Who Audits the Auditors: The IRS Slams Tax Preparers, But For Good Reason?
by Byrne Hobart
A recent IRS survey revealed that almost two thirds of tax preparers not enrolled with the IRS make errors in the returns they prepare. This study is illuminating, first for what it reveals, but also for what it obscures.
The first thing to keep in mind is that the study was more limited than the headlines indicate. According to the New York Times,
The report was done by the Treasury Inspector General for Tax Administration, the independent oversight arm of the I.R.S. Agents posing as taxpayers solicited and paid for returns at a small sample of 28 unenrolled preparers — 16 of them at small mom-and-pop shops and 12 at chains.
Usually, a sample size of just 28 isn’t acceptable for drawing serious conclusions — if someone were to study the efficacy of the IRS, for example, they wouldn’t look at just 28 agents. Even with a broad survey, it’s a little unusual for an experiment to be designed so that someone with an interest in one outcome of the experiment is also participating in it: IRS agents surveying entities unregulated by the IRS, to decide whether or not those entities should be regulated by the IRS, may be biased, and these biases could easily lead them to influence the tax preparers in a consistent way.
We probably can’t rely on the numbers produced by this survey (about two thirds of returns done incorrectly, two thirds of these giving the taxpayer a lower tax payment than the legal amount, and most of these apparently due to mathematical and typographical errors). But it does bring up an important question: how do you choose the right tax preparer, when national chains and small companies show the same error rate?
One thing to remember when considering these errors is the scope of the tax code: the portion designed by the IRS 13,458 pages long, and the part stipulated by Congress is another 3,387 pages (at least according to this site, which also compiles a list of quotes from politicans estimating the code at between 2,500 and 2.5 million pages long). It’s quite implausible for a generalist to know enough about the tax code to get things perfectly right — and when that generalist does the vast majority of his work during a single month of the year, there isn’t much time to check for ambiguity.
Fortunately, many specialists avoid this problem. Someone who focuses exclusively on tax issues faced by small retailers, or small real estate operations, or individuals taxed by multiple jurisdictions, is likely to know the relevant portions of the code extremely well. And a tax preparer focused on late filing or revised returns will have steadier business, and more time to research individual issues.
Although this IRS survey does draw attention to the fact that no tax filing can be guaranteed to be error-free, it does so in a way that’s clumsy, hard to use, and inapplicable to many situations encountered by the average taxpayer. A better survey would involve more participants, looking into more kinds of filing, and adjusting for the possible bias of the surveyors. This kind of study can be useful, but this particular study simply isn’t.