Groups Call for State Regulation of Tax Preparers

As millions of consumers turn to paid tax preparers to help complete what for many taxpayers is their largest financial transaction of the year, a coalition of consumer and community organizations is urging state and federal policymakers to ensure taxpayers are protected from fraud and incorrectly prepared tax returns. Due to a recent lawsuit, the Internal Revenue Service (IRS) is blocked from instituting minimum licensing and training requirements, shifting responsibility to state legislatures.

To draw attention to the issue, CFA issued a report last week, Protecting Consumers at Tax Time: Federal and State Efforts to Address Common Problems Associated with Paid Tax Preparation, which details the challenge consumers face when trying to pick a paid tax provider and the key components of a successful state reform effort.  “Transparency of pricing, minimum training and competency standards, regulation of credit products and a prohibition on junk fees represent the key components of meaningful reform,” said CFA’s Policy Advocate and report co-author Michael Best in a press statement.

More than half of all federal tax returns are completed by a paid preparer, and nearly 60 percent of low-income taxpayers claiming the Earned Income Tax Credit use paid preparers.  However, multiple rounds of mystery shopper tests of tax preparers found instances of incompetence and even fraud, with 24 percent of the returns in a 2008 test and 44 percent of returns in a 2011 test presenting problems.  In 2014, the Government Accountability Office sent undercover investigators to 19 randomly selected tax preparer offices.  Only two of the 19, or 11 percent, of the returns had the correct refund amount.  The mistakes ranged from giving taxpayers $52 less to $3,718 more than they were entitled to.

In 2011 the IRS began implementing new regulations, such as registering all paid preparers, creating competency exams, and requiring continuing education. However, the education and examination components of the regulations  were halted in January 2013 due to an injunction from the U.S. District Court of the District of Columbia, where three independent tax preparers contended that the regulations exceeded the IRS’ statutory authority. In February 2014 an appeals court upheld the district court’s decision. Without the authority to regulate tax preparers, the IRS has instituted voluntary standards to address common abuses.

A voluntary program is unlikely to reduce errors and fraud in the tax preparation process to the same extent as a mandatory standard, however. While some preparers may enroll in the voluntary program, it is likely that those preparers responsible for the highest rate of problem returns will not enroll. The CFA report is intended to help policymakers develop strengthened regulations in this area by framing the problem and pointing legislatures to solutions and resources, such as the model state tax preparer law developed by the National Consumer Law Center.  “The Model Law is based on the strongest elements of the existing state laws and the IRS program,” explained National Consumer Law Center staff attorney Chi Chi Wu. “We urge the 46 states that do not regulate tax preparers to join the four that do.”

Currently California, Maryland, New York and Oregon are the only states that have adopted requirements that paid preparers undergo training, recertify through continuing education courses or pass a skills test, while reforms have been proposed in Colorado and Ohio.

Lawmakers Introduce Bills to Create Food Safety Agency

Sen. Dick Durbin (D-IL) and Rep. Rosa DeLauro (D-CT) introduced companion bills last week to consolidate federal food safety activities into one independent single food safety agency.  The Food Safety Act (H.R. 609, S. 287) is designed to address the fragmented state of the federal food safety system, in which at least 15 federal agencies share responsibility for food safety, operating under laws that do not reflect current conditions in the food system or current scientific knowledge about the cause and prevention of foodborne illness.

“Food safety is a critical public health issue,” said Chris Waldrop, Director of the CFA’s Food Policy Institute, in a press statement endorsing the legislation.  “But right now, responsibility for food safety is scattered among 15 different agencies. We need one independent agency focused on the safety of the entire food supply.”

The Centers for Disease Control and Prevention estimates that each year, 48 million Americans are sickened by foodborne illness, resulting in 128,000 hospitalizations and 3,000 deaths. “A single food safety agency would allow us to better focus our resources where the greatest risks lie,” Waldrop said. “The Safe Food Act is a strong vision for the future of food safety.”

In contrast, an Administration plan to consolidate the food safety programs of USDA’s Food Safety and Inspection Service and the Food and Drug Administration into a new agency within the Department of Health and Human Services (HHS) risks diluting that focus.  “HHS is a massive organization,” said Waldrop in a press statement praising the Administration’s food safety funding request for 2016 but opposing the proposed reorganization. “A new food safety agency would be lost among the other priorities of the Department, and would likely not receive the recognition or resources necessary for it to be effective.”

FCC Sets Appropriate Broadband Universal Service Goal

When Federal Communications Commission (FCC) Chairman Tom Wheeler suggested recently that 25 Megabits per Second (MPS) should be the standard for basic service in the broadband age, his statement triggered strong opposition from those in the industry and the political arena looking to end the commitment to universal service policy in the United States.  In fact, however, current policies have failed to deliver universal access to broadband services and need to be updated, CFA Research Director Mark Cooper argued in a press statement.

Cooper noted that 30 percent of Americans still don’t have access to Internet service 30 years after it was first sold to the public. Another 23 percent of Americans have speeds less the 3 MPS, while 42 percent have 10 MPS or more. In contrast, all the major mass media of the 20th Century — radio, television, and telephone — had achieved over 95 percent penetration of relatively uniform service in a comparable period.  The decision of the FCC to abandon its Title II authority is the primary cause of the ongoing failure to achieve universal service, he said.

The statement from Wheeler represents “a good faith effort by the FCC to define a forward looking goal for universal service that makes sense for the broadband age and secure the authority to pursue that goal in the face of an industry that has failed to achieve it in a reasonable and timely manner,” he said. “It is clear that the FCC can only partly address the challenge under its 706 authority; it needs clear Title II authority to channel funds to the unserved and underserved.”

Privacy Groups Concerned over FCC’s Enhanced 9-1-1 Program

The Federal Communications Commission approved new rules last month that it hopes will improve location accuracy for wireless calls to 911.  Prior to the vote, a group of privacy advocates wrote a letter urging the Commission to carefully consider and resolve associated privacy concerns.

“Public safety should not come at the expense of consumer privacy – nor does it have to,” the groups wrote. “The E911 rules … have the potential to save thousands of lives each year, but the development of highly precise location technologies designed to comply with the new regulations will raise a host of privacy concerns that have not been sufficiently addressed in the E911 proceeding.”

The groups urged the Commission to clarify that privacy and security plans will not be approved for carriers unless they meet the following conditions:

• Users should have the option of opt out because they will not expect information about their personal devices and physical address to be stored in a national database that is accessible to multiple parties.
• Access to the updated E911 system should only be able to be triggered through the handset and remotely in order to protect consumer location information from outsiders.
• Technologies designed to comply with E911 requirements should not be made available to third parties without consumers’ express opt-in consent.
• Consumers should be able to turn the location setting on or off via a global setting on their mobile devices should will also be able to granularly grant or deny access to location services to each application
• Information gathered from E911 technologies should not be used by or disseminated to third parties, including government entities.

Heightened Cost Disclosure Proposed for Fixed Income Securities

The Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB) have proposed new rules that would require disclosing price reference information for transactions in fixed income securities. Under the two proposals, bond dealers in retail fixed income transactions would be required to disclose the price of certain same-day principal trades in the same security on the consumer’s confirmation.

“This information will put investors in a better position to assess whether they are paying fair prices and whether their dealers are fulfilling their best execution duties,” said CFA’s Financial Services Counsel Micah Hauptman in a letter to FINRA and MSRB. “As a result, this information will allow retail investors to make more informed investment decisions. These rules will also foster increased price competition in fixed income markets, which will ultimately lower investors’ transaction costs.”

Hauptman noted that retail investors in fixed income securities pay substantially more to trade in corporate and municipal bonds than they pay to trade in equities, and they also pay substantially more in corporate and municipal bonds than sophisticated traders pay. “Theoretical and empirical evidence suggests that these price discrepancies are largely due to the fact that fixed income markets are opaque, and retail investors are not receiving information that would allow them to make better-informed decisions and pay lower transaction costs,” Hauptman stated. “In short, without essential price information, financial intermediaries are able to extract rents from their less well-informed retail customers by charging them higher transaction costs.”

Disclosure alone cannot address the many issues that affect retail investors, he wrote, but proper disclosure can increase the likelihood that investors make more informed choices. “These proposals will put retail investors in a better position to understand the costs they are paying and to assess whether those costs are reasonable,” Hauptman concluded.