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 (53.5% of individual tax returns in 2016 were filed by paid preparers). [1]
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. Commercial tax preparation software, such as TurboTax, is widely used by individuals preparing their own tax returns. The Free File Alliance provides free tax preparation software for individuals with less than $72,000 of adjusted gross income for tax year 2020. People who make more than $72,000 can use Free File Fillable Forms, electronic versions of U.S. Internal Revenue Service (IRS) paper forms.
National registration of paid preparers
In 2007, the IRS estimated that there were between 900,000 and 1.2 million paid preparers. [2]
Until 2011, the IRS did not have a requirement for national registration of paid tax return preparers in the United States. Effective January 1, 2011, new rules required the registration of almost all paid federal tax return preparers. Many of the new rules, however, were soon struck down by a federal court.
The new rules had required 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 were required to register, but were not required to take the exam and were not subject to the continuing education requirements. [3]
For purposes of the registration requirement, the IRS had defined a "tax return preparer" as "an individual who, for compensation, prepares all or substantially all of a federal tax return or claim for refund." [4] Beginning in mid-2011, tax return preparers (other than CPAs, attorneys, and enrolled agents and a few others) had generally been required to take and pass a competency test to become a registered tax return preparer. [4]
Tax return preparers who had a Preparer Tax Identification Number (PTIN) before testing was to become available were to have until December 31, 2013, to pass the competency test. New tax return preparers would have been required to pass the competency test before they could obtain a PTIN. [4] The IRS had indicated that the new rules would have applied to all kinds of federal tax returns, including income taxes and payroll taxes. [4] 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). [4]
In 2013, however, the United States District Court for the District of Columbia struck down most of these rules in the Loving case, holding that the Internal Revenue Service had no authority to require competency exams for tax preparers. The Court did indicate its decision did not affect the PTIN requirement. This requirement remains in effect. [5]
All tax return preparers, including those tax return preparers who are attorneys, certified public accountants, or enrolled agents, are still required to have a PTIN. This rule continues to be effective for preparation of any federal tax returns after December 31, 2010. [4]
The office of the National Taxpayer Advocate has reported that of 76,715,982 U.S. individual income tax returns (Forms 1040, 1040A and 1040EZ) prepared by paid return preparers that were filed for the tax year 2017, a total of 39,252,790 returns were prepared by unenrolled preparers. For that tax year, a total of 22,837,596 individual returns were prepared by CPAs, and 9,509,999 were prepared by enrolled agents. The rest were prepared by attorneys and other practitioners. [6]
Controversy
Impact of lobbying
For most US taxpayers, the IRS already collects all the information needed to send them a draft tax filing like a credit card statement. Taxpayers could decide not to accept that and instead use any of the other options currently used today. Or they could simply accept the draft tax filing, sign and return it with a check in the appropriate amount if they owed anything; if not, they'd receive the indicted refund, as they would otherwise. [7]
For-profit tax preparation companies such as Intuit, the developer of TurboTax, have lobbied for at least 20 years to prevent the IRS from offering return-free filing, simpler returns, or its own free electronic filing portal. [8] [9] Between 2013 and 2020, Intuit and H&R Block have each spent at least $2 million annually on lobbying. [10] [11] [12]
Anti-tax activist groups, including Grover Norquist's Americans for Tax Reform, have also joined in lobbying against measures which would simplify tax returns, seeing frustration with filing as fuel for voter resistance to government growth. [13]
This lobbying resulted in the introduction of the Taxpayer First Act of 2019. ProPublica reported that Intuit, H&R Block and other tax preparation services made it exceedingly difficult and almost impossible for a taxpayer who qualified to file for free to actually find how to do that. [14] After the ProPublica exposé, the Free File provision was removed from the bill. [15]
Federal
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. In addition to the amount collected in taxes, Americans spent roughly 6% of that amount in their efforts to comply with the law and between 12% and 30% more in doing things that would not have to be done if the tax system were more rational (though estimating the costs of compliance and efficiency losses is difficult because neither the government nor taxpayers maintain regular accounts of these costs). [16] Beyond those issues, tax preparation businesses have been plagued with controversies over refund anticipation loans.
Tax Filing Simplification Act of 2022
The Tax Filing Simplification Act of 2022 was introduced by Senator Warren on July 13, 2022 with 22 cosponsors. [17] A companion bill was introduced the next day in the US House with 48 cosponsors. [18]
The Taxpayers Protection Alliance opposed this bill, saying "giving the IRS more power to prepare tax returns is both an overreach and a conflict of interest. ... From leaked private tax information to strong-arming poor people with audits, power should be taken away from the agency." [19] ( The Markup later reported that online tax preparation software companies like Intuit / Turbotax, H & R Block and others were not adequately protecting their clients confidential data, which was being harvested and shared with Meta / Facebook, so ads could be more accurately targeted, [20] raising questions about whether government or private companies better protects people's data. As to who is "strong-arming poor people", ProPublica [8] [10] [14] and Lessig [7] insist that tax preparation companies and big business more generally make money from blocking legislation like this.)
Similarly, the National Taxpayers Union insisted that Senator Warren's bill was "anything but simple. ... The IRS additionally already has a free option available to all taxpayers, ... a result of an agreement between the IRS and the Free File Alliance (FFA), a nonprofit coalition of tax software companies. Sen. Warren claims these companies are detrimental when they are in fact voluntarily assisting millions of taxpayers filing their tax returns for free", [21] a claim contradicted by a ProPublica investigation. [8] [10] [14]
NC Policy Watch agreed with ProPublica, saying: "The Tax Filing Simplification Act would require the IRS to give people easy access to wage and other data needed to file a tax return that the agency already has in its possession. Such a system of pre-filled tax returns is not new; other countries already do it this way, making filing taxes a zip ... . This legislation would also allow taxpayers with simple returns to choose to have the government fully prepare their tax returns ... [for] free. Why doesn’t our country make it free and easy for people to file their tax returns? Because a few big corporations profit from the current, dysfunctional system." [22]
Neither bill received a hearing.
California
The ReadyReturn program in California, begun as a pilot in 2005 (revived in 2007 and later integrated into CalFile) sends taxpayers believed to need simple tax returns a proposed draft of a return. Taxpayers can accept or modify the draft or, if they prefer, they can ignore the draft and complete their tax return without the draft. The process is similar to receiving a credit card bill where the recipient can dispute charges they did not authorize. This system is used in countries that include Denmark, Sweden, and Spain. Intuit and the tax preparation service H&R Block have disclosed lobbying Congress against setting up a similar system for federal U.S. tax returns. [23] [24] Intuit spent about $3 million on lobbying in California from 2005 to 2010, where it unsuccessfully opposed the ReadyReturn program. [23]
On November 22, 2022, The Markup reported that "Tax Filing Websites [including TurboTax, H&R Block and others] Have Been Sending Users’ Financial Information to Facebook" to facilitate targeting ads. [20]
Software
In 2018, TurboTax was the most popular tax preparation software in the United States, holding a 66.6% market share of self-prepared returns. H&R Block at Home (formerly TaxCut) is the second most popular with a 14% share. Other popular tax software includes: TaxACT at 7%, Tax Hawk (including FreeTaxUSA) at 5.9%, Credit Karma's free tax software (now owned by the Cash App) at 1.7%, and TaxSlayer at 1.5%. [25] According to a survey by Credello, 53% of respondents filed their taxes with an online software system and 12% filed their taxes independent of a software system. [26]
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 taxpayers meeting certain income guidelines. In 2019, the Free File Alliance was accused by ProPublica of serving as a bulwark against the IRS providing simpler options or return-free filing, arguing that tax companies have lobbied to instead offer Free File options where they can push users to their paid services. [27]
Form 1040, officially, the U.S. Individual Income Tax Return, is an IRS tax form used for personal federal income tax returns filed by United States residents. The form calculates the total taxable income of the taxpayer and determines how much is to be paid to or refunded by the government.
Americans for Tax Reform (ATR) is a politically conservative U.S. advocacy group whose stated goal is "a system in which taxes are simpler, flatter, more visible, and lower than they are today." According to ATR, "The government's power to control one's life derives from its power to tax. We believe that power should be minimized." The organization is known for its "Taxpayer Protection Pledge", which asks candidates for federal and state office to commit themselves in writing to oppose all tax increases. The founder and president of ATR is Grover Norquist, a conservative tax activist.
Tax returns in the United States are reports filed with the Internal Revenue Service (IRS) or with the state or local tax collection agency containing information used to calculate income tax or other taxes. Tax returns are generally prepared using forms prescribed by the IRS or other applicable taxing authority.
Tax returns in Canada refer to the obligatory forms that must be submitted to the Canada Revenue Agency (CRA) each financial year for individuals or corporations earning an income in Canada. The return paperwork reports the sum of the previous year's taxable income, tax credits, and other information relating to those two items. The return is the method by which the Canadian government determines the appropriate amount of tax that should be paid by individuals and corporations. The result of filing a return with the federal government can result in either a refund, or an amount due to be paid. There is a penalty for not filing a tax return.
Intuit Inc. is an American multinational business software company that specializes in financial software. The company is headquartered in Mountain View, California, and the CEO is Sasan Goodarzi. Intuit's products include the tax preparation application TurboTax, personal finance app Mint, the small business accounting program QuickBooks, the credit monitoring service Credit Karma, and email marketing platform Mailchimp. As of 2019, more than 95% of its revenues and earnings come from its activities within the United States.
TurboTax is a software package for preparation of American and Canadian income tax returns, produced by Intuit. TurboTax is a market leader in its product segment, competing with H&R Block Tax Software and TaxAct. TurboTax was developed by Michael A. Chipman of Chipsoft in 1984 and was sold to Intuit in 1993.
Form 1099 is one of several IRS tax forms used in the United States to prepare and file an information return to report various types of income other than wages, salaries, and tips. The term information return is used in contrast to the term tax return although the latter term is sometimes used colloquially to describe both kinds of returns.
In the United States of America, an Enrolled Agent (EA) is a tax advisor, who is a federally authorized tax practitioner which is empowered by the U.S. Department of the Treasury. Enrolled Agents represent taxpayers before the Internal Revenue Service (IRS) for tax issues that include audits, collections, and appeals.
The Free File Alliance is a group of tax preparation companies which operate a public-private partnership with the Internal Revenue Service (IRS) to provide free electronic tax filing services under the IRS Free File program to United States taxpayers meeting certain guidelines. The IRS stipulates filers must have an adjusted gross income (AGI) of $73,000 or less for tax year 2022 to qualify, but participating companies can set their own requirements and restrictions. The IRS Free File program is a compromise between the IRS and for-profit tax software companies that enables lower and middle-income filers to file their taxes for free while ensuring the IRS does not develop its own free-to-use tax software that would compete with private, for-profit tax software companies.
The United States Internal Revenue Service (IRS) uses forms for taxpayers and tax-exempt organizations to report financial information, such as to report income, calculate taxes to be paid to the federal government, and disclose other information as required by the Internal Revenue Code (IRC). There are over 800 various forms and schedules. Other tax forms in the United States are filed with state and local governments.
E-file is a system for submitting tax documents to the US Internal Revenue Service through the Internet or direct connection, usually without the need to submit any paper documents. Tax preparation software with e-filing capabilities includes stand-alone programs or websites. Tax professionals use tax preparation software from major software vendors for commercial use.
TaxAct Holdings, Inc. is an American tax preparation software company based in Cedar Rapids, Iowa. The company offers its own software package "TaxAct" to individual tax registers, companies and professional affiliates. The company was founded in 1998.
TaxSlayer LLC is a privately held tax preparation and tax software company based in Augusta, Georgia. The company offers online tax preparation technology for American consumers and tax professionals, allowing them to electronically file state and/or federal returns. TaxSlayer also offers business technology products and services for legal, bookkeeping and HR/payroll.
The IRS Return Preparer Initiative was an effort by the Internal Revenue Service (IRS) to regulate the tax return preparation industry in the United States. The purpose of the initiative is to improve taxpayer compliance and service by setting professional standards for and providing support to the tax preparation industry. Starting January 1, 2011 and, until the program was suspended in January 2013, the initiative required all paid federal tax return preparers to register with the IRS and to obtain an identification number, called a Preparer Tax Identification Number (PTIN). The multi-year phase-in effort called for certain paid tax return preparers to pass a competency test and to take annual continuing education courses. The ethics provisions found in Treasury Department's Circular 230 were extended to all paid tax return preparers. Preparers who have their PTINs, pass the test and complete education credits were to have a new designation: Registered Tax Return Preparer.
The IRS Free File Program is a service that allows U.S. taxpayers to prepare and e-file their federal income tax returns for free. Through the program, commercial tax software companies that are part of the Free File Alliance offer free tax preparation software to tax filers with annual adjusted gross income (AGI) below $73,000 for Tax Year 2022. The AGI is adjusted and typically increases slightly for each tax-filing season. The service is available through the IRS's website at www.irs.gov/freefile. Free fillable forms also are available to all taxpayers as part of the Free File Program.
A tax return is a form on which a person or organization presents an account of income and circumstances, used by the tax authorities to determine liability for taxes.
Republic, Lost: How Money Corrupts Congress—and a Plan to Stop It is the sixth book by Harvard law professor and free culture activist Lawrence Lessig. In a departure from the topics of his previous books, Republic, Lost outlines what Lessig considers to be the systemic corrupting influence of special-interest money on American politics, and only mentions copyright and other free culture topics briefly, as examples. He argued that the Congress in 2011 spent the first quarter debating debit-card fees while ignoring what he sees as more pressing issues, including health care reform or global warming or the deficit. Lessig has been described in The New York Times as an "original and dynamic legal scholar."
CalFile is the current tax preparation program/service of the California Franchise Tax Board (FTB).
A Registered Tax Return Preparer is a former category of federal tax return preparers created by the U.S. Internal Revenue Service (IRS).
The Annual Filing Season Program is a voluntary Internal Revenue Service (IRS) program designed to incentivize non-credentialed tax return preparers to participate in continuing education (CE) courses. Participants receive an Annual Filing Season Program - Record of Completion, which may be displayed to prospective clients as a way to stand out in the marketplace and to demonstrate tax knowledge and filing competency. AFSP participants can also opt to be listed in The Directory of Federal Tax Return Preparers with Credentials and Select Qualifications, a public information database on the IRS website.