Tax Preparers: Oregon's Regulatory Regime May Lead to Improved Federal Tax Return Accuracy and Provides a Possible Model for National Regulation
Published: 2008-08-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Millions of taxpayers use paid tax return preparers and many of these paid preparers are not subject to any qualification requirements. Paid preparers in California and Oregon are exceptions in that these states have set paid preparer qualification standards. Additionally, two bills before Congress would require national paid preparer regulations. To help Congress better understand the potential costs and revenue effects of regulating paid preparers, GAO was asked to study (1) how IRS, California, Oregon, and other states regulate paid preparers, (2) how the accuracy of federal tax returns from California and Oregon compare to other returns, and (3) state-level costs and benefits of the California and Oregon programs and insights they provide for a possible national program. GAO analyzed IRS research data on tax return accuracy; interviewed IRS officials, state administrators, and preparer community representatives; and reviewed relevant documents.
section_title: What GAO Found
paragraphs: No federal registration, education, or testing requirements apply to all paid preparers before they can prepare tax returns. California and Oregon have requirements that preparers must meet before preparing returns in those states. California paid preparers who are not attorneys, certified public accountants, enrolled agents (or employed by one of these types of tax practitioners) must complete an education requirement, obtain a bond, pay a fee, and register. In following years, they must complete continuing education requirements, and renew their registration. Oregon has similar, but more stringent requirements. Oregon has a two-tiered licensing system, with an education requirement and examination for Licensed Tax Preparers and work experience and a second examination for Licensed Tax Consultants. Oregon exempts certified public accountants and their employees, as well as attorneys, from these requirements. Oregon requires enrolled agents to take a shorter version of the consultant examination. Fifty-four percent of Oregon applicants passed the state's basic examination. Recently, Maryland enacted legislation to regulate paid preparers and at least three other states have similar pending legislation. According to GAO's analysis of the Internal Revenue Service's (IRS) tax year 2001 National Research Program data, Oregon returns were more likely to be accurate while California returns were less likely to be accurate compared to the rest of the country after controlling for other factors likely to affect accuracy. In dollar terms, the average Oregon return required approximately $250 less of a change in tax liability than the average return in the rest of the country. For Oregon's 1.56 million individual tax filers, this equates to over $390 million more in federal income taxes paid in Oregon than would have been paid if the returns were as accurate as similar returns in the rest of the country. These results are consistent with, but do not prove, that Oregon's regulations lead to some increased tax return accuracy. GAO's analysis could not account for all factors that might affect the accuracy of these tax returns. Because some states without preparer regulation also had tax returns that, on average, were more accurate than the national average, some portion of the increased accuracy of Oregon returns likely is due to other factors. The California and Oregon programs' costs varied with differences in the programs' scope. Both programs' administrative costs are funded primarily from program fees. California's costs were about $29 per preparer and Oregon's about $123. GAO estimates that the total annual cost of the ongoing Oregon program, including state costs and the cost to preparers for their time and expense in acquiring required education, likely is about $6 million. Officials in both states believe program benefits like reducing the number of incompetent preparers outweigh costs, although neither state had data on benefits. IRS officials said that a national program's costs likely would depend on the program's objectives and features.

section_title: Letter
paragraphs: Nearly 78 million of the 127 million individual income tax returns filed  during the 2006 filing season were prepared by paid tax return preparers.  Paid preparers are such an important part of the federal tax administration  system that the Internal Revenue Service (IRS) sometimes refers to them  as “partners.” However, we testified in 2006 on the serious errors that paid  preparers can make—errors that cause taxpayers to underpay their taxes,  exposing themselves to IRS enforcement action, or that lead taxpayers to  not take advantage of available credits or deductions and, as a result, they  end up paying too much. Tax return preparers may be self employed or  may work in a variety of business settings, including large companies,  franchises, and small businesses. Most paid preparers are not subject to  any education, testing, or registration requirements. Two states, California  and Oregon, are exceptions in that for many years they have had their own  requirements that apply to paid preparers working in their states.
To help Congress better understand the potential costs and revenue  effects of establishing regulation at a federal level for all paid preparers,  you asked us to answer the following questions: (1) How do IRS,  California, Oregon, and other states regulate paid preparers? (2) Using  available IRS data, how does the accuracy of federal tax returns in  California and Oregon compare to that of returns in the rest of the  country, after accounting for other factors that might influence accuracy?  (3) What are the state-level costs and benefits of the paid preparer  programs in California and Oregon and what insights do they provide for  possible benefits if Congress were to enact national paid preparer  registration or licensing requirements?
To answer these questions, we reviewed relevant documents from  California, Oregon, and IRS, including budget and legislative material. We  interviewed California and Oregon state program administrators and paid  preparer industry representatives in those states and nationwide. We also  searched legal databases for examples of newly enacted paid preparer  laws in other states and pending legislation. We also interviewed IRS  officials to discuss the implications of using the California or Oregon  regulatory regimes as possible models for federal-level paid preparer  legislation. To compare tax return accuracy, we analyzed data from the  National Research Program (NRP), an IRS study of reporting compliance  for a random sample of individual tax returns filed for tax year 2001. In  most cases, the returns were audited to determine whether income,  expenses, and other items were reported accurately by the taxpayers. We  determined that the data used to characterize tax return accuracy  differences between California, Oregon, and the rest of the country and to  describe the costs of the two state programs were sufficiently reliable for  the purposes of this report; we determined this after assessing the  reliability of NRP data, reviewing California and Oregon financial reports,  and interviewing state program administrators. We conducted this  performance audit from September 2007 through July 2008 in accordance  with generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on our  audit objectives. For a more detailed discussion of our scope and  methodology, see appendix I.
subsections: section_title: Background
paragraphs: A paid tax return preparer is anyone who is paid to prepare, assist in  preparing, or review a taxpayer’s tax return. In this report, we refer to two  categories of paid preparers—tax practitioners and unenrolled preparers.  CPAs, attorneys, and enrolled agents are tax practitioners. Tax  practitioners can practice before IRS; practicing before IRS includes the  right to represent a taxpayer before the IRS, to prepare and file documents  with IRS for the taxpayer, and to correspond and communicate with IRS.  Individuals can become enrolled agents by passing a 3-part examination;  IRS waives the examination requirement for people with specific prior  work experience at IRS. Department of the Treasury Circular 230,  Regulations Governing the Practice of Attorneys, Certified Public  Accountants, Enrolled Agents, Enrolled Actuaries, and Appraisers before  the Internal Revenue Service, applies to tax practitioners and governs  their duties, restrictions, sanctions, and disciplinary proceedings. IRS’s  Office of Professional Responsibility (OPR) has responsibility for  administering and enforcing Treasury Circular 230. We use the term  unenrolled preparer to describe the remainder of the paid preparer  population. In most states, anyone can be an unenrolled preparer  regardless of education, experience, or other standards.
Paid preparers are a critical part of the nation’s tax administration system  because of the wide variety of services they offer and their unique  relationship with taxpayers. Paid preparers may combine several taxpayer  services, including help understanding tax obligations, answering tax law  questions, and providing tax forms and publications, return preparation,  and electronic filing. IRS regards tax professionals as a critical link  between taxpayers and the government. For example, IRS has a section of  its Web site dedicated to providing information directly to tax  professionals. IRS also sponsors the Nationwide Tax Forums, annual  conferences in several cities every year to provide tax education to paid  preparers.  The Web site of the National Association of Tax Professionals  also points out the shared responsibility of paid preparers to represent  their clients while respecting the law, listing among its professional  standards one that says “Should the client insist upon  item being  stated on the return incorrectly, the member should withdraw and refuse  to prepare the return.”
The number of active paid preparers is unknown. In 1999, IRS estimated  there were up to 1.2 million paid preparers, but IRS officials acknowledge  that the actual number could be significantly higher or lower. The total  number of active paid preparers is unknown because only a small portion  of all paid preparers—enrolled agents—are licensed directly by IRS to  practice before the IRS. As of June 2008, about 43,000 tax preparers were  actively enrolled to practice before the IRS. IRS officials said that the  number of new enrolled agent applications and the number of people  taking the examination have declined in recent years. They noted that  these declines followed increases in enrolled agent application and  examination fees. Similarly, the number of attorneys and accountants  who make tax return preparation a part of their practice is unknown.
Millions of tax returns prepared by paid preparers have serious  compliance problems, which often leave taxpayers owing or overpaying by  hundreds or thousands of dollars. As we have previously reported, IRS’s  tax year 2001 NRP data indicate that tax returns prepared by paid  preparers had a higher error rate—56 percent—than returns prepared by  taxpayers—47 percent. In 2002, we estimated that on as many as              2.2 million tax returns, taxpayers claimed the standard deduction when  their potential itemized deductions were greater, and that about half of  these taxpayers had returns prepared by another person. In 2005, we  reported that many tax returns included claims for one of three available  postsecondary education tax preferences that resulted in higher overall  tax liability than if one of the other preferences had been taken, and that  over half of these returns were prepared by paid preparers. However, 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.
On the other hand, some mistakes are clearly the fault of the preparer. In  2006 we reported on the results of an investigation where we identified  mistakes in 19 out of 19 visits to paid preparers working in preparer chain  offices. Some of the mistakes were significant, either exposing the  taxpayers to serious IRS enforcement action or costing taxpayers over  $1,500 in overpaid taxes. In 2007, the Department of Justice took action  against corporations operating franchises of a major tax preparation  chain. The government complaints alleged that the franchisee  corporations created and fostered a business environment “in which  fraudulent tax return preparation is encouraged and flourishes.” The  corporations that owned the franchises agreed to sell the franchises to  new owners and to be permanently barred from preparing federal income  tax returns.
When mistakes or deliberate noncompliance by paid preparers result in  taxpayers underreporting their tax liabilities, it adds to the tax gap. The  net tax gap is an estimate of the difference between the taxes owed— including individual income, corporate income, employment, estate, and  excise taxes—and what was eventually paid for a specific year. IRS most  recently estimated the net tax gap to be $290 billion in 2001.
In March 2008, we recommended that IRS develop a plan to require a  single identification number for paid preparers, including assessing the  feasibility of options, their benefits and costs, as well as their usefulness  for enforcement and research, on paid preparer behavior. Also, as of July  2008 there were similar bills pending before Congress calling for national  paid preparer regulation. Senate Bill 1219 and House of Representatives  Bill 5716 would require members of the current community of unenrolled  paid preparers to pass an initial qualifying examination and meet  continuing annual education requirements. Support for legislation such as  this can be found in the National Taxpayer Advocate’s 2002 and 2003  Annual Reports to Congress, which recommended Congress create a  designation called a “Federal Tax Return Preparer,” defined as someone  other than an attorney, CPA, or enrolled agent, who prepares more than  five federal tax returns in a calendar year and satisfies registration,  examination, and certification requirements.
section_title: IRS, California, and Oregon Differ Significantly in How Each Regulates Paid Tax Preparers
paragraphs: Only a few Internal Revenue Code provisions apply to all paid preparers  and only a small portion of paid preparers—enrolled agents—have any  federal registration, testing, or fee requirements. All paid preparers are  subject to a few Code provisions and may be penalized if they fail to  follow them. For example, the Internal Revenue Code imposes monetary  penalties on paid preparers who (1) understate a taxpayer’s liability due to  a position that fails to meet the applicable legal standard, (2) fail to  provide a copy of the return to the taxpayer, or (3) fail to identify  themselves on the returns they prepare. Additionally, for returns that  include the Earned Income Credit (EIC), paid preparers must ask specific  questions to determine a taxpayer’s eligibility for the credit. Also, all paid  preparers who choose to file electronically are subject to IRS Electronic  Return Originator rules.
Both California and Oregon began to regulate paid preparers in the 1970s.  California’s program was first administered by the state’s Department of  Consumer Affairs, and legislation transferred oversight responsibility to  CTEC in 1997. Oregon’s program was established by the 1973 Oregon  Legislative Assembly after representatives of the state’s paid preparer  community recommended that the legislature regulate the profession.  According to a preparer involved at the time, the Oregon Legislative  Assembly was responding to a report that there were many dishonest or  incompetent paid preparers working in the state.
The main features of California’s paid preparer program are qualifying and  continuing education and registration. To become a CRTP, individuals  initially register with CTEC by completing a 60-hour qualifying education  course, purchasing a $5,000 surety bond, completing an application, and  paying a $25 registration fee. CTEC may waive some of the qualifying  education requirements for individuals with 2 recent years experience in  the preparation of personal income tax returns. In each subsequent year,  CRTPs must complete 20 hours of continuing education, ensure their bond  remains in full force, submit a renewal application, and pay a $25 renewal  fee. As of June 6, 2008, 41,755 paid preparers were registered with CTEC.
CPAs, attorneys, enrolled agents, and employees of any of these types of  tax practitioners are exempt and not required to register.
California does not require prospective CRTPs to pass a criminal  background check or to report past criminal convictions or current legal  issues. This means that prior questionable or illegal conduct is not known  to program administrators. Moreover, CTEC does not have the authority to  deny a preparer’s registration application based on known illegal conduct,  nor does the California Code include provisions for refusing to renew a  CRTP’s registration as long as the CRTP meets the continuing education  requirement and pays the annual registration fee.
The 60-hour qualifying education requirement is intended to ensure paid  preparers have a basic knowledge of federal and California tax laws.  According to the CTEC policy manual, the intent of the annual continuing  education requirement is to enhance the paid preparer’s skill in tax  matters above the basic knowledge they have already acquired. CTEC  approves an education provider’s curriculum based on an independent  review of one of the prospective provider’s courses at least once every 3  years.
People who are not one of the types of exempt tax practitioners who  prepare tax returns in California without becoming CRTPs can be fined.  Under a Memorandum of Understanding between CTEC and the California  Franchise Tax Board (FTB), the FTB is reimbursed by CTEC for  providing staff to identify unregistered tax preparers. In 2007, FTB  provided one full-time and one part-time employee and CTEC reimbursed  FTB $270,000. Persons suspected of illegally preparing tax returns are first  issued penalty letters and encouraged to become registered. If they do not  register within 90 days, the FTB can levy fines of up to $5,000. An FTB  official said that between July 1, 2005, and June 30, 2006, FTB identified 77  individuals as unregistered. Many of these persons were identified by the  2 FTB staff members who visited the Los Angeles and San Francisco Bay  areas—where there are large numbers of paid preparer offices—met with  paid preparers, and asked to see evidence of registration. Noncompliant  paid preparers have also been identified through complaints sent to CTEC  and passed along to FTB.
Oregon requires paid preparers who are not already licensed by the state  as CPAs or attorneys, or working for a CPA, to obtain a state license to  prepare tax returns. Enrolled agents—practitioners licensed by  Treasury—must also obtain an Oregon license, but they are subject to  fewer qualifying requirements than other individuals who are seeking an  LTC license. The state board that administers the program—the Oregon  Board of Tax Practitioners—issues two levels of paid preparer licenses:  the Licensed Tax Preparer (LTP) license and the Licensed Tax Consultant  (LTC) license. To become an LTP, a person must have a high school  diploma or the equivalent, complete 80 hours of approved qualifying  education, pass a state-administered examination with a score of               75 percent or better, and pay an $80 registration fee. To continue as an  LTP in following years, individuals must annually renew their license by  completing 30 hours of approved continuing education and paying an $80  renewal fee. An LTP in Oregon may only prepare tax returns for Oregon  residents under the supervision of an LTC, CPA, or attorney. A person  can become an LTC after working as a tax preparer for a minimum of 780  hours during 2 of the prior 5 years, completing a minimum of 15 hours of  continuing education within 1 year of submitting an application, and  passing a more advanced examination with a score of 75 percent or  better.
LTPs and LTCs must disclose on their initial license and license renewal  applications if they have been convicted of a crime or are under  indictment for criminal offenses involving dishonesty, fraud, or deception.  According to the Oregon statute, OBTP can consider the circumstances in  particular cases and still approve an application when the applicant has  disclosed a legal issue.
Many applicants do not pass the LTP or LTC examinations. For instance,  from March 1, 2006, to February 28, 2007, 54 percent of test takers passed  the LTP examination and 30 percent passed the LTC examination. The  OBTP updates both examinations yearly. The examinations cover specific  Oregon and federal personal income tax laws as well as tax theory and  practice. The LTC examination also includes questions on corporation and  partnership income as they relate to personal income tax returns. The  examination questions pertain to approximately 75 percent federal and 25  percent state law. IRS enrolled agents in Oregon who wish to become  LTCs must pass a shorter version of the LTC examination that is limited to  Oregon state laws. The intent of Oregon’s education and examination  requirement is to ensure paid preparers comprehend the state and federal  tax codes. OBTP reports that in March 2008, 3,993 paid preparers held one  of these two licenses—1,916 LTPs and 2,077 LTCs.
The Oregon statute includes fines for preparing tax returns without a  license. Each return prepared can generate a separate fine, so the total  penalty for working as an unlicensed preparer can be very large. OBTP  also has the authority to assess civil penalties of up to $5,000, or suspend  or revoke the license of LTCs and LTPs who engage in fraudulent or illegal  conduct, or who violate other provisions of the Oregon statutes or OBTP  rules. Additionally, the board may order restitution to consumers harmed  by tax preparation fraud. From March 2001 to November 2007, OBTP took  disciplinary action 48 times, with fines totaling about $2 million. The  largest fine for one individual was in April 2002 for $805,700. Only a  fraction of fines are eventually collected however—while about $867,000  in fines were levied from July 2005 through June 2007, about $69,000 in  fines and $6,000 in interest was collected during the same period. Persons  penalized by the OBTP can appeal these decisions and OBTP has an  arrangement with the Oregon Office of Administrative Hearings to provide  an administrative law judge to hear these cases. Individuals can also  appeal their cases to the Oregon Court of Appeals.
Both California and Oregon use their registered or licensed paid preparer  lists to contact preparers to remind them about requirements and to  inform them about changes to the tax code or other matters they should  know about. However, neither state uses their preparer information to  track paid preparer accuracy or for enforcement purposes. California does  not require CRTPs to include their CTEC registration number on either the  state or federal tax returns that they prepare. Oregon requires LTCs and  LTPs to include their license number on both types of returns, but officials  told us that this requirement is not consistently followed as some licensees  incorrectly put down their Preparer Tax Identification Number, Social  Security Number, or an employer’s Employer Identification Number.  Consequently, neither state has a reliable means to track or analyze  returns prepared by registered or licensed paid preparers in their states.  Table 1 illustrates some of the highlights of the California and Oregon  regulatory programs.
In May 2008, Maryland also enacted paid preparer legislation that will  require tax preparers to pass an examination, pay a registration fee, and  subsequently comply with continuing education requirements. Also, New  York, Oklahoma, and Arkansas all have legislation pending that would  create tax preparer programs. All three pending bills create an oversight  regime, which would include tax preparer registration and education  requirements, both initial and continuing.
The Oklahoma and Arkansas bills require that preparers pass an  examination to register. Arkansas’s pending legislation closely models the  Oregon regime, with requirements for both preparers and consultants.  New York’s pending legislation is similar to California’s paid preparer  program, requiring preparers to maintain surety bonds but having no  provision for preparer testing. The enacted Maryland program and the  pending legislation in New York and Oklahoma exempt CPAs, attorneys  and their employees, and enrolled agents from the requirements. The  Arkansas bill would exempt CPAs and attorneys and their employees, and  would require enrolled agents to pass a test only on Arkansas tax law  issues. Table 2 provides an overview comparison of the California and  Oregon requirements with the Maryland requirements and the pending  legislation in the other states.
IRS officials noted that continued growth in the number of different paid  preparer registration or licensing regimes in different states could become  a problem if the requirements differ from state to state. The officials  described this as primarily a problem for the tax preparation industry in  that a variety of regulatory regimes across many different states could  make it complicated, for example, for paid preparers to move their  practice from one state to another or for a tax preparation chain to move  employees or expand their operations.
section_title: Oregon’s Regulatory Regime May Lead to More Accurate Federal Tax Returns
paragraphs: When controlling for other factors likely to affect tax return accuracy, our  analysis of IRS data showed that tax year 2001 federal tax returns filed in  Oregon were more likely to be accurate than returns in the rest of the  country, which is consistent with but not sufficient to prove that Oregon’s  regulatory regime improves tax return accuracy. Relative to the rest of the  country, Oregon paid preparer returns had a greater likelihood of being  accurate and California paid preparer returns were less likely to be  accurate. Specifically, we found that the odds that a return filed by an  Oregon paid preparer was accurate were about 72 percent higher than the  odds for a comparable return filed by a paid preparer in the rest of the  country. Conversely, the odds that a paid preparer return in California was  accurate were about 22 percent lower than for paid preparer returns in the  rest of the country. This indicates that California’s paid preparer  regulatory regime may not improve the likelihood that returns are  accurate, relative to the rest of the country. Our analysis controlled for  factors such as the complexity of tax returns in comparing California and  Oregon to the rest of the country. However, our analysis cannot rule out  the possibility that factors for which we could not control affected the  accuracy of tax returns in either state.
To determine the relative likelihood that Oregon and California returns  were accurate, we used multivariate logistic regression to compare the  odds of return accuracy in these states compared to odds in the rest of the  country, controlling for other characteristics that might influence return  accuracy. To make these accuracy comparisons, we used data from IRS’s  NRP, which assessed the accuracy of individual tax returns from tax year  2001. We defined a return as accurate if it required less than $100 absolute  value in changes.
As an illustration of the differences among paid preparer returns in  California and Oregon, we computed the probability of accuracy for a  medium complexity, form 1040, U.S. Individual Income Tax Return, for a  taxpayer with income over $100,000. While a return with these  characteristics prepared by a paid preparer in Oregon would have a           74 percent probability of being accurate, a similar return prepared by a  paid preparer in California would have a 55 percent probability of being  accurate.
In addition to having a higher likelihood of accuracy than the rest of the  country, on the average Oregon 2001 federal tax return—regardless of  whether it was self prepared or from a paid preparer—auditors identified a  smaller increase in taxes owed. In Oregon, the average return required  approximately $250 less of a change in tax liability than the average return  in the rest of the country. Our $250 estimate is conservative in that it does  not incorporate the limited number of cases with relatively large liability  changes. With about 1.56 million individual tax filers in Oregon in 2001,  this translates into over $390 million more in income taxes paid in Oregon  than would have been paid if Oregon returns were prepared at the level of  accuracy seen on similar returns in the rest of the country. The average tax  liability change in California was higher than the average in the rest of the  country by approximately $90.
Although the differences we observed in the states’ regulatory programs  and in how likely California and Oregon returns were to be accurate  compared to the rest of the country are consistent with the Oregon regime  leading to some improved federal tax return accuracy, the analysis cannot  rule out that the regime did not have such an effect. We could not control  for other factors that may influence accuracy, such as whether Oregon  paid preparers were more likely to be attorneys or CPAs than preparers  elsewhere in the country. Also, data are not available on return accuracy  prior to the existence of each state’s program, so we cannot compare the  before and after effects of the regimes. Before and after data might have  shown, for instance, whether the California regime leads to improved tax  return accuracy compared to what it otherwise would have been even  though California’s returns in 2001 were less accurate, on average, than  returns in the rest of the country. Also, we considered the accuracy of tax  returns in other states and found that some states without paid preparer  laws had more accurate tax returns than the national average, after  controlling for the factors in our model. This indicates that regulation  over paid preparers alone does not explain the differences that we found.  Further, to the extent that the Oregon regime does improve tax return  accuracy, our methodology does not identify whether any part of the  regime is most important to that result. Our methodology only takes into  account the entire regimes as implemented in Oregon and California.
section_title: Costs and Benefits of the California and Oregon Programs Provide Some Guidance for a National Program
paragraphs: Both California and Oregon support their programs almost entirely  through fees, with state program costs averaging about $29 and $123 per  year, respectively, per registered paid preparer. In addition to the fees  charged to paid preparers, the preparers or their employers bear other  costs, such as those associated with taking courses on tax law and return  preparation. Program administrators and preparer community  representatives in both states said that there are intangible benefits from  their regulatory regimes, although there are no studies quantifying  outcomes in either place. The California and Oregon paid preparer  registration programs include differing design features, such as on testing  applicants and how much enforcement is deemed desirable, that show, not  surprisingly, that more extensive programs cost more.
subsections: section_title: California’s Less Extensive Program Costs Less Than Oregon’s
paragraphs: California’s paid preparer program is more limited in scope than Oregon’s,  and has lower direct administration costs per registered preparer. Because  neither state provides funding for the programs above the fees collected,  the entire cost of both programs are borne directly or indirectly by the  regulated paid preparer communities.
As noted previously, California’s program primarily requires unenrolled  preparers to register with the state and meet minimum education  requirements. The total direct budgeted cost of the California program was  about $1.2 million in fiscal year 2007, with most of the funding coming  from the $25 registration fees that CRTPs must pay, with additional funds  coming from late registration fees and other income such as fees paid by  education providers that apply to be approved as CTEC education  providers. CTEC’s total budget in 2007 was $1.2 million and CTEC  reported 41,755 CRTPs in June 2008, so the cost per CRTP was about $29.  According to CTEC officials, no funds from state tax revenues are used to  pay for administering or enforcing California’s paid preparer laws.
Like California, Oregon also registers preparers and seeks to ensure that  paid preparers meet minimum education requirements, but it also tests  prospective LTPs and LTCs, adding to the administration cost of the  Oregon program. In 2008, prospective LTPs pay $50 and prospective LTCs  pay $85 to take the examinations. Also as of 2008, LTPs pay $80 and LTCs  pay $95 to obtain their initial license and in each subsequent year to renew  their license. The registration fee for a new LTC who had been an LTP is  $65. OBTP also collects fines and penalties from both unlicensed tax  return preparers and licensed paid preparers who violate Oregon laws— averaging about $38,000 per year in the 2005 through 2007 period. OBTP’s  administrative expenses amounted to about $490,000 in 2007—divided by  the 3,993 LTCs and LTPs OBTP reported in March 2008, this is about $123  per licensee. According to OBTP officials, OBTPs operating funds come  from the fees and fines described above and none come from the state’s  general revenues.
Administrative functions of CTEC and OBTP include communicating with  paid preparers and the public at large about their regulations, informing  the paid preparer community about tax law and processing changes,  evaluating education providers, recordkeeping related to registration and  licensing, maintaining a Web site that taxpayers can use to find a paid  preparer or check that a particular paid preparer is properly registered or  licensed, and working with the state legislature and the rest of the state  government. Some of the difference in the administrative cost per  registered or licensed preparer between the two states may be attributed  to economies of scale in the registration of paid preparers that California  has relative to Oregon. While California’s direct operating budget is about  twice the size of Oregon’s, the number of preparers that it registers is more  than 10 times greater.
Enforcement-related expenses take up a share of the CTEC and OBTP  budgets. In California, CTEC paid the FTB $270,000 in fiscal year 2007 to  conduct enforcement targeted at identifying unregistered preparers and  either bringing them into compliance or fining them. CTEC is not involved  in imposing fines on unregistered preparers and has no means of taking  enforcement action against a CRTP for misconduct, and it has never  incurred litigation expenses associated with someone appealing a CTEC  decision. In Oregon, the OBTP has a full-time investigator on its staff and  directly imposes fines on both licensed and unlicensed paid preparers for  misconduct. As discussed previously, these fines can be appealed, so  OBTP arranges with the Oregon Office of Administrative Hearings for an  administrative law judge to hear cases, and reimburses the Oregon  Attorney General’s Office for counsel to handle legal aspects of disputed  cases. In 2007, OBTP expenses for its investigator and costs related to  litigation were about $93,000.
The regulatory programs in the two states impose additional costs beyond  the direct administration expenses found in the CTEC and OBTP budgets.  In both states, prospective paid preparers must meet qualifying education  requirements and the financial and time costs of obtaining this education  are directly borne by either the individual or his or her employer. We  contacted frequently used education providers in both states and found  costs were typically in the $200 to $300 range, although one was $614.  According to paid preparers we spoke to, the cost of obtaining continuing  education was sometimes fairly low, especially when continuing education  was obtained through participation in professional associations. In some  associations, monthly meetings usually include a presentation that  qualifies for continuing education credit. Other preparers, however, may  choose to travel to conferences or training sessions, such as an IRS  Nationwide Tax Forum, to obtain their continuing education over just a  few days. The registration fee for the IRS forums is fairly low—$179 for  early registration in 2008. Out-of-town travel, when necessary, adds to the  cost of obtaining required continuing education. Continuing education can  also be obtained from state-approved education providers in both  classroom settings and over the Internet.
Because results for the Oregon regime are consistent with some positive  effect on federal tax return accuracy, the cost of that regime is of  particular interest. We conservatively estimated the total costs associated  with Oregon’s regulation to be about $6 million in 2007. This estimate  includes the regime’s direct administrative costs as well as an estimate of  the cost of licensees obtaining qualifying and continuing education from  education providers, the value of the time they spend in those classes and  studying outside of class, and the same education-related costs for all  unsuccessful test takers. This estimate is conservative because it counts  preparer education time and expense for all licensees, including enrolled  agents, who have continuing education requirements under that program,  and employees of tax preparation chains that require similar education for  all of their preparers. Appendix I describes how we made our estimate.
IRS has developed rough measures of return on investment in terms of tax  revenue that it assesses from uncovering noncompliance. Generally, IRS  cites an average return on investment for enforcement of 4:1, that is, IRS  estimates that it collects $4 in revenue for every $1 of funding. For the  Oregon paid preparer regulatory regime to be considered a reasonably  cost-effective tax administration policy by this standard, it would have to  account for only a small share of the $390 million in higher federal tax  revenue we estimated came in from Oregon compared to the rest of the  country. It is important to note that the 4:1 IRS average return is based on  administrative spending and such expenses are less than 10 percent of our  approximately $6 million annual total cost estimate for the Oregon  program.
Regulation of preparers can also have the effect of increasing the price of  tax preparation services by reducing the supply of paid preparers. A  California tax preparer association representative said that the costs to  obtain and maintain CRTP status are fairly low and likely do not have  much of an impact on prices consumers pay, and that the requirements to  become a paid preparer are not so great that the number of paid preparers  in the state is being held lower than it would be without any regulation. In  Oregon, however, direct costs to become a paid preparer and to maintain  licensed status are somewhat higher. Potentially more important,  however, is the requirement that LTPs only work in offices supervised by  an LTC, attorney, or CPA, and that LTCs may not supervise more than two  offices. This means that there can be a substantial bar to the opening of a  new tax preparation business if the owner cannot find and recruit an LTC.  We were told by a representative of a tax preparation chain that he had  experienced difficulty in opening a new rural office because he could not  find an LTC to supervise LTPs. However, since there are somewhat more  LTCs in Oregon than LTPs, such problems may be limited.
Data that could be used to analyze prices charged by paid preparers in  California or Oregon, or to compare prices charged in those states with the  rest of the country, are not available. NRP data, however, provide a related  point of comparison on the use of paid preparers. NRP data show that  taxpayers in Oregon are somewhat less likely to use a paid preparer than  taxpayers in the rest of the country and even less likely to use paid  preparers than taxpayers in California. NRP data show that about              58 percent of individual taxpayers used paid preparers nationally, while  only 49 percent of Oregon taxpayers did so. About 64 percent of California  tax returns were prepared by paid preparers. It is possible that the Oregon  regulatory regime has had the effect of reducing the supply of paid  preparers, leading to an increase in the price charged for the service.
section_title: California and Oregon Officials Consider Their Programs to Be Beneficial
paragraphs: Program administrators and preparer community representatives in both  California and Oregon described their programs as having benefits that  outweigh their costs. Officials in both states also said they believe that  paid prepared tax returns are more accurate due to their paid preparer  regulatory regimes. However, neither California nor Oregon program  administrators have analyzed tax returns to see if this is the case.  Representatives also noted that registration facilitates communication  with paid preparers that are registered or licensed, so notifying them  about, for example, recent changes in tax rules or forms, can be done  fairly easily.
Program administrators and paid preparer community representatives in  California and Oregon also told us education requirements likely reduce  the number of incompetent paid preparers and have led to a more  professional tax preparation industry. California and Oregon program  administrators also said that consumers benefit from the ability to go  online and verify whether a paid preparer is registered or licensed. Both  state programs also give taxpayers the ability to seek restitution when  wronged by a paid preparer.
A benefit of the Oregon program is that prospective preparers who cannot  pass the state examination are not allowed to prepare tax returns in that  state. As noted previously, the Oregon LTP examination has only a            54 percent passing rate. This means that many people who want to  become paid preparers but lack the knowledge and skills necessary to  pass the Oregon exam are not legally preparing tax returns. People in  every other state with a similar desire to become a paid preparer—and a  similar lack of skill—are presumably preparing tax returns.
Occupational licensing of other professions has been shown to have costs  and benefits to the consumer. As with other markets for services,  licensing paid preparers might be expected to have several potential  effects depending on how licensing requirements are designed. Depending  on the level of education or expertise required to obtain a license, some  preparers who become licensed may acquire additional knowledge, which  helps them better prepare returns or expand their expertise to additional  types of returns. In Oregon, officials said that they believe unlicensed tax  preparers cost the consumer money when they prepare incorrect or  inaccurate tax returns. Occupational licensing of other professions  suggests that taxpayers may be willing to pay more to have their returns  prepared by registered or licensed paid preparers if the regulatory  requirements (i.e., education requirements) provide greater assurance of a  higher quality prepared return. Consumers who continue to use these paid  preparers may benefit as a result and some taxpayers who previously self  prepared their own returns may switch to a licensed or registered preparer  because of additional assurance of quality service. On the other hand, if  the licensing requirements cause some preparers to no longer offer  services, prices may rise and some taxpayers may switch to self  preparation.
section_title: Implications for a National Regulatory Program
paragraphs: The California and Oregon paid preparer regulation programs provide  reference points for national policymakers when considering a national  paid preparer regulatory regime. In both cases, program costs are driven  by the scope of the program. As with the differences we identified in  California and Oregon, a more extensive national program will likely cost  more to administer than a less extensive one.
An additional point of comparison for policymakers considering a  potential national paid preparer program is IRS’s enrolled agent program.  Enrolled agents are paid preparers who are permitted to represent their  clients in matters before IRS. Enrolled agents have to either pass a 3-part  examination covering individual income taxes, business taxes and  representation, and practices and procedures, or have specific IRS  experience. During the period May 2007 through April 2008, the overall  passing rate for the three parts of the examination was 48 percent.  Prospective enrolled agents also have to meet continuing education  requirements and pay a $125 registration fee every 3 years. One area in  which the enrolled agent program parallels the two state programs we  studied is that the examination is handled through a contract that is of no  direct cost to the government. A private company developed the tests and  administers them at sites around the country and it is compensated  entirely through fees of about $100 that test takers pay to take each part of  the 3-part examination. Most of the test taking fee is retained by the  contractor, but $11 is remitted to IRS. Applicants are also required to  allow IRS to conduct a background check.
IRS officials in OPR said that the more a national program is expected to  accomplish, the more expensive it will likely be to design, implement, and  administer. Enforcement is a key consideration, as even the fairly modest  enforcement efforts in the two states we reviewed took up 19 percent of  total administrative costs in Oregon and 23 percent in California. IRS  officials said that more extensive enforcement nationwide could be very  costly. IRS officials said they have not developed specific costs for a  national regime, in part because they are uncertain which of the many  potential elements the program would include.
section_title: Conclusions
paragraphs: The California and Oregon regulatory regimes point to the feasibility of a  nationwide regulatory regime involving paid preparer education,  registration, and, as in Oregon’s case, testing. Both states have enacted  registration and other requirements while funding the administration of  their programs through relatively modest fees paid by paid preparers,  similar to the way that IRS sees to the testing of enrolled agents. A key  benefit from the Oregon approach is the apparent rigor of its qualifying  examinations. Just under half of the people who take the Oregon LTP  examination fail to pass. These people are not legally preparing tax returns  in Oregon today, at least not until they are able to pass the examination.  Paid preparers with an equivalent lack of demonstrated ability may well be  working as paid preparers in other states.
Available data do not conclusively support or refute the idea that adopting  some or all of the California or Oregon program elements at the national  level would improve the accuracy of paid prepared returns or reduce the  tax gap. However, the more stringent requirements of the Oregon regime  along with our modeling results suggest that an Oregon-style approach to  paid preparer regulation may be beneficial. The higher level of accuracy  found on Oregon returns meant $390 million more in income taxes paid in  Oregon than would have been paid if Oregon returns were as accurate as  returns everywhere else. The cost of the Oregon program is quite small in  comparison, about $490,000 per year in administrative expenses and an  estimated total of about $6 million after including the time and expense  associated with paid preparers meeting their education and testing  requirements. If only a small share of the increased revenue is attributable  to the Oregon regulatory regime, it would compare favorably to IRS’s  overall efforts to increase reporting accuracy. With over half of individual  taxpayers using paid preparers, it may be possible to make meaningful  progress towards narrowing the tax gap by requiring all paid preparers to  demonstrate competence before being allowed to prepare other people’s  tax returns.
However, because the extent, if any, to which the Oregon regulatory  regime improves federal tax return accuracy, is uncertain, if a similar  regulatory regime is adopted at the federal level, its effect on tax return  accuracy should be assessed. Because IRS has resumed periodic studies of  tax return accuracy, such a study could compare accuracy of returns  before and after implementation of a federal regime.
section_title: Matter for Congressional Consideration
paragraphs: If Congress judges that the Oregon paid preparer regulatory regime is  likely to account for at least a modest portion of the higher accuracy of  Oregon federal tax returns and could be implemented nationwide at a  favorable cost compared to the potential benefits of improved accuracy, it  should consider adopting a similar regime nationwide. In light of the  uncertainty about the extent to which Oregon’s regime improves tax  return accuracy, if Congress enacts national paid preparer legislation, it  should also require IRS to evaluate its effectiveness.
section_title: Agency Comments
paragraphs: In a letter commenting on a draft of this report dated August 1, 2008, the  Commissioner of Internal Revenue noted the important role that paid  preparers play in supporting a fair, efficient, and effective system of tax  administration. His letter also notes IRS’s strategy of working with paid  preparers and curbing abuses by unscrupulous preparers. IRS also  provided technical comments which we incorporated. The  Commissioner’s letter is included in appendix II.
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If you or your staff have any questions about this report, please contact me  at (202) 512-9110 or brostekm@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report are listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to answer the following questions: (1) How do IRS,  California, Oregon, and other states regulate paid preparers? (2) Using  available IRS data, how does the accuracy of federal tax returns in  California and Oregon compare to that of returns in the rest of the  country, after accounting for other factors that might influence accuracy?  (3) What are the state-level costs and benefits of the paid preparer  programs in California and Oregon and what insights do they provide for  possible benefits if Congress were to enact national paid preparer  registration or licensing requirements?
To answer the first and third objectives we conducted a literature review  of both the California and Oregon paid preparer programs, including a  review of applicable laws and budget documents. We also interviewed  state program administrators from the California Tax Education Council  and the Oregon Board of Tax Practitioners (OBTP); officials from the  California Franchise Tax Board and the Oregon Department of Revenue;  and leaders in each state’s paid preparer community, and reviewed  documents provided to us by them. At the federal level, we reviewed  appropriate legislation concerning the regulation of paid preparers,  interviewed IRS officials, primarily from the Office of Professional  Responsibility, and reviewed documents related to the enrolled agent  program. We also interviewed and obtained data from an official from  Prometric, the company IRS contracted with to develop and administer  the enrolled agent examinations. We interviewed the National Taxpayer  Advocate and members of her staff concerning her prior recommendations  to regulate paid preparers. We also met with a representative from the  National Association of Enrolled Agents to understand their perspective  on a more expansive national regulatory regime. Finally, we conducted a  literature review of professional occupational regulation to understand the  potential effects of occupational regulation on the paid preparer  profession. In identifying nonfederal paid preparer regulation programs,  we limited our review to state governments and requirements concerning  qualification, registration, or licensing of paid preparers and we did not  consider possible county or city regulations, or laws dealing with paid tax  return preparer conduct.
For the discussion of costs and benefits from the Oregon program in the  third objective, we also used information from the OBTP about program  costs and the number of new and returning licensees in 2007. We obtained  information from education providers about the fees that they charge for  basic and continuing education. We also used the U.S. Bureau of Labor  Statistics national average hourly wage for paid tax return preparers— $16.78 in 2007—the value of the time spent obtaining the education. Using  this information, we developed an estimate of the total cost of the Oregon  program. In considering costs to include, we included higher-end  estimates where possible to ensure that our estimate of the total cost of  the Oregon program was conservative. For example, we did not consider  the fact that many Oregon licensees are employed by a national tax  preparation chain that requires its paid preparers to receive initial and  continuing education, so they would be obtaining that education  regardless of the Oregon laws.
To answer the second objective, we analyzed data from IRS’s National  Research Program (NRP). The NRP contains detailed tax and audit data  from approximately 47,000 randomly selected tax year 2001 returns, and  includes extensive compliance data including line-by-line estimates of  accuracy. Unlike other compliance-related data sets, NRP data are  generalizable to the population of individual taxpayers throughout the U.S.  While NRP was not designed for specific state-level analysis, in  conjunction with IRS’s NRP officials, we agreed on the types of analysis  that the data would support and which variables could be used.
Our analysis comprised four main steps, each of which is explained in  more detail below. We first examined the odds that returns from different  locations and using different preparation types were accurate. Next, we  considered the relative likelihood that a return was accurate, prior to  controlling for other factors. Additionally, recognizing that Oregon and  California differ from the rest of the country in terms of factors potentially  related to a return’s accuracy, we developed multivariate statistical models  to assess whether returns from these states were more or less likely than  returns from other states to require liability changes of $100 or more in  absolute value after controlling for other factors. We also assessed  differences in the accuracy of self-prepared tax returns. Finally, we  estimated potential cost savings using multivariate regression analysis to  assess the size of average tax liability changes for Oregon or California  returns relative to the returns in the rest of the United States, controlling  for other factors.
In creating our statistical models, we examined a variety of variables on  the basis of previous research, our reports, and recommendations from  NRP personnel. Our final model included measures of the complexity of  the return, including whether it was for a sole proprietor or claimed the  Earned Income Credit (EIC). We also included the examination class of  the return, taxpayer adjusted gross income in quartiles, whether the  return was e-filed, filing status, and a proxy for a state’s aggregate level of  English proficiency. All models were calculated using sampling weights  and robust estimation to account for differential variation among returns  in distinct sampling strata.
subsections: section_title: Logistic Regression
paragraphs: Table 3 illustrates differences in likelihood that returns from different  locations and using different preparation types were accurate. Column A  of table 3 shows that, prior to controlling for other factors, 54 percent of  California returns and 71 percent of Oregon returns were accurate  compared to 64 percent of returns in the rest of the United States. On  average, 58 percent of paid preparer returns were accurate, compared to  70 percent of self-prepared returns. The lower half of table 3 illustrates the  combined effect of location and preparation status. Prior to controlling for  other factors, 49 percent of California paid preparer returns and                 67 percent of Oregon paid preparer returns were accurate, compared to   59 percent of paid preparer returns in the rest of the country. Similarly,  without controlling for other factors, 63 percent of California self-prepared  returns and 75 percent of Oregon self-prepared returns were accurate,  compared to 71 percent of self-prepared returns in the rest of the country.  The odds within each category, shown in column C, compare the  proportion of returns that were accurate to the proportion of returns that  were not accurate.
For the next step, we used odds ratios to compare the relative likelihood  that returns from different locations or of different preparation types were  accurate. The unadjusted odds ratio in column D compares the odds of  return accuracy in each specific subgroup to a reference group, prior to  controlling for other factors. An odds ratio of 1 illustrates that on average,  returns for the two groups have the same odds of being accurate, while  odds ratios above 1 indicate a higher likelihood of accuracy and odds  ratios below 1 indicate a lower likelihood of accuracy. Column D of table 3  illustrates that, prior to controlling for other factors, California returns on  average had lower odds of accuracy than returns in the rest of the country,  by a factor of .66 (34 percent lower). Conversely, Oregon returns on  average had higher odds of accuracy than the rest of the country, by a  factor of 1.37 (37 percent), before we account for other factors that might  influence accuracy. This pattern holds when we compare returns using  different preparation methods to similarly prepared returns. For example,  California paid preparer returns have odds of accuracy approximately      33 percent lower than paid preparer returns in the rest of the country, and  Oregon paid preparer returns have odds that are 41 percent higher than  similarly prepared returns in the rest of the country, before controlling for  other factors.
These unadjusted odds do not control for other factors that might  differentiate between returns in Oregon and California compared to those  in the rest of the country. However, descriptive data reveal that the  characteristics of returns filed in California and Oregon differ from the  characteristics of returns filed in the U.S. as a whole. For example, a  greater proportion of Oregon and California residents file sole proprietor  returns than in the U.S., on average.
To control for potential differences that might influence the likelihood of  filing an accurate return, we used multivariate logistic regression. These  models enabled us to compare the adjusted odds of accuracy for returns  from Oregon or California with returns in the rest of the country, holding  constant the effect of other factors that could affect accuracy. Column E  in the upper half of table 3 shows that the odds of accuracy for an average  Oregon return were still higher when compared to the rest of the country,  and the odds of accuracy for a California return were still lower, after  controlling for other factors. Additionally, paid preparer returns, on  average, had lower odds of accuracy than self-prepared returns,  controlling for other factors including location. As we note previously, not  all mistakes on paid prepared tax returns are the fault of the paid preparer.
The results for all returns in the upper half of table 3 treat location and  preparation type as distinct factors, without considering potential  interaction between location and preparation type. To ensure that these  estimates did not mask compliance differences between paid preparer and  self-prepared returns and to assess the potential impact of regulation on  the population directly affected by the regime (paid preparers), we also  examined self-prepared and paid preparer returns separately (see the  lower half of table 3). These models reveal pronounced effects among paid  preparers, after controlling for other factors. Among paid preparer returns,  Oregon returns had odds of accuracy 72 percent higher, and California  returns had odds of accuracy 22 percent lower, than comparable paid  preparer returns in the rest of the country. While self-prepared returns in  California had lower odds of accuracy than self-prepared returns in the  rest of the country, and Oregon returns had higher odds of accuracy after  controlling for other factors, these results were not statistically significant  at the 95 percent level.
Our estimates of the impact of location on the likelihood that a return was  accurate had fairly wide confidence intervals. One reason for this is due to  our inability to incorporate the full range of individual or state-level  factors that might influence the likelihood of compliance, such as whether  a paid prepared return was prepared by an attorney or CPA. Additionally,  the NRP sample was designed for purposes other than to compare states,  which resulted in wider confidence bounds than would a sample designed  specifically for state-level estimates.
Our analyses identified several factors other than location that influenced  the likelihood that a return would require less than $100 in liability  changes, both among returns in general and the subpopulation of paid  preparer returns. For example, the odds that a return claiming the EIC was  accurate were less than half those of returns that did not claim the EIC in  all models. Similarly, sole proprietor returns (those individual returns that  had an attached Schedule C, Profit or Loss from Business) had lower  odds of being accurate than other returns. Additionally, returns with a  filing status of “married, filing separately” were significantly less likely to  be accurate than returns in any other filing status. Overall, 1040 forms with  total positive incomes of less than $100,000 had higher odds of accuracy  compared to form 1040 returns with total positive income of $100,000 or  above. Conversely, among forms with total positive income of $100,000,  forms 1040F, Profit or Loss from Farming, and 1040C, U.S. Departing  Alien Income Tax Return, were less likely to be accurate. In general, e- filed returns had slightly lower odds of accuracy than paper returns.
In addition to our main logistic regression model, we conducted a series of  alternative analyses to examine the impact of location and paid preparer  status with additional control factors and alternative dependent variables,  and found results generally consistent with the models presented in table  3. These included several models with and without various aggregate state  factors (such as per capita income and whether a state had an income  tax), with alternative measures of complexity (including one based on the  number of schedules filed), and with a dummy variable for returns that  were software generated but not e-filed. Finally, we examined alternative  dependent variables, including tax liability changes prior to EIC and  additional child credits, and the net sum of dollar values of line item  adjustments for each return. These additional analyses give us confidence  that our results are robust to a variety of model specifications and  different definitions of accuracy.
section_title: Cost Savings
paragraphs: To identify potential cost savings from an Oregon-style regulatory regime,  we used multivariate linear analysis to assess the size of average tax  liability changes among all returns, controlling for other factors. We  conducted diagnostic analysis to identify and exclude outliers and  potentially high-leverage cases—individual cases that have the potential to  disproportionately affect our estimate when compared to other cases. Our  estimate of savings is thus conservative when compared to an analysis that  includes all cases, as it does not incorporate the savings generated by a  limited number of cases with relatively large liability changes. After  controlling for the other factors described, we found that the average  return in Oregon required significantly lower changes in tax liability than  returns in California or the rest of the country. The average Oregon return  required tax liability increases that were approximately $250 lower than  comparable returns in the rest of the country. In contrast, the average  California return required tax liability increases that were approximately  $90 higher than returns in the rest of the country, controlling for other  characteristics.
We conducted this performance audit from September 2007 through July  2008 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Comments from the Internal Revenue Service
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact person named above, David Lewis, Assistant  Director; Crystal Bernard; Amy Bowser; James Cook; John Mingus; Ed  Nannenhorn; Karen O’Conor; and Anna Maria Ortiz made key  contributions to this report.