Tax preparation

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Tax preparation is the process of preparing tax returns, often income tax returns, often for a person other than the taxpayer, and generally for compensation. Tax preparation may be done by the taxpayer with or without the help of tax preparation software and online services. Tax preparation may also be done by a licensed professional such as an attorney, certified public accountant or enrolled agent, or by an unlicensed tax preparation business. Because United States income tax laws are considered to be complicated, many taxpayers seek outside assistance with taxes (59.2% of individual tax returns in 2007 were filed by paid preparers[1]). The remainder of this article describes tax preparation by someone other than the taxpayer.

Some states have licensing requirements for anyone who prepares tax returns for a fee and some for fee-based preparation of state tax returns only. The Free File Alliance provides free tax preparation software for individuals with less than $58,000 of adjusted gross income for tax year 2010. People who make more than $58,000 can use Free File Fillable Forms, electronic versions of IRS paper forms. Both the brand-name software and online fillable forms are available only at the Internal Revenue Service website at www.irs.gov/freefile.

National registration of federal tax return preparers in the United States[edit]

Until 2011, the U.S. Internal Revenue Service (IRS) did not have a requirement for national registration of paid tax return preparers in the United States. However, effective January 1, 2011, new rules require the registration of almost all paid federal tax return preparers. The new rules require that some paid preparers pass a national tax law exam and undergo continuing education requirements. Persons who are certified public accountants (CPAs), attorneys or enrolled agents are required to register, but are not required to take the exam and are not subject to the continuing education requirements. CPAs and attorneys are licensed on a state-by-state basis, and are subject to state-imposed continuing education requirements to maintain their licenses.[2]

For purposes of the registration requirement, the IRS defines a "tax return preparer" as "an individual who, for compensation, prepares all or substantially all of a federal tax return or claim for refund."[3]

All tax return preparers, including those tax return preparers who are attorneys, certified public accountants, or enrolled agents, are required to have a practitioner tax identification number (PTIN). This rule is effective for preparation of any federal tax returns after December 31, 2010.[3]

Beginning in mid-2011, tax return preparers (other than CPAs, attorneys, and enrolled agents and a few others) were generally been required to take and pass a competency test to officially become a registered tax return preparer.[3]

Tax return preparers who have PTINs before testing becomes available have until Dec. 31, 2013, to pass the competency test. After testing becomes available, new tax return preparers would have been required to pass the competency test before they can obtain a PTIN.[3]

A new continuing education requirement of 15 hours per year would have been imposed on tax return preparers (except for CPAs, attorneys, enrolled agents, and a few others).[3]

The IRS has indicated that the new rules apply to all kinds of federal tax returns, including income taxes and payroll taxes.[3]

As of January 18, 2013 the United States District Court for the District of Columbia ruled that it was unlawful for the IRS to require competency exams for tax preparers. However, it did rule that the PTIN was within its statutory authority and that requirement remains in effect.[4]

Controversy[edit]

In 2012 the tax preparation service industry made nearly $6 billion in revenue.[5] The cost of preparing and filing all business and personal tax returns is estimated to be $100 to $150 billion each year. According to a 2005 report from the U.S. Government Accountability Office, the efficiency cost of the tax system—the output that is lost over and above the tax itself—is between $240 billion and $600 billion per year. For tax return preparation, Americans spent an amount equal to roughly 20% of the amount collected in taxes.[6][7] As of August 2012, there are more tax preparers (1.2 million) than there are law enforcement officers (765 thousand) and firefighters (310,400) combined.[8] Tax preparation businesses have been plagued with controversies over Refund anticipation loans. Intuit, the developer of tax preparation software TurboTax, has lobbied to prevent the IRS from setting up a Web portal for electronic tax filing.[9]

The ReadyReturn program in California sends taxpayers who would seem to have simple returns a draft of their tax return. They can either accept, modify or ignore it while completing their taxes as they would without it. It's similar to getting a credit card bill, for which you can dispute charges you did not make. Intuit, maker of the tax preparation software, TurboTax, spent over $1.7 million between 2001 and 2010 attempting to kill this program.[10]

Software[edit]

Some popular tax preparation software [11] includes:

"The Free File Alliance is a group of tax preparation companies that have partnered with the Internal Revenue Service to provide free electronic tax filing services to U.S tax payers meeting certain guidelines."[12]

See also[edit]

Notes[edit]

  1. ^ IRS - Tax Stats at a Glance
  2. ^ "Proposed New Requirements for Tax Return Preparers," Internal Revenue Service, U.S. Dep't of the Treasury, at [1]
  3. ^ a b c d e f Id.
  4. ^ http://www.irs.gov/Tax-Professionals/IRS-Test-Requirements-for-Becoming-a-Paid-Tax-Professional
  5. ^ Pell Research Industry Report on Tax Preparation Services - cited with permission
  6. ^ Tax Policy: Summary of Estimates of the Costs of the Federal Tax System by the U.S. Government Accountability Office
  7. ^ The Times is still wrong on taxation by Bruce Bartlett
  8. ^ "When tax complexity puts dinner on the table". Face the Facts USA. George Washington University. 15 August 2012. Retrieved 27 August 2012. 
  9. ^ NPR - IRS Urges E-Filing — But by Vendors Only, Please
  10. ^ Lessig, Lawrence (2011). Republic, Lost: How Money Corrupts Congress -- and a Plan to Stop It. Twelve. p. 201. ISBN 978-0-446-57643-7. 
  11. ^ Top Picks - Tax Preparation Software Reviews
  12. ^ Free File Alliance

External links[edit]