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Mystery Shoppers Find Deceit, Incompetence Among Tax Preparers

IRS urged to bar sale of refund anticipation loans

April 10, 2008

Advocacy groups have released a report on mystery shopper testing. The report was also sent to the Internal Revenue Service as part of consumer comments filed in the IRS rulemaking on use of tax returns to market RALs.

The mystery shopper tests portray an industry that imposes high costs on vulnerable low-income filers and fails to provide high-quality tax preparation.

The report shows preparers in Philadelphia and Durham, NC, failed to tell taxpayers about free filing options, and some failed to disclose that RALs are loans.

They also made serious errors on some testers’ returns, which would have resulted in inflated refunds, and failed to handle education credits or investment income correctly. Many preparers did not give clear price information about RALs, other products, and tax preparation fees, leaving testers confused and unable to comparison shop.

“Taxpayers put their trust, their financial health, and their liability for taxes in the hands of commercial preparers,” noted Chi Chi Wu, Staff Attorney at National Consumer Law Center. “Unfortunately, that trust may not always be well placed.”

Mystery shoppers

Seventeen “mystery shopper” tests were conducted at H&R Block, Jackson Hewitt, Liberty Tax service and independent preparers by the Community Reinvestment Association of North Carolina (CRA-NC) in Durham and by Community Legal Services of Philadelphia (CLS) and the Philadelphia Campaign for Working Families. The National Consumer Law Center (NCLC) analyzed test results for the report.

All of the testers had their taxes prepared by commercial preparers. Fifteen of these testers received RALs or a refund anticipation check (RAC). (One of these testers had to withdraw because of incompetent tax preparation, and another tester was not given a RAL or RAC).

The results showed that some preparers still do not inform taxpayers that a RAL is a loan, despite years of complaints and lawsuits on that issue. Even when testers were told that an RAL is a loan, many preparers did not give clear price information about RALs, RACs, and tax preparation fees. Only one preparer in either city informed the tester how to receive a fast, free refund by e-file and direct deposit.

A few testers were given RALs or RACs by default, while others were automatically required to pay charges for RACs for state refunds. Several preparers made serious errors that significantly affected tax liability, causing two testers to file amended returns to fix errors.

One tester withdrew after a preparer advised him to essentially engage in tax fraud, even telling test coordinators, “My experience with [the independent preparer] has been a scary one. I say that mainly because the lack of confidence in the preparer’s ability to competently complete our return ….”

Results varied for independent preparers. Several, including a gift shop and a small loan company, charged multiple ancillary fees, including one preparer who charged $324 in such fees. However, another independent preparer steered both testers who went to her office away from RALs.

"We engaged in testing because we had concerns about the cost of RALs to working families," said Peter Skillern of the Community Reinvestment Association of North Carolina. "The surprise to us was seeing firsthand just how unreliable the preparers were in handling the tax filing needs of consumers. Preparers made a lot of mistakes."

Community Legal Services (CLS) of Philadelphia has conducted its own mystery shopper tests of commercial tax preparers for the past three years, and joined with other groups this year to expand the test.

"Year after year, our mystery shoppers' experiences reveal that some commercial tax prep companies confuse and abuse their customers with poor disclosures, high fees and costly miscalculations," said Kerry Smith, an attorney with CLS. "It's time for the IRS to take action to ban the marketing of expensive, risky refund anticipation loans."

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