United States General Accounting Office 

GAO Report to the Committee on Finance, U.S. 

Senate 

October 2003 TAX 

ADMINISTRATION 

Most Taxpayers 

Believe They Benefit 

from Paid Tax 

Preparers, but 

Oversight for IRS Is a 

Challenge 

GAO-04-70


a
Highlights of GAO-04-70, a report to the 

Chairman and Ranking Minority Member, 

Committee on Finance, United States 

Senate 

Over 55 percent of the nearly 130 

million taxpayers in tax year 2001 

used a paid tax preparer. However, 

using a preparer may not assure 

that taxpayers pay the least amount 

due. Last year, GAO estimated that 

as many as 2 million taxpayers 

overpaid their 1998 taxes by $945 

million because they failed to 

itemize deductions and half of 

these used preparers. 

GAO was asked to (1) obtain the 

views of taxpayers about paid 

preparers and examples of 

preparer performance including 

any problems and (2) describe the 

Internal Revenue Service’s (IRS’s) 

oversight of problem preparers; the 

challenges facing IRS in dealing 

with problem preparers, especially 

the Office of Professional 

Responsibility; and the efforts to 

address those challenges. To obtain 

the views of taxpayers who used 

preparers, GAO surveyed a national 

representative sample of taxpayers. 

October 2003 

TAX ADMINISTRATION 

Most Taxpayers Believe They Benefit 

from Paid Preparers, but Oversight Is a 

Challenge for IRS 

GAO estimates that most of the taxpayers who used a paid preparer believe 

they benefited from doing so. Many taxpayers told us they believed they 

would have great difficulty filling out their own tax forms because they do 

not understand their filing requirements. At the same time, some taxpayers 

are poorly served when paid preparers make mistakes, causing taxpayers to 

over-or underpay their taxes or pay for services, such as short-term loans 

called Refund Anticipation Loans (RALs), without understanding their costs 

and benefits. The evidence available does not allow a precise estimate of the 

extent of problems caused by paid preparers, but nothing suggests that the 

percentage of taxpayers affected is large. Nevertheless, even a small 

percentage of the over 72 million taxpayers who used paid preparers in 2001 

translates into millions of taxpayers who are potentially adversely affected. 

IRS has several offices responsible for taking action against problem paid 

preparers, including the newly formed Office of Professional Responsibility. 

These offices sanction preparers for violating standards of conduct; assess 

monetary penalties for violating tax laws when preparing returns; monitor 

and, if justified, sanction problem preparers offering electronic filing and 

RALs; and investigate fraudulent preparer behavior. However, balancing 

resources devoted to such efforts against those devoted to other IRS 

priorities is a challenge. In addition to IRS, other federal agencies, state and 

local governments, and professional organizations have a role in regulating 

paid preparers. At least two proposals exist to expand IRS’s oversight of paid 

preparers. Consideration of such proposals is complicated by the difficulty 

of developing reliable estimates of the number of taxpayers affected by 

problem preparers or the effectiveness of the actions taken against them. 

Because making decisions about 

IRS’s role is a policy matter and 

data to determine the efficacy of 

current oversight efforts would be 

difficult to develop, whether to 

expand IRS’s role in regulating paid 

preparers is a judgment that 

Congress and IRS must make and 

GAO is not making 

recommendations in this report. In 

commenting on a draft of this 

report, the IRS Commissioner 

generally concurred with our 

findings. 

www.gao.gov/cgi-bin/getrpt?GAO-04-70 

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Jim White at 

(202) 512-5594 or Whitej@gao.gov. 

Percentage of Returns with a Paid Preparer’s Signature 

60 Percent 

50 

40 

30 

20 

10 

0 

Tax year 

Source: IRS. 

1981 

1982 

1983 

1984 

1985 

1986 

1987 

1988 

1989 

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

1998 

1999 

2000 

2001 
Contents


Letter


Results in Brief 


Background 


Taxpayers Believe They Benefit by Using Paid Preparers but Some 


Are Poorly Served 

IRS and Others Act Against Problem Paid Preparers, but Balancing 

Taxpayer Protection Against Other Priorities Is a Challenge 

Concluding Observations 

Agency Comments and Our Evaluation 

1 

2 

3 

4 

13 

24 

25 

Appendixes 

Appendix I: 

Appendix II: 

Appendix III: 

Appendix IV: 

Objectives, Scope, and Methodology 

Objective 1: Obtaining Taxpayer Views, Examples of Paid Preparer 

Performance, and What Is Known about the Extent of Problems 

Caused by Paid Preparers 

Objective 2: Describe IRS’s Oversight of Problem Paid Preparers; 

Management Challenges Facing IRS’s Offices that Provide 

Oversight; and Efforts to Address Management Challenges 

Final Survey Results Weighted to the U.S. Population


Comments from the Internal Revenue Service


GAO Contacts and Staff Acknowledgments


GAO Contacts 

Acknowledgments 

28 

28 

32 

34 

37 

39 

39 

39 

Tables Table 1: Key Findings in the Office of Director of Practice 14 

Table 2: Some Examples of Paid Preparer and RAL Oversight 

Efforts by State and Local Government 24 

Figures	 Figure 1: 

Figure 2: 

Figure 3: 

Figure 4: 

Figure 5: 

Figure 6: 

Percentage of Returns with a Paid Preparer’s Signature 4


Paid Preparer Users’ Confidence That They Did Not 


Overpay Taxes 5


Client Perceptions on Aspects of Paid Preparer 


Performance 7


Example of Paid Preparer Fees 11


Visits and Actions by the ERO Monitoring Program 18


Paid Preparer Criminal Investigations for Calendar Years


2001 and 2002 20


Page i GAO-04-70 Paid Tax Preparers 
Contents 

Abbreviations 

Criminal Investigation Division 

EIC Earned Income Credit 

ERO Electronic Return Originator 

FTC Federal Trade Commission 

IRS Internal Revenue Service 

ODP Office of Director of Practice 

OPR Office of Professional Responsibility 

RAL Refund Anticipation Loan 

SB/SE Small-Business/Self-Employed Division 

TAS Taxpayer Advocate Service 

This is a work of the U.S. government and is not subject to copyright protection in the 

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reproduce this material separately. 

Page ii GAO-04-70 Paid Tax Preparers 

CI 
Page 1 GAO-04-70 Paid Tax Preparers 

A

United States General Accounting Office 

Washington, D.C. 20548 

October 31, 2003


The Honorable Charles E. Grassley 


Chairman 


Committee on Finance


United States Senate


The Honorable Max Baucus


Ranking Minority Member


Committee on Finance


United States Senate


Filing a correct tax return can be a daunting task for taxpayers. Many


taxpayers do not understand their filing requirements and would have great 


difficulty filling out their tax forms without the assistance of paid 


preparers. IRS’s most recent estimates are that in tax year 2001 more than


55 percent of the nearly 130 million individual filers paid someone to 


prepare their tax returns, and in tax year 2000, taxpayers paid almost $15 


billion for individual tax preparation services. However, using a paid


preparer does not always assure that taxpayers will pay the least amount of 


taxes that are legally due. For example, last year we estimated that as many 


as 2 million taxpayers overpaid their 1998 taxes by $945 million because 


they claimed the standard deduction when it would have been more 


beneficial to itemize, and half of these taxpayers used a paid preparer.

1


Concerned that some paid preparers might not be diligent when completing 


tax returns, you asked us to (1) obtain the views of taxpayers who used 


paid preparers and provide examples of paid preparer performance, 


including what is known about the extent of problems caused by paid 


preparers and (2) describe IRS’s efforts to prevent, detect, and take action


against problem paid preparers; the management challenges facing IRS 


offices that interact with paid preparers, especially the Office of 


Professional Responsibility; and the efforts to address those management 


challenges.


To address the objectives, we surveyed a nationwide random sample of 


taxpayers who used paid preparers. While this sample is representative of 


1

U.S. General Accounting Office, 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 1 GAO-04-70 Paid Tax Preparers 
all taxpayers who used paid preparers, it has some limitations and must be 

interpreted carefully because it is based on taxpayer perceptions. 

Taxpayers responding to our survey may not understand the tax laws well 

enough to evaluate whether they received quality service from their paid 

preparers, resulting in inflated satisfaction levels. In addition, we 

conducted in-depth interviews with a smaller judgmental sample of 

taxpayers who provided examples of paid preparer performance, but we 

were unable to independently verify the facts in the taxpayers’ examples. 

We also interviewed paid preparers, representatives of professional 

organizations, various IRS officials, and low-income tax clinic directors. We 

presented our survey and interview findings at a Finance Committee 

hearing on April 1, 2003.

2

 In addition, we conducted a review of IRS’s closed 

case files on paid preparers investigated for fraud or other misconduct and 

reviewed IRS’s paid preparer penalty collection data. A more detailed 

discussion of our scope and methodology, including the potential effect of 

our taxpayer survey’s 46 percent response rate, may be found in appendix I. 

Results in Brief	 Based on projections from our survey, most of the taxpayers who used a 

paid preparer believe they benefited from doing so and would use a paid 

preparer in the future. The taxpayers we interviewed in-depth identified a 

variety of advantages in using paid preparers. Some said they did not 

understand the tax laws or lacked the time or patience to complete returns 

on their own. However, when paid preparers make mistakes or exhibit 

other problematic behavior, the consequences for taxpayers can be 

significant. While available evidence does not allow a precise estimate of 

how extensive the problem is, none of the evidence suggests that the 

percentage of poorly served taxpayers is large. Nevertheless, even a small 

percentage of the over 72 million taxpayers who used paid preparers in 

2001 translates into millions of taxpayers who potentially overpaid or 

underpaid their taxes due to preparer mistakes or other problematic 

behavior. In addition, IRS’s National Taxpayer Advocate—who heads the 

program that helps resolve taxpayers’ tax problems with IRS and 

recommends changes to mitigate taxpayer problems—and other 

knowledgeable observers have concerns about how well taxpayers 

understand the costs and benefits of the short-term Refund Anticipation 

Loans (RALs) offered by some preparers. 

2

 U.S. General Accounting Office, Paid Tax Preparers: Most Believe They Benefit, but Some 

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

Page 2 GAO-04-70 Paid Tax Preparers 
IRS has several offices responsible for taking action against problem paid 

preparers, but balancing resources devoted to such efforts against those 

devoted to other priorities is a challenge. The newly formed Office of 

Professional Responsibility (OPR) enforces professional standards and is 

beginning to address management problems that made its predecessor 

office ineffective. Many changes are still being implemented, so it is too 

soon to know the impact of the changes. IRS’s Small Business/SelfEmployed (SB/SE) and Criminal Investigation (CI) divisions may penalize 

or recommend prosecuting problem preparers, but generally focus on only 

the most serious cases because of their other enforcement priorities. This 

is a challenge because of the lack of firm data about the extent of 

problematic paid preparer behavior and the effectiveness of actions to 

combat it. 

While most taxpayers may receive quality service from their preparers, 

problematic behavior by some preparers raises the question of whether IRS 

should be more active in overseeing paid preparers. Internal and external 

proposals have been made to expand IRS’s oversight of paid preparers. 

However, the lack of information on the overall extent of problems with 

paid preparers and the effectiveness of the actions taken against them 

make this a judgment that Congress and IRS management must make. We 

are not making any recommendations in this report. 

Background	 Paid preparers aid taxpayers in the completion of their tax returns for a fee. 

They range from licensed professionals, such as attorneys, certified public 

accountants, and enrolled agents, to those lacking formal training who 

complete tax returns part-time. Paid preparers authorized to represent 

taxpayers in matters before IRS are called practitioners and include 

attorneys, certified public accountants, and enrolled agents. Preparers 

work for a variety of enterprises including accounting firms, large tax 

preparation services, and law firms. Some are self-employed. IRS estimates 

that in 1999 there were 1.2 million paid preparers, although the actual 

number is unknown because some paid preparers do not sign the returns 

they prepare. The percentage of returns with a paid preparer’s signature 

has been steadily increasing over the past 20 years, as shown in figure 1. 

Page 3 GAO-04-70 Paid Tax Preparers 
Figure 1: Percentage of Returns with a Paid Preparer’s Signature 

60 Percent 

1981 

1982 1983 

1984 

1985 

1986 

1987 

1988 

1989 

1990 

1991 

1992 

1993 

1994 

1995 1996 

1997 

1998 

1999 

2000 2001 

Tax year 

Source: IRS. 

Paid preparers provide a variety of tax-related services besides tax 

preparation, including tax and estate planning and services that help clients 

receive funds quickly, such as electronic filing and RALs. 

Taxpayers Believe Based on projections from our national survey, most taxpayers who used a 

paid preparer believe they benefited from doing so and would use a paid They Benefit by Using preparer in the future. Taxpayer surveys and studies of returns suggest that

Paid Preparers but some taxpayers are poorly served by their paid preparers, but they do not 

Some Are Poorly allow a very precise estimate of the extent of the problem. 

Served 

Most Taxpayers Believe Based on projections from our national survey, most taxpayers who used a 

They Benefit From Using paid preparer believe they benefit from doing so. We estimate that 77 

Paid Tax Preparers percent of the taxpayers who used a paid preparer in 2002 were very or 

generally confident that they did not pay more in taxes than was legally 

required, as shown in figure 2, and that 87 percent would use one again in 

Page 4 GAO-04-70 Paid Tax Preparers 

50 

40 

30 

20 

10 

0 
the future.3

 These data suggest that paid tax preparers are providing 

needed services to taxpayers. 

Figure 2: Paid Preparer Users’ Confidence That They Did Not Overpay Taxes 

49% 

12% 

28% 

5% 

Not at all confident 

7% 

A little confident 

No opinion 

Generally confident 

Very confident 

Source: GAO nationwide survey of taxpayers using a paid preparer in 2002. 

Note: The estimates have a 95 percent confidence interval of plus or minus 5 percent or less. 

Percentages total more than 100 percent due to rounding. 

The results of our taxpayer survey must be interpreted carefully—it is 

based on taxpayer perceptions, and taxpayers may not understand the tax 

laws well enough to evaluate the performance of their paid preparers. For 

example, most of the taxpayers we talked to in-depth said they used a paid 

preparer because they found IRS tax forms and documents too 

complicated or they were confronting an unusually complicated tax 

situation. If taxpayers lack the technical expertise needed to identify 

preparer errors, their survey responses may underestimate the extent of 

problems caused by paid preparers. 

3

We are 95 percent confident that the percentage estimates of our survey are within +/- 5 

percentage points or less of what we would have obtained if we had surveyed the entire 

study population. 

Page 5 GAO-04-70 Paid Tax Preparers 
With that caveat in mind, taxpayers in our nationwide survey said that their 

preparers did sufficient probing or took other steps to ensure an accurate 

return. We estimate that about 91 percent of taxpayers believe their 

preparers had enough information about their personal circumstances to 

accurately prepare their tax returns. We also estimate that 88 percent of 

taxpayers using paid preparers were asked for supporting documentation. 

Most of the preparers we talked to said they ask their clients to provide 

documentation to support claimed income, deductions, and credits, such 

as W-2 forms from employers or 1099 forms from financial institutions, to 

ensure the accuracy and completeness of the information reported on 

returns. In addition, paid preparers are required by law to take certain steps 

when filling out returns for their clients, including signing the return and 

giving their clients copies of the completed returns. We estimate that the 

vast majority of taxpayers who used a paid preparer in 2002 were provided 

a signed copy of their return, as shown in figure 3. 

Page 6 GAO-04-70 Paid Tax Preparers 
Had enough 

Figure 3: Client Perceptions on Aspects of Paid Preparer Performance 

Percentage 

100 

90 

80 

70 

60 

50 

40 

30 

20 

10 

0 

accuracy 

Saw

information for

documentation

Signed return 

Gave a copy of return 

Response 

Don’t know 

No 

Yes 

Source: GAO nationwide survey of taxpayers using a paid preparer in 2002. 

Note: The estimates have a 95 percent confidence interval of plus or minus 5 percent or less. 

Taxpayers choose to use paid preparers for a variety of reasons. As already 

noted, many of the taxpayers we interviewed in-depth told us they used a 

paid preparer because they did not understand the tax laws. According to 

the National Taxpayer Advocate, many taxpayers rely upon the expertise of 

a paid preparer to complete their returns since they are faced with a 

complex set of tax laws and a multitude of requirements for deductions, 

exemptions, and credits. One taxpayer, for example, said she began using a 

paid preparer 9 years ago to help her with estate tax issues following the 

death of her father because she needed help from a tax professional in 

dealing with complicated estate tax issues. Other taxpayers said they 

Page 7 GAO-04-70 Paid Tax Preparers 
lacked the time or patience to complete their returns on their own. For 

example, a mother of four who operates her own business part-time and is 

finishing her degree at night said she simply does not have the time to do 

her own taxes. Other taxpayers stated that they paid someone to prepare 

their taxes in hopes of obtaining a larger and/or quicker refund. 

Some of the paid preparers we spoke to agreed that educating taxpayers 

about the tax laws is an important component of their practice. For 

example, one preparer who works primarily with immigrants said he and 

his staff spend considerable time explaining to their clients that paying 

taxes is part of the civic responsibilities they assumed in immigrating to 

this country. Other preparers told us they often have to educate taxpayers 

on more complex concepts, such as computing the basis (the investment 

made in a property) to determine how much of a real estate sale would be 

taxable. Another preparer told us he found that a taxpayer had overpaid his 

taxes by more than $6,200 over a 3-year period because the taxpayer had 

overlooked earned income and child tax credits. Still another preparer told 

us how he helped a taxpayer receive a refund in excess of $19,000 when he 

found out that the taxpayer, who had moved twice in less than 2 years, had 

missed out on deductions for moving expenses due to job relocations. 

Some Taxpayers Are Poorly 

Served by Paid Preparers 

When paid preparers make mistakes or exhibit other problematic behavior, 

the consequences for taxpayers may be significant. Examples provided by 

low-income tax clinic4 representatives and paid preparers include: 

•	 A taxpayer who overpaid his taxes over a period of years by roughly 

$3,500 to $5,000. The taxpayer had received notices for several years 

from IRS stating that he may be eligible for the Earned Income Credit 

(EIC).

5

 Each year, he took the notices to his preparer, but the preparer 

took no action. 

4

Low-income tax clinics are organizations that receive a matching grant from IRS to 

represent low-income taxpayers involved in controversies with IRS or to provide tax 

education and outreach to taxpayers who speak English as a second language or who have 

limited English proficiency. 

5

The EIC is a refundable federal income tax credit for low-income working individuals and 

families. The credit reduces the amount of federal tax owed and can result in a refund check 

when the EIC exceeds the amount of taxes owed. 

Page 8 GAO-04-70 Paid Tax Preparers 
•	 One preparer told his elderly client to provide him with the checks to 

make her quarterly estimated payments. Although he claimed these 

payments on the client’s tax return, he never gave the checks to IRS—he 

kept them for himself. After receiving notices from IRS, the taxpayer 

visited the paid preparer who told her that IRS must have made a 

mistake. The preparer was sent to jail. 

•	 Another preparer incorrectly advised a married couple with two 

children to each file separately as head of household so that they could 

claim two EICs. The couple ended up owing taxes, interest, and 

penalties. 

•	 A paid preparer let a taxpayer file for the EIC for 2 years although the 

taxpayer lacked the appropriate documentation and was ineligible for 

the credit. The taxpayer received a tax refund he was not entitled to 

receive, resulting in a tax liability of $3,300. 

As with all anecdotal evidence, these examples are not necessarily 

representative of the kinds of problems taxpayers encounter when dealing 

with problematic paid preparers. Also, taxpayers may have contributed to 

these problems by either providing incomplete information to their 

preparers or being actively complicit in avoiding taxes that are legitimately 

owed. 

In addition to over- or underpaying their taxes, IRS officials and others told 

us that sometimes taxpayers are poorly served by paying for services that 

accelerate the receipt of refunds, including RALs. The primary benefit of 

RALs is that they allow clients to receive funds quickly, sometimes in just a 

few minutes, rather than the 10 days it typically takes taxpayers who file 

electronically to receive their tax refunds. The ability to quickly receive 

funds makes RALs appealing to low-income taxpayers who often want or 

need their refund quickly. In addition, as the National Taxpayer Advocate 

pointed out in the fiscal year 2002 Annual Report to Congress, many lowincome clients who lack bank accounts find that RALs are the only way to 

electronically file a return and receive their refunds quickly. For these and 

other reasons, RALs are becoming more popular. Based on IRS data, the 

Page 9 GAO-04-70 Paid Tax Preparers 
National Consumer Law Center estimates that 12.1 million RALs were 

taken out in 2001, up from 10.8 million in 2000.6 

Although this suggests that many taxpayers find value in using RALs, IRS 

officials and others have raised concerns about whether taxpayers are fully 

aware of the costs involved and their tax filing alternatives. For example, a 

recent New York City investigation found that some paid preparers fail to 

disclose the costs of RALs and the availability of alternatives to the loans.7 

The investigation found that only 27 of the 43 preparers visited mentioned 

the annual percentage rate and other fees associated with RALs. New York 

City’s investigation also found that electronic filing was not strongly 

publicized as an alternative way for clients to receive their tax refunds 

quickly. According to a low-income tax clinic director, many paid preparers 

fail to fully explain to taxpayers that accepting a RAL carries a certain 

risk—if refunds are delayed or denied, taxpayers may be liable for 

additional charges and fees. Without clear information about the costs and 

risks, taxpayers cannot always weigh the costs against the benefits that 

they might receive. 

Also, based on information we gathered, fees for RALs and other services 

that accelerate the receipt of refunds vary widely. For example, while some 

preparers charge nothing for electronic filing services, one preparer we 

spoke to (while we were posing as a potential client) said he would charge 

us between $210 and $250 to file electronically. Another preparer said he 

would charge $174 for a RAL on a $700 refund, which equates to an annual 

interest rate of over 900 percent, assuming a loan period of 10 days, while 

another preparer quoted us a RAL fee of $130 on a $1,200 refund, which 

equates to an annual interest rate of about 400 percent, assuming the same 

loan period. These examples are not necessarily representative of all 

preparer fees; the exact amounts of preparer fees for accelerated refunds 

depend on various individual circumstances, such as the financial 

institution the preparer uses to finance the loan and the amount of refund 

due. 

6

National Consumer Law Center/Consumer Federation of America, The High Cost of Quick 

Tax Money: Tax Preparation, ‘Instant Refund’ Loans, and Check Cashing Fees Target the 

Working Poor (Boston, Mass.: January 2003). 

7

New York City Council Investigative Division, Tax Preparers: Taking Advantage By Not 

Disclosing (New York, N.Y.: February 2003). 

Page 10 GAO-04-70 Paid Tax Preparers 
The RAL fees, when combined with tax preparation fees, may considerably 

reduce a taxpayer’s refund. For example, the preparer mentioned above 

who quoted a RAL fee of $130 on a $1,200 refund also quoted a tax 

preparation fee of $190 in addition to the RAL fee. As shown in figure 4 

below, the fees would have reduced the refund by more than 25 percent. 

Figure 4: Example of Paid Preparer Fees 

2 

Refund minus preparation fees 

$1,200 – ($190) = $1,010 

3 

Refund minus refund anticipation 

loan (RAL) fees 

$1,010 – ($130) = $880a 

$1,200 

1 

Expected refund 

Net refund 

$880 

4 

$1,200 

$1,010 

$880 

Source: GAO. 

a The $130 RAL fee consists of $80 in financing charges and $50 in bank fees. 

In another example, a low-income tax clinic director informed us of a 

disabled taxpayer who was due a refund of $1,230 on a simple return. After 

paying various fees, such as return preparation and a RAL, she received a 

check from her preparer for $414—about 34 percent of her expected 

refund. 

Page 11 GAO-04-70 Paid Tax Preparers 
Little Authoritative 

Evidence Regarding 

Problematic Paid Preparers 

A variety of evidence, including the above examples and our nationwide 

survey, shows that some taxpayers are poorly served by their paid 

preparers. While this evidence does not allow a precise estimate due to 

methodological limitations, none of it suggests that the percentage of 

poorly served taxpayers is large. However, even a small percentage of the 

more than 72 million taxpayers who used paid preparers in 2001 can 

translate into millions of affected taxpayers. 

Taxpayer surveys show that some taxpayers had problems with the quality 

of the service provided by their paid preparer. Based on the results of our 

nationwide survey, we estimate that 5 percent of paid preparer users had 

no confidence that they had not overpaid their taxes, and another 7 percent 

had little confidence, as shown in figure 2. We also estimate that 3 percent 

of paid preparer users did not believe that their preparer had enough 

information to accurately complete their return, as shown in figure 2. Our 

survey results are similar to a 1997 Consumer Reports nonrandom survey 

of 26,000 of its readers, in which 6 percent said they discovered an error 

made by their preparers.8

 As discussed earlier, taxpayer survey results need 

to be interpreted carefully because they reflect taxpayer perceptions and 

may misstate the extent of the problem. 

Studies of filed returns also suggest that some paid preparers do not 

exercise due diligence in filing returns. For example, we have already 

mentioned that last year we estimated that as many as 2 million taxpayers 

overpaid their 1998 taxes by $945 million because they claimed the 

standard deduction when it would have been more beneficial to itemize, 

and half of these taxpayers used a paid preparer.

9

 Similarly, a recent report 

by the Treasury Inspector General for Tax Administration estimated that 

there were approximately 230,000 returns filed by paid preparers where 

taxpayers appeared eligible for but did not claim the Additional Child Tax 

Credit.10 In addition, a 2002 IRS study of the EIC for tax year 1999 returns 

estimated that some taxpayers claimed about $11 billion more than they 

8

Consumers Union of U.S., Inc., “Tackling Your Taxes,” Consumer Reports, vol. 62. no. 3 

(1997). This percentage represents Consumer Reports subscribers who responded to 

the survey and is not necessarily representative of taxpayers in general. 

9

GAO-02-509. 

10Treasury Inspector General for Tax Administration, Analysis of Statistical Information 

for Returns With Potentially Unclaimed Additional Child Tax Credit (Washington, D.C.: 

January 2003). 

Page 12 GAO-04-70 Paid Tax Preparers 
were entitled to while others claimed $710 million less than they were 

entitled to.11 The IRS reported that paid preparers filed more than 65 

percent of all EIC returns. None of these studies tried to determine how 

many errors were the fault of the preparer and how many were the fault of 

the taxpayer. However, based on our earlier examples of paid preparer 

performance, it seems likely that preparers bear responsibility for at least 

some of the over- or underpayments. Taxpayers could be at fault if they 

provide the preparer with incorrect information. 

IRS and Others Act 

Against Problem Paid 

Preparers, but 

Balancing Taxpayer 

Protection Against 

Other Priorities Is a 

Challenge 

Several IRS offices have responsibility for problem paid preparers, but 

balancing resources devoted to taxpayer protection with resources 

devoted to other priorities is a challenge. Proposals have been made for 

expanding IRS’s oversight of the paid preparer industry. Consideration of 

such proposals is complicated by a lack of data on the extent of the 

problem and the effectiveness of IRS’s actions and by the involvement of 

other agencies, state, and local governments as well as professional 

organizations. 

New Office of Professional 

Responsibility (OPR) 

Beginning to Address 

Problems Overseeing 

Practioners 

The newly formed OPR enforces professional standards for those paid 

preparers authorized to represent taxpayers in matters before IRS. These 

authorized preparers, called practitioners, include attorneys, certified 

public accountants, and enrolled agents. 

Treasury Department Circular No. 230 imposes standards of 

professionalism and conduct for practitioners and authorizes IRS to 

institute proceedings against practitioners who violate the regulations.12 

Depending on the seriousness of the violation, OPR can sanction 

practitioners through private reprimand, censure (a public reprimand), 

suspension, or disbarment. For example: 

11Department of the Treasury, Internal Revenue Service, Compliance Estimates for Earned 

Income Tax Credit Claimed on 1999 Returns (Washington, D.C.: Feb. 28, 2002). 

12 Federal regulations, 31 CFR Part 10, published in pamphlet form as Treasury Department 

Circular No. 23, delegate the Treasury Secretary’s authority over taxpayer representatives to 

IRS. Circular 230 requires an administrative law judge to conduct some disciplinary 

proceedings. 

Page 13 GAO-04-70 Paid Tax Preparers 
•	 As a result of an OPR investigation, OPR accepted a practioner’s offer of 

consent to suspension for almost 3 years for violation of the 

requirement of due diligence as to accuracy in preparing corporate tax 

returns for 3 years. The practitioner underreported income by over 

$50,000 in 1 year, and claimed unsubstantiated expenses of over $25,000 

in the other 2 years. The practitioner also overstated a real estate tax 

deduction by over $30,000 in 1 year. 

•	 In another case, a practitioner was disbarred from practice for giving 

false or misleading information to IRS. The practitioner signed a power 

of attorney as being licensed when the license had not been renewed, 

thereby making the practitioner ineligible to practice before IRS. 

As part of IRS’s modernization effort, IRS hired an outside management 

consulting firm to make high-level recommendations concerning the 

staffing, organization, technology, and operating procedures of the Office 

of Director of Practice (ODP), the office OPR replaced. Table 1 summarizes 

the consultant’s findings. 

Table 1: Key Findings in the Office of Director of Practice 

Area Key findings 

Mission and strategy Office is not strategically focused. 

Narrow interpretation of jurisdiction (covering practitioners 

only) leaves major problems unaddressed and contradictions 

within system. 

Awareness and confidence in ODP processes within IRS is 

low. 

Operation of office is reactive to incoming workload. 

Business processes Business processes are lengthy. 

Decision authority is not delegated to lead program staff. 

Guidelines for business process decisions do not exist in a 

written form. 

Procedures emphasize practitioner rights. 

Communication internally and externally is limited. 

Organization and staffing Organization lacks structure. 

Relationships with external stakeholders are weak. 

Staffing pattern and deployment does not align skills to 

functions. 

Management practices are underdeveloped. 

Page 14 GAO-04-70 Paid Tax Preparers 
(Continued From Previous Page) 

Area Key findings 

Technology	 Information systems are separate, and do not provide 

adequate functionality for administrative and program needs. 

Systems are undocumented. 

Staff is untrained to fully utilize existing functionalities. 

Source: IRS consultant. 

According to the OPR Director, IRS took the high-level findings of the 

consultant’s report and drew on its management and staff’s expertise to 

develop a plan to make needed improvements. For example, IRS 

reorganized the office, renaming it OPR, and has started to implement 

several other changes. As an initial step, OPR contacted various tax 

professional organizations in January 2003 and laid out the following 

priorities for the balance of 2003: 

• enhance the visibility of OPR internally as well as externally, 

• increase the capacity and capability of OPR, 

• process the workload in a shorter time frame, 

• ensure that Circular 230 sanctions are applied fairly and consistently, 

• identify and implement organizational performance measures, and 

•	 establish and maintain an effective working alliance with the tax 

professional organization community. 

While IRS has already made some improvements, according to the OPR 

Director, the following efforts are on-going: 

•	 hiring and training a significantly expanded staff of attorneys and 

support personnel; 

• improving and documenting operational practices and procedures; 

• implementing performance measures; 

•	 communicating the OPR mission and progress internally and externally 

through speaking engagements, newsletters, and Web sites; 

Page 15 GAO-04-70 Paid Tax Preparers 
•	 working with IRS Chief Counsel and Treasury Department Tax Policy 

personnel to make beneficial amendments to Circular 230; and 

•	 maintaining an open door policy with respect to the practitioner 

community in order to learn of their concerns and their suggestions. 

Also, the OPR director said it is going to take some time to make all the 

needed changes. We did not try to assess OPR’s on-going improvements 

because some are not yet complete and others are too new to have 

produced the desired improvements. 

SB/SE Faces Challenges 

Balancing Paid Preparer 

Compliance Actions With 

Other Enforcement 

Priorities 

IRS’s SB/SE division has responsibility for assessing and collecting 

monetary penalties against any paid preparers who do not comply with tax 

laws when filing returns. SB/SE assessed about $2.4 million in penalties in 

calendar years 2001 and 2002, and collected about $291,000 or 12 percent, 

including all or some portion of penalties from 44 percent of the preparers 

penalized. According to IRS officials, collecting paid preparer penalties has 

not been a priority in the division’s overall collection efforts due to other 

higher priority work, such as abusive tax schemes. 

According to an SB/SE representative, there are currently no plans for 

SB/SE to make collecting paid preparer penalties a priority. The 

representative stated that their priorities include abusive tax schemes, and 

they cannot afford to make these low dollar paid preparer cases a priority 

given their responsibility for addressing billions of dollars in uncollected 

taxes. Also, IRS does not currently have a system in place to identify paid 

preparer penalties separately from other assessments once a case is 

assigned for collection, and to do so would require a labor-intensive 

computer programming effort. 

However, the monetary amounts of these penalties, which are small 

relative to IRS’s other compliance efforts, may not reflect how important 

the penalties are as a deterrent to problematic paid preparers. According to 

the Internal Revenue Manual,13 penalty assertion is the key enforcement 

vehicle for noncompliant preparers. As mentioned earlier, IRS has no data 

on the extent of the problems with paid preparers or how effective its 

enforcement efforts are in deterring problematic preparer behavior. In 

13Internal Revenue Manual, 4.10.6.8.2(1) (Washington, D.C.: May 14, 1999). 

Page 16 GAO-04-70 Paid Tax Preparers 
assessing but not collecting these penalties, IRS may be sending preparers 

a mixed message about whether poor performance by preparers will be 

tolerated. For example, several paid preparers and low-income tax clinic 

officials we interviewed said that IRS was not providing enough paid 

preparer oversight and that it should be increased. IRS has made changes 

to its fiscal year 2003 compliance program guidance to place a higher 

priority on assessing penalties against problem preparers. However, 

collecting paid preparer penalties will continue to be part of the regular 

collection process because they are not to be given any special treatment 

as a priority. 

IRS Monitors Preparers 

Who Offer Electronic Filing 

but Has Limited Role in 

Monitoring RALS 

IRS has broad authority to monitor and sanction Electronic Return 

Originators (ERO) whom IRS authorizes to file tax returns electronically. 

IRS’s monitoring is to ensure ERO compliance with provisions of any 

revenue procedures, publications, or notices that govern IRS’s e-file 

program, including RALs. Through random and mandatory visits, the ERO 

monitoring program offices monitor the activities of EROs to ensure 

compliance with IRS’s e-file program and to investigate allegations and 

complaints against EROs. In 2001, IRS established a goal of visiting 1 

percent of all EROs each year. IRS met its goal in 2002, visiting more than 

1,400 EROs and sanctioning 215 of them for violating IRS guidelines. Figure 

5 shows the number of EROs visited and sanctions issued by degree of 

seriousness, for fiscal year 2002, and for two thirds of fiscal year 2003, 

based on the most recent data available through May 2003. 

Page 17 GAO-04-70 Paid Tax Preparers 
Figure 5: Visits and Actions by the ERO Monitoring Program 

1,600 Visits 

1,412 

1,001 

577 

884 

117 91 38 50 60 15 16 14

IRS’s CI division investigates paid preparers suspected of criminal or 

fraudulent behavior and other related financial crimes. However, according 

to CI officials, they have a system using indicators developed from prior 

cases to identify and work only the most egregious cases due to overall 

resource limitations, leaving some cases unworked. Nevertheless, 

according to IRS, CI is increasing its investigations of criminal and 

fraudulent paid preparers. For example, according to IRS it more than 

doubled the number of paid preparer criminal investigations in 2002 

1,400 

1,200 

1,000 

800 

600 

400 

200 

0 

Referrals Visits Written 

reprimands 

Recommended 

suspension 

Immediate 

suspension 

Referral to CI 

Actions taken 

2002 

2003a 

Source: IRS. 

a Cumulative through May 23, 2003. 

However, while IRS does impose some requirements on paid preparers 

offering RALs, its role is limited and the requirements serve in part to 

ensure that RALs are presented to taxpayers as loans and not as an 

accelerated tax refund. For example, IRS’s Publication 1345 prohibits EROs 

from basing their fees on a percentage of the refund amount or computing 

their fees using any figure from tax returns. 

CI Division Investigates 

Criminal and Fraudulent 

Preparer Behavior 

Page 18 GAO-04-70 Paid Tax Preparers 
compared to 2001 and experienced a significant increase in the number of 

investigations referred for prosecution in the first quarter of fiscal year 

2003. 

CI officials told us that to prioritize its work, CI identifies and investigates 

the most egregious criminal behavior using a fraud ranking system that 

determines which preparers should be investigated. Officials said the 

ranking is based on information developed from individual returns 

provided by fraud detection centers. Fraud detection centers are CI offices 

collocated at IRS campuses that attempt to detect fraud by scanning paper 

and electronic returns. The system ranks preparers by the number of 

suspected fraudulent filed returns by applying criteria that have proven in 

the past to be successful in prosecution of fraud cases. However, as 

mentioned earlier, IRS has no data on the extent of the problem with paid 

preparers, including those who are fraudulent, or the effectiveness of CI’s 

deterrent actions against them. 

Two programs provide much of the organizational framework for CI’s 

actions against criminal paid preparer behavior. The division’s Return 

Preparer Program identifies and investigates criminal paid preparers while 

the Questionable Refund Program identifies fraudulent tax returns. Once 

identified, the program stops payment on fraudulent tax refunds and refers 

fraudulent tax schemes to CI field offices for further investigation. Figure 6 

shows that in 2001 and 2002, CI evaluated 574 referrals of possible criminal 

paid preparer behavior and initiated 395 criminal investigations against 

paid preparers. 

Page 19 GAO-04-70 Paid Tax Preparers 
Allegations

Recommended

Figure 6: Paid Preparer Criminal Investigations for Calendar Years 2001 and 2002 

Number 

600 574 

500 

400 

300 

200 

100 

0 

134 134 119 

181 

395 

evaluated 

Criminal

initiated 

prosecutions

Indictments 

Sentenced 

Incarcerated

investigations

CI actions taken 

Source: IRS Division of Criminal Investigation. 

According to CI, criminal paid preparer behavior varies. Some criminal 

preparers create false forms such as W-2s and file returns on behalf of 

deceased taxpayers. Others buy social security numbers and the names of 

dependents from taxpayers with multiple children in order to allow others 

to claim dependent related tax credits, such as the EIC. According to CI 

officials, most criminal preparers are investigated for aiding and abetting a 

false tax return. For example, during 2001 to 2002, more than 91 percent of 

CI’s initiated investigations against paid preparers involved preparers who 

helped prepare false or fraudulent tax returns. One investigation resulted in 

a preparer pleading guilty for assisting in the preparation of false tax 

returns and sentenced to 38 months in prison and assessed a $10,000 fine. 

The preparer owned and operated a tax preparation business and among 

her criminal activities regularly advised clients to claim fraudulent tax 

credits for dependents and child care, even though the clients had no 

dependents. The preparer’s actions from 1997 to mid-2000 resulted in a loss 

to the Treasury of between $1.5 and $2.5 million. From 2001 to 2002, CI 

Page 20 GAO-04-70 Paid Tax Preparers 
investigations resulted in the indictment and sentencing of 13414 paid 

preparers, of which 119 were incarcerated. 

Anecdotally, several preparers we spoke to stated that publishing examples 

of convictions against preparers may help deter future criminal preparer 

behavior. However, IRS does not have quantitative information about the 

size of the problem with paid preparers or the extent to which convictions 

against paid preparers are a deterrent to other preparers. Information on 

deterrence would be difficult, perhaps impossible to develop. 

Others Believe More IRS 

Oversight Is Needed 

While IRS provides some oversight of paid preparers, others believe that it 

should provide additional oversight. The Low Income Taxpayer Protection 

Act of 2003, S. 685 proposed in the 108th Congress, would require the 

licensing and registration of paid preparers and RAL providers. The 

proposal would also require all preparers to abide by the rules of conduct 

that currently govern practitioners and contains provisions aimed at 

discouraging the use of RALs, including regulating the fees charged for 

RALs. 

The National Taxpayer Advocate recommended a similar proposal 

requiring the registration of paid preparers in her 2002 Annual Report to 

Congress. The proposal would require paid preparers to be registered with 

IRS, pass a certification examination, and maintain annual educational 

requirements. In a previous report to the Congress, the National Taxpayer 

Advocate stated that while paid preparers are subject to monetary 

penalties if they prepare returns negligently, many preparers are not 

subject to standards of conduct, licensed by any state regulatory agency, or 

required to participate in continuing education programs. Thus, according 

to the Advocate, the only course of action that can be taken to enjoin a paid 

preparer is the initiation of a civil action by the Secretary of the Treasury 

against the preparer in A District Court of the United States. According to 

the Advocate, such action is costly, time consuming, and leaves 

questionable income tax preparers free to remain in business and 

14 The 134 preparers indicted are not necessarily the same preparers sentenced. Some 

preparers indicted were not sentenced during the period and some of those sentenced may 

have been indicted in a prior period. 

Page 21 GAO-04-70 Paid Tax Preparers 
potentially harm taxpayers if they continue to prepare income tax returns 

during the legal process of the civil action.

15 

Some of the paid preparers and officials from low-income tax clinics and 

professional organizations we interviewed said that IRS could provide 

additional oversight of paid preparers, although several said that it would 

be difficult for IRS to undertake such efforts. Several of the preparers we 

interviewed said that IRS’s current oversight of paid preparers needed 

improvement and most of the paid preparers, low-income tax clinics, and 

professional organizations we interviewed told us they supported the 

licensing or registration of paid preparers as a way to provide additional 

oversight of paid preparers. For example, one preparer said he felt paid 

preparer oversight was not in IRS’s order of priorities and that paid 

preparers should be licensed so that IRS could enforce education and 

conduct standards. Others told us that IRS should impose a registration or 

licensing requirement on paid preparers although some expressed 

reservations. For example, a representative from the National Society of 

Accountants said that it would be an arduous task for IRS to create a 

system to license hundreds of thousands of people and then set up the 

mechanisms to discipline them. Officials from a low-income tax clinic also 

expressed concerns, saying that such a proposal may increase the cost of 

tax preparation by reducing the supply of available preparers. 

Any consideration of whether to change IRS’s responsibilities for 

overseeing paid preparers would likely take into account several factors. 

One, obviously, is the benefits and costs to taxpayers who use paid 

preparers. However, as highlighted in this report, data are lacking about the 

extent of problematic paid preparer behavior and the effectiveness of 

existing IRS actions, which makes it difficult to assess the tradeoff between 

benefits and costs. Another factor is that regulating the paid preparer 

industry, a private sector industry, is a form of consumer protection. IRS’s 

major functions, which include processing tax returns, responding to 

taxpayer questions, and enforcing compliance with the tax laws, give it 

little experience in providing consumer protection. Still another factor is 

the implication for IRS resources. Recently we have reported on declines in 

IRS’s enforcement programs, including declines in resources allocated to 

those programs. We have also reported that needs in other IRS programs 

have often been met at the expense of resources devoted to enforcement. 

15National Taxpayer Advocate, FY 2001 Annual Report to Congress (Washington, D.C.: 

December 2001). 

Page 22 GAO-04-70 Paid Tax Preparers 
IRS Is Not Alone in 

Providing Some Preparer 

Oversight 

Any consideration of whether to increase IRS paid preparer oversight or 

consumer protection must also recognize that IRS is not alone in providing 

such oversight. Other federal agencies, such as the Federal Trade 

Commission (FTC), state and local governments, and professional 

organizations engage in efforts to prevent, detect, and take action against 

problem paid preparers. For example, FTC has taken action against paid 

preparers pursuant to its authority to enforce the provisions of the Federal 

Trade Commission Act.16 FTC’s primary mission is to protect consumers by 

enforcing federal consumer protection laws that prevent fraud, deception, 

and unfair business practices. This protection extends to taxpayers using 

paid preparers for tax preparation and other related services. 

In addition, at least six states and one city have laws that provide paid 

preparer oversight or consumer protection regarding RALs. These laws 

range from requiring registering or licensing of paid preparers to requiring 

disclosure statements for RALs. For example, the City of New York 

requires a separate disclosure statement for RAL agreements that must be 

provided in English or Spanish. New York City’s law also requires paid 

preparers to provide an oral explanation of the law’s required written 

disclosure in language understood by the taxpayer. In addition to 

government entities, professional organizations, such as the American 

Institute of Certified Public Accountants and the American Bar 

Association, also impose general standards of conduct on the actions of 

their members, including those representing taxpayers before the IRS and 

preparing tax returns. We did not attempt to identify all federal, state, and 

local governments or professional organizations that have a paid preparer 

or RAL oversight role in addition to IRS. Table 3 shows examples of some 

tax preparation and RAL oversight in addition to that provided by IRS. 

1615 U.S.C. Sections 41-58. 

Page 23 GAO-04-70 Paid Tax Preparers 
Table 2: Some Examples of Paid Preparer and RAL Oversight Efforts by State and Local Government 

Tax preparation oversight RAL oversight 

Exam to be 

License/ register licensed/ Continuing education 

Government preparers registered required Register Disclose 

State 

California x x 

Illinois x 

Minnesota x 

North Carolina x x 

Oregon x x x 

Wisconsin x 

Local 

New York City x 

Source: GAO 

Three of these seven oversight efforts shown in the table above were 

passed or enacted within the past year. To date, none of the state or local 

governments responsible for the efforts has evaluated the effectiveness of 

these efforts. The absence of such data further complicates any 

consideration about changing IRS’s role. Without data, IRS management 

cannot determine how much these other government entities will provide 

paid preparer oversight or consumer protection. 

Concluding 

Observations 

Paid tax preparers are critical to the functioning of our tax system. Many 

taxpayers do not understand their filing requirements and would have great 

difficulty filling out their tax forms without the assistance of paid 

preparers. 

While most taxpayers may receive quality services from their preparers, 

problematic behavior by some preparers raises the question of whether IRS 

should be more active in overseeing paid preparers. Since paid tax 

preparation is a private sector industry, this can be viewed as a question 

about the extent to which the nation’s tax administrator ought to be 

involved in consumer protection. On the one hand, the complexity of the 

tax code is at least partly responsible for the existence of the paid tax 

preparation industry. As a consequence, IRS might be viewed as properly 

Page 24 GAO-04-70 Paid Tax Preparers 
having some responsibility for oversight of the industry. On the other hand, 

IRS’s mission is tax administration and the agency may not have the 

expertise or the regulatory culture for successfully carrying out consumer 

protection responsibilities. In addition, unless given a budget increase IRS 

would have to divert resources from other priorities in order to carry out 

expanded industry oversight responsibilities. In recent years IRS has often 

met such resource needs by decreasing staffing of its enforcement 

activities. 

At least two proposals exist for legislative action, one from the Taxpayer 

Advocate and the other, the Low Income Taxpayer Protection Act of 2003, 

S. 685, proposed in the108th Congress. Unfortunately, there is not much 

reliable information about the tradeoffs associated with changing IRS’s 

role. Examples of problematic preparer behavior are easy to find but 

reliable estimates of the number of taxpayers affected by the problems do 

not exist and would be difficult, perhaps impossible, to develop. Such data 

would be needed to properly evaluate proposals for changing IRS’s role. 

While the federal government and some state and local governments have 

taken actions intended to address problematic preparer behavior, the 

effectiveness of the actions is not known. Because making decisions about 

IRS’s role is a policy matter and because data are not available to determine 

the efficacy of IRS’s current oversight efforts, whether to expand IRS’s role 

in ensuring taxpayers receive quality service from paid preparers is a 

judgment that Congress and IRS management must make. We are not 

making recommendations in this report. 

Agency Comments and 

Our Evaluation 

The Commissioner of Internal Revenue provided written comments on a 

draft of this report in an October 28, 2003, letter, which is reprinted in 

appendix III. The Commissioner agreed with the information presented in 

our report and noted that IRS will continue its efforts to provide oversight 

of paid tax preparers and is developing new initiatives to ensure the ethical 

responsibility of preparers. These efforts include continuing to develop the 

Office of Professional Responsibility, considering changes to Circular 230, 

coordinating with professional tax associations, increasing compliance 

efforts, forming a multifunctional work group to improve communications 

within IRS, and developing a national paid preparer strategy. 

The Commissioner said that, based on the information in our report, IRS 

will undertake an analysis of whether IRS can take additional steps to 

increase the impact of its efforts to assess penalties against paid tax 

preparers. In response to our observation that penalties assessed against 

Page 25 GAO-04-70 Paid Tax Preparers 
paid preparers are not a collection priority, the Commissioner noted, and 

we agree that preparer penalty cases are included in IRS’s collection 

priority system. Our point is that they are not a collection priority because 

of their relatively low dollar value and we noted that IRS collected only 12 

percent of the penalties assessed in calendar years 2001 and 2002. The 

Commissioner commented that it might be a better reflection of IRS’s 

collection efforts to point out that during this period, the agency collected 

all or some portion of penalties from 44 percent of the SB/SE preparers 

who were assessed a penalty and we changed our draft to show the 

percentage collected. We were aware that some paid preparers voluntarily 

pay the penalties assessed against them but, as indicated by the 

Commissioners’ response, more than half of paid preparers paid nothing. 

Since uncollected preparer penalties represent about 88 percent of the 

value of penalty assessments, we said that IRS may be sending the paid 

preparer community a mixed message about whether poor performance by 

preparers will be tolerated. At the same time, we recognize that collecting 

paid preparer penalties has not been a priority due to other higher priority 

work, such as abusive tax schemes. 

As agreed with your offices, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days from its 

date. At that time we will send copies to the Secretary of the Treasury, the 

Commissioner of Internal Revenue, and other interested parties. We will 

also make copies available to others on request. In addition, the report will 

be available at no charge on the GAO Web site at http://www.gao.gov. 

Page 26 GAO-04-70 Paid Tax Preparers 
This report was prepared under the direction of Jonda Van Pelt, Assistant 

Director. Other major contributors are acknowledged in appendix IV. If you 

have any questions about this report, contact me on (202) 512-9110. 

James R. White 

Director, Tax Issues 

Page 27 GAO-04-70 Paid Tax Preparers 
Appendix I 

Objectives, Scope, and Methodology


The objectives of this report were to (1) obtain the views of taxpayers who 

used paid preparers and provide examples of paid preparer performance, 

including what is known about the extent of problems caused by paid 

preparers and (2) describe IRS’s efforts to prevent, detect, and take action 

against problem paid preparers; challenges facing IRS offices that interact 

with paid preparers, especially the Office of Professional Responsibility; 

and efforts to address those challenges. 

Objective 1: Obtaining 

Taxpayer Views, 

Examples of Paid 

Preparer Performance, 

and What Is Known 

about the Extent of 

Problems Caused by 

Paid Preparers 

To obtain the views of taxpayers who used paid preparers about the quality 

of service the preparers provided, we conducted (1) a representative 

nationwide survey and (2) in-depth interviews with a small judgmental 

sample of the individuals who participated in our nationwide survey. We 

also searched for studies that talked about the extent of problems caused 

by paid preparers. 

Methodology for the 

Taxpayer Survey Regarding 

Use of Paid Preparers 

To determine taxpayer views of their paid preparers, we contracted with 

the Marist College Institute for Public Opinion of Poughkeepsie, New York 

to include our questions at the beginning of their multisubject telephone 

survey of the United States conducted between February 5 and 24, 2003. 

Interviews were completed with 917 of the estimated 1,996 eligible sampled 

individuals for a response rate of 46 percent.1

 The results presented in our 

report are based on the 429 interviews with respondents who reported they 

paid someone to prepare their federal personal tax returns for their 2001 

income. 

Study Population and We sought to obtain information about the views of the adult population of 

Sample Design the United States. The study procedures yield a sample of members of the 

1

Based on the RR3 response rate convention defined by the American Association of Public 

Opinion Research 

(http://www.aapor.org/default.asp?page=survey_methods/standards_and_best_practices/sta 

ndard_definitions).

Page 28 GAO-04-70 Paid Tax Preparers 
Appendix I


Objectives, Scope, and Methodology


noninstitutional population of the United States (50 states and the District 

of Columbia) who are 18 years or older, speak English, and reside in a 

household with a land-based telephone (cellular telephone numbers were 

not included in the sample). 

Random Digit Dial Equal Probability Selection Methods were followed to 

identify households. Survey Sampling International (SSI) of Fairfield, 

Connecticut provided the probability sample of telephone numbers. These 

were drawn from active telephone blocks of telephone exchanges with 

listed numbers and excluded numbers that SSI identified as being business 

numbers or not in service (e.g., disconnected). At least eight calls were 

made to each telephone number to attempt to identify a respondent. 

A member within each household was initially randomly chosen by 

selecting the individual whose birthday most recently preceded the date of 

the telephone contact. Once the selection of a household member was 

made, two attempts were made to complete the interview with that 

individual. If, after two contacts, including scheduled appointments, the 

selected member could not be reached or refused to complete the survey, a 

second adult member of the household was asked to participate. If a 

household refused twice, it was not contacted until the final week of data 

collection at which time a monetary incentive was offered for completion 

of the interview. 

Survey respondents are weighted in our analyses so that age, gender, and 

regional estimates from our survey will match U.S. data on these 

demographic characteristics. The U.S. data come from county-level 

estimates from Census 2000 that were projected forward by SCAN/U.S., 

Inc. to July 1, 2002. 

Sources of Error	 As with all sample surveys, this survey is subject to both sampling and 

nonsampling errors. The effects of sampling errors, due to the selection of 

a sample from a larger population, can be expressed as confidence 

intervals based on statistical theory. The effects of nonsampling errors, 

such as nonresponse and errors in measurement, may be of greater or 

lesser significance but cannot be quantified on the basis of the available 

data. 

Sampling errors arise because we used a sample of individuals to draw 

conclusions about the much larger population. The study’s sample of 

telephone numbers is based on a probability selection procedure. As a 

Page 29 GAO-04-70 Paid Tax Preparers 
Appendix I


Objectives, Scope, and Methodology


result, the sample was only one of a large number of samples that might 

have been drawn from the total telephone exchanges from throughout the 

country. If a different sample had been taken, the results might have been 

different. To recognize the possibility that other samples might have 

yielded other results, we express our confidence in the precision of our 

particular sample’s results as a 95 percent confidence interval. For all the 

percentages presented in this report, we are 95 percent confident that 

when only sampling errors are considered the results we obtained are 

within +/- 5 percentage points or less of what we would have obtained if we 

had surveyed the entire study population. In addition to the reported 

sampling errors, the practical difficulties of conducting any survey 

introduce other types of errors, commonly referred to as nonsampling 

errors. For example, questions may be misinterpreted, some types of 

people may be more likely to be excluded from the study, errors could be 

made in recording the questionnaire responses into the computer-assisted 

telephone interview software, and the respondents’ answers may differ 

from those who did not respond. 

To test the understanding of the questions, we pretested the survey by 

conducting 57 interviews. To ensure that responses were correctly 

recorded in the computer-assisted telephone interview software, trained 

interviewers were used who had been specifically briefed on the study, and 

interviewer supervisors regularly monitored, evaluated, and provided 

feedback to the interviewing staff who worked from a centralized 

telephone facility. 

For this survey, the 46 percent response rate is a potential source of 

nonsampling error; we do not know if the respondents’ answers are 

different from the 54 percent who did not respond. Both GAO and Marist 

took steps to maximize the response rate—the questionnaire was carefully 

designed, at least eight telephone calls were made at different times of day 

on different days of the week to try to contact each telephone number, the 

interview period extended over 20 days, respondents were informed that 

their responses were anonymous, suspended interviews and refusals were 

recontacted at least once, and respondents were provided with a toll-free 

number to either call back at a more convenient time or to obtain further 

information about the survey. 

Because we did not have information on those taxpayers who chose not to 

participate in our survey, we could not estimate the impact of the 

nonresponse on our results. Our findings will be biased to the extent that 

the people at the 54 percent of the telephone numbers that did not yield an 

Page 30 GAO-04-70 Paid Tax Preparers 
Appendix I


Objectives, Scope, and Methodology


interview have different experiences with paid tax preparers than did the 

46 percent of our sample who responded. Knowing that the survey would 

concern tax issues could not have created large biases because only about 

1.6 percent of the eligible households in the sample (31 individuals) refused 

after the interview began (i.e., after they could have known the interview 

would address tax issues.) The remaining nonresponding units (about 52 

percent of the sample) did not know that the interview would address tax 

issues. The 52 percent is comprised of about 18 percent (356) who refused 

before the interview could be started, about 14 percent (274) where an 

eligible respondent was identified in the household, and about 21 percent 

(estimated 418) where no one was contacted at the telephone number but 

the household was assumed to be eligible. This estimate of 418 

uncontacted, but eligible, households is derived assuming that the 

percentage of eligible households among all our 704 uncontacted 

households would be the same (59.14 percent) as the percentage of eligible 

households among households for which the eligibility status was 

determined. 

To obtain examples of paid preparer performance, we conducted in-depth 

interviews with 18 taxpayers from our nationwide survey of taxpayers. In 

addition, we discussed paid preparer performance and received examples 

of paid preparer performance from various IRS offices, some paid 

preparers, some low-income tax clinics, and IRS’s Taxpayer Advocate 

Service. To obtain information on the fees charged by paid preparers for 

electronic filing and refund anticipation loans we contacted seven 

preparers posing as potential clients and also gathered loan cost schedules 

from the Web sites of two lenders. We also reviewed closed case files in IRS 

offices, including the Office of Professional Responsibility (OPR), Small 

Business/Self-Employed (SB/SE) division, and Criminal Investigation (CI) 

division. 

A copy of the survey is in appendix II. 

In-depth Interviews with As part of our nationwide survey of taxpayers, we asked the individuals we 

Taxpayers	 contacted if they would be willing to participate in an in-depth interview 

regarding their experiences with paid tax preparers. For those taxpayers 

who agreed, we used a structured questionnaire that covered, for example, 

how taxpayers found their paid preparers and investigated the credentials 

of the preparer, the type of preparer used, why the taxpayer used a paid 

preparer, and how extensively the preparer probed the taxpayers’ personal 

Page 31 GAO-04-70 Paid Tax Preparers 
Appendix I


Objectives, Scope, and Methodology


tax circumstances and asked for documentation. We interviewed 18 

taxpayers in-depth. 

Studies Discussing the 

Extent of Problems Caused 

by Paid Preparers 

To obtain studies discussing the extent of problems caused by paid 

preparers, we relied upon studies mentioned in interviews with IRS 

officials and through periodical searches. We also used a 1997 Consumer 

Reports survey of their readership concerning paid preparers, a report by 

the Treasury Inspector General for Tax Administration regarding 

potentially unclaimed child tax credits, a Department of Treasury study 

regarding earned income tax credits, and a previous GAO report that 

estimated the number of taxpayers eligible to itemized deductions who 

used the standard deduction instead. 

Objective 2: Describe 

IRS’s Oversight of 

Problem Paid 

Preparers; 

Management 

Challenges Facing 

IRS’s Offices that 

Provide Oversight; and 

Efforts to Address 

Management 

Challenges 

To describe IRS’s efforts to prevent, detect, and take action against 

problem paid preparers, we interviewed officials from IRS offices including 

OPR, SB/SE, CI, and the Taxpayer Advocate Service (TAS). IRS officials 

said these offices interact the most with preparers. We also reviewed 

various documents used by these offices to provide paid preparer 

oversight. 

To describe challenges facing IRS offices that interact with paid preparers, 

especially OPR, and efforts to address those challenges, we interviewed 

officials from OPR, including its new Director, as well as officials from 

other IRS offices discussed above, such as SB/SE and CI. We also used 

documents from OPR, including a consulting firm report on the office of 

Director of Practice and documents from other IRS offices. 

To examine IRS’s efforts to assess and collect penalties against paid 

preparers, we interviewed officials from IRS’s SB/SE division, reviewed 

collection data, and examined division documents. To determine the 

percentage of assessed fines collected and uncollected by SB/SE we relied 

upon a SB/SE analysis of collections data extracted from IRS’s 

Enforcement Revenue Information System. To assess the reliability of 

these data, we reviewed existing documentation related to the data sources 

and interviewed officials knowledgeable about the data. We determined 

that the data were sufficiently reliable for the purposes of this report. 

To obtain information about IRS’s efforts to register and monitor Electronic 

Return Originators (ERO), we interviewed officials from SB/SE’s ERO 

Page 32 GAO-04-70 Paid Tax Preparers 
Appendix I


Objectives, Scope, and Methodology


Monitoring Program and reviewed IRS Publication 1345 covering 

requirements for EROs. To determine the number of EROs, monitoring 

visits, and sanctions issued, we relied upon IRS’s e-file Provider Monitoring 

Report. In addition, we reviewed various other documents including a 

recent report by the Treasury Inspector General for Tax Administration. 

To describe IRS’s efforts to investigate criminal and fraudulent paid 

preparer behavior, we interviewed officials from CI and reviewed case file 

information. We used data from the CI Management Information System 

and interviewed CI officials to determine statistics on the cases worked. To 

assess the reliability of these data, we reviewed existing documentation 

related to the data sources and interviewed officials knowledgeable about 

the data. We determined that the data were sufficiently reliable for the 

purposes of this report. 

To examine efforts suggested by IRS’s Taxpayer Advocate Service to 

provide additional IRS oversight of paid preparers or provide more 

consumer protection, we interviewed officials from the Advocate’s office 

about a proposal to license paid preparers. We also reviewed the 2001 and 

2002 National Taxpayer Advocate’s reports to Congress where the 

Advocate’s proposals are explained and discussed. 

To provide examples of actions taken against problem paid preparers by 

other federal, state, and local governments, we relied upon interviews and 

reports from a variety of sources including paid preparers, professional and 

consumer organizations, officials from several states, and some federal 

agency representatives. Based on these interviews and reports, we 

examined state and local laws that create oversight of certain aspects of 

paid preparer behavior. We did not attempt to identify all federal, state, and 

local governments or professional organizations that have a paid preparer 

or RAL oversight role. Those discussed are only examples of what we 

found during our research and there may be others. 

The data cited from IRS for the estimated number of individual filers in 

2001 that paid someone to prepare their tax returns, the amount paid in 

2000 for tax preparation, the number of paid preparers in 1999, and the 

number of RALs taken out in 2001 and 2000 are considered background 

information. As such, we did not verify these numbers. 

We conducted our work from April to October 2003 in accordance with 

generally accepted government auditing standards. 

Page 33 GAO-04-70 Paid Tax Preparers 
Appendix II 

Final Survey Results Weighted to the U.S. 

Population 

Survey Results1 

“We have a few questions about your experiences last year in completing 

your federal income tax return. We are interested in whether or not you 

paid someone last year to fill out your 2001 income tax return.” 

“Did you pay someone to prepare your tax return last year?” 

__47__ YES (Continue with Question 2) 


__51__ NO (Stop)


___1 NOT SURE


___1__ REFUSED


“For the rest of the questions, we’ll refer to this person as the paid preparer. Was the paid preparer who filled out your tax return: A) A tax 

preparation service such as H & R Block or Jackson-Hewitt, B) An accountant, CPA or lawyer, C) Someone else, or D) do you not know?” 

__35__ A. A TAX PREPARATION SERVICE 

__52__ B. AN ACCOUNTANT, CPA, OR LAWYER 

__ 9__ C. SOMEONE ELSE 

_ _4__ D. DON’T KNOW 

“Who worked directly with the paid preparer, was it only yourself, both yourself and someone else, or only someone else?”* 

__46_ ONLY YOURSELF


__35_ BOTH YOURSELF AND SOMEONE ELSE


__17_ ONLY SOMEONE ELSE


___1_ NOT SURE/REFUSED 


1

 We are 95 percent confident that the percentage estimates of our survey are within +/- 5 percentage points or less of what we would have 

obtained if we had surveyed the entire study population. 

Page 34 GAO-04-70 Paid Tax Preparers 
Appendix II


Final Survey Results Weighted to the U.S. 


Population


* Percents do not add to 100 due to rounding. 

“Next, we ask about some of the practices that paid preparers sometimes follow. For each one, please tell me whether you know if it is 

something your paid preparer did do or did not do or whether you do not know.” 

“First, did your paid preparer give you a copy of your completed tax return, 

not give you a copy or do you not know?” 

__95__ YES, GAVE COPY 

___1__ NO, DIDN’T GIVE COPY (skip to 4c) 

___4_ DON’T KNOW (skip to 4c) 

“Did your paid preparer sign your copy of your completed tax return as the preparer, not sign your copy, or do you not know?” 

___83_ YES, SIGNED COPY 

____3_ NO, DIDN’T SIGN COPY 

___14_ DON’T KNOW 

“Did your paid preparer see any documents that showed the income you received or any deductions or tax credits that you might have 

claimed? That is, did the paid preparer see the documents, not see them, or do you not know?” 

__88__ YES, SAW DOCUMENTS 

___2__ NO, DIDN’T SEE DOCUMENTS 

__10__ DON’T KNOW 

“For the next question, I want you to think about everything about you that affects the amount of taxes you pay, such as whether or not you 

have children at home, earn interest from a bank account, or pay a mortgage. Do you believe that your paid preparer had enough 

information about your situation to accurately prepare your income tax return, didn’t have enough information, or don’t you know?” 

__91__ YES, HAD ENOUGH INFORMATION 

___3__ NO, DIDN’T HAVE ENOUGH INFORMATION 

___6__ DON’T KNOW 

Page 35 GAO-04-70 Paid Tax Preparers 
Appendix II


Final Survey Results Weighted to the U.S. 


Population


“How confident are you that you did not pay more in taxes than was legally required last year? Would you say that you are very confident, 

generally confident, a little confident, not at all confident or that you have no opinion?”* 

___49_ VERY CONFIDENT 

___28_ GENERALLY CONFIDENT 

____7_ A LITTLE CONFIDENT 

____5_ NOT AT ALL CONFIDENT 

___12_ NO OPINION 

* Percents do not add to 100 due to rounding. 

“Has the IRS sent you any type of notice saying that any part of your tax return from last year had to be changed, or has the IRS not 

contacted you, or do you not know whether you have been contacted?” 

____8 YES, IRS SENT NOTICE 

___86_ NO, IRS NOT CONTACTED 

____6_ DON’T KNOW 

“Now think about your new 2002 tax return that is due soon. Do you think you will use a paid preparer again or not use a paid preparer for 

this new tax return?” 

__87_ YES, USE A PREPARER AGAIN 

___7_ NO, NOT USE A PREPARER (stop) 

___6_ DON’T KNOW (stop) 

“The U. S. General Accounting Office is doing research on peoples’ opinions and experiences with their paid preparers. Would it be okay 

with you if someone from the General Accounting Office telephoned you in the next month for a research interview?” 

__45_ YES (NOT REWEIGHTED TO U.S. 

__54_ NO (stop) POPULATION) 

Page 36 GAO-04-70 Paid Tax Preparers 
Appendix III 

Comments from the Internal Revenue Service


Page 37 GAO-04-70 Paid Tax Preparers 
Appendix III


Comments from the Internal Revenue Service


Page 38 GAO-04-70 Paid Tax Preparers 
Appendix IV 

GAO Contacts and Staff Acknowledgments


GAO Contacts	 James White (202) 512-9110 

Jonda Van Pelt (415) 904-2186 

Acknowledgments	 In addition to those named above, Vince Balloon, Larry Dandridge, 

Katherine Davis, Michele Fejfar, Evan Gilman, Tre Forlano, Brittni Milam, 

Libby Mixon, Cheryl Peterson, and Peter Rumble made key contributions 

to this report. 

(450210) Page 39 GAO-04-70 Paid Tax Preparers 
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