T A X A T I O N

compliance & enforcement

Do Taxpayers Want Less Aggressive

Returns?
By Stacy Wade and Teresa Stephenson

n order to maintain a good relationship with their clients, tax Background

I preparers must understand their clients’ objectives. A recent

study indicates that taxpayers often perceive and expect their
tax preparers to be less aggressive than they actually are. When
individuals are asked why they hire a professional to prepare their
return, “accuracy” rates higher than any other reason. Paid pro-
fessionals, however, have long behaved as though “tax mini-
mization” is the overriding concern. Recent legislation address-
ing preparer penalties may encourage tax preparers to discuss
these expectations with their clients, fostering a better working
relationship.
Despite the increasing availability of consumer tax software,
the number of individuals employing paid tax preparers con-
tinues to grow. In 2006, nearly 63% of individual tax returns
were prepared and signed by paid preparers (IRS Taxpayer
Usage Study). The influence and advice of these paid prepar-
ers is an important component of the reporting process. Recent
research indicates that tax preparers may often be more aggres-
sive on uncertain tax positions than their clients expect or desire
(see Teresa Stephenson, “Do Clients Share Preparers' Self-
Assessment of the Extent to Which They Advocate for Their

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Clients?” Accounting Horizons, vol. 21,
no. 4, 2007).
Taxpayers and Tax Preparers
Taxpayers want accurate returns and to
avoid audits. Research has shown that over
two thirds of taxpayers put “accuracy” as
their primary motivation for hiring a tax pre-
parer (Julie H. Collins, Valerie C. Milliron,
and Daniel R. Toy, “Factors Associated with
Household Demand for Tax Preparers,”
Journal of the American Tax Association,
Fall 1990; Yankelovich, Skelly, and
White, Inc., “Taxpayer Attitudes Study:
Final Report,” IRS, 1984). If their return is
chosen for audit, individuals consider their
tax preparer to have failed and are more like-
ly to hire a new preparer—even if the
audit turns out favorable (Dan L. Schisler
and Susan C. Galbreath, “Responsibility for
Tax Return Outcomes: An Attribution
Theory Approach,” Advances in Taxation,
vol. 12, 2000).
On the other hand, tax professionals (as
well as academic tax literature) seem to
equate client advocacy with tax mini-
mization (see Richard C. Hatfield, “The
Effect of Accountability on the Evaluation
of Evidence: A Tax Setting,” Advances in
Taxation, vol. 12, 2000). Many tax pre-
parers view taking aggressive positions
on ambiguous tax matters to be advocat-
ing for their clients’ best interests. This
behavior is evidenced through research
demonstrating that, all other things being
equal, professionally prepared returns gen-
erate lower tax liabilities than self-prepared
returns (Charles W. Christian, Sanjay
Gupta, G. J. Weber, and E. Willis, “The
Relation Between the Use of Tax Preparers
and Taxpayer’s Prepayment Position,”
Journal of the American Taxation
Association, vol. 16, no. 1, 1994).
A related concern is that taxpayers often
report that their preparers don’t listen to
them as well as they should (Anne L.
Christensen, “Evaluation of Tax Services:
A Client and Preparer Perspective,”
Journal of the American Taxation
Association, vol. 14, no. 2, 1992). When
tax preparers do not fully understand their
clients’ motivations and desires, they risk
taking more aggressive tax positions than
their clients are comfortable with. This
“gap” in understanding the expectations of
taxpayer-clients has been widely evident,
from large firms to sole practitioners.
FEBRAURY 2009 / THE CPA JOURNAL
While most studies concerning the
relationship and motivations of paid pre-
parers and taxpayers have concentrated
on large, multinational firms and their
clients, a recent study by this author
(Stephenson 2007) found comparable
results in smaller firms and with individ-
ual preparers and their clients. Because
over half of individuals using profession-
al services employ these smaller firms,
the findings are relevant to many tax
practitioners. Another difference from prior
studies is that clients’ perceptions or expec-
tations of their preparers’ reporting
behavior were assessed. In the study, tax-
payers were asked to evaluate the degree
to which they thought their tax preparer
advocated for them. In other words, how
aggressive did they perceive their tax pre-
parer to be on their behalf? Tax preparers
were also surveyed and asked to self-assess
the degree to which they advocated for
their clients. The study showed that tax pre-
parers, in general, were more aggressive
than expected by their clients. This is
important because it suggests that taxpay-
ers may not realize nor be comfortable with
the level of aggressive positions taken by
their tax preparers. This news may bring
welcome relief for many tax preparers who
feel pressured to achieve tax minimiza-
tion through risky tax positions.
Potential Impact of Recent Legislation
One reason this new information is espe-
cially pertinent to tax preparers in the cur-
rent filing season is the recent attention
given to their role as tax advisors. The
Government Accountability Office (GAO)
stated that tax professionals have a lot of
influence over the degree of compliance
exhibited by their clients, and thus have
influence over reducing the quarter-tril-
lion dollar “tax gap” (GAO-07-391T). In
addition, the Small Business and Work
Opportunity Tax Act of 2007 provided for
higher preparer penalties and more strin-
gent disclosure requirements for uncertain
tax positions. The act also broadened the
regulations to cover preparers of all types
of tax returns, not only those completing
income tax returns. The disclosure require-
ments were relaxed somewhat in the
recently enacted Emergency Economic
Stabilization Act of 2008, but were not
remanded to their original level.
Furthermore, the increased penalty rates
were not modified in the new legislation.
The new preparer penalties for taking
unreasonable positions are the greater of
$1,000 or 50% of the income derived from
preparing the return (the previous level was
$250 per offense).
The Emergency Economic Stabilization
Act of 2008 reduced the disclosure require-
ment for nonreportable transactions from
a “more likely than not” probability of suc-
cess to “substantial authority” for the posi-
tion taken. This change brings the disclo-
sure requirement for preparers down to a
level that is consistent with the standard
mandated to the taxpayer. It is not, how-
ever, as low as the “realistic probability
of success” standard that predated the Small
Business and Work Opportunity Tax Act
of 2007. Determining which standard
applies to a particular situation is a judg-
ment call. By definition, “more likely
than not” equates to a greater than 50%
likelihood of success in an examination;
“substantial authority” falls somewhere
between a “reasonable basis” and “more
likely than not;” and “realistic probability
of success” suggests a one-in-three
chance that the issue will be decided favor-
ably on its merits. Although the standards
are defined, there is room for disagreement
over their application. The combination
of higher preparer penalties, revised dis-
closure requirements, and the existing sub-
jectivity surrounding the process may
give the IRS added incentive to examine
these transactions more closely. Taking
an aggressive stance on an uncertain tax
matter is potentially more costly for paid
preparers than it has been in the past.
Confirming that tax strategies are consis-
tent with a taxpayer’s desired risk level will
help ensure that both parties are on board
with the reported position.
Determine the Right Path for Each Client
There are several conclusions to be
drawn from the accounting research regard-
ing the relationship between tax profes-
sionals and their clients. If taxpayers
seem to want less aggressive returns, tax
professionals can be more conservative and
enter into less risk for each party. When
tax preparers take stances that are more
aggressive than expected by their clients,
they pass on a hidden cost of increased
audit risk and expose their practice to lit-
igation risk. A more conservative stance
3
would likely reduce the amount of time
required to prepare a tax return and result
in lower fees, a benefit clients will appre-
ciate. Finally, by reducing the risk of audit,
tax professionals reduce the chance of
losing clients due to a perception of fail-
ure to protect them from the IRS.
Admittedly, there are clients that want
an aggressive return. By talking to clients
and determining their risk position, tax pro-
fessionals can spend additional time work-
ing on the returns of those that do want
aggressive advice and charge higher fees
to offset the increased risk. In these cir-
cumstances, it is important to specifically
explain the tradeoffs between tax mini-
mization, higher tax preparation fees, and
the increased likelihood of audit. The fil-
ing season provides an opportunity to dis-
cuss advocacy expectations with clients and
ensure that both the preparer and the tax-
payer are on the same page. ❑

Stacy Wade, PhD, CPA, is an assistant

professor in the department of accounting
at Western Kentucky University, Bowling
Green, Ky. Teresa Stephenson, PhD,
CMA, is an assistant professor in the
department of accounting at the University
of Wyoming, Laramie, Wyo.

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