TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Office of Audit

Highlights

THE INTERNAL REVENUE SERVICE LACKS A COORDINATED STRATEGY TO
ADDRESS UNREGULATED RETURN PREPARER MISCONDUCT

Final Report issued on July 25, 2018

Highlights of Reference Number:† 2018-30-042 to the Commissioner of Internal Revenue.

IMPACT ON TAXPAYERS

Paid tax return preparers serve an important role in the U.S. tax system as they prepare approximately 60 percent of all tax returns filed.† Because the IRSís effort to regulate preparers was invalidated as a result of litigation, tax return preparers are generally unregulated, and they can prepare returns without possessing training or education.† In addition, there is extensive evidence that some of them prey upon innocent taxpayers.

WHY TIGTA DID THE AUDIT

The IRS has tools, including civil penalties, civil injunctions, and criminal investigations to address incompetent and unscrupulous preparers.† This audit was initiated to determine how effectively the IRS uses those tools.

WHAT TIGTA FOUND

The Deputy Commissioner for Services and Enforcement designated the Small Business/Self-Employed (SB/SE) Division to serve as the IRSís lead function to address preparer misconduct; however, TIGTA found no evidence of a coordinated strategy in the IRS to address preparer misconduct.† Only a relatively small number of civil examinations are pursued against preparers each year relative to complaints about tax preparers.† For example, during Fiscal Year 2016, the IRS investigated just 140 (15 percent) of 951 misconduct referrals.† Additionally, the SB/SE Division does not establish goals addressing preparer misconduct or track them in any meaningful way.† Collection of tax preparer penalties is not effectively prioritized or worked given that only about 15 percent of assessed penalties are being collected.

The Return Preparer Office, which was originally established to lead the now defunct regulatory effort, is still in existence but now primarily focuses its efforts on tax professionals and those few tax return preparers who volunteer to be subject to certain annual training.† The Return Preparer Office checks tax compliance for tax professionals but not for most unregulated preparers.† More than 26,000 Preparer Tax Identification Number recipients acknowledged being tax noncompliant.† Additionally, while preparing tax returns without a Preparer Tax Identification Number is subject to a penalty, the penalties are assessed on a limited ad hoc basis.† In Processing Year 2016, the IRS failed to assess $121,175,195 in Preparer Tax Identification Number penalties.

Despite the availability of significant information about possible preparer misconduct, the IRS has not taken full advantage of the capabilities.† For example, TIGTA identified suspicious behavior by more than 10,000 preparers who each filed at least 25 returns annually with refund claims on 100 percent of the returns they filed.† The IRS could conduct similar analyses to identify additional possible unscrupulous preparers.

WHAT TIGTA RECOMMENDED

TIGTA made several recommendations to improve the identification and deterrence of misconduct by unregulated tax preparers.† In response to the report, IRS officials agreed with eight of the nine recommendations and plans corrective actions.† However, the IRS disagreed to assess the priority and assignment of preparer misconduct penalties and track the results.

TIGTA believes more emphasis should be placed on the collection of return preparer penalties, and tracking the success of these efforts would assist collection function management in realizing a better collection rate.

READ THE FULL REPORT

To view the report, including the scope, methodology, and full IRS response, go to:

https://www.treasury.gov/tigta/auditreports/2018reports/201830042fr.pdf.

 

Phone Number ††/† 202-622-6500

E-mail Address †/TIGTACommunications@tigta.treas.gov

Website†††††† ††††††/http://www.treasury.gov/tigta