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TIGTA Report on VITA Errors

Posted on Nov. 6, 2013

This week, TIGTA released a report detailing errors it has found following a mystery shopping study at VITA sites last filing season. The study indicated that of the 39 tax returns prepared for auditors, 20 (or 51 percent) were correct, while 19 (or 49 percent) were prepared incorrectly. While the study is not statistically significant, the mystery shopper approach and TIGTA studies on accuracy of return preparation have received lots of attention lately. They have come up in connection with the Loving case, for example. IRS and those who favor regulating return preparers point to prior studies of commercial preparers that showed unlicensed preparers making errors; counsel for Loving has pointed to prior TIGTA studies showing errors at VITA sites as suggestive that competency testing may not achieve the IRS’s objective of increased return accuracy; after all VITA volunteers must pass a test to be able to prepare returns for free.

There is lots out there already discussing the report, and IRS response to the report. (See for example Accounting Today, which has a small piece discussing the findings and an IRS response). I write to highlight a few parts of the report, including its suggestion that more systematic use of a checklist when getting information from taxpayers would likely reduce errors.

According to TIGTA, the errors actually resulted in a net overpayment to the IRS; as the volunteers in a number of instances failed to claim appropriate business deductions on a Schedule C, educator expense deductions and retirement credits. Summing it up, TIGTA states that if the 19 incorrect returns had actually been filed, 11 taxpayers would not have received refunds to which they were entitled; and 5 would have owed more in tax or penalties than they otherwise should have owed if the returns were accurate (the other 3 would have received too high a refund or paid too little in tax).

Some issues that have a general high rate of error among self-prepared and commercially prepared returns had a high accuracy rate in this study. For example, in Appendix V of the report, TIGTA indicated that the VITA volunteers had an 85% accuracy rate on the EITC. Child tax credit accuracy and dependency exemption accuracy rates were 92%.

TIGTA’s recommendations focused on ensuring that volunteers appropriately gathered information from taxpayers and that there was a sufficient quality review in place.  In highlighting problems with the information gathering and quality review, TIGTA suggested that volunteer training in those areas was not mandatory, and that additional training and emphasis in interviewing and quality review may have been helpful in reducing errors:

In addition, the IRS created a training document with detailed guidance on the IRS’s intake/interview and quality review processes. However, the IRS encourages but does not require volunteer return preparers and quality reviewers to complete this training, nor does the IRS require site coordinators to complete training on the intake/interview and quality review guidelines. Considering the number of volunteers and quality reviewers who did not follow the IRS guidelines and that most of the errors would not have been made or would have been detected had the guidelines been followed, site coordinators should be required to complete training on these processes. Site coordinators are responsible for overseeing the volunteers’ work and should have a full understanding of the requirements to ensure that volunteers preparing tax returns and performing quality reviews follow the guidelines.

I am a big proponent of uniform approaches to ensuring quality across the board. A book The Checklist Manifesto by Atul Gawande nicely illustrates how checklists can reduce errors in a wide range of activities, including medicine and construction. The essential point in the book is that humans are fallible when it comes to ensuring that they are doing all they are supposed to do; simple checklists go a long way in improving accuracy in outcomes. Likewise, more definitive and specific due diligence obligations such as that in place with the EITC can improve compliance. Questions in checklists can force taxpayers and preparers to confront issues systematically and reduce the odds that preparers overlook important information. Visibility and accountability often drive compliance.

There are many ways to make the process more visible and accountable. Often, there are costs associated with visibility and accountability (including higher prep fes), but those costs must be weighed in relation to likely reduced errors. I will look more specifically at the EITC due diligence rules in a subsequent post.

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