Tax preparation
Encyclopedia
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). 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.
(IRS) has not had a requirement for national licensing of paid tax return preparers in the United States. However, the IRS is working on proposed changes that will eventually require the registration of almost all paid federal tax return preparers. The new rules will 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
will be required to register, but will not be required to take the exam and will not be subject to the continuing education requirements. To maintain their licenses, CPAs and attorneys are subject to continuing education requirements imposed on a state-by-state basis.
For purposes of the registration requirement, the IRS will define a "tax return preparer" as "an individual who, for compensation, prepares all or substantially all of a federal tax return or claim for refund."
All tax return preparers, including those tax return preparers who are attorneys, certified public accountants, or enrolled agents, will be required to have a practitioner tax identification number (PTIN). This rule is proposed to be effective for preparation of any federal tax returns after December 31, 2010.
Beginning in mid-2011, tax return preparers (other than CPAs, attorneys, and enrolled agents and a few others) will generally be required to take and pass a competency test to officially become a registered tax return preparer.
Tax return preparers who have PTINs before testing becomes available will have until Dec. 31, 2013, to pass the competency test. After testing becomes available, new tax return preparers will be required to pass the competency test before they can obtain a PTIN.
A new continuing education requirement of 15 hours per year will also be imposed on tax return preparers (except for CPAs, attorneys, enrolled agents, and a few others). As of early August 2010, the IRS had not yet decided on a beginning date for that requirement.
The IRS has indicated that the new rules will apply to all kinds of federal tax returns, including income taxes and payroll taxes.
is estimated to be $250 to $300 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. Tax preparation businesses have been plagued with controversies over Refund anticipation loan
s. Intuit, the developer of tax preparation software TurboTax
, has lobbied to prevent the IRS from setting up a Web portal for electronic tax filing.
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
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
Income tax in the United States
In the United States, a tax is imposed on income by the Federal, most states, and many local governments. The income tax is determined by applying a tax rate, which may increase as income increases, to taxable income as defined. Individuals and corporations are directly taxable, and estates and...
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). 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
Free File Alliance
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...
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
Until recently, the U.S. Internal Revenue ServiceInternal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
(IRS) has not had a requirement for national licensing of paid tax return preparers in the United States. However, the IRS is working on proposed changes that will eventually require the registration of almost all paid federal tax return preparers. The new rules will require that some paid preparers pass a national tax law exam and undergo continuing education requirements. Persons who are certified public accountants
Certified Public Accountant
Certified Public Accountant is the statutory title of qualified accountants in the United States who have passed the Uniform Certified Public Accountant Examination and have met additional state education and experience requirements for certification as a CPA...
(CPAs), attorneys or enrolled agents
Enrolled Agent
An Enrolled Agent is a tax professional recognized by the United States federal government to represent taxpayers in dealings with the Internal Revenue Service...
will be required to register, but will not be required to take the exam and will not be subject to the continuing education requirements. To maintain their licenses, CPAs and attorneys are subject to continuing education requirements imposed on a state-by-state basis.
For purposes of the registration requirement, the IRS will define a "tax return preparer" as "an individual who, for compensation, prepares all or substantially all of a federal tax return or claim for refund."
All tax return preparers, including those tax return preparers who are attorneys, certified public accountants, or enrolled agents, will be required to have a practitioner tax identification number (PTIN). This rule is proposed to be effective for preparation of any federal tax returns after December 31, 2010.
Beginning in mid-2011, tax return preparers (other than CPAs, attorneys, and enrolled agents and a few others) will generally be required to take and pass a competency test to officially become a registered tax return preparer.
Tax return preparers who have PTINs before testing becomes available will have until Dec. 31, 2013, to pass the competency test. After testing becomes available, new tax return preparers will be required to pass the competency test before they can obtain a PTIN.
A new continuing education requirement of 15 hours per year will also be imposed on tax return preparers (except for CPAs, attorneys, enrolled agents, and a few others). As of early August 2010, the IRS had not yet decided on a beginning date for that requirement.
The IRS has indicated that the new rules will apply to all kinds of federal tax returns, including income taxes and payroll taxes.
Controversy
The cost of preparing and filing all business and personal tax returnsTax return (United States)
Tax returns in the United States are reports filed with the Internal Revenue Service or with the state or local tax collection agency containing information used to calculate income tax or other taxes...
is estimated to be $250 to $300 billion each year. According to a 2005 report from the U.S. Government Accountability Office
Government Accountability Office
The Government Accountability Office is the audit, evaluation, and investigative arm of the United States Congress. It is located in the legislative branch of the United States government.-History:...
, 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. Tax preparation businesses have been plagued with controversies over Refund anticipation loan
Refund Anticipation Loan
A refund anticipation loan is a short-term consumer loan secured by a taxpayer’s expected tax refund, and designed to offer customers quicker access to funds than waiting for their tax refund...
s. Intuit, the developer of tax preparation software TurboTax
TurboTax
TurboTax is an American tax preparation software package developed by Michael A. Chipman of Chipsoft in the mid-1980s. TurboTax became an Intuit product as a result of the 1993 acquisition of its creator, San Diego-based Chipsoft. Chipsoft, now known as Intuit Consumer Tax Group, is still based in...
, has lobbied to prevent the IRS from setting up a Web portal for electronic tax filing.
Software
Some popular tax preparation software includes:- TaxACTTaxACTTaxACT is an American tax preparation software package developed by 2nd Story Software. The predecessor to Tax Act was known as Personal Tax Edge by Parsons Technology. In 1994, Intuit purchased Parsons Technology and Personal Tax Edge...
- H&R Block at Home (formerly TaxCut)
- TurboTaxTurboTaxTurboTax is an American tax preparation software package developed by Michael A. Chipman of Chipsoft in the mid-1980s. TurboTax became an Intuit product as a result of the 1993 acquisition of its creator, San Diego-based Chipsoft. Chipsoft, now known as Intuit Consumer Tax Group, is still based in...