The days are numbered for paid tax preparers who don't understand tax law - or intentionally flout it - yet file returns anyway, leaving the taxpayer to suffer the consequences.
The IRS proposed last week that all paid preparers be registered and, with a few exceptions, undergo testing and continuing education. Maryland also has a law that allows state regulators to license preparers, but that effort has been stalled by a lack of funding. A state regulator hopes money is made available this year despite a huge budget shortfall.
More than 80 percent of filers use either a tax preparer or tax software to file returns. The IRS estimates there may be as many as 1.2 million preparers.
That includes those who work for large tax preparation companies, such as H&R; Block, as well as preparers who operate out of homes or rented kiosks during tax season.
Warning: Unless you're getting help from a lawyer, certified public accountant or an enrolled agent who represents taxpayers before the IRS, your tax preparer is largely unregulated. Mistakes by paid preparers are frequent.
The Government Accountability Office, for instance, tested the accuracy of 19 tax-preparer chains a few years ago by asking them to fill out returns for government workers posing as customers. Only two accurately figured the tax liability, and all 19 made mistakes on the return.
Maryland nonprofits that provide free tax preparation say they often see errors or flat-out exaggerations made on their clients' past returns filled out by preparers.
"I have had clients make $18,000 a year and have $12,000 in charitable deductions. I say, 'You're giving all your income to your church?' " said Robin McKinney, director of the Maryland CASH Campaign. McKinney said the clients respond, "What do you mean? I don't go to church."
Sometimes errors aren't in the filer's favor because the preparer failed to claim legitimate deductions and credits.
But if a filing is wrong, the taxpayers are the ones who pay the consequences. Once you sign the return, you are certifying everything in it is true, McKinney said. And if it's not, you'll be responsible for the back taxes, penalties and interest.
Under the IRS proposal, all paid preparers filing federal returns would be covered. However, lawyers, CPAs and enrolled agents would be exempt from testing and continuing education mandates because they meet similar requirements through their professional licensing agencies.
The IRS recommendations won't be adopted by this tax season. The same goes for licensing in Maryland, one of four states to pass laws to regulate preparers.
The 2008 Maryland law required that tax preparers be licensed by mid-2010, but the program hasn't been funded yet, said Harry Loleas, deputy commissioner of Occupational and Professional Licensing. If the state provides money this year, some Maryland preparers could be licensed by the next filing season, he said.
Even though the IRS is moving to regulate preparers, state licensing still is needed to ensure preparers here can handle state returns, said McKinney. Plus, the more oversight, the better for all taxpayers who benefit when everyone pays what they owe, she said.
For this season, though, you're on your own to find a reputable preparer.
Some tips •Don't go with the preparer who promises the biggest refund before you even get in the door, as tempting as that might be. Preparers would have no idea about the size of your refund unless they have reviewed your finances and documents.
•Choose a preparer who will be around after the filing season. Preparers who set up shop for just a few months might be hard to find if the IRS has some questions later.
•Avoid preparers charging a fee based on the size of your refund, which gives them an incentive to inflate deductions and credits. Check the preparer's credentials.
•Run from a preparer who asks you to sign an incomplete or blank return. Whatever the preparer puts on those empty lines when you're not looking can come back to hurt you. And don't sign a return until you read it.
•Likewise, avoid preparers who won't sign your return: There might be a reason they don't want their name attached to it.
•Free help is available, too. Maryland singles with income of up to $25,000 and families earning up to $49,000 are eligible for free tax preparation from trained volunteers. To find locations, call 800-492-0618.
•The Maryland comptroller will prepare state tax returns for free, regardless of income, at its 11 offices. It also plans to release a consumer guide Thursday on choosing a preparer that will be available online at comp.state.md.us.