Testing turns up hazards ranging from losing a chunk of your refund to errors or even fraud committed in your name by unregulated preparers. Here's what you need to know.
Walk into a tax preparer’s office and you never know how good the advice you get will be, according to mystery shoppers who found few who filled out federal returns correctly.
The National Consumer Law Center recently reported that last year, out of 29 tax preparation offices it tested, only two forms were completed correctly. In 2014, the center said, just two of 19 preparers randomly selected by the Government Accountability Office (GAO) had calculated the correct refund amounts for mystery shoppers. Among the bad advice, according to the report:
- One GAO tester was told incorrectly that income didn’t need to be reported to the Internal Revenue Service if it was reinvested in a mutual fund.
- A preparer tested by the law center fabricated business expenses.
- Testers posing as single parents were told they did not have to report $800 in side income if there was no W-2 for it.
- In another single-parent test, preparers told testers to go ahead and claim a child as a dependent even when the tester said the child spent more than half her time with her other parent.
- Many preparers just didn’t know how to handle income reported on a 1099-DIV form, which is used for reporting dividends.
“There’s a minefield of dangers for the tens of millions of consumers who use paid tax preparers to fill out their most important financial document of the year,” said Chi Chi Wu, the National Consumer Law Center’s staff attorney. “The hazards range from losing a chunk of their refund for unnecessary financial products, to errors or even fraud committed by unregulated preparers.”
The center and the Consumer Federation of America released the report to bolster their push for federal and state lawmakers to require certification and education for preparers. All that’s needed now in most states is a $50 IRS-issued tax identification number. The federation says that in a survey released on Jan. 19, 8 in 10 of the 1,011 respondents supported the idea of requiring tax preparers to pass a test.
Not everyone agrees that testing and certification would solve the problem.
“Licensing doesn’t ensure that people are honest,” said Dan Alban, an attorney at the Institute for Justice representing tax preparers, in a Bloomberg News report. He argues that additional requirements would simply push mom-and-pop preparers out of the market.
Among other problems the center uncovered:
- Opaque fees: Tax preparation fees are often high, and almost always non-transparent, making it nearly impossible for consumers to comparison-shop. Tax preparers can charge up to $500 or more in fees, yet many will claim they cannot give a price quote or will give inaccurate estimates.
- Hidden costs: Preparers are charging $25 to $60 for refund anticipation checks (RACs), which deliver tax refunds and pay for tax preparation fees by deducting them from anticipated IRS refunds. If a taxpayer pays $35 to defer payment of a $350 tax preparation fee for three weeks, the annual percentage rate is 174 percent, the center said.
- Junk add-ons: Payday lenders and others are offering taxpayers supposed no-fee refund anticipation loans (RALs). The center warns, however, that lenders charge tax preparers $35 to $45 for each RAL. The center suspects preparers “might pass along these fees, or charge even more, by padding their tax preparation fees or by charging separate ‘add-on’ junk fees.”
Have you used a tax preparer? How was your experience? Share with us in comments below or on our Facebook page.