Friday editorial: Expensive mistakes
In a recent experiment, the Treasury Department’s tax watchdogs tested the competence of a small sample of commercial income tax preparers. The result: The preparers made mistakes on two-thirds of the returns.
So why, it’s worth asking, do taxpayers pay preparers an average of $234 per return to make mistakes when we’re perfectly able to make own mistakes for free? Two answers suggest themselves:
First, Americans are intimidated by the task and awed by people who claim expertise in doing important, complex work.
Second and more significantly, the tax code is nearly as complicated as brain surgery. IRS instructions might as well be written in a foreign language. So when someone claims to understand them, we’re happy to dump our shoebox of records onto the desk.
The Treasury Department says that 83 million Americans trust commercial tax preparers each year. Not all them are competent — and nothing requires them to be. As Treasury’s Inspector General for Tax Administration points out, “Anyone — regardless of training, experience, skill or knowledge — is allowed to prepare federal income tax returns for others for a fee.”
The inspector general had tax forms done at 28 different preparers: 12 chain operations and 16 mom-and-pop shops. Eleven of the returns contained innocent mistakes arising from human error or the misinterpretation of tax law. But six contained errors deemed “willful or reckless.”
Accuracy did not seem to be connected to the amount charged. One preparer who charged $72 got it right, while one charging $248 got it wrong using the same information.
In all, the 28 preparers shorted the government by a total of $12,828. This might suggest another explanation for why people use tax preparers: Some are willing to cheat to benefit their taxpayer customers. If the cheating is discovered, it’s the taxpayer who has to pay the tax owed, plus interest and possible penalties — even if the preparer is at fault.
Taxpayers who earn $54,000 or less may not know that can prepare their own taxes for free using software accessible through the IRS website, ww.irs.gov.
People with incomes above that cut-off point still can prepare their own returns using tax-preparation software available for as little as $15. The question-and-answer programs are fairly easy to use. We’ll still make mistakes, but at least the math will be right.
Doing it yourself also avoids the risk of another financial rip-off: the costly refund-anticipation loans touted by chain tax preparation companies. Those loans are a very bad deal; on an annualized basis, the interest can be as high as 2,000 percent.
The IRS inspector general did not test high-end tax preparers — accounting firms, tax lawyers, actuaries and the like — who pass tests to officially enroll with the IRS. There’s an ongoing debate in Washington over whether to test and license all tax preparers. Before that happens, the IRS should commission a larger, more scientifically designed survey of commercially prepared tax forms. If two out of three of them still are wrong, drastic measures may be in order.
I am a CPA with 20 years experience in the tax department of one of the “Big Four” accounting firms. Early in my career I prepared more than my share of some of the most complex individual income tax returns in town. I now do exclusively for corporations.
While I agree, there are many some of the commercial tax payers that may be in over their heard; most do at least an adequate job of preparing the basic tax returns of most taxpayers. What do you expect for the fees you mentioned? A competent CPA would charge more than the listed fee for an hour of work. I have seen the results of these studies before and many of the “mistakes” are often either insignificant or the result of judgment areas made more difficult by the intentional grayness of the data provided to the tax preparer. Unbiased experts would need to do a thorough review to determine how many of the returns were legitimately incorrect.
It is predictable that the Post-Dispatch would recommend more regulation as the panacea for any problem. Milton Freeman has written extensively how the regulation of professions ultimately only benefits those regulated at the expense of the public. The regulations serve as a barrier to entry and force fees higher.
The real issue is that the tax laws and regulations are so complex because of the attempt at social engineering closely attempted by the tax law. Guilt free welfare (earned income credit, child credits, exemptions, etc) can be provided to the masses. The vast majority have no idea they are actually receiving substantial transfer payments. This phenomenon is now being demonstrated by Senator Obama telling the middle class (which actual pays little or no tax) that they are somehow being taken advantage of by the very people who fund all of the goodies they expect government to provide.
A workable solution would be a flat tax in which everyone pays some tax. The middle class would not longer be about to vote for taxes on some mythical undeserving rich person to pay for handouts to themselves without voting for an increase in their own taxes. This would reduce the need for tax professionals. However, I do not think that any tax professional needs to worry about simplification. Every previous attempt at simplification has been a full employment act for tax professionals.
“The finest opportunity ever given to the world was thrown away because the passion for equality made vain the hope for freedom.” - Lord Action, “The History of Freedom in Christianity”
The IRS didn’t mention that if you call the IRS and ask a question you will get a WRONG answer 50 percent of the time,.
I’m self-employed, and have a handful of rental homes. My tax return, with all the various schedules, was nearly 100 pages. Insane! Fortunately, I can do it in Turbo Tax and it doesn’t take much longer than gathering the information to give it to somebody else.
I’ll agree with the editorial that “drastic measures may be in order.” Personally, I’d favor eliminating income taxes in favor of a national sales tax. In my situation, a flat tax would make almost no difference, as the complexity in my return comes from the self-employment and real estate. Before we were married, my wife’s tax return was just a few pages long, and could be done in Turbo Tax in less than ten minutes.
I was going to offer my two cents worth, then I read David’s. Just go re-read his.
Federal tax code rewards consumption, penalizes thrift, and discourages savings and investments. Long ago, it stopped being a revenue source and became a social engineering tool to redistribute private assets in accordance with collectivist ideals.
As the scope of government continues to expand, the burden of federal liabilities and manipulation will drain, and then crush our economy. Smart individuals and business are already moving their assets and enterprises out of the country for self preservation. The jobs and commerce go along.
Those Joe Biden considers “patriotic” will stand by while the federal bureaucracy bleeds them to extinction trying to transfuse their socialist cause. The USA can’t afford their Utopian mansion any more than Jim and Jan Sixpack could afford the subprime mortgage on their overpriced luxury home.
Well David, I’m glad you are so well versed in what Milton has written. Perhaps the problem is not with the establishment of professional standards but rather the people who are selected to establish those standards.
Mabe instead of selfregulation you should actually establish an organization independent of the profession and let them work up a list of standards. Mabe instead of selfregulation you should actually establish an independent organization that would have the responsibility for oversight and enforcement. Of course, as with any operation, the quality of the people involved with the operation would determine the level of success or lack there of.
And yes, I’ve always liked the idea of a flat tax. Keep it simple stupid and things will work a lot better. In theory, there probably should be any exception to the rule. Not only would this simplify the tax collection process, but it would enable everyone to focus their attention on what really drives most people crazy, how are we going to spend the money?
By the way David, most middle class people I know really don’t mind paying a few more taxes as long as they are getting value for their dollar. That’s the rub.
DC,
I appreciate the comments. Regulatory agencies by their nature are dominated by the very industry’s that are being regulated. The problem is not that the people serving on the regulatory body are corrupt and incompetent (though they often are). The issue is the very pretext that a disinterested body of individuals acting altruistically can make better decisions than decision a free market economy. In virtually every instance, the answer has shown to be no. Most bureaucrats think that if they can just get a little more power and funds that they will solve all of the world’s problems.
Also, the facts do not support you contention on the middle class not minding paying taxes. The middle class has consistently supported “soak the rich” tax increases. The average middle class taxpayer consistently underestimates the taxes they pay. These same people often do not even realizing that they get more back in tax refunds than they paid in due to the effect on refundable credits. The middle class reaps a vastly disproportionate amount of the benefits of government spending and shoulders very little to none of the tax burden. Rather than not “getting enough bang for their buck” they consistently clamor for more transfer payments.