Tax preparation in the United States

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). 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.

In 2007, the IRS estimated that there were between 900,000 and 1.2 million paid preparers. 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. 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." 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. 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.

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. 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. Between 2013 and 2020, Intuit and H&R Block have each spent at least $2 million annually on lobbying. 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. 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. After the ProPublica exposé, the Free File provision was removed from the bill.

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). Beyond those issues, tax preparation businesses have been plagued with controversies over refund anticipation loans.

The Tax Filing Simplification Act of 2022 was introduced by Senator Warren on July 13, 2022 with 22 cosponsors. A companion bill was introduced the next day in the US House with 48 cosponsors. 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." (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, raising questions about whether government or private companies better protects people's data. As to who is "strong arming poor people", ProPublica a claim contradicted by a ProPublica investigation. Neither bill received a hearing.

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. Intuit spent about $3 million on lobbying in California from 2005 to 2010, where it unsuccessfully opposed the ReadyReturn program.

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. 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. 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.