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Is Your Tax Preparer an Idiot--or a Crook?

Is your tax preparer a crook or an idiot? Unless they are professionally licensed, which is not a requirement for most of the industry, the answer is "most likely." Unfortunately, for the 2010 filing season, it's taxpayer beware.

"Ultimately, it's the taxpayer, not the tax preparer, who is on the hook," said Internal Revenue Service Commissioner Doug Shulman at a press conference on Monday.

Shulman was speaking on the eve of launching new proposed regulations that would demand that all tax preparers register with the government, pass competency tests and stay up to date on new tax rules by taking classes. (Certified public accountants, attorneys and enrolled agents would be exempted, since they already pass competency tests and have continued education requirements as part of maintaining their professional designations.)

The rules were necessitated by a series of troubling studies that found that professionally prepared tax returns are riddled with errors. One study that looked at unlicensed preparers found that a stunning 61% of the sample returns were prepared incorrectly. The Treasury Inspector General for Tax Administration estimated that 65% of these errors were simple mistakes, but about 35% were outright fraud, where the preparer purposefully faked some fact or circumstance, presumably to get the taxpayer a higher refund.

Last year, TIGTA did another study of the trained volunteers who man so-called Volunteer Income Tax Assistance (VITA) centers, preparing some 3 million returns for seniors and low-income individuals each year, and found that these preparers didn't do much better. About 41% of the sample returns TIGTA auditors brought to VITA centers in 2009 were done incorrectly, too.

No relief yet
A wide array of experts, from accountants to legislators, lauded the IRS announcement, saying the new rules would make it safer to bring your 1040 to a preparer. Since some 87 million Americans pay others to prepare their returns, that's a significant shift for the vast majority of the population. The bad news is that these new rules won't go into effect for this filing season. At best, they'll affect 2010 returns that are prepared in 2011.

Shulman says he is doing some things to straighten out the industry now, though, including "knock and talk" visits where agents will pop in to preparation offices--sometimes covertly--to see what kind of advice they're doling out to customers.

The unanswered question is whether the problem is bad preparers, who can be pulled into line by licensing, or a tax system run amok. With dozens of new tax breaks to contend with and a code that started the year some seven-times as wordy as the Bible, 2009 is likely to be an error-prone season. Who do you think deserves the blame?

Need to know how to choose a tax preparer in today's dicey environment? You can find some guidance here.