Problems with paid preparers

Did you pay a tax preparer to do your return in February or March? You might want to pull that sucker out and give it another look.

Apparently some tax pros screw up returns pretty badly. At least those that the Government Accountability Office encountered did.

Michael Brostek, director of strategic issues for the GAO, told a U.S. Senate committee yesterday that the government investigative office visited 19 branches of large, commercial tax chains in a major metropolitan area over the last two months. Find the full GAO report here, and coverage of the hearing in this Washington Post story.

In every case, the GAO found problems on the returns: "Nearly all of the returns prepared for us were incorrect to some degree, and several of the preparers gave us very bad tax advice…. Only 2 of 19 tax returns showed the correct refund amount, and in both of those visits the paid preparer made mistakes that did not affect the final refund amount."

Some of the errors were fairly small, but others were not so easy to ignore. The total dollar damage? The chain tax preparers hypothetically cost the investigators $3,465 in taxes they shouldn't have paid and, on the other end of the ledger, made errors that resulted in more than $12,000 in improper refunds.

Unfortunately, the error-ridden results from the GAO's recent onsite sampling seem to be a continuation of a disturbing trend. The investigators also analyzed 2001 returns and found "many errors on returns prepared by paid preparers, and some of those errors were more frequent on paid-prepared returns than on self-prepared returns."

Yikes!

On one hand, it's easy to understand why everyone, professional and amateur alike, has such trouble with taxes. Despite political lip service to simplification, tax laws seem to get messier each year. And a vaunted tax code overhaul remains on the shelf, not likely to see action until well after this election year.

Sometimes the changes truly are attempts to help filers, such as this year's uniform definition of child to make dependency claims easier, or the special tax breaks offered to 2005 hurricane victims and those who came to their assistance. But even with laws crafted with the best of intentions, unforeseen individual taxpayer circumstances very often produce thorny real-life tax consequences.

Tax laws don't have to be new to be troublesome. The 30-year-old Earned Income Tax Credit, for example, is incredibly complex, driving most people to tax professionals in an effort to avoid reaching the ends of their ropes.

And let's not even go into the alternative minimum tax issue, which each year forces more and more filers to make two separate tax computations to come up with their correct tax liability.

So what happens now? Tax laws are not going to get any easier any time soon. And if the pros can't figure them out, what are average taxpayers like you and I to do?

The GAO has recommended that the IRS conduct "necessary research to determine the extent to which paid preparers live up to their responsibility to file accurate and complete tax returns based on information they obtain from their customers."

Uh, OK. But what about us? You and me and all the other potential clients of paid preparers across the country? What should we do while this "necessary research" is going on?

The official bottom line is Caveat Taxpayer. Remember, regardless of who fills out the return, when you sign it, you are legally responsible for what's on that form.

The usual suspects: No names were named in the GAO report, but it's probably a safe bet that a couple of H&R Block and Jackson Hewitt offices were involved in the study. It's only natural to think the fake taxpayers stopped by those companies, especially given the problems H&R Block has encountered this tax season, like including customer Social Security numbers on tax software mailing labels or screwing up its own corporate return.

But that doesn't mean the whole chain should be tarred with the same brush, even if it does seem to be a pretty darn wide brush of late. The GAO was careful to note in its report that the investigation was limited, and that "many paid preparers do their best to provide their clients with tax returns that [are] fully compliant with the tax law."

To ensure that your preparer at H&R Block or Jackson Hewitt or the independent accounting office down the street is part of that accurate and diligent group, TODAY'S TAX TIP offers some steps you can take.

• Check credentials: You want to make sure the preparer has the latest training and information on tax law changes.
• Depend on friends: Get references from friends and family you trust.
• Find out the fees: One-size doesn't fit all when it comes to taxes, so it's important to know how the preparer charges for routine filings and what might be considered additional work at an additional cost.
• Assess accessibility: Make sure your tax pro will be around after April, both for potential problem resolution advice, as well as general tax planning assistance for next year's return.
• Gauge any guarantee: Different levels of training and certification determine just how much (or little) a professional can help you out if the IRS audits your taxes.

Understand the limits your preparer might have. Also find out whether the preparer and/or the firm will pay for any mistakes (additional tax, penalties, interest) on their part. 

You'll find more tips on picking a preparer at this IRS Web page.

Working girls working on their taxes: In devising fake taxpayer situations to present to the tax chain preparers, the GAO came up with a plumber and his family and a single mom who worked in retail sales.

I'm guessing that retail sales meant in an actual store.

But that might be an appropriate euphemism for this woman in this New York Times story on taxpayers employed in out-of-the-mainstream areas.

"I just write down that I'm self-employed and leave it at that," she said. "The form doesn't ask and I don't tell. Just because I work as a prostitute, I still want to be a taxpaying member of society."