TIGTA memo concerning EITC preparers

The following memo is from the office of The Inspector General for Tax Administration. Since it is a government document, it is not copyrighted and may be published.

== Begin memo =October 18, 2010 TIGTA - 2010-64 Contact: Karen Kraushaar (202) 622-6500 snipped-for-privacy@tigta.treas.gov snipped-for-privacy@tigta.treas.gov

The IRS Should Take Further Actions To Identify Tax Return Preparers Who Submit Improper Earned Income Tax Credit Claims

WASHINGTON - Although the Internal Revenue Service (IRS) has increased its efforts to improve compliance with the Earned Income Tax Credit (EITC), it also needs to improve its ability to identify preparers who submit improper EITC claims, according to a report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA). The EITC was created in 1975 to offset the impact of Social Security taxes for individuals who work but have low incomes. The refundable nature of the EITC and the complexity of eligibility requirements increase the likelihood of taxpayer error and fraud. The IRS estimates that between $11 billion and almost $14 billion in erroneous EITC claims are paid annually. For Tax Year 2008, individuals claimed $49.2 billion in EITC; 66 percent of the returns were prepared by tax return preparers.

The IRS recognizes the role tax return preparers play in ensuring compliance with EITC requirements. Beginning in 1999, the IRS developed the EITC Paid Preparer Strategy in an effort to increase tax return preparer compliance with EITC requirements. TIGTA performed this audit to determine if the IRS's EITC Paid Preparer Strategy effectively identifies and addresses tax return preparers who prepare tax returns with erroneous EITC claims.

"One of the most significant challenges the IRS faces in its efforts to address tax return preparers' EITC compliance is its inability to identify everyone who prepares returns," said J. Russell George, the Treasury Inspector General for Tax Administration. "Our study found that actions need to be taken to improve IRS's effectiveness in identifying those preparers who are at high risk for submitting improper EITC claims," he added.

TIGTA made two recommendations to the IRS in its report, and the IRS agreed with one of those recommendations. To view the report, including the scope and methodology, go to: http//:

End memo = The pdf document reads in part: TIGTA recommended that the Commissioner, Wage and Investment Division: o Include a risk factor in its computation of the probability score for tax return preparers who were identified in a previous year as a high-risk tax return preparer and were included in the control group. o Select high-risk tax return preparers for a Due Diligence Visit (DDV) based on the preparer's probability score and volume of EITC tax returns prepared. TIGTA recommended that the Commissioner, Small Business/ Self-Employed Division, should ensure the DDVs are properly performed, with adequate case documentation in support of the assessment/nonassessment of penalties.

In their response to the report, IRS officials agreed to implement actions to improve the probability scoring and the quality of the DDVs. However, they did not agree to revise the selection of high-risk tax return preparers for a DDV. Management indicated the current process provides the flexibility needed to maximize the use of resources and allows for consideration of additional factors when needed. Our analysis shows the IRS' process does not result in the most efficient and effective use of resources. Our analysis is based on the IRS' process for quantifying the success of the DDV Program and the most current data available.

Dick