A paid preparer is simply anyone who is paid to prepare, assist in preparing, or review a taxpayer’s tax return. In this statement, we refer to two categories of paid preparers—tax practitioners and unenrolled preparers. CPAs, attorneys, and enrolled agents are tax practitioners. Tax practitioners differ from unenrolled preparers in that they can practice before IRS, which includes the right to represent a taxpayer before IRS, prepare and file documents with IRS for the taxpayer, and correspond and communicate with IRS. 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. Tax practitioners are subject to standards of practice under the Department of Treasury Circular No. 230. Enrolled agents are generally required to pass a three-part examination and complete annual continuing education, while attorneys and CPAs are licensed by states but are still subject to Circular 230 standards of practice if they practice before IRS. Generally, unenrolled preparers are not subject to these requirements. In April 2006, we made a recommendation to IRS to conduct research on the extent to which paid preparers meet their responsibility to file accurate and complete tax returns. conducted a study of the quality of paid preparers and issued a report recommending increased oversight of paid preparers. Recommendations included (1) mandatory registration, (2) competency testing and continuing education, and (3) holding all paid preparers— including unenrolled preparers—to Circular 230 standards of practice. IRS implemented each recommendation through regulations issued in September 2010 and June 2011. The June 2011 regulations amended Circular 230 and established a new class of practitioners called “registered tax return preparers.” IRS intended for these new requirements to support tax professionals, increase confidence in the tax system, and increase taxpayer compliance. GAO-06-563T. According to IRS officials, approximately 84,148 competency exams were taken prior to the District Court’s decision. new testing and continuing professional education requirements. IRS appealed the order, but it was affirmed in February 2014 by the U.S. Court of Appeals for the District of Columbia Circuit. Figure 1 provides a summary timeline of IRS’s implementation of paid preparer requirements and legal proceedings. The President’s Fiscal Year 2015 budget, released in March 2014, included a proposal to explicitly provide the Secretary of the Treasury and IRS with the authority to regulate all paid preparers. Although the District Court determined that IRS does not have the authority to regulate unenrolled preparers, the decision did not affect the requirement that all paid preparers obtain a Preparer Tax Identification Number (PTIN) and renew their PTIN annually. As of March 16, 2014, approximately 676,000 paid preparers have registered or renewed their PTINs. As shown in figure 2, the two largest categories of PTIN registrations and renewals are unenrolled preparers—55 percent—and CPAs—31 percent. Currently, Oregon, Maryland, California, and New York regulate paid preparers. Both Oregon and California began to regulate paid preparers in the 1970s, while Maryland and New York’s programs were implemented more recently. Further, the programs themselves involve different types of requirements for paid preparers as illustrated in table 1. In August 2008—prior to Maryland and New York implementing paid preparer requirements—we reported on state-level paid preparer requirements in California and Oregon. Specifically, we reported that both California and Oregon have requirements that paid preparers must meet before preparing returns; of the two states, Oregon has more stringent requirements. According to our analysis of IRS tax year 2001 NRP 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. Specifically, in August 2008, we found that the odds that a return filed by an Oregon paid preparer was accurate were 72 percent higher than the odds for a comparable return filed by a paid preparer in the rest of the country. According to IRS’s SOI data, an estimated 81.2 million or 56 percent of approximately 145 million individual tax returns filed for tax year 2011 were completed by a paid preparer. Estimated use of paid preparers was fairly evenly distributed across income levels, and as table 2 shows, taxpayers with more complex returns used preparers the most. For example, preparers were more commonly used by taxpayers who filed the Form 1040 as opposed to the 1040EZ or 1040A and those claiming itemized deductions or the Earned Income Tax Credit (EITC). Across all income levels taxpayers who used paid preparers had a higher median refund than those who prepared their own returns at statistically significant levels, as shown in table 3. Specifically, individual taxpayers who used a paid preparer had an estimated median tax refund across all adjusted gross income levels that was 36 percent greater than taxpayers who prepared their own return. Taxpayers rely on paid preparers to provide them with accurate, complete, and fully compliant tax returns; however, tax returns prepared for us in the course of our investigation often varied widely from what we determined the returns should and should not include, sometimes with significant consequences. Many of the problems we identified would put preparers, taxpayers, or both at risk of IRS enforcement actions. The NRP’s review of tax returns from 2006 through 2009 also found many errors on returns prepared by paid preparers, and some of those errors were more common on paid prepared returns than on self-prepared returns. Nearly all of the returns prepared for our undercover investigators were incorrect to some degree, and several of the preparers gave us incorrect tax advice, particularly when it came to reporting non-Form W-2 income and the EITC. Only 2 of 19 tax returns showed the correct refund amount. While some errors had fairly small tax consequences, others had very large consequences resulting in the overstatement of refunds from $654 to $3,718. Our undercover investigators visited 19 randomly selected tax preparer offices—a non-generalizeable sample—to have taxes prepared. We developed two taxpayer scenarios based on common tax issues that we refer to as our “Waitress Scenario” and our “Mechanic Scenario.” Key characteristics of each scenario are summarized in table 4. Refund amounts derived by the 19 preparers who prepared tax returns based on our two scenarios varied greatly. For our waitress scenario, the correct refund amount was $3,804, however, refund amounts on returns prepared for our undercover investigators ranged from $3,752 to $7,522. Similarly, the correct refund amount for the mechanic scenario was $2,351; however, refunds ranged from $2,351 to $5,632. Paid preparer errors generated during our 19 non-generalizeable visits resulted in refund amounts that varied from giving the taxpayer $52 less to $3,718 more than the correct amount. Of the 19 paid preparers we visited, 2 determined the correct refund amount: one correct tax return was prepared for the waitress scenario and one for the mechanic scenario. An additional 4 paid preparers calculated tax returns within $52 of the correct refund amount. On the remaining 13 tax returns—7 for the waitress scenario and 6 for the mechanic scenario—preparers overestimated the total refund by $100 or more. Figure 3 shows the amount of the refund over and under the correct refund amount. In some instances, paid preparers made similar errors across multiple site visits. For example, on the waitress return paid preparers made two of the same errors: (1) not claiming the unreported cash tips and (2) claiming both children as eligible to receive the EITC. These errors resulted in clusters of overstated refunds. In four site visits, paid preparers not claiming unreported cash tips resulted in a refund amount overstated by $654. In three site visits, paid preparers made both errors, which resulted in a refund amount overstated by $3,718. In the mechanic scenario, paid preparers that did not include side income resulted in tax refunds that ranged from $2,677 to $3,281 above the correct refund amount. A majority of the 19 paid preparers we visited made errors on common tax return issues; on some lines of the tax return most paid preparers were correct. Some of the most significant errors involved paid preparers (1) not reporting non-Form W-2 income, such as unreported cash tips, in 12 of 19 site visits; (2) claiming an ineligible child for the EITC in 3 of 10 site visits; and (3) not asking the required eligibility questions for the American Opportunity Tax Credit. Such errors could lead taxpayers to underpay their taxes and may expose them to IRS enforcement actions. By contrast, in some instances the majority of preparers took the right course of action. For example, 17 of 19 paid preparers completed the correct type of tax return and 18 of 19 preparers correctly determined whether to itemize or claim the standard deduction. Our results are summarized in figure 4. Type of tax return. Paid preparers completed the correct type of tax return—the Form 1040—for 17 of 19 site visits. Two paid preparers incorrectly completed the Form 1040A for the waitress scenario. The Form 1040A should not have been used because the waitress received tip income that was not reported to her employer. Dividend and capital gains income. Preparers recorded the income correctly on 8 of 9 returns. The mechanic received qualified and ordinary dividends, and capital gains from a mutual fund that were reinvested into the fund. This income was documented on a third party reporting form; the Form 1099-DIV.