When filing their 2017 tax returns this year, many taxpayers will follow a familiar path: gathering up their W-2s and 1099s and heading down to the tax office that’s filed their returns for years. Because of the professional-looking setting, a nationally recognized name, or their history with the office, they innately trust their preparer.
But most taxpayers don’t know the truth about their preparers: Over half of them are not licensed with the government; they charge high, often hidden, fees; and they’re more likely to make mistakes. For many taxpayers in 2018, there are high-quality prep options available for less—or even for free.
The first problem is that many filers don’t know whether their preparer has a professional credential. In fact, most are unlicensed and unregulated. In March 2014, the Government Accountability Office noted that 55% of all preparers had no federally recognized license. Even worse, in 2012 unlicensed preparers were responsible for more than three out of four tax returns claiming the Earned Income Tax Credit (EITC)—a credit for low- and moderate-income workers—according to the National Taxpayer Advocate’s 2013 Annual Report to Congress.
Second, unlicensed preparers can be very expensive. The GAO study found fees for a relatively simple return ranged from $160 to $408, averaging $289. Many of my clients have paid much more for very simple returns; most fees exceed $300. I’ve seen some that are upwards of $800. Preparers often hide these fees within the substantial refunds that their clients receive. If you’re getting a $7,500 refund from the Internal Revenue Service, the preparer may market it as a $6,700 refund—burying the $800 fee in paperwork. The taxpayer may never find out about the exorbitant price they just paid. After all, a $6,700 refund seems good enough!
Third, unlicensed preparers don’t provide services that justify such high fees. Rather, their returns contain more errors than those prepared by credentialed preparers, trained volunteers, or even taxpayers themselves.
Unlicensed preparers—who are not required to have a college degree or take continuing education classes—are more likely to make mistakes on a tax return. The statistics bear out this intuitive fact. The GAO study found that in an undercover audit of 19 unlicensed preparers, only two calculated the refund correctly. A more statistically rigorous 2014 IRS report found that between 49% and 54% of unlicensed preparers claimed too large of a refund. Some preparers also engage in outright fraud.
But ultimately, the taxpayer must answer to the IRS. Preparer mistakes can lead to an audit, which, as my clients can attest, can cause sleepless nights and an unaffordable IRS bill.
Fortunately, higher-quality, cheaper options are available to many taxpayers. Unlicensed preparer fees are actually greater on average than the costs for preparers with some professional license. The average fee for a credentialed preparer to file a federal and state tax return that did not itemize deductions was $176, according to a recent survey. The 2014 IRS report states that credentialed preparers are also less likely to make mistakes on returns claiming the EITC. Even self-prepared tax returns have lower error rates—with off-the-shelf tax software again costing substantially less.
A few options are entirely free. The IRS funds Volunteer Income Tax Assistance (VITA) programs throughout the country. IRS-trained and certified volunteers prepare tax returns at no cost for taxpayers with annual incomes below $54,000. A 2017 IRS analysis found that 92.79% of all 2016 returns completed in this program contained no errors. (The 2014 report found a higher error rate, but analyzed data from a period when fewer requirements and controls were in place.) There are also free self-prep options online, for those comfortable with TurboTax and similar options. If the worst happens, and a filer receives a letter from the IRS, there are also Low Income Taxpayer Clinics, like the one I direct, that can advise and potentially represent taxpayers for free.
While not all unlicensed tax preparers are disreputable, filers are likely paying much more for them than cheaper, less risky options. Given this, taxpayers should reconsider their plans for this filing season and avoid unlicensed preparers if possible. At minimum, they should check their preparer’s fees and credentials.
Filers should also find a VITA site near them; volunteers may be able to give filers a second opinion on their prior filings, which might have been prepared incorrectly by unlicensed vendors. Some sites will even prepare and file those prior-year amended returns for the taxpayer.
This year, taxpayers should discover the truth about their tax preparer. Filers should ask them about their credentials, education, and fees; shop around if the preparer suddenly doesn’t live up to expectations; and, most importantly, see whether free tax preparation is an option. After all, why pay for a service that’s not worth the cost?
Patrick Thomas is the director of the Notre Dame Law School’s Tax Clinic, and specializes in federal income taxation and tax law and policy.
