By Stefan Herlitz, Staff Writer
During the 2015 tax year, the Internal Revenue Service (IRS) processed nearly 240 million tax returns, collecting almost $3.3 trillion, and in doing so spent 35¢ per $100 collected. Hidden inside the tax return system is one of the largest social welfare programs in America: the Earned Income Tax Credit (EITC). The EITC provides an extra lump sum of money to low-income workers and a substantial sum to those who have children. As it is meant to incentivize work, the credit increases with income up to approximately $18,000, after which it falls with income. At the highest credit level, the EITC can amount to over $6,000, a large chunk of a family’s income for the year; the Tax Policy Center notes that this credit lifted over 6 million people out of poverty in 2013.
However, the EITC program has a high error rate. More than a quarter of payments are made in error largely because of issues revolving around whether children are qualified for the credit. To fight this problem, the IRS focuses significant resources on examining returns that claim the EITC; of the nearly 1.4 million tax returns examined in 2015, almost a third were EITC returns.
I spent this Fall working as a student attorney at the Harvard Legal Services Center’s Federal Tax Clinic and, in the process, helped many low-income clients whose taxes were under question by the IRS due to EITC complications. Several of my clients experienced difficulty proving that the children they claimed lived with them for the requisite portion of the year, and others with nontraditional families claimed the children of their significant other as “step-children,” even though they weren’t married. If a taxpayer is proven to owe the credit back, they face a tax bill of around $4,500 on average per erroneously-claimed year which is a staggering amount of money to owe at once for anyone, let alone for someone with multiple children making around $20,000 per year. The IRS faces extreme difficulty getting the EITC back, and often simply can’t; the examination process happens after the money has already been spent, and the people who receive the largest benefits are also the least likely to be able to pay them back.
This is why Congress must pass legislation to allow the IRS to do something the courts have said it currently cannot: regulate paid unenrolled tax return preparers. An unenrolled tax preparer is a person who is not a CPA, Enrolled Agent, or other professional whose practice is currently regulated, either by the IRS or some other body. Currently, anyone could qualify as an unenrolled preparer, even with no formal training or oversight. More than half of individuals who pay a preparer to do their taxes use an unenrolled preparer, and more than three-quarters of EITC returns using a paid preparer were prepared by an unenrolled tax preparer. This means that we leave a large amount of the administration of one of the largest benefit programs in America, which pays out over $60 billion per year, in the hands of preparers without training or oversight, which to any citizen ought to sound absurd.
Need another example as to why these preparers must be regulated? Both of my clients who erroneously claimed their significant others’ children as “step-children” did so on the advice of an unenrolled paid preparer for multiple years. The preparers received their fees, and my clients now owe thousands of dollars to the government that they won’t be able to pay back. Regulation and registration could prevent these issues before they arise, something which legislators on both sides of the aisle ought to agree.