Tax Preparation Errors

Recently I ran across a news blurb about the free IRS tax preparation services, the Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs. A recent audit determined that 41% of the tax returns prepared by these free programs were incorrect.

My first reaction to this news was to wonder about the error rate for paid tax preparers. How do they compare to the IRS volunteers?

Turns out, their error rate is even worse—61% of professionally prepared tax returns contained significant errors, and only 39% were prepared correctly.

Part of the problem is a lack of national standards. Anyone can call themselves a tax preparer. Testing is required to get a license, but a license is not required to do the job. (But if you get audited later, only a licensed tax preparer can represent you during the audit.) IRS audits can find the preparers who are doing a bad job, but less than 1.5% of tax returns get audited. That may make you feel relieved that the IRS won't catch your mistakes, but it also means the IRS won't catch your tax preparer if he's ripping you off.

Another problem is the overwhelming complexity of the U.S. tax code. Even our senators and congressmen get in trouble for not paying all the taxes they owe. Former senator Daschle received a 1099 which was incorrect, leading to an incorrect tax liability in his form. Is it reasonable to expect everyone to double-check the 1099s sent to them by their banks?

The complicated tax code seems to be the real root of the problem. If 45 different tax preparers get 45 different results for the same information, the problem is not entirely with the tax preparers. Simplifying the tax code would go a long way toward reducing the number of incorrectly prepared returns.