Errors in Tax Returns Made by Tax Professionals

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tax error made by tax professionalToday I came across an article posted by the U.S. Government Accountability Office, which conducted a study of accuracy of the tax returns prepared by paid professionals. Although the study is limited in its scope, it found significant errors made by the tax professionals and great discrepancy in the amount of refund taxpayers would receive.

The study involved fictional characters and life situations and was conducted at 19 different sites. Out of the 19 paid preparers only 2 calculated the refund amount correctly. The remaining 17 calculated the refund amount anywhere from $52 less to what a fictional taxpayer was entitled to more than $3,718 over the entitled amount.

Although the numbers of mistakes made by paid preparers was wide, the following errors occurred most often:

  • Not reporting cash tips which don’t appear on W-2 forms given to employees.
  • Obtaining higher Earned Income Tax Credit by claiming a child that is not qualified.
  • Depriving taxpayers from the American Opportunity Tax Credit by not asking questions that may help determine taxpayer eligibility for the credit.
  • Providing inaccurate tax identification number to the IRS by tax preparers.

IRS’s National Research Program collected data from 2006 to 2009 on accuracy of the filed returns. The results showed that both individuals preparing taxes independently as well as paid preparers make errors when generating tax returns. Surprisingly more errors related to refund amount (or amount owed to the IRS) were made by paid preparers: 60% of the prepared returns versus 50% prepared by taxpayers themselves.

Government Accountability Office conducted the study because a significant portion of tax returns is still prepared by the tax professionals. For 2011 that represented over 81 million returns (56% of 145 million received) and if roughly a 60% of those returns are problematic, the IRS has a reason to believe that close to 49 million tax payers get benefitted or leave money on the table. Another way to look at it is that 49 million reports may be red flagged for an audit.

As of today the IRS lacks the power to regulate paid tax preparer’s industry. A potential legislation would create certain standards and educational requirements necessary to operate a business. It would also require a registration and greater oversight and scrutiny of businesses flagged by the IRS.

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