Tax practitioner credentials and the incidence of IRS audit adjustments

A random selection of Internal Revenue Service office audits from October 1997 to July 1998, the type of audit that concerns most taxpayers, is analyzed. Taxpayers engage paid preparers in order to avoid this type of audit and to avoid any resulting tax adjustments. Whether there are more audit adjustments and penalty assessments on tax returns with paid-preparer assistance than on tax returns without paid-preparer assistance is examined. By comparing the frequency of adjustments on IRS office audits, it is concluded that there are significantly fewer tax adjustments on paid-preparer returns than on self-prepared returns. Moreover, CPA-prepared returns resulted in fewer audit adjustments than non CPA-prepared returns. The study included 2,253 audit cases; 71% of the audited taxpayers prepared their own tax return, 19% hired a CPA, and 10% hired a non-CPA. Most adjustments come from deduction errors, and CPA-assisted returns have significantly lower likelihood of having a deduction adjustment.