The Role Tax Preparers Play in Taxpayer Compliance: An Empirical Investigation with Policy Implications

Abstract

In January 2010, the IRS published its Return Preparer Review Final Report, recommending extensive increases in oversight of the tax return preparer industry. These increases in oversight are suggested to be achieved through numerous measures, including preparer registration, competency testing, continuing professional education, ethical standards, and enforcement. Effective August, 2011, new paid preparer regulation requires all tax return preparers who offer their services for a fee to register and obtain a unique Preparer Tax Identification Number (PTIN) that must be used to sign all returns they prepare. Given that additional preparer regulation is expected to come into effect within the next couple of years, this paper suggests taking a step back before contemplating further steps forward. It explores existing data to shed better light on tax preparers and how they affect the tax system and its administration. Such examination, at a time of regulatory reform, may be utilized to either support and offer guidance for increased preparer oversight or may, alternatively, cast doubts over some of the regulatory advancements already implemented as well as those steps that are proposed. To this end the paper undertakes an empirical analysis of U.S. individual tax returns looking at three variables. The two independent parameters include: (1) tax return characteristics: by line item and type of return, and (2) preparation mode: whether the return is self prepared; or, if prepared by someone other than the taxpayer, by which type of a preparer. The third, dependent, variable applied is the compliance or noncompliance of the return examined. The analysis draws from 3,457 tax returns where taxpayers claimed the Earned Income Tax Credit (EITC) for Tax Year 1999. These returns have all been subject to either face-to-face or correspondence audit and provide a uniquely thorough pool of data presently unavailable for the general population.

Keywords: Empirical Analysis, Tax Compliance, Law & Economics, Legal Intermidiates