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On January 30, 2025, Senators Mike Crapo, Chairman of the Senate Finance Committee, and Ron Wyden, the Committee’s ranking member, jointly released a discussion draft of the Taxpayer Assistance and Service (“TAS”) Act. This draft legislation represents a significant step toward enhancing U.S. tax administration. Of the 68 provisions in the draft, about 40 align with recommendations TAS has advocated for in our recent Annual Reports to Congress and Purple Book of Legislative Recommendations.
In a previous blog, I emphasized how this legislation could significantly enhance taxpayer rights. Continuing the conversation, this blog focuses on return preparer oversight, a critical issue in ensuring taxpayer protection. I argue that the TAS Act provisions strike a reasonable balance between safeguarding taxpayers and minimizing undue burdens on tax preparers.
Each year, millions of taxpayers hire paid tax return preparers to ensure their returns are filed accurately and they claim the tax benefits they’re entitled to receive under the law. However, a longstanding challenge persists in the return preparation industry – paid preparers often do not have to meet any education or ethics requirements. This lack of accountability has created an environment where some preparers are prone to errors or worse, engage in fraudulent practices. Too often, taxpayers are not well served, and the public fisc is shortchanged. In 2023, over 60 percent of all returns prepared for hire were prepared by individuals without professional credentials (i.e., individuals other than accountants, attorneys, or enrolled agents).
While many non-credentialed return preparers are competent and ethical, the absence of federal oversight allows unscrupulous or unqualified preparers to make costly mistakes or even perpetuate fraud with only minor consequences. For taxpayers, the consequences of such practices can be severe, ranging from unclaimed tax benefits to audits and penalties resulting from erroneous or fraudulent returns. In the context of tax administration, oversight of return preparers is a priority need.
Studies reveal troubling patterns of errors made by non-credentialed tax preparers. These studies, including “shopping visit” audits conducted by the Government Accountability Office (GAO) and the Treasury Inspector General for Tax Administration (TIGTA), demonstrate the frequency of inaccuracies on returns prepared by non-credentialed preparers. Posing as taxpayers, GAO and TIGTA auditors found that non-credentialed preparers frequently produce inaccurate returns – some by mistake and others by claiming tax benefits for which they know the taxpayer is not eligible. These findings underscore the urgent need for more effective oversight of the tax preparation industry.
One stark example is the Earned Income Tax Credit (EITC), which Congress designed to support millions of lower-income families. For years now, it has been plagued by a high rate of improper claims.
| Type of Preparer | Credentialed | Non-Credentialed |
|---|---|---|
| Returns Claiming EITC | 3,307,125 | 12,500,722 |
| Percentage of EITC Returns | 21% | 79% |
| Audits on EITC Returns | 5,912 | 63,215 |
| Percentage of Audits on EITC Returns | 9% | 91% |
| Audits Adjustments on EITC Returns | 3,434 | 50,592 |
| Percentage of EITC Audit Adjustments | 6% | 94% |
In fiscal year (FY) 2023, 33.5 percent of EITC payments, amounting to $21.9 billion, were estimated to be improper. Among tax returns claiming the EITC prepared by paid tax return preparers, 96 percent of the total dollar amount of EITC audit adjustments was attributable to returns prepared by non-credentialed preparers.
Similarly, the abuse of pandemic-related credits, such as the sick and family leave credit for certain self-employed individuals on Form 7202, disproportionately involved non-credentialed preparers. As of October 29, 2024, non-credentialed preparers were responsible for 83 percent of the returns claiming this credit and a staggering 98 percent of all disallowed claims after IRS audit. Many taxpayers, unaware their preparers had incorrectly claimed these credits, faced excessive fraud penalties and collection demands.
| Estimated FY 2022 Improper Payments and Rates | Estimated Improper Payment Rate | Total Payments | Estimated Improper Payments |
|---|---|---|---|
| Earned Income Tax Credit (EITC) | 32% | $57.5 billion | $18.2 billion |
| Additional Child Tax Credit (ACTC) | 16% | $32.8 billion | $5.2 billion |
| American Opportunity Tax Credit (AOTC) | 36% | $5.6 billion | $2.0 billion |
| Net Premium Tax Credit (Net PTC) | 27% | $2.1 billion | $0.6 billion |
Although somewhat dated, the GAO shopping visits mentioned above further illustrate the magnitude of errors committed by non-credentialed preparers. In 2006, GAO auditors posing as taxpayers made 19 visits to several national tax return preparation chains in a large metropolitan area. Using two carefully designed fact patterns, they sought assistance in preparing tax returns.
On 17 of 19 returns, preparers computed the wrong refund amounts, with variations of several thousand dollars. In five cases, the prepared returns reflected unwarranted excess refunds of nearly $2,000. In two cases, the prepared returns would have caused the taxpayer to overpay by more than $1,500 (e.g., by not claiming all deductions or other tax benefits for which the taxpayer qualified).
In five out of ten cases in which the EITC was claimed, preparers failed to ask where the auditor’s child lived or ignored the auditor’s answer and prepared returns claiming ineligible children. In ten of 19 cases, business income was not reported. The GAO conducted a similar study in 2014, and it produced similar results. It again found that preparers computed the wrong tax liability on 17 of 19 prepared returns.
These examples suggest a significant portion of errors originate from preparers who lack the training or ethical accountability required to ensure accurate tax filings.
The taxpayers who suffer most from these errors are often those who can least afford the consequences: low-income individuals facing audits, penalties, and frozen refunds due to preparer incompetence or unscrupulous misconduct.
To address these problems, various proposals have been made to create minimum standards in the return preparation industry, including by requiring non-credentialed preparers to pass a basic competency test in return preparation and to take annual continuing education courses.
While the need for oversight is clear, some tax preparers – especially small business owners – express concern about the potential burden of new regulations. Critics argue that competency tests and continuing education mandates could undermine their ability to operate, forcing small preparers out of business and reducing taxpayer access to affordable return preparation services. Others contend that existing Preparer Tax Identification Number (PTIN) requirements and penalties already provide sufficient safeguards against fraudulent tax preparation.
Regarding competency tests, they argue that some people are not good test-takers, and the requirement to pass a test may exclude competent preparers who have been accurately preparing returns for years. As for continuing education, critics claim that a high number-of-hours requirement would prevent preparers from spending that time conducting business and earning income. They say the IRS already has the authority to recommend prosecution of individuals who violate the law.
The National Taxpayer Advocate has long advocated for stronger oversight of return preparers. This authority must ultimately come from Congress, as the courts have determined that “tax preparation” is not considered “tax representation” (see Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014)). This distinction is important because oversight for taxpayer representation exists under Section 330 of Title 31 of the U.S. Code and accompanying regulations, known as Circular 230. These laws establish standards for individuals representing taxpayers before the IRS.
However, no similar standards currently exist for return preparers. To charge money for tax preparation, an individual merely needs to obtain a PTIN — a process with no continuing education requirement, no ethical standards, and little IRS oversight. If one pays the renewal fee, they get to keep their PTIN. This distinction has made it difficult for the IRS to impose the same oversight on return preparers as it does on professionals who represent taxpayers before the IRS.
For years, TAS has urged Congress to establish minimum standards for return preparers similar to those imposed on attorneys, CPAs, and enrolled agents who represent taxpayers before the IRS. These recommendations also emphasized the urgent need for stricter preparer penalties and IRS authority to suspend or revoke a preparer’s PTIN for violation of the minimum standards.
While the TAS Act discussion draft does not fully adopt TAS’s prior recommendations, it takes important steps towards achieving comparable goals. For example, TAS has repeatedly recommended that Congress amend 31 U.S.C. § 330 to authorize the Secretary of the Treasury to establish minimum standards for paid federal tax return preparers. This would overcome the objection in Loving and explicitly grant the IRS oversight authority over tax return preparers, which should improve competence through continuing education and required ethical standards of behavior. TAS has also recommended that Congress give the IRS the authority to revoke a PTIN for violations of these standards, a power many are surprised to learn the agency does not currently have.
The TAS Act does not amend 31 U.S.C. § 330, but it achieves a similar objective by amending IRC § 6109 (see TAS Act § 504), which requires all PTIN holders to meet minimum standards to retain their PTIN registration. Specifically, § 504 mandates that PTIN holders must:
Section 504 of the TAS Act also grants the IRS the authority to revoke or suspend a PTIN if a preparer fails to meet these standards and establishes monetary penalties for infractions at $1,000 per violation. In cases involving willful fraud, misrepresentation, or willful threats, the penalties can be up to 100 percent of the income derived (or to be derived) per violation. This approach provides an enforcement mechanism that ensures preparers are held to a minimum standard without directly amending 31 U.S.C. § 330, while also offering protection to taxpayers from harmful practices.
In our previous Annual Reports to Congress, we have highlighted “ghost preparers” as a most serious problem for taxpayers. Ghost preparers are individuals who prepare returns but fail to sign them or use a valid PTIN. Ghost preparers evade existing IRS penalties and often engage in fraudulent activities, prepare erroneous returns without putting their names on the bottom of the returns, and put taxpayers in harm’s way.
Section 502 of the TAS Act discussion draft specifically addresses this issue by:
This section translates the concerns we have raised these past few years into concrete legislative action, ensuring the IRS has the necessary tools to hold ghost preparers and other abusers of the PTIN requirement accountable to reduce taxpayer exposure to fraud. Together, sections 502 and 504 of the discussion draft establish the requirement of a valid PTIN, establish minimum standards for PTIN holders, impose meaningful penalties for violations of the PTIN rules, and authorize the IRS to suspend or revoke a PTIN for violations of these rules.
Another area where the TAS discussion draft aligns with our prior recommendations is in tackling fraudulent alterations and refund misappropriation. We have called for stronger penalties against return preparers who fraudulently alter returns after they have been signed by taxpayers. Unscrupulous preparers sometimes change refund amounts, divert funds to their own accounts, or manipulate return details for their benefit. But the IRS has had difficulty asserting penalties in these circumstances because a tax return that is altered after a taxpayer has signed it is no longer legally a “return.”
Section 501 of the discussion draft implements our recommendation by amending IRC § 6696(e) to broaden the definition of a “return” for penalty purposes to include alterations. This ensures fraudulent alterations are punishable, and that preparers who engage in post-signature alterations face significant financial penalties. Specifically:
The TAS Act adopts our previous recommendation by ensuring preparers who engage in fraudulent alterations cannot continue to operate unchecked.
One of the most egregious abuses by fraudulent preparers involves misappropriating taxpayer refunds, either by diverting funds into their own accounts or by inflating refund amounts to charge higher fees. Current law does not allow a preparer to endorse a taxpayer’s refund check, but the IRS Office of Chief Counsel has determined that actions such as changing the direct deposit information on a tax return is not the equivalent of endorsing or otherwise negotiating a taxpayer’s refund check. For this reason, TAS has repeatedly recommended Congress amend the law to include electronic refunds that are not otherwise deemed to be checks and to increase the penalties for misappropriation so they become meaningful deterrents.
Section 503 of the TAS Act implements this recommendation by:
Together, sections 501 and 503 of the TAS Act would fully implement our prior recommendation to Congress by redefining what constitutes a “return” for penalty purposes, expanding civil penalties to cover theft involving electronic refunds, and aligning penalty amounts with the scale and severity of the preparer fraud. These provisions would provide the IRS with the tools it needs to protect taxpayers from predatory preparers.
However, one question remains: Would the new IRC § 6695(f) apply to the misappropriation of debit cards issued to taxpayers in lieu of refund checks or electronic transfers? This scenario arises occasionally, particularly for taxpayers who lack traditional banking services.
I recommend that Congress explicitly address this issue, as existing interpretations have not always considered debit cards equivalent to electronic funds transfers for purposes of IRC § 6695(f), similar to how electronic funds transfers were previously not treated the same as refund checks.
The National Taxpayer Advocate first proposed creating minimum standards for tax return preparers in 2002. The Senate Finance Committee approved the proposal twice under the leadership of then-Chairman Grassley and the full Senate approved it once, but both bills died. Around 2009 to 2011, the IRS sought to implement minimum standards and worked closely with stakeholders to make the proposal as workable as possible, but in the end, the courts invalidated them.
Since then, the Obama administration, the first Trump administration, and the Biden administration have each asked Congress to pass legislation giving the Treasury Department the legal authority to establish and enforce minimum preparer standards, but Congress has not acted. While I would prefer to see somewhat stronger minimum standards, the reality is that small business return preparers have legitimate concerns, and I have become convinced that the only way to make progress is to accept a plan that imposes less burden. In my view, the discussion draft of the TAS Act does that.
Rather than making the perfect the enemy of the good, I believe the TAS Act strikes a reasonable balance.
Return preparers play a vital role in the United States tax system, and the need for effective oversight is clear. The debate over return preparer oversight is not about targeting hardworking, honest professionals. It’s about preventing fraud and ensuring taxpayers receive the legally accurate and ethical service they deserve. The TAS Act provisions represent a balanced approach, preserving professional autonomy while protecting vulnerable taxpayers from predatory preparers without placing undue burdens on preparers. The draft discussion provisions are a clear step forward, providing a framework for oversight that can evolve over time to better address emerging challenges.
For the tax system to work, taxpayers must be able to trust their preparers instead of gambling on whether they are honest and knowledgeable. With the right safeguards in place, Congress can ensure that taxpayers are protected and that ethical return preparers have the tools to continue providing their services, thereby ensuring accountability and accessibility in return preparation and fostering a tax system that works for everyone.
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.
