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. 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. 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 preparer in the future. Taxpayer surveys and studies of returns suggest that some taxpayers are poorly served by their paid preparers, but they do not allow a very precise estimate of the extent of the problem. Based on projections from our national survey, most taxpayers who used a paid preparer believe they benefit from doing so. We estimate that 77 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 the future. These data suggest that paid tax preparers are providing needed services to taxpayers. 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. 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. 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 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. When paid preparers make mistakes or exhibit other problematic behavior, the consequences for taxpayers may be significant. Examples provided by low-income tax clinicrepresentatives 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). Each year, he took the notices to his preparer, but the preparer took no action. 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 low- income 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 National Consumer Law Center estimates that 12.1 million RALs were taken out in 2001, up from 10.8 million in 2000. 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.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.