The majority of Americans pay someone else to do their taxes — about 3 out of 5 taxpayers. This is tragedy to me on many levels. For starters, it’s insane that our tax code is so complicated that people feel they can’t do it on their own. Part of the problem is fear of numbers — “Innumeracy,” which is mathematical illiteracy — that I wrote about extensively in my book , Stop Getting Ripped Off. But the bigger problem is the way Americans fund our government, which is hopelessly broken. The more opaque things are, the more loopholes and exceptions, the harder it is to pin blame on waste, and the harder it is to make sure people are paying their fare share.
And this is the deeper level of tragedy. Going through the exercise of filling out tax forms tells you a lot about our government, how it functions, and how we prioritize things. Young adults often hear words like “mortgage interest deduction” and roll their eyes, until they discover one day that homeowners have a huge advantage over renters in our country. To the tune of many thousands of dollars. Maybe that’s good. Maybe that’s not. But it’s terrible when folks don’t think about it and discuss it openly. Filling out your own tax forms brings you face to face with these realities. Paying someone else to do it is one more step towards a detached, disinterested public.
And then there’s this: Many people you pay to do your taxes do them wrong. Far more than you’d think. For privacy reasons, it’s impossible to get precise numbers, of course. But plenty of secret shopper tests reveal this thorny reality — it’s quite possible you are paying someone else to do your taxes because you are afraid you’ll make a mistake, and the person you pay is making mistakes anyway. Why?
Anyone — and I mean ANYONE – can open a tax prep business in America. Anyone.
I covered this problem recently for Credit.com. You can read my story there, or continue reading below. But my main message — 40 percent of Americans file using the one-page 1040EZ form or the two-page 1040A. Really, you can do it yourself.
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‘Tis the season to see a lot of advertisements for tax preparation companies, promising to help consumers get a pile of money back from Uncle Sam. The ads are enticing — more than half of Americans pay someone else to do their taxes. Set aside for a moment the financial truth that if you are getting a big tax refund, you are doing it wrong. Plenty of studies into “professional” tax preparers show they are often doing it wrong, too.
Last year, when Congress sent “secret shoppers” to tax prep firms, only 11% got them right. Mistakes ranged from giving taxpayers $52 less to $3,718 more than they were entitled to. Part of the problems, say consumer groups and the Internal Revenue Service, is that almost anything goes in the tax prep industry.
“Anyone can hang out a shingle as a tax return preparer, with no knowledge, no skill and no experience required,” lamented Taxpayer Advocate Nina Olson in congressional testimony on the issue during last year’s tax season.
In most states, there are virtually no rules for who can provide paid tax preparation services, and that has consumer groups coming out in force demanding new standards. A consortium published a list of voluntary standards last week, and called on state lawmakers to pass laws requiring training and certification for tax prep workers.
“Transparency of pricing, minimum training and competency standards, regulation of credit products and a prohibition on junk fees represent the key components of meaningful reform,” said Michael Best, policy advocate at the Consumer Federation of America.
The IRS has tried to regulate the tax prep industry in the past, but a federal appeals court ruled last year that the agency didn’t have authority to make new rules.
The ruling stung, particularly because Obamacare has created a new layer of complexity for some tax filers — and a new marketing tool for the industry.
“This tax season in particular is gearing up to be the most complicated in decades,” said Elise Blasingame, director of community education for Georgia Watch, an advocacy group. “We will likely see more predatory and uninformed preparers than usual provide incorrect information this tax season as a result.”
In last year’s secret test, Congress’ Government Accountability Office used two scenarios:
- The “Waitress Scenario” involved a single mother with cash and non-cash tips, eligible for the Earned Income Tax Credit, with two children (one who lived at home) under 15, and with a deduction for student loan interest.
- The “Mechanic Scenario” involved a married couple filing jointly with children aged 7-20 at home, itemized deductions, and non-farm W-2 business income.
Only two of the 19, or 11%, of the returns had the correct refund amount.
The results were hardly shocking, however. The GAO surveyed taxpayer errors from 2006 through 2009 and found that tax returns prepared by preparers had a higher estimated percent of errors — 60% — than self-prepared returns — 50%.
Credit.com reached out to popular tax preparation companies H&R Block and Jackson Hewitt for this story; neither responded by press time. Last year, H&R Block CEO William Cobb told Congress that his firm supported legislation that set standards.
“What we want is a level playing field,” he said. “We just want to clean up this industry.”
Currently, four states — California, Maryland, New York and Oregon — have passed laws regulating tax prep firms. The consumer groups called for state-level legislation from the other 46. Also, now that courts have blocked federal rules designed by the IRS, consumer groups are calling on Congress to pass a new federal law explicitly granting the IRS new authority.
In the meantime, the IRS has begun this year to offer a voluntary certification program to tax preparation professionals. The Voluntary Annual Filing Season Program offers a “Record of Completion” to workers who complete a six-hour refresher course, including two hours of ethics training, from an IRS-approved provider. Consumers might think to ask a tax preparer if they’ve taken the courses, but the program is so new, it’s unclear how many tax pros have taken it.
Chi Chi Wu, a lawyer with the National Consumer Law Center, said certification is an important step, and she was hopeful tax preparation firms wouldn’t object. H&R Block workers go through some training already, she said.
“We actually have some common agreement with them on this issue,” Wu said.
In additional to training, the consumer groups also called for tax prep firms to be more clear about costs consumers face while seeking tax prep help. Fee structures can be as opaque as tax forms.
“One critical move that state and federal policymakers can make is to enact a disclosure box policy that allows consumers to compare and contrast fees and services,” said David Rothstein, from the Neighborhood Housing Services of Greater Cleveland.
Ross H. Yednock, program director for the Michigan Economic Impact Coalition, called the lack of tax preparation rules “astounding.”
“Consumers are bombarded by false or misleading advertising claims, taxpayers have little or no protection from unscrupulous actors, and inaccurate or fraudulent filings increase government costs,” he said. “For the sake of everyone involved — the millions of hardworking taxpayers, thousands of competent and honest tax professionals, and taxing agencies — we need to pass reasonable reforms and protections in the tax preparation industry.”