Uncredentialed tax preparer errors included fictitious deductions, review shows

Uncredentialed preparers of tax returns often produced returns containing basic errors, inflated deductions, and misapplied credits, a nonprofit advocacy group’s investigation during the 2025 filing season found.

The report, released last month by the Center for Taxpayer Rights, comes as Congress considers giving the IRS more oversight of the industry, a move the AICPA supports with its endorsement of the Taxpayer Assistance and Service Act (TAS Act).

“You really just don’t know what you’re getting necessarily in [an uncredentialed] tax return preparer,” Melanie Lauridsen, vice president–Tax Policy & Advocacy for the AICPA, said in a JofA podcast episode about various efforts to regulate tax preparers. “The CPA brand, obviously, that carries the weight from the education requirements and the ethical components that they work under. But the unregulated, you just don’t know.”

The center used mystery shoppers to visit tax preparers in six states, where testers posed as typical low-income filers and asked for help with three common tax situations. The report also drew on a nationwide survey of low-income taxpayers and a review of IRS data on preparer penalties. The results show numerous mistakes made by uncredentialed preparers leading to incorrect refund amounts. The report said the most problematic area the testing found was related to Schedule C income.

“Underreporting of cash income, estimating or completely fabricating deductions, and confusion about the deductibility of expenses for business use of the home resulted in wildly different results on the returns,” the report said.

The preparers visited by testers “routinely failed to ask the relevant questions pertaining to household composition and income,” the report said.

Most (56%) of the more than 684,000 preparers registered with the IRS at the beginning of this year, according to the report, were uncredentialed, meaning they were not attorneys; CPAs; enrolled agents or actuaries; or participants in the IRS voluntary annual filing season program.

Those numbers likely understate the number of uncredentialed preparers because some preparers, known as “ghost preparers,” do not sign returns. Uncredentialed and ghost preparers have “a significant compliance impact on low-income taxpayers,” the report said. For example, IRS data shows that returns prepared by uncredentialed return preparers account for over 94% of the dollar adjustments in earned income tax credits (EITCs) for tax year 2021, the report said.

Enforcement

Despite those risks, the report found that IRS oversight of preparers remains limited.

The report points to what it calls a weak enforcement of preparers who abuse the system. The IRS doesn’t even track the number of return preparer misconduct complaints it receives, the report said, “so it has no sense of the scope of harm to taxpayers as a result of preparer actions, including stolen refunds.”

The IRS has identified 87,000 “high risk return preparers” since 2005, the report said, and “those preparers are disproportionately involved in improper claims for the EITC and other refundable credits, it rarely assesses preparer penalties, and even more rarely collects on those penalties.”

For tax years 2018 through 2021, uncredentialed preparers accounted for 93% of the preparer penalties assessed and 89% of the dollar amount of those penalties, the report said, citing IRS data.

The report said that IRS data showed that as of January 2025, the IRS had assessed almost $75 million in civil return preparer penalties, of which $66.5 million was assessed on uncredentialed preparers, who file most individual returns. However, the IRS collected only 18.85% of that amount, or $12.5 million.

Recommendations

To address the gaps in oversight and enforcement, the center recommended six changes:

• Congress should authorize the IRS to establish a program to register and require minimum competency of federal income tax return preparers.

• The IRS should mount a comprehensive nationwide consumer education campaign to help taxpayers identify competent preparers and protect themselves against incompetent or unscrupulous ones.

• The IRS should reinstate and expand Direct File.

• The IRS should track and publish the number of complaints of return preparer misconduct received, disallowed, and accepted by the IRS for each calendar or tax year.

• The IRS should publish and regularly update the data relating to assessment and collection of civil and criminal return preparer penalties and injunctions, by type of preparer.

• The IRS should prioritize the collection of civil preparer penalties it assesses.

The center’s recommendations mirror themes emerging in broader reform proposals. Those themes are reflected in the AICPA’s support for the TAS Act.

Tax preparer errors “create complications not only for just the IRS, but also for the taxpayers,” Lauridsen said. “You think about some of the errors that happen, you think about the [employee retention credit] mills that were coming about and all the debacle that happened …, and we’ve seen the consequences of that. It really is an important area to be able to focus and try to come up with some minimum professional standards for tax return preparers.”

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.