Regulating Tax Return Preparation

Abstract

Annually, the U.S. government collects nearly $3 trillion of income and employment taxes. With respect to these collections, Form 1040 (U.S. Individual Income Tax Return) seeks to ensure taxpayer accuracy. Currently, two sets of players dominate the Form 1040 preparation and submission process: tax return preparers and tax return preparation software companies. The former guides taxpayers through the entire tax return preparation and submission process, and the latter provides taxpayers with the necessary tools to complete and submit tax returns themselves. Tax return preparers and tax software companies thus stand as vital intermediaries between the government and taxpayers. Despite the key role that tax return submission plays in government function, Congress exercises virtually no oversight over the process. Currently, regardless of education, knowledge, or experience, any person can prepare tax returns for compensation; similarly, almost no checks exist to ensure the substantive accuracy of tax returns prepared with tax software. As a result of these shortcomings, taxpayers file millions of flawed tax returns each year. Faulty returns shortchange the government of necessary revenue, deprive some taxpayers of crucial government benefits, and leave others liable for back taxes and penalties. This Article is the first to propose comprehensive tax return preparation process reform. It urges Congress to regulate both tax return preparers and tax preparation software companies. Adoption of one or more of the proposed reforms should lead to more accurate tax returns, protect taxpayers, and ensure a fairer and more efficient tax system.

Keywords: Taxation, tax return preparers, tax software, tax compliance, behavioral law and economics, tax policy

JEL Classification: H2, H20, H21, H24, H26, H29, K34