Schedule C Tax Preparer Errors: What a Federal Study Found in 2026

A Federal Study Sent Undercover Testers to Tax Preparers. Every Schedule C Return Came Back Wrong.

On March 16, 2026, the Center for Taxpayer Rights published its 2025 Filing Season Mystery Shopping Report. Researchers sent trained testers to 53 independent preparation sites across six states. One scenario involved a sole proprietor with W-2 income, a 1099-K from Venmo sales totaling $5,013, and $3,000 in additional cash receipts. Eight returns were actually prepared.

Every single one understated Schedule C income. Not most. All eight.

I have seen bad returns walk through my door for years, but this study puts numbers behind what practitioners already know. These were ordinary returns. The preparers either did not know the rules or did not bother asking the questions that would have revealed them.

What the Preparers Actually Did

The hypothetical sole proprietor ran a home-based food or hair business, had legitimate deductions for mileage, phone, and supplies, and did not qualify for a home office deduction because the workspace was not used exclusively for business. Correct Schedule C profit: $6,733. The eight prepared returns ranged from a loss of $3,828 to income of $5,865. Not one reached the right number.

Five returns claimed home office expenses between $2,400 and $9,600. Under IRC Section 280A, a home office deduction requires a space used exclusively and regularly for business. A kitchen where you also cook dinner does not qualify. Multiple testers reported that the expense appeared on their return without the preparer asking a single question about the space. The preparer just put it in.

Three returns left out the $3,000 in cash sales entirely. One preparer told a tester that cash does not need to be reported without documentation, and that the IRS does not mind. That is simply false. IRC Section 61 defines gross income as all income from any source. There is no documentation exception for cash receipts. That is not a conservative position. That is instructing a client to underreport income.

One return included a $4,000 deduction for wages paid to employees who did not exist. Another claimed $8,040 in mileage on a business that earned $8,013 total. Those are not debatable interpretations of ambiguous code sections. Someone typed those numbers in to manufacture a larger refund.

Why a Higher Income Does Not Change This

The scenario was not complicated. The errors did not come from misreading a difficult regulation. They came from preparers who skipped required questions, claimed deductions with no factual basis, and in some cases made numbers up.

That behavior does not improve when a client earns more. A preparer who claims a home office deduction without asking about exclusive use applies the same logic on a $400,000 Schedule C. One who tells a client undocumented cash is not reportable says the same thing at any income level. The problem is not the complexity of the return. It is whether the person signing it knows what they are doing.

The enforcement data in this report is worth sitting with. Between 2018 and 2021, the IRS assessed over $74 million in civil preparer penalties and collected 18.45 percent of it. From non-credentialed preparers specifically, the collection rate was 18.85 percent. When the IRS barely follows through on its own assessments, there is nothing pushing preparers to improve between filing seasons.

As of early 2026, roughly 56 percent of registered preparers held no professional credential. They were not required to pass any exam or demonstrate any knowledge of the tax code before charging fees and signing returns.

What a Credentialed Preparer Does Differently

When I work a Schedule C with home office exposure, the deduction does not go on the return until I know the answers to specific questions. How large is the space? Used exclusively for business? On a regular basis? If the facts do not satisfy Section 280A, the deduction stays off. For mileage, I want to see a contemporaneous log, not an estimate the client thinks sounds reasonable. For cash income, the answer is short: it goes on the return because Section 61 does not carve out transactions without a paper trail.

Credentialed practitioners operate under Circular 230 and face penalties under IRC Section 6694 for unreasonable positions on a return. Those rules sit in the back of every tax judgment a credentialed preparer makes. They are not paperwork formalities. They change how the work gets done.

That is the gap this study documented. Not a stylistic difference in how returns are prepared. An actual knowledge gap, with fabricated numbers on one side and disciplined analysis on the other.

What to Do Before April 15

The deadline is four weeks out. If your return has self-employment income and you are not confident the preparer worked through the analysis correctly, now is a reasonable time to check. Home office claims, cash income, and vehicle expenses are exactly where the gap between competent and incompetent preparation causes the most damage, and where IRS scrutiny tends to land.

The tax advisory and tax compliance services are built for business owners who need accurate, defensible returns. If you have a Schedule C and want to know your return was done right, that conversation is worth having before April 15.

If a return is already in progress, ask how the home office deduction was calculated, how mileage was substantiated, and whether all income including cash appears on Schedule C. You are responsible for what is filed under your name. The IRS will come to you first, regardless of who prepared it.

Is Your Schedule C Done Right?

If your 2025 return includes self-employment income and you want a direct answer before April 15, schedule a consultation. No obligation. An honest conversation about your return.

The study found that every Schedule C return prepared by an uncredentialed preparer came back wrong. Every one. With four weeks until the filing deadline, that is worth knowing.

Source: Center for Taxpayer Rights, 2025 Filing Season Mystery Shopping Report (March 16, 2026)