduct similar to those in Circular 230, including the need for due diligence 

in preparing tax returns. 

Page 12 GAO-06-563T 
accuracy in preparing tax returns. Practitioners are also prohibited from 

charging contingent fees, that is, fees based on whether the return will 

avoid challenge from IRS, for some services including preparation of an 

original tax return. Finally, practitioners are prohibited from making 

fraudulent, coercive, or deceptive advertising statements. 

IRS’s Office of Professional Responsibility (OPR) administers the rules set

forth in Circular 230. OPR may censure, suspend, or disbar any 

practitioner from practice before IRS if the practitioner violates any 

Circular 230 regulation, is shown to be incompetent or disreputable, or 

misleads or threatens a client with intent to defraud. OPR receives 

complaints from taxpayers and IRS employees regarding tax preparers. 

The American Jobs Creation Act of 20049

 added the authority to impose a 

monetary penalty on a practitioner who violates Circular 230, and an 

employer or firm if it knew, or should have known, of the misconduct. The 

act also added violations of Circular 230 to the list of misconduct that can

lead to an injunction. In fiscal year 2005, OPR investigated 719 

practitioners, resulting in 320 sanctions. 

In the section on diligence as to accuracy in Circular 230, a practitioner 

will have been “presumed to have exercised due diligence for purposes of 

this section if the practitioner relies on the work product of another 

person and the practitioner used reasonable care in engaging, supervising,

training, and evaluating the person, taking proper account of the nature of

the relationship between the practitioner and the person.”10 According to 

an IRS official, “another person” includes an unenrolled preparer, and 

enrolled agents are responsible for ensuring that unenrolled preparers 

working for them do high quality work. According to the official, if there 

were a problem with an unenrolled preparer’s work, IRS could take action

against the employing enrolled agent.

11

Although all states have licensing requirements for CPAs and attorneys, 

only two states have licensing requirements for unenrolled preparers. 

California and Oregon both require unenrolled paid preparers to register 

State Regulation of Paid 

Preparers Focuses on 

Licensed Practitioners 

 9

Pub. Law No. 108-357, Oct. 22, 2004. 

10Circular No. 230. 

11In our 19 site visits that will be described later, we do not know if any of the paid 

preparers we saw were enrolled agents or working for enrolled agents. 

Page 13 GAO-06-563T 
with state agencies and meet continuing education requirements. 

California requires that paid preparers pass a 60-hour approved course and 

obtain a tax preparer bond to become registered. California also requires 

20 hours of continuing education annually. In Oregon, tax preparers must 

be at least 18 years old, have a high school degree or equivalent, complete

80 hours of income tax law education, and pass a tax preparer 

examination. Oregon also requires 30 hours of continuing education 

annually. While Oregon requires enrolled agents to register, enrolled 

agents must meet far fewer registration requirements than unenrolled 

preparers must. 

In addition to state licensing requirements, tax practitioners often belong 

to professional organizations such as the American Institute of Certified 

Public Accountants, the American Bar Association, or the National 

Association of Enrolled Agents. These organizations impose general 

standards of conduct on the actions of their members, including those 

who prepare tax returns. 

Taxpayers relying on paid preparers to provide them with accurate, 

complete, and fully compliant tax returns may not get what they pay for. 

Tax returns prepared for us in the course of our investigation often varied

widely from what we determined the returns should and should not 

include, sometimes with significant consequences. Many of the problems 

we identified put preparers, taxpayers, or both at risk of IRS enforcement 

actions. The National Research Program’s review of 2001 tax returns also 

found many errors on returns prepared by paid preparers, and some of 

those errors were more frequent on paid prepared returns than on selfprepared returns. 

All 19 of our visits to tax return preparers affiliated with chains showed 

problems. Nearly all of the returns prepared for us were incorrect to some 

degree, and several of the preparers gave us very bad tax advice, 

particularly when it came to reporting non-W-2 business income. Only 2 of

19 tax returns showed the correct refund amount, and in both of those 

visits the paid preparer made mistakes that did not affect the final refund 

amount. While some errors had fairly small tax consequences, others had 

very large consequences. Incorrectly reported refunds ranged from 

refunds overclaimed by nearly $2,000 to underclaims of over $1,700. 

Figures 1 and 2 below show how the tax return preparers we visited 

completed key lines on the 1040 form, and explanations of some of these 

Taxpayers Using Paid 

Preparers May 

Receive Incorrectly 

Completed Tax 

Returns 

All of the Tax Return 

Preparer Visits We

Conducted Produced 

Errors, Some with 

Substantial Consequences 

Page 14 GAO-06-563T 
lines follow the figures. Also, appendix I has descriptions of selected visits 

we made to paid preparers, describing two example visits with fewer 

issues and two with serious compliance problems. 

Page 15 GAO-06-563T 
Figure 1: Summary of How Paid Preparers Completed Selected Lines on the IRS Form 1040 (page 1) 

Page 16 GAO-06-563T 
Figure 2: Summary of How Paid Preparers Completed Selected Lines on the IRS Form 1040 (page 2) 

Identifying information. Taxpayer names and social security numbers 

were correctly entered on all but one of our returns, with one preparer 

Page 17 GAO-06-563T 
entering a wrong middle initial. Some preparers asked for this information 

orally, and some asked us to complete information worksheets. 

Filing status. All of our prepared tax returns showed the correct filing 

status for the two different scenarios we used. The plumber’s return 

always correctly indicated married filing jointly, and the sales worker’s 

return always indicated her filing status as head of household.

Exemptions. Exemption information entered on the returns prepared for 

us included some mistakes. All 9 of the plumber’s returns listed the correct 

number of exemptions. However, the plumber’s daughter was listed with a 

different last name on 1 return. Also, both of the plumber’s children were 

listed with first and middle names on another return, despite the 1040 form

clearly calling for dependents’ first and last names. 

Of the 10 sales worker returns prepared for us, 7 incorrectly indicated 

both children lived with the taxpayer in 2005. When asked where her 

children lived, our staff always said that one lived with her and the other

with the child’s grandmother throughout 2005. However, this question was 

not always asked. In general, incorrectly reporting the number of 

dependent children may have implications for other lines on a tax return, 

specifically the dollar amount of personal exemptions on line 42, the child 

tax credit reported on line 52, and the additional child tax credit on Form 

8812 and line 68. 

Wages and investment income. Most income documented by third-party 

reporting forms (Forms W-2 or 1099) was included on our returns 

correctly, but not in every case. Wages shown on forms W-2 were correctly 

listed on line 7 (see fig. 1) of all 19 of the tax returns prepared for us in our 

investigation. Similarly, tax-exempt interest (line 8a) and qualified 

dividends (line 9b) were listed on a Form 1099 from a mutual fund and 

were entered correctly on all 9 of the plumber’s returns. However, the

same Form 1099 included ordinary dividends, but 1 preparer entered the 

wrong amount on line 9a. Also, the mutual fund Form 1099 listed capital 

gains, but 2 returns did not include capital gains income on line 13. 

State tax refunds. State tax refunds were also shown on Forms 1099 

given to the paid preparers we visited, but 8 out of 19 preparers handled 

Page 18 GAO-06-563T 
them incorrectly.12 In the plumber scenario, the state tax refund should 

have been reported as income (line 10) on this year’s return, but this was 

not done on 5 of the 9 returns prepared for him. The sales worker did not 

itemize deductions for 2004, so her state tax refund was not supposed to 

be reported as income this time. However, 2 of 10 preparers included her 

state tax refund on line 10, and a third preparer listed the state tax refund

amount from the state Form 1099 as unemployment compensation on line 

19. 

Business income. Reporting “side income”—income from casual selfemployment arrangements—was very problematic in many of our visits to 

paid preparers. Both of our taxpayer scenarios included self-employment 

income, and we told the preparer that we had such income whenever we 

were asked. Also, if the preparer did not ask about non-W-2 business 

income, we still told the preparer that we had such income before the end 

of the visit. Despite being told of the side income in every case, 2 out of 9 

plumber return preparers and 8 out of 10 sales worker return preparers 

did not report the income as required.13

Even in cases where the side income was reported, several paid preparers 

gave us incorrect information. Several advised us that reporting such 

income was our decision because IRS would not know of it unless we 

reported it. One preparer told our investigator posing as a sales worker 

that she did not have to report the income unless it was over $3,200. 

Another said that her income could not be reported because she did not 

have the names and the social security numbers of the children she 

watched. On the other hand, the discussion of side income with the paid 

preparers (when a discussion took place) often, to the sales worker’s 

potential benefit, included detailed probing by the preparer to identify 

expenses to offset the income we described. 

 12According to IRS publication 525, a state tax refund generally must be reported as income 

if the taxpayer deducted the tax in an earlier year. The plumber scenario included that he 

itemized deductions, including state income taxes paid, in the prior year and the sales 

worker scenario included that she did not itemize deductions the prior year. There are

some qualifications to the reporting requirement in the IRS publication, but questions 

asked by paid preparers (if any) either did not address them or led to answers that would

cause the refund to be included as income. 

13Our taxpayers’ returns should have included either a Schedule C-EZ, Net Profit from

Business, or a Schedule C, Profit or Loss from Business. In both scenarios, the income also

required a Schedule SE for self-employment taxes. 

Page 19 GAO-06-563T 
The amount of business income we built into our scenarios, and that 

preparers often did not include on the tax returns that they prepared, was 

not unusual for wage-earning taxpayers who underreported business 

income for tax year 2001. According to data taken from IRS’s recent NRP 

efforts, for tax year 2001, about 37 percent of taxpayers with wages and 

business income who underreported their business income did so by 

amounts of up to $1,500, and about 65 percent underreported their 

business income by up to $5,000.14

Deductions. Only 2 of 9 of the plumber’s returns reported the correct 

amount of itemized deductions (line 40). Returns done by 2 preparers 

claimed the standard deduction, even though it was about $4,000 less than 

the total amount of itemized deductions we included in the scenario. Five 

other preparers itemized deductions for the plumber, but made other 

mistakes. These errors changed the amount of the plumber’s refund, 

although sometimes by fairly small amounts. One preparer, however, 

missed deductions for property taxes worth about $4,000, meaning that the 

claimed refund was hundreds of dollars lower than it should have been. 

On the other hand, all 10 of the sales worker returns claimed the standard

deduction, which was to the taxpayer’s advantage in these cases because

she had very few deductions to itemize. In 2002, we reported that as many

as 2 million taxpayers failed to minimize their taxes by failing to itemize 

their deductions and that about half of these taxpayers had returns 

prepared by another person.15

Foreign tax credit. The plumber’s Form 1099 from his mutual fund 

showed a small amount of foreign taxes paid, but only 1 of the 9 preparers 

we visited claimed the foreign tax credit (line 47) for which the taxpayer 

was eligible. 

Child-care expenses. The sales worker had child-care expenses, but 

none of the 10 preparers we visited included the credit for child- and 

dependent-care expenses (line 48) for which she was eligible. Some 

preparers told her that she could not claim the credit because she did not 

 14Taxpayers with wage income who underreported their business income by amounts 

ranging from $1,500 to $5,000 accounted for only a relatively small amount—about $5.8

billion—of the approximately $53.6 billion underreported as business income by all wage 

earners with business income. 

15GAO, Tax Deductions: Further Estimates of Taxpayers Who May Have Overpaid 

Federal Taxes by Not Itemizing, GAO-02-509 (Washington, D.C.: Mar. 29, 2002). 

Page 20 GAO-06-563T 
have the social security number of her child-care provider. This 

information was incorrect. The instructions for Form 2441 state that a 

taxpayer who attempts to collect the social security number of his or her 

child-care provider but is unsuccessful can report that fact on Form 2441 

and still claim the credit.16

Education credits. In the plumber scenario, one of the taxpayer’s 

children was a college student in the second year of postsecondary 

education, but 6 of 9 paid preparers made some sort of error in 

determining the line 50 education credit—either improperly including 

items in expenses, not claiming the credit most advantageous to the 

taxpayer, or both. The expenses and the year in school made the Hope 

education credit far more advantageous to the taxpayer than either the 

tuition and fees deduction (line 23) or the Lifetime Learning credit. Of the 

9 plumber’s returns, 6 included the Hope credit, but 3 of the 6 preparers 

involved improperly included books among the expenses, increasing the 

credit by about $100 above what it should have been. One preparer 

included the tuition and fees deduction instead of the Hope credit and 2 

others claimed the Lifetime Learning credit, reducing the taxpayer’s 

refund by hundreds of dollars. In 2005, we reported that many tax returns, 

including many prepared by paid preparers, made such suboptimal 

choices among the three postsecondary education tax preferences.17

Earned income credit. The EIC on line 66a was another area where paid

preparers made very significant mistakes. Of the 10 returns prepared for 

the sales worker, 5 reported two children on Schedule EIC, Earned 

Income Credit, instead of the one child who lived with the taxpayer in

2005 and was eligible for the EIC. IRS has estimated that incorrectly 

claimed children are the largest category of errors for the EIC, accounting 

for about $3 billion of the estimated $8.5 billion to $9.9 billion in EIC 

overclaims in tax year 1999. IRS regulations require that paid preparers 

ask a series of questions to determine eligibility for the EIC, including 

whether children lived with the taxpayer in the United States for more 

 16It is possible that some preparers understood the rules for reporting the credit. Other

preparer mistakes, such as not reporting side income or claiming the wrong number of 

exemptions, had the effect of eliminating the sales worker’s tax liability. Because the credit

for child- and dependent-care expenses is not refundable, not claiming it in cases where the 

taxpayer’s tax liability was reduced to 0 may not have been a mistake in its own right. 

17GAO, Student Aid and Postsecondary Tax Preferences: Limited Research Exists on 

Effectiveness of Tools to Assist Students and Families through Title IV Student Aid and

Tax Preferences, GAO-05-684 (Washington, D.C.: July 29, 2005). 

Page 21 GAO-06-563T 
than half of the year. We were posing as a fairly unsophisticated taxpayer 

who was unaware of EIC eligibility rules, so we did not volunteer that one 

of our children did not live with us in 2005. Whenever we were asked if our 

children lived with us, however, we said that one did and one did not. Only 

1 preparer asked all of the required questions. Three preparers asked 

about the names, dates of birth, and social security numbers of the two 

children but never asked where the children lived in 2005. Three preparers

gave us a worksheet to complete that asked most but not all of the 

required questions, but 2 of these preparers still entered two children 

when we wrote down that one child did not live with the sales worker at 

all during the year. In 1 of these cases, another employee reviewed the 

return. 

Refunds. As a result of the errors described above, some claimed refunds 

on line 73a on our 19 returns were either substantially higher or lower than 

they should have been. Figure 3 shows the deviation from the correct 

refund amount under our two scenarios. The pairs of bars shown in the 

figure indicate returns prepared by employees affiliated with the same 

chain. As shown in the figure, refunds reported for the plumber were 

incorrect in all 9 cases—sometimes by only small amounts, but at other 

times by substantial sums. Refunds reported for the sales worker were 

correct in 2 cases and overstated in the other 8 cases. The paid preparers 

that arrived at the refund amount that was $218 too high ignored the sales 

worker’s side income but reported the correct number of children living 

with her when calculating the EIC. The preparers who arrived at 

overclaimed refunds of $1,956 did not include the side income and 

reported two children for EIC purposes. 

Page 22 GAO-06-563T 
Figure 3: Refund Amounts over or under Correct Amount 

The 19 paid preparers we visited arrived at the correct refund amount only 

twice. On 5 returns, all for the plumber, they understated our refund 

amount by a total of $3,465. On 12 returns (4 for the plumber and 8 for the 

sales worker) they overstated the refund by a total of $12,169—a total of 

$1,735 in overstated refunds for the plumber and $10,434 for the sales 

worker. 

Preparer’s identifying information. In addition to various 

computational errors, some preparers also did not include identifying 

information required on the 1040 forms they completed. IRS regulations 

require that paid preparers include a signature or typed name, a social 

security number or “PTIN” (an IRS-issued unique identifier for paid 

preparers), and the name and employer identification number of their 

employer. Four of our 19 returns had no preparer signature and 2 had no 

preparer social security number or PTIN. All but 1 return prepared for us 

included a company name and employer identification number; that return 

was missing all identifying information. 

Page 23 GAO-06-563T 
Preparer services and fees. Most paid preparers we visited offered 

services besides the federal tax returns we requested. Some preparers 

offered to prepare the state tax return for us. In a few cases the preparer 

gave us completed state tax returns along with the federal return and did 

not indicate that there was an additional charge. Whenever asked, we said 

we only wanted a federal tax return. Electronic filing was always an 

option. One preparer proceeded to electronically file our return, even after

we said we wanted to mail in a paper return. In this case, the preparer did 

not ask us to provide a personal identification number or ask us directly to 

sign a form authorizing the electronic filing, as required by IRS regulations. 

We were also usually offered ways to get our refunds more quickly than

waiting for a check mailed from IRS. Some of these options involved 

RALs—short-term loans made to taxpayers and paid off with tax refunds—

and others involved direct deposit alternatives. In some cases, what were 

clearly RALs were not described as loans but as “options” or “bank 

products.” One preparer gave us a RAL application to sign at the start of 

the visit without explaining what it was we were being asked to sign. 

Another preparer told us the size of the refund we could receive in 12 to 48 

hours but did not give us the amount we would receive if we were willing 

to wait for a check from IRS, did not identify the faster refund as a loan, 

and did not explain that the amount we would receive was reduced by the 

amount of the fee associated with the option. In this case, the fee for the 

RAL was between about $470 and about $570, after subtracting the amount 

charged to prepare the return. With a refund amount of about $5,000 and 

assuming a 10-day wait for the refund, this means that the annual 

percentage rate for the loan was between about 380 percent and about 470 

percent. 

The fees charged in our 19 visits varied widely, sometimes between offices

affiliated with the same chain, and were sometimes significantly larger or 

smaller than the original estimate we were given. In both the plumber and 

the sales worker scenarios, we received 1 set of returns at no cost, and 

another paid preparer reduced the fee for the sales worker without 

explaining why. Figure 4 shows the fees charged by each of the 19 paid 

preparers we visited. The pairs of bars in figure 4 represent the fees 

charged by offices of the same chain for the same scenario. In only 1 of the 

9 cases where the same firm prepared the same tax return were we 

charged the same amount. In some cases, the preparer stressed that one 

advantage of purchasing a RAL or paying the fees to arrange for direct 

deposit of the refund would mean that the cost of the visit would come out 

of the refund and that we would not have to pay any money on the day of 

the visit. 

Page 24 GAO-06-563T 
Figure 4: Fees Charged for Tax Preparation Services 

One of the common sense steps we mentioned earlier when choosing or 

working with a paid preparer is to make sure you understand how much 

the services you are getting cost. For this reason, we asked for an estimate 

of fees at the start of every paid preparer transaction. Eight preparers 

either did not provide an estimate or gave an estimate with the qualifier 

that the fee would depend on the forms required. In the other 11 cases, we 

were quoted a fee or a range that did not depend on a variety of forms, and 

in 9 of those the fee we were ultimately charged was within the quoted

range, within $30 of the fee quoted, or less than the estimate. Some 

preparers provided a detailed receipt showing the forms that were 

prepared, but some receipts only showed the final fee. None of the more 

detailed receipts, however, included specific costs for individual forms. 

Page 25 GAO-06-563T 
According to IRS officials, paid preparers and taxpayers risk enforcement 

action by filing a tax return that includes the types of misstatements or 

omissions that we have described. According to the officials, although IRS 

seldom has clear evidence about what transpires between a preparer and a 

taxpayer, if IRS were to uncover problems with the preparation of real tax 

returns similar to several that we found, the preparers would be subject to

civil sanctions. 

Many Problems on Our 

Tax Returns Could Risk 

IRS Enforcement Actions 

against the Paid Preparer, 

the Taxpayer, or Both 

Several penalties would be applicable depending on the facts and 

circumstances of each situation. IRS officials said that if the preparers had 

been preparing tax returns to be actually filed, many of them would have 

been subject to civil penalties for such things as negligence and willful or 

reckless conduct. For example, as stated earlier in our testimony, if a paid

preparer encourages a taxpayer not to report or to erroneously report 

transactions on his or her tax return, resulting in a tax-due understatement 

or refund overstatement, the preparer could be assessed penalties of up to

$1,000 for willful or reckless disregard of tax rules and regulations.18 In 

both of our scenarios, information provided to preparers included selfemployment income that the preparer did not encourage reporting. 

According to IRS officials, the preparer is clearly responsible for properly 

reporting all income, including the self-employment income in these 

scenarios, on a taxpayer’s return. They added that although preparers are 

not required to audit taxpayers to uncover unreported income, they must 

make reasonable inquiries to correctly report income. 

IRS officials also said that civil penalties would be applicable to other 

issues we encountered, depending on the facts and circumstances. 

Preparers who did not ask all the EIC due diligence questions would be 

subject to the penalty for the failure to be diligent in determining EIC 

eligibility. Similarly, preparers who improperly included hundreds of 

dollars of books in the education credit taken would be subject to a 

penalty for negligence. 

IRS officials we spoke with, who included representatives of Criminal 

Investigation, said that although the dollar amounts of errors made by the 

practitioners might not result in prosecutions, criminal sanctions such as 

willful preparation of a false or fraudulent return might apply. 

 18IRC sections 6694(a) and (b). 

Page 26 GAO-06-563T 
In addition to paying the tax due after correcting the return and any 

related late payment interest, the taxpayer may also be assessed a penalty, 

depending on the facts and circumstances of each situation, according to

IRS officials. For example, if taxpayers substantially understate income, 

overstate deductions, or provide other incorrect information resulting in 

decreased tax or improperly high refunds, they may be assessed an 

accuracy-related penalty. The penalty could be assessed for any failure to

comply with the tax laws, including the failure to report self-employment 

income.19

Because the returns we had prepared were not real returns and were not 

filed, penalties would not apply. However, we have referred matters we 

encountered to IRS so that any appropriate follow-up actions can be 

taken. 

The National Research 

Program Found Errors on 

Returns Prepared by Paid 

Preparers

IRS’s tax year 2001 NRP data also indicate that tax returns prepared by 

paid preparers contained a significant level of errors. As shown in table 7, 

IRS audits of returns prepared by a paid preparer showed a higher error 

rate—56 percent—than audits of returns prepared by the taxpayer—47 

percent.20 Errors in this context changed either the tax due or the amount 

to be refunded. A similar statistically significant relationship existed for all 

income groups of $80,000 and below that we studied. Of course, as noted 

before, it is important to remember that tax preparers are used more often 

on some more complicated returns than on some simpler ones, although 

we were unable to gauge the full extent to which this might be true. Also, 

the fact that errors were made on a return done by a paid preparer does 

not necessarily mean the errors were the preparer’s fault; the taxpayer 

may be to blame. The preparer must depend on the information provided 

by the taxpayer. 

 19IRC section 6662(b). 

20All percentage estimates from the NRP files have margins of error of plus or minus 5

percentage points or less, unless otherwise noted. All numerical estimates other than 

percentages have margins of error of plus or minus 5 percent or less of the value of those 

numerical estimates, unless otherwise noted. 

Page 27 GAO-06-563T 
Table 7: Estimated Percentage of NRP-audited Tax Year 2001 Individual Returns 

with Errors 

Type of return Estimate (percent)

Prepared by a paid preparer 56

Prepared by the taxpayer 47

All returns 52

Source: GAO analysis of IRS NRP data. 

The different error rates for paid preparer and self-prepared returns 

translated into different amounts that taxpayers owed IRS after audit. For 

instance, as shown in table 8, taxpayers using a paid preparer owed a 

median of $363 to IRS after audit, compared with a median of $185 for 

taxpayers preparing their own returns. This type of disparity in taxes owed 

existed for every income level we studied except for the $40,001–60,000 

and $60,001–80,000 ranges in which the differences were not statistically 

significant. 

Table 8: Estimated Median Additional Taxes Owed on NRP-audited Tax Year 2001 

Individual Returnsa

Type of return Estimate Lower bound Upper bound

Prepared by a paid preparer $363 $338 $397

Prepared by the taxpayer 185 164 210

All returns 279 262 300

Source: GAO analysis of IRS NRP data. 

a

The 95 percent confidence intervals surrounding the estimates range from the lower bounds to the 

upper bounds. 

Table 9 shows some specific Form 1040 line items for which the NRP paid

preparer and self-prepared error rates differed from each other in a 

statistically significant way. We also found problems with these line items 

in our visits to paid preparers. For example, NRP audits revealed that, for 

the Form 1040 line showing the amount of standard deduction or itemized 

deductions taken, about 23 percent of self-prepared individual returns had 

errors, compared with about 31 percent of returns done by paid preparers. 

Paid preparer and self-prepared error rates did not differ from each other 

in a statistically significant way for business income and education credits

line items, other line items for which we had found problems. 

Page 28 GAO-06-563T 
Table 9: Estimated Percentages of NRP-audited Tax Year 2001 Individual Returns 

Containing Specific Line Items with Errors on Those Line Items 

Form 1040 line item 

Self-prepared 

returns (percent) 

Returns done by a

paid preparer (percent)

Deductions 23 31

Foreign tax credit 16 6

Earned income credit 45 53

Refund 48 57

Source: GAO analysis of IRS NRP data. 

Our limited review and the problems we found do not permit observations

about the quality of the work of paid tax preparers in general. 

Undoubtedly, many paid preparers do their best to provide their clients 

with tax returns that are both fully compliant with the tax law and cause 

them to neither overpay nor underpay their federal income taxes. 

Furthermore, as we observed in 2003, it is easy to understand how the 

complexity of the tax code brings many taxpayers to conclude that they 

should turn to a paid preparer. 

Concluding 

Observations 

As we also observed in 2003, however, our tax system depends on 

taxpayers accurately completing and filing their returns. With their 

important role in helping taxpayers meet their obligations, paid preparers 

become a critical quality-control checkpoint for the tax system. Where we 

saw serious problems in our few visits, these same preparers may make 

similar mistakes on the genuine tax returns they complete this year. Their

mistakes and misstatements may also ripple even further through the 

system as the taxpayers they serve may come to believe that, for example,

non-W-2 business income does not have to be reported, and they may even 

spread that misinformation among their friends and neighbors. In light of 

the importance of paid preparers in our tax system today, knowing if what 

we found is the exception or the rule in the paid tax preparation services 

industry is critical. With better information about the extent of problems, 

IRS can better target its limited enforcement and education resources. 

Finally, our observation in 2003 that taxpayers who choose to use paid 

preparers need to be wise consumers is even more important today in light 

of our most recent findings. As IRS notes on its Web site under “Tips for 

Choosing a Tax Preparer,” no matter who prepares a tax return, the 

taxpayer is legally responsible for all of the information on that tax return. 

Page 29 GAO-06-563T 
We discussed our findings and observations with senior IRS officials, and 

they generally agreed with our message. 

We recommend that the Commissioner of Internal Revenue conduct 

necessary research to determine the extent to which paid preparers live up

to their responsibility to file accurate and complete tax returns based on 

information they obtain from their customers. In conducting this research, 

the Commissioner should consider whether the methodology we used 

would provide IRS with a more complete understanding of paid preparers’ 

performance. 

Mr. Chairman, this concludes my prepared statement. I would be happy to

respond to any questions you or other Members of the Committee may 

have at this time. 

For further information on this testimony, please contact Michael Brostek 

at (202) 512-9110 or brostekm@gao.gov. David Lewis, Assistant Director; 

Mario Artesiano; Paul Desaulniers; Danielle Free; Leon Green; George 

Guttman; Christine Hodakievic; Lindsey Houston; Shirley Jones; Jason 

Kelly; Lawrence Korb; Barbara Lewis; John Mingus; Karen O’Conor; and 

Cheryl Peterson made key contributions to this testimony. 

Recommendation for 

Executive Action 

Contacts and 

Acknowledgments 

Page 30 GAO-06-563T 
Page 31 GAO-06-563T 

Appendix I: Paid Preparer Visit Examples 

None of our 19 visits to paid preparers were problem-free, but some had 

relatively minor issues while others had more serious problems. The 

following are descriptions of selected visits we made to paid preparers. 

For each scenario, we provide one example of a visit that had fewer 

compliance issues than most of our visits under the same scenario, and

one example that had more serious problems than most. 

During this site visit, the paid preparer asked various questions and 

prepared a return with few problems. For example, presumably to 

determine the taxability of a state income tax refund, the preparer asked 

about the previous year’s itemized deductions and their amount. The 

preparer also asked about which year the college-age child was in 

schooling and whether the tuition in question had been paid in 2005, 

questions needed to determine the applicability of the Hope education 

credit. While the preparer did not ask about side income, when the 

taxpayer volunteered that he had non-W-2 income, the preparer included it 

on the return without discussing whether to either change it or not report 

it. The preparer also probed for expenses to offset it. 

The refund on the completed tax return was only $4 below the correct 

amount. The difference was due to the preparer (1) overclaiming the 

amount of personal property tax paid by including nondeductible fees and

(2) not taking the credit for foreign taxes paid. The preparer also listed 

noncash charitable donations as cash donations, though this did not affect 

the amount of the refund. 

The cost of the visit to the paid preparer was about $100 more than the 

amount originally quoted. However, at the start of the visit, the preparer 

had said that the actual amount would depend on the number of forms 

used. One of the forms used was the Schedule B, Interest and Ordinary 

Dividends. While this form might have been used to capture information 

the taxpayer provided, it did not need to be filed with IRS, since the 

income amounts were less than the minimums requiring the form. The 

paid preparer did not offer other services such as a Refund Anticipation 

Loan (RAL) to the taxpayer. 

Costly issues for the taxpayer during this site visit were the paid preparer’s 

failure to itemize deductions and the preparer’s decision to claim the 

tuition and fees deduction instead of the Hope education credit. The 

preparer did not itemize the deductions despite the fact that the taxpayer 

showed the preparer the documents supporting itemization. The preparer 

Example of a Plumber 

Visit with Minor 

Issues 

Example of a Plumber 

Visit with Serious 

Problems 
even asked questions about medical expenses and charitable

contributions. The preparer also asked about whether there were any 

nonreimbursed employee expenses and about whether the college-age 

child was a full-time student. 

On another issue, when discussing the taxpayer’s side income, the 

preparer wondered if the taxpayer had reported it the previous year, 

which he had. The preparer suggested also reporting it this time so as not 

to arouse suspicion, but at a much lower amount than the taxpayer 

identified. The taxpayer declined the offer, and the preparer ultimately 

included the correct amount. The preparer did not provide the taxpayer 

with a completed Schedule C-EZ or a Schedule SE, although information 

from both was reported on the form 1040. In addition, the preparer did not 

include the state tax refund as income. 

When asked about the tax return’s price at the beginning of the session, 

the preparer could not give an exact estimate but instead provided a range. 

However, the preparer ended up not charging the taxpayer at all since the 

refund involved was so small. In fact, the refund was about $1,700 smaller 

than the correct amount. 

This example is 1 of the 2 retail sales worker returns in which the refund 

computed by the paid preparer was the same amount we computed. The 

preparer reported the correct number of children for EIC purposes and 

asked most of the due diligence EIC questions. Although the preparer 

claimed the wrong number of children as exemptions, that did not affect 

the final refund amount. Although the preparer did not ask directly about

side income, the preparer included it when we offered the information. 

The price charged was the same as the price quoted, and the preparer 

pointed out that a RAL was in fact a loan. The preparer did not, however,

sign the tax return or provide any other preparer information on it. 

In this example, the paid preparer’s return resulted in the tax return 

showing a refund of almost $2,000 more than the correct amount. The 

return did not include the side income even though the preparer asked 

about anything else that should be considered and the taxpayer mentioned 

it. The preparer said the taxpayer would need records of income and 

expense to be able to report the income. The return included two children 

as qualifying for the EIC and the additional child tax credit even though 

only one lived with the taxpayer. The preparer appeared to go through an 

on-screen EIC checklist but did not ask the taxpayer the questions. The 

Example of a Retail 

Sales Worker Visit 

with Fewer Serious 

Issues than Most We

Encountered 

Example of a Retail 

Sales Worker Visit 

with Several Serious 

Problems 

Page 32 GAO-06-563T 
papers taken away from the preparer included an EIC worksheet with the 

answers completed by the preparer, some of them incorrect. 

There were also other issues with the return prepared. First, it did not 

include child-care expenses as the taxpayer was told the expenses would 

have to exceed $7,300 to be claimed. Second, it incorrectly included the 

state tax refund as income because the preparer said the amount was for 

unemployment compensation. Third, the return did not include the 

preparer’s social security number although it did show his name. 

The preparer offered a RAL that would have been available in an hour at a 

cost of about $400. 

Page 33 GAO-06-563T (450471) 
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