Increasing voluntary tax compliance for return preparers

What was the challenge?

Paid tax preparers complete the majority of tax returns claiming refundable credits, and the IRS estimated a loss in 2021 of approximately $26 billion in improper payments from these credits. The IRS Return Preparer Program (RPP) is an agency-wide effort to enforce compliance of tax return preparers. As part of their continuous efforts to increase voluntary tax compliance through RPP, the IRS aimed to improve the efficacy of the educational letters sent to paid preparers prior to the filing season.

What was the program change?

The IRS sends a letter, called the Letter 5025, to preparers prior to the filing season if the returns they prepared for their clients during the previous season had likely errors in claiming benefits. A redesigned letter simplified and clarified the language, made salient the consequences of filing improperly, and communicated that the preparer’s clients might also be notified of likely inaccuracies in their returns. Preparers who had recently received other IRS outreach were also eligible to receive follow-up outreach (letters or phone calls) during the filing season, if they continued to submit returns that contained likely errors or did not meet due diligence requirements.

How did the evaluation work?

Tax preparers were randomly assigned to be sent either a treatment-as-usual (TAU) version of the Letter 5025, an updated version of the letter with additional insights from the behavioral sciences (referred to as the behavioral insights or BI letter), or no letter, in order to learn whether letters can lead to improvements in tax compliance, and whether different letter contents has differential impacts. The evaluation measures the effects of the Letter 5025 for preparers who had recently received other IRS outreach (and were eligible for follow-up outreach) separately from those who had not received other outreach.

What was the impact?

Among preparers who had not received other recent IRS outreach, sending the Letter 5025 reduced the percent of returns with likely errors, the dollar amount of credits claimed with likely errors, and the average total refund amount per preparer. Sending the letter to these preparers resulted in an estimated cost savings of $129 million in filing season 2021. Sending the Letter 5025 had no impact among the preparers who had recently received other IRS outreach. The impacts of the letter did not differ by the version of the letter sent.

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