You choose, we deliver
If you are interested in this story, you might be interested in others from The Journal Gazette. Go to www.journalgazette.net/newsletter and pick the subjects you care most about. We'll deliver your customized daily news report at 3 a.m. Fort Wayne time, right to your email.

Local

  • Fort Wayne trick-or-treat hours announced
    The official Trick-or-treat hours for the city of Fort Wayne are from 6 to 8 p.m. Oct. 31, Fort Wayne Police Department Public Information Officer Michael Joyner said today.
  • Crews continue to clean up train derailment
    Cleanup continues at the intersection of Dawkins and Webster roads east of New Haven from Monday’s multi-car train derailment.
  • Noble County road closed for repair
    Noble County Road 290 West, between 600 North and 700 North, will be closed for road repair, county emergency management officials said today.
Advertisement
At a glance
If you’re cringing over the check you have to write to the IRS this year, consider these tax-saving tips from John Foxworthy, a certified financial planner with Phillips Financial in Fort Wayne. These steps could reduce the amount you have to pay next spring.
•Contribute as much as you legally can to your 401(k) or individual retirement account to reduce your taxable income.
•Contribute to a health savings account, if you qualify. That also reduces taxable income.
•Deposit money in a 529 education savings account for your child, grandchild or other deserving youngster to receive a tax credit of up to $1,000.
•Donate cash, clothes or cars to charity. You can take a deduction on the value – if you itemize.
•Consult a tax professional to find out whether these or other strategies will work for your individual situation.
– Sherry Slater, The Journal Gazette
What to ask
If you pay someone to prepare your annual tax returns, these are some basic questions you should ask:
•How long have you been preparing tax returns?
•What is your training in tax preparation?
•Have you worked on cases similar to mine?
•Will you go with me if I’m audited?
Source: Julie Wood, certified public accountant
Samuel Hoffman | The Journal Gazette
Accountant Julie Wood of Witmer Wood Tax Consultants in Leo works with client Caroline Gerig.

Unregulated tax preparers pose risks to customers

When your mom cuts your hair at home, you don’t expect the same quality you’d get from a professional stylist.

That’s understood.

But many people might not realize that when they go to an independent tax preparation office, the quality of service might not be any better than if Mom crunched the numbers at the kitchen table.

Only four states require testing and continuing education for hundreds of thousands of independent tax preparers who work with the public. And Indiana isn’t one of them.

After a federal appeals court threw out proposed IRS rules regulating tax preparers last month, the tax preparation industry will continue to be largely unregulated for another tax season.

The Institute for Justice, which successfully fought the proposed IRS regulations in court, estimates that more than 350,000 small independent tax preparers would have been affected by the regulations.

All told, up to 1.2 million tax preparers make a living deciphering the U.S. tax code for clients. The IRS reported that 63 percent of all returns were done by tax preparers in 2013 and estimates are that about half of those were filed by unregulated preparers.

In its Feb. 11 ruling, the U.S. Court of Appeals for the District of Columbia said the IRS isn’t authorized to write the proposed regulations. That power, the court said, is reserved for Congress and the president.

Julie Wood, a certified public accountant, said that just because the IRS doesn’t have the authority to require a competency test, that doesn’t mean it’s not a good idea.

“Personally, I liked the idea. I really did,” she said.

No one is protecting the public from incompetent tax preparers, said Wood, an owner of Witmer Wood Tax Consultants LLC in Leo.

Wood had to pass extensive, detailed tests on various aspects of accounting to earn her CPA designation. She specializes in taxes – though not all CPAs do. Jim Rolleston, the only other person in the firm who prepares and signs tax returns, is an enrolled agent, someone who has passed stringent tests specifically on tax preparation.

CPAs, enrolled agents and lawyers are required to meet relatively high professional standards.

In contrast, the proposed test was to ensure only a minimum competency level for independent tax preparers, who must decipher the nearly 74,000-page U.S. tax code.

Even Wood has limitations. She doesn’t handle certain types of tax filings because she doesn’t understand the intricacies well enough.

Wood shudders to think of someone without specialized training handling complicated tax returns. But it’s legal.

Small, independent tax preparers aren’t subject to any standards in most states. They can simply hang out a shingle and start meeting with clients.

Sandra Cates, owner of Fisher Income Tax Service, thinks the system already has enough safety built in without requiring a competency test.

Her business, at 1815 Taylor St., employs three tax preparers and files about 1,000 returns on behalf of clients each tax season.

Cates’ daughter is on track to earn an associate degree in accounting from Ivy Tech in May, but most of the firm’s collective tax knowledge comes from annual compliance classes and old-fashioned familiarity with returns.

“We’ve all been doing them for years,” said Cates, who has 35 years’ experience.

Since the firm opened in 1993, the staff has made only one mistake, she said. About 10 years ago, a preparer forgot to include a W-2 income form in the calculations. Fisher Income Tax Service, named for Cates’ mother, paid all the penalties. The client was responsible for the additional taxes due.

That’s how it should work, she said. Any tax prep company that makes a lot of mistakes will end up paying a lot of IRS fines. And it won’t get much repeat business.

Cates said her company gets a lot of return customers.

Jean Hartley, a local competitor, isn’t persuaded that penalties are enough to weed out incompetent practitioners.

The founder of Hartley Tax & Accounting LLC, 6066 E. State Blvd., said tax preparers often cover fines assessed on incorrectly prepared tax returns – but the IRS doesn’t require it.

Hartley, who employs only CPAs and enrolled agents, has prepared tax returns for 22 years. Her team of five preparers files about 2,000 returns each tax season.

“We kind of liked (the minimum competency test) because it kind of brought a little more professionalism to the job,” she said.

The biggest problem, in Hartley’s opinion, is when someone buys tax preparation software and offers to use it for friends and family.

Those people who think they’re doing a good deed don’t sign the returns, Hartley said. And they don’t take responsibility when something goes wrong.

“They just throw up their hands and say, ‘I did the best I could. You knew I didn’t know what I was doing,’ ” Hartley said.

California, Oregon, Maryland and New York have adopted requirements for independent tax preparers who are not CPAs, enrolled agents, attorneys or certain types of banking officials. Those standards include taking tax prep courses and passing a test.

State Senate President Pro Tem David Long, R-Fort Wayne, on Saturday didn’t immediately recall an effort to license tax preparers in Indiana.

“It seems reasonable that there would be some process of registering with the state on this,” he said.

But, Long added, it’s easy to stumble when drawing the line on who should be required to register. Someone who helps out an elderly aunt or close neighbor by preparing their taxes shouldn’t necessarily have to meet the same requirements as someone who opens a commercial business and prepares tax returns for strangers, he said.

National consumer groups support a national requirement. They note that independent preparers are less regulated than hair stylists, who are required to be licensed in all states and the District of Columbia.

Estimates of how many unregulated tax preparers exist vary widely, since they are not required to register anywhere.

A Government Accountability Office study of all kinds of tax preparers in 2008 found numerous cases of incorrect returns, including failing to claim all available deductions in seven of nine cases, not reporting business income in 10 out of 19 cases, and unwarranted extra refunds.

Some preparers took deductions for children that didn’t qualify, and some failed to report business income in almost half the cases studied.

Average taxpayers aren’t the only ones who fall victim to incompetent tax advisers.

In a case disclosed last month, NBA basketball star Kevin Durant of the Oklahoma City Thunder is suing his tax preparer for taking invalid deductions.

The lawsuit says Durant’s accountant deducted expenses for Durant’s personal travel and personal chef. That is not allowed under IRS law because it’s not a business expense. Durant may have to pay back taxes and penalties because the filing was incorrect. He’s suing for $600,000.

Chi Chi Wu, staff attorney at the National Consumer Law Center, a Washington-based consumer advocate group, said investigations by “mystery shoppers” have found so many cases of incompetence and fraud that licensing requirements could only help the situation.

“States are our best hope at this point,” she said, citing Congress’ inability to pass much legislation in general.

Wu said the NCLC conducted three rounds of mystery shoppers in 2008, 2010 and 2011.

“We weren’t even looking for (fraud), we were looking for refunds and anticipation loans (loans from tax preparers based on forthcoming tax refunds). We found, ‘Oh my God, there’s all this fraud going on in tax preparation.’ ”

“I used to joke that my middle schooler could set up a card table and do taxes,” she said. “He’s a little bit older now and probably better than some of the preparers out there.”

sslater@jg.net

McClatchy-Tribune contributed to this story.

Advertisement