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Tax preparation in the United States
Tax preparation in the United States
Tax preparation in the United States
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Tax preparation is the process of preparing tax returns, particularly income tax returns, on behalf of a taxpayer, typically for compensation. Taxpayers may complete their own returns, either manually or with the assistance of tax preparation software and online services. Alternatively, tax preparation may be conducted by licensed professionals such as attorneys, certified public accountants (CPAs), or enrolled agents, as well as by unlicensed tax preparation businesses. Some U.S. states impose licensing requirements for individuals or entities that prepare tax returns for compensation, which may apply to federal, state, or both types of tax returns.

United States income tax laws are considered to be complicated, leading many taxpayers to seek outside assistance with taxes (53.5% of individual tax returns in 2016 were filed by paid preparers).[1] Commercial tax preparation companies have extensively lobbied against the Internal Revenue Service (IRS) creating its own free online system of tax filing like those that exist in most other wealthy countries.[2][3][4][5]

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. The IRS under the Joe Biden administration introduced a free electronic tax filing system, enabling individuals to avoid buying services from commercial tax preparation companies. The Republican Party and tax preparation companies have criticized this free electronic tax filing system and sought to end it.[6]

National registration of paid preparers

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In 2007, the IRS estimated that there were between 900,000 and 1.2 million paid preparers.[7]

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.[8]

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."[9] 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.[9]

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.[9] The IRS had indicated that the new rules would have applied to all kinds of federal tax returns, including income taxes and payroll taxes.[9] 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).[9]

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.[10]

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.[9]

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.[11]

Controversy

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Impact of lobbying

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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.[12]

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.[13][14] Between 2013 and 2020, Intuit and H&R Block have each spent at least $2 million annually on lobbying.[15][16][17]

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.[18]

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.[19] After the ProPublica exposé, the Free File provision was removed from the bill.[20]

Federal

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

Tax Filing Simplification Act of 2022

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The Tax Filing Simplification Act of 2022 was introduced by Senator Warren on July 13, 2022 with 22 cosponsors.[22] A companion bill was introduced the next day in the US House with 48 cosponsors.[23]

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."[24] (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,[25] raising questions about whether government or private companies better protects people's data. As to who is "strong-arming poor people", ProPublica[13][15][19] and Lessig[12] 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",[26] a claim contradicted by a ProPublica investigation.[13][15][19]

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."[27]

Neither bill received a hearing.

California

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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.[28][29] Intuit spent about $3 million on lobbying in California from 2005 to 2010, where it unsuccessfully opposed the ReadyReturn program.[28]

Sharing data with Meta / Facebook

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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.[25]

Companies

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Many companies and local businesses offer tax preparation services through their branches. Some of the most well known include: H&R Block, Jackson Hewitt, and Liberty Tax Service.

Software

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I use the computer to do my income tax. My economic life is a mess of $2.75 parking-lot tickets and $13.89 lunch receipts, which used to pile up like fall leaves until I spent a week burrowing through them at income-tax time. Now all I do is sit down at the machine for five minutes every few nights and type in all transactions of interest to the tax man—so much in from my employers, so much out to the credit-card company. At the end of the year, I load the income-tax program into the computer, push the button marked "Run," and watch as my tax return is prepared. Since it took me only about six months to learn BASIC (and the tax laws) well enough to write the program, I figure this approach will save me time by 1993.

— James Fallows, 1982[30]

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%.[31] 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.[32]

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 preventing the IRS from providing simpler options or return-free filing. They reported that most tax companies have lobbied to make it as difficult as possible for taxpayers to use their Free File options and push users to their paid services.[33]

See also

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Notes

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Further reading

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Revisions and contributorsEdit on WikipediaRead on Wikipedia

Tax preparation in the United States

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from Grokipedia
Tax preparation in the United States encompasses the compilation of financial records, calculation of , application of deductions and credits, and submission of returns to the (IRS) and state tax authorities, primarily to fulfill annual federal obligations under the . This process, required for most individuals earning above certain thresholds and for businesses, determines tax liabilities or refunds via standardized forms such as for individuals, with deadlines typically set for April 15. The U.S. tax system, rooted in the 16th Amendment ratified in 1913 authorizing federal income taxation, has evolved into a framework of escalating complexity, with the core code exceeding 6,000 pages and imposing compliance costs surpassing $536 billion annually due to intricate rules on deductions, credits, and reporting requirements. This complexity arises from provisions like itemized deductions for mortgage interest and state taxes, alongside credits such as the , which reduce taxable income or owed amounts but demand meticulous documentation and often professional expertise to maximize benefits without errors. Taxpayers may self-prepare using free IRS tools or software, opt for electronic filing—which has dominated since its 1986 pilot and now processes the majority of returns—or engage credentialed preparers. Professional preparers, numbering in the hundreds of thousands, must secure an IRS Preparer Tax Identification Number (PTIN) to handle federal returns, while designations like (EA)—requiring passage of a three-part Special Enrollment Examination—or (CPA) confer authority to represent clients in audits and disputes. Programs such as Volunteer Income Tax Assistance (VITA) offer free preparation for low-income and elderly filers, mitigating burdens for qualifying groups amid the system's demands. Defining challenges include the code's growth through legislative additions, which empirical analyses link to higher error rates, administrative burdens on the IRS, and disproportionate impacts on small entities lacking resources for compliance, underscoring ongoing debates over simplification without eroding revenue or incentives.

History

Origins and Early Practices (1913–1960s)

The ratification of the Sixteenth Amendment on February 3, 1913, granted Congress the power to levy taxes on incomes without apportionment to the states, overturning prior restrictions. The subsequent imposed a 1% normal tax on individual net incomes exceeding $3,000 (with surtaxes reaching 6% on incomes over $500,000), initially affecting fewer than 1% of Americans, or about 358,000 filers for the 1913 tax year. Taxpayers submitted —a four-page document introduced for the 1913 returns—with deadlines of March 1 for filing and June 15 for payment; verification often involved field agents from the Bureau of Internal Revenue's new Personal Income Tax Division, and preparation was predominantly self-conducted using basic arithmetic due to limited deductions and exemptions. World War I drove rapid rate increases—to a top marginal of 77% by 1918—necessitating a 1917 public compliance campaign featuring "Four Minute Men" speeches to educate citizens on obligations. Filings rose to around 5.5 million by 1920 amid proliferating revenue acts adding schedules for investments and business income, yet manual ledger-based calculations persisted, with certified public accountants (CPAs) emerging as key preparers for complex cases, surpassing attorneys in specialization post-1913. No federal oversight of paid preparers existed, leaving services unregulated and reliant on professional societies like the American Institute of Accountants for standards. The interwar period and Great Depression introduced further layers via New Deal legislation, such as the Social Security Act of 1935's 1% payroll withholding on wages up to $3,000, though individual income tax preparation remained paper-based and self-reliant for most. World War II transformed practices: the 1942 Revenue Act's Victory Tax (a 5% flat levy on incomes over $624, later integrated) and the 1943 Current Tax Payment Act's mandatory paycheck withholding expanded the tax base to 43 million filers by 1945, easing routine compliance but amplifying needs for professionals among self-employed filers navigating expanded deductions, wartime exemptions, and Form 1040 schedules. Into the 1950s and early 1960s, filings surpassed 60 million by 1960 as broadened liability, yet preparation methods evolved slowly with IRS adoption of punch-card tabulation in 1948 and rudimentary computers by 1950 for internal processing, not taxpayer use. The 1953 "Teaching Taxes" initiative distributed educational kits to 30,000 schools to foster self-preparation skills, underscoring ongoing reliance on manual forms amid code expansions like those for and capital gains, which propelled informal tax services by accountants despite absent licensing.

Professionalization and Expansion (1970s–1980s)

The Tax Reform Act of 1976 established the initial federal regulatory framework for paid return preparers, mandating that they obtain an identifying number from the IRS, sign all returns prepared for compensation, furnish a copy of the completed return to the taxpayer, and retain copies or lists of taxpayer names and identifying numbers for three years. These requirements replaced prior reliance primarily on criminal penalties for willful aiding in tax understatements, introducing civil sanctions to enhance accountability and deter or . The Act defined an income tax return preparer as any person who prepares for compensation all or a substantial portion of a return or claim for refund, thereby encompassing a broad range of commercial services beyond traditional accountants or attorneys. Penalties under new Internal Revenue Code sections, such as §6694 for understatements due to willful or reckless disregard of rules or negligent positions without reasonable basis, ranged from $100 per return (adjusted for inflation in later years) to higher amounts for repeated violations, with due diligence obligations requiring preparers to verify taxpayer-provided information against known facts. This regime, enacted amid growing concerns over abusive practices and uneven enforcement, professionalized the field by imposing standards of competence and record-keeping, though it stopped short of mandatory licensing or education requirements for non-enrolled practitioners. IRS , which governs practice before the agency for enrolled agents, certified public accountants, and attorneys, saw clarifying amendments in the early 1970s but did not directly regulate non-appearing commercial preparers until later expansions. The industry expanded concurrently, driven by tax code complexity from inflation-induced bracket creep (absent indexing until 1981) and proliferating deductions, which increased demand for specialized assistance. , the dominant player, scaled from over 4,300 franchised and company-owned offices in 1970 to more than 8,600 by the mid-1970s through aggressive , national television starting in 1972, and standardized programs that professionalized seasonal staff for mass-market service. By 1978, the firm prepared over one in nine U.S. returns, reflecting a shift where paid preparation rose from informal services to a structured commercial sector. Into the 1980s, growth accelerated with tax reforms like the Economic Recovery Tax Act of 1981 and , which added layers of credits, exclusions, and compliance burdens, further elevating reliance on preparers. handled approximately 10 million returns for the 1981 filing season alone, while new entrants like , founded in 1982 via acquisition and rebranding of existing services in , introduced competition through rapid and emphasis on refund anticipation loans. Early computer-assisted preparation emerged in the late , though adoption remained limited to large firms until the decade's end, enabling faster processing amid rising return volumes exceeding 90 million annually by 1980.

Digital Transformation and Modernization (1990s–Present)

The introduction of electronic filing, known as IRS e-file, marked a pivotal shift in tax preparation, beginning with a pilot program in 1986 in three cities (, Ohio; ; and Raleigh-Durham, North Carolina) and expanding nationwide in 1990, when 4.2 million returns were filed electronically. Concurrently, personal tax preparation software proliferated in the 1990s, building on early entrants like , originally developed in 1984 by Chipsoft and acquired by in 1993; by 1991, at least 15 software options were available for computerized tax preparation. This era saw automation become practical for practitioners due to converging computer technology, software availability, and increasing tax code complexity, reducing manual calculations and enabling faster processing. The late 1990s and early 2000s accelerated digital adoption with the rise of internet-based services, including IRS online forms and publications, while electronic filing rates grew from 16% of returns in 2000 to 50% by 2010. By 2013, 83% of individual returns were filed electronically, reflecting broader taxpayer preference for speed and options introduced in 1987. Major providers like and expanded online platforms, competing with emerging low-cost options, though commercial software often bundled e-filing with paid features, influencing market dynamics. IRS modernization efforts intensified post-1998 Restructuring and Reform Act, which prompted comprehensive reorganization including IT upgrades, though projects like the Customer Account Data Engine and Modernized e-File faced delays into the due to funding constraints and technical challenges. The Taxpayer First Act of 2019 allocated resources for technology enhancements, such as improved cybersecurity and processing systems, amid ongoing reliance. By the , over 90% of returns were e-filed annually, with more than 150 million individual returns processed electronically each year. Recent advancements include the 2024 pilot of Direct File, a free IRS-run online platform for simple returns in 12 states, expanding permanently in 2025 to 24 states and covering 30 million taxpayers, bypassing commercial software for basic filers with W-2 income. This initiative addresses criticisms of public-private partnerships like , which since 2003 promised free e-filing but often restricted access and generated industry profits through upsells, achieving limited uptake relative to potential. Mobile apps and integrations with financial institutions further streamlined preparation, though core systems remain burdened by outdated infrastructure, prompting calls for sustained investment.

The Tax Filing Process

Eligibility, Deadlines, and Basic Requirements

U.S. citizens and resident aliens must file a federal income tax return if their for the tax year exceeds thresholds based on filing status, age, and dependency status. These thresholds approximate the amounts, ensuring that only triggers the filing obligation. For tax year 2024, the filing requirements for most taxpayers are as follows:
Filing StatusUnder 6565 or Older
Single$14,600$16,550
Head of Household$21,900$23,850
Married Filing Jointly (both under 65)$29,200N/A
Married Filing Jointly (one 65+)N/A$30,750
Married Filing Jointly (both 65+)N/A$32,300
Qualifying Surviving Spouse$29,200$30,750
Married Filing Separately$5$5
Dependents face separate thresholds: for single dependents under 65 and not blind, filing is required if unearned income exceeds $1,300, earned income exceeds $14,600, or gross income exceeds the greater of $1,300 or earned income (up to $14,150) plus $450. Adjustments apply for age 65 or older, blindness, or married dependents. Self-employed individuals must file if net earnings from self-employment reach $400 or more, owing to self-employment tax liability regardless of total gross income. Nonresident aliens with U.S.-sourced income may need to file Form 1040-NR under treaty or withholding rules. Even below thresholds, filing is advisable to claim refunds of withheld taxes, qualify for credits like the Earned Income Tax Credit, or report advance premium tax credits received under the Affordable Care Act. The standard filing deadline for calendar-year individual returns ( or 1040-SR) is April 15 of the following year, or the next business day if it falls on a Saturday, Sunday, or legal holiday. For year 2024 returns, this deadline is April 15, 2025. The IRS typically opens the electronic filing season in late January, allowing taxpayers to prepare their returns using tax software or professional preparers at any time prior, though submissions cannot be accepted or processed until the official opening day. Taxpayers unable to file by the due date may request an automatic six-month extension using Form 4868, extending the filing deadline to October 15, 2025, for 2024 returns; however, any owed must still be paid by April 15 to avoid failure-to-pay penalties. Fiscal-year filers have deadlines four months after their year-end, typically the 15th day of the fourth month. Late filing without reasonable cause incurs a penalty of 5% of unpaid per month, up to 25%, plus interest. Basic requirements include obtaining a valid taxpayer identification number: a Social Security Number (SSN) for U.S. citizens and eligible residents, or an Individual Taxpayer Identification Number (ITIN) for those ineligible for an SSN but required to file, such as certain nonresident aliens with U.S. tax obligations. SSNs or ITINs must be provided for the taxpayer, spouse (if joint filing), and all claimed dependents; missing numbers disqualify certain credits and may reject the return. Taxpayers must select an appropriate filing status (e.g., single, married filing jointly) based on marital and dependency facts as of the last day of the tax year, and report all worldwide income for citizens and residents. Electronic filing is encouraged for accuracy and faster processing, with paper returns mailed to IRS service centers by the deadline postmark.

Documents, Forms, and Calculations

Taxpayers preparing individual returns in the United States must gather various documents to report income, deductions, credits, and other relevant information accurately. Essential documents include Forms W-2 from employers reporting wages and withheld taxes, Forms series for non-wage income such as 1099-INT for , 1099-DIV for dividends, 1099-MISC or 1099-NEC for miscellaneous or nonemployee compensation, and 1099-B for proceeds from broker transactions. Additional records may encompass receipts for itemized deductions like medical expenses, charitable contributions, or ; Form 1095-A for coverage; and documentation for income or transactions. Personal identification details, such as Social Security numbers for the taxpayer, spouse, and dependents, are also required to verify eligibility for exemptions or credits. The primary form for most individual filers is Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR for seniors born before January 2, 1960, used to summarize income, deductions, credits, and tax owed or refunded. Supporting schedules attach to Form 1040 as needed: Schedule 1 for additional income and adjustments to income; Schedule A for itemized deductions including medical expenses, taxes paid, interest, gifts to charity, and casualty losses; Schedule B for interest and ordinary dividends if exceeding certain thresholds; Schedule C for profit or loss from sole proprietorship businesses; Schedule D for capital gains and losses; and Schedule E for supplemental income from rentals or royalties. Other attachments may include Form 2441 for child and dependent care expenses or Form 8863 for education credits, depending on circumstances. Filers select these based on their financial situation, with the IRS providing instructions specifying when each applies. Key calculations begin with determining from all sources, then subtracting adjustments—such as educator expenses, interest, or tax deductions reported on Schedule 1—to arrive at (AGI). is then computed by subtracting either the (e.g., $14,600 for single filers or $29,200 for married filing jointly in 2024, adjusted for age or blindness) or itemized deductions from AGI, potentially further reduced by the qualified business income deduction. The resulting taxable income is applied to brackets (10% to 37% for 2024) or tax tables to compute tentative tax liability, from which nonrefundable credits are subtracted, followed by refundable credits to determine final tax owed or refund due. Tax software or preparers often automate these steps, but manual filers must follow IRS worksheets for precision, ensuring consistency with reported income documents to avoid discrepancies or audits.

Preparation Methods: Self-Filing, Software, and Professionals

Taxpayers in the United States may prepare their federal income tax returns through self-filing, tax preparation software, or by engaging professional preparers, with the choice often depending on the complexity of their financial situation, income level, and familiarity with tax rules. In recent years, electronic filing has dominated, with 219.9 million of 266.6 million total returns filed electronically in 2024, encompassing both self-prepared and assisted methods. Surveys indicate that approximately 44% of plan to use tax software for their returns, while 18% intend to hire professionals, leaving a significant portion to manual self-filing, though exact breakdowns vary due to self-reporting and the overlap between software-assisted and unassisted preparation. Self-Filing involves taxpayers completing forms such as the independently without paid assistance, either on paper or electronically via free tools. This method suits individuals with straightforward income sources, such as wages reported on , and minimal deductions. The process requires gathering documents like W-2s, 1099s, and receipts for deductions, then calculating , , and tax liability using IRS instructions or worksheets. For those with of $84,000 or less in 2025, the IRS program offers free guided self-preparation software from partnered providers, though only about 2% of eligible taxpayers utilize it despite 70% qualifying. Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs provide free in-person self-preparation help for low-income (typically under $64,000) and elderly taxpayers, respectively. In 2023, over 65 million self-prepared returns were e-filed, representing a substantial but declining share as software adoption grows. Self-filers avoid preparation fees but bear full responsibility for accuracy, with research showing they underreport income 87% less than clients of paid preparers. Tax Preparation Software enables assisted self-filing by guiding users through interactive questionnaires that import data from financial institutions, perform calculations, and flag potential errors or optimizations. Leading products include from and H&R Block's online and desktop versions, which support a range of complexities from simple W-2 filings to income on Schedule C. Tax software platforms charge more for filing returns involving 1099 forms (especially 1099-NEC) because this income is typically self-employment or business income. It requires additional IRS forms like Schedule C (for profit/loss) and Schedule SE (for self-employment tax), plus guidance on deductions, expense tracking, and complex calculations. This complexity pushes users to higher-tier plans (e.g., TurboTax Self-Employed edition) that provide specialized support, unlike simpler W-2 wage returns covered in free or basic editions. Basic versions are free for federal returns with limited forms, but fees escalate to $89–$129 for deluxe editions covering itemized deductions and state returns as of 2025 pricing. In 2025 (for tax year 2025 filing in 2026), DIY tax software costs ranged from $0 (free editions for simple returns) to $85–$209 federal plus $37–$50 state (e.g., TurboTax Deluxe/Premium/Self-Employed $49–$209 federal; H&R Block Deluxe/Premium/Self-Employed $35–$130 federal + $37 state), significantly cheaper than average CPA fees of $200–$1,000+ for individual returns (basic/simple $200–$600, complex $600–$1,200+), varying by location, complexity, and professional credentials. Software adoption has surged with electronic filing mandates and features like scores, contributing to over 90% of individual returns being e-filed in recent years. These tools reduce errors through built-in validations aligned with IRS e-file schemas but may upsell unnecessary features or limit free access, prompting FTC scrutiny in prior years for deceptive advertising. Established services like TurboTax and H&R Block integrate directly with IRS systems for e-filing and offer accuracy guarantees reimbursing penalties and interest, making them preferable to pure chatbot AIs, which lack official IRS integration and risk errors in complex tax scenarios. Professional Preparers are hired for complex scenarios involving multiple income streams, investments, business ownership, or international elements, where expertise minimizes compliance risks, maximizes credits like the Earned Income Tax Credit, and can potentially increase refunds or reduce liabilities by identifying overlooked deductions and minimizing errors compared to self-filing or software. For simple returns, self-filing is often sufficient without significant additional benefits, though net savings for complex situations depend on preparation fees, typically $200–$300 for basic returns. Qualified professionals include Certified Public Accountants (CPAs), who hold state licenses requiring 150 semester hours of education, exams, and experience; Enrolled Agents (EAs), federally authorized by passing the IRS Special Enrollment Examination; and unregulated preparers with a Preparer Tax Identification Number (PTIN). EAs and CPAs can represent clients in IRS audits, unlike non-credentialed preparers. Average costs range from $220 to $800 for individual Form 1040 returns, with hourly rates of $150–$500 for intricate cases, often structured as fixed fees or per-form add-ons. Professionals ensure adherence to evolving rules, such as those under the Tax Cuts and Jobs Act, but studies indicate their clients underreport income more frequently than self-preparers, potentially due to aggressive positioning. Common errors related to multiple income sources or W-2 omissions include failing to report all income from multiple W-2 forms (e.g., from multiple jobs), omitting a W-2 entirely, or incorrectly aggregating wages and withholding amounts from multiple sources, often resulting in underreported income that triggers IRS automated CP2000 notices since the IRS receives copies of all W-2s and matches them against filed returns. Preparers may also fail to verify or request all income documents from clients, leading to incomplete returns. In 2023 surveys, about 18% of filers opted for this method, reflecting its role in handling the U.S. tax code's estimated 4.5 million words of complexity.

Regulation of Paid Preparers

State-Level Licensing and Standards

In the United States, regulation of paid preparers occurs primarily at the state level, resulting in a patchwork of requirements that vary significantly by . Most states impose no specific licensing beyond the federal Preparer Tax Identification Number (PTIN), allowing individuals to prepare returns for compensation without demonstrating competency through exams or , though general business registration or laws may apply. As of 2025, only a handful of states—approximately six—mandate formal registration, , or licensing for paid preparers, often to mitigate risks of errors, , or unethical practices in tax advice. California enforces one of the strictest regimes through the California Tax Education Council (CTEC), established under state law requiring all non-exempt paid preparers to register annually. Applicants must complete a 60-hour qualifying course on federal and state tax from a CTEC-approved provider, obtain a PTIN, secure a $5,000 surety bond, undergo a criminal via live scan fingerprinting, and pay registration fees starting at $33 plus costs. of at least 20 hours annually, including coverage of and California-specific topics, is mandatory for renewal, with non-compliance leading to penalties up to $5,000 per violation or revocation. Exemptions apply to CPAs, attorneys, and enrolled agents, but the system has processed over 100,000 registrations since its inception, aiming to protect consumers from unqualified preparers. Oregon's Board of Tax Practitioners licenses two tiers: Licensed Tax Preparers (LTPs) for basic returns and Licensed Tax Consultants (LTCs) for more complex work, with LTPs required to operate under LTC supervision initially. LTP applicants, aged 18 or older with a or equivalent, must complete an 80-hour approved course in basic law, pass a state with at least 75% score, hold a PTIN, and submit to background checks; annual renewal demands 30 hours of , including 2 hours on . LTCs face additional hurdles, such as 1,100 hours of supervised experience and a . Violations, including unauthorized practice, can result in fines up to $1,000 per offense or license suspension. Other states with notable requirements include New York, where preparers filing more than 10 state returns annually must register for a Paid Preparer Identification Number, complete basic training, and adhere to ethical standards enforced by the Department of Taxation and Finance. Nevada mandates registration with proof of competency via education or exam, while and require similar filings with fees and potential background reviews for paid preparers. Maryland imposes registration and bonding for those preparing state returns for fee. These measures, often enacted in response to consumer complaints about inaccurate filings, contrast with the majority of states' approach, where preparer quality relies on market reputation and federal PTIN renewal.
StateKey RequirementsEnforcement Body/Source
60-hour education, $5,000 bond, CE, background checkCTEC/FTB
80-hour course + exam for LTPs, 30-hour CE, supervisionBoard of Tax Practitioners
New YorkRegistration if >10 returns, trainingDept. of Taxation and Finance
Registration, competency proofState
This decentralized framework has drawn criticism for inadequate consumer protections in unregulated states, prompting calls for uniformity, though interstate commerce complicates enforcement.

Federal Regulation Attempts and Court Challenges

In 2010, the Internal Revenue Service (IRS) issued regulations under 31 U.S.C. § 330, which authorizes the Treasury Department to regulate "representatives" who practice before the IRS, attempting to extend oversight to all paid tax return preparers by classifying tax preparation as such practice. The regulations, codified in Treasury Regulations §§ 601.501–601.509, required all paid preparers to obtain a Preparer Tax Identification Number (PTIN), while non-credentialed preparers (those without CPA, attorney, or enrolled agent status) had to pass a competency examination and complete annual continuing education. This Registered Tax Return Preparer (RTRP) program aimed to standardize qualifications amid evidence of preparer errors contributing to billions in tax underpayments annually, though critics contended it exceeded statutory bounds by equating routine form-filling with representational advocacy. Independent tax preparers challenged the regulations in federal court, arguing that § 330's scope is limited to those providing written advice or representing clients in IRS proceedings, not mere return preparation. In 2012, the U.S. District Court for the District of Columbia ( Bates) permanently enjoined enforcement of the examination, , and suitability requirements against non-credentialed preparers, upholding only the PTIN mandate as within IRS disclosure authority under separate statutes like 26 U.S.C. § 6109. The D.C. of Appeals affirmed in Loving v. IRS (2014), ruling 2-1 that tax preparation does not constitute "practice before the [IRS]" under § 330, as historical interpretations and the statute's text focus on advocacy and representation rather than clerical tasks, rendering the expanded regulation . Following the Loving decision, the IRS rescinded the RTRP framework in June 2014 via Revenue Procedure 2014-42, confining regulation to practitioners (attorneys, CPAs, and enrolled agents) who engage in representation or advice, while retaining the PTIN requirement for all paid preparers to track compliance and deter . This left federal oversight fragmented, with the IRS relying on voluntary compliance programs, audits, and injunctions against egregious preparers rather than proactive licensing. Subsequent enforcement actions targeted fraudulent preparers under criminal statutes like 26 U.S.C. § 7206, but courts have upheld extensions tied to preparer only where intent to evade is proven, as in recent Tax Court rulings. Legislative efforts to grant explicit federal licensing authority have persisted into the but faced resistance over concerns of erecting in a low-margin industry serving low-income filers. In March 2025, bills were reintroduced in to empower IRS regulation amid agency staffing cuts, echoing prior proposals like the 2019 Taxpayer First Act's limited expansions. Section 504 of the draft Taxpayer Assistance and Service (TAS) Act in 2025 proposed registration, testing, and education mandates, but drew opposition from coalitions citing Loving's statutory limits and potential job losses without proven accuracy gains. As of October 2025, no comprehensive federal licensing regime has been enacted, leaving PTIN as the primary federal touchpoint alongside state variations. The 2024 overruling of Chevron deference in may facilitate future challenges to any residual or new IRS rules interpreting preparer authority narrowly.

Ongoing Debates and Recent Reforms (2010s–2025)

In the early 2010s, the IRS attempted to establish comprehensive federal oversight of paid tax return preparers through the Registered Tax Return Preparer (RTRP) program, mandating competency examinations, annual , and ethical standards for non-credentialed practitioners to address widespread errors and noncompliance. This initiative was challenged in Loving v. IRS (2014), where the U.S. Court of Appeals for the D.C. Circuit ruled that the IRS lacked statutory authority under 31 U.S.C. § 330 to impose such requirements on preparers who are not attorneys, certified public accountants, or enrolled agents, effectively dismantling the RTRP framework and limiting federal regulation to basic identification via Preparer Tax Identification Numbers (PTINs). Post-Loving, debates intensified over the balance between and market access, with taxpayer advocates arguing that unregulated preparers—comprising over 70% of the industry—contribute to error rates exceeding 60% in certain claims, particularly refundable credits, leading to billions in improper payments annually. The IRS shifted to voluntary measures like the Annual Filing Season Program (AFSP), which offers limited representation rights to participants completing 15 hours of and adhering to rules, alongside enhanced penalties for misconduct such as frivolous positions (up to $1,000 per return) or failure to sign returns ($50 per violation). Critics from the preparation industry, including groups like the National Association of Enrolled Agents, contend these tools suffice when combined with state-level licensing in over 30 states, warning that federal mandates would impose undue burdens, raise compliance costs, and deter low-income filers from accessing affordable services without evidence of net benefits. Recent reforms have focused on incremental enforcement rather than broad licensing, including 2022 IRS strategies targeting high-risk preparers in refundable credit claims, which recovered over $1 billion in improper payments through audits and injunctions. In December 2024, the Treasury and IRS proposed updates to Circular 230, revising rules for practice before the agency by eliminating obsolete RTRP references and clarifying standards for non-credentialed preparers, while emphasizing consent requirements for data use to enhance privacy. Legislative efforts, such as recurring bills to grant explicit regulatory authority, have stalled amid partisan divides, though the Taxpayer Advocate Service in 2025 advocated for balanced oversight in proposals like the TAS Act, which would authorize competency testing while exempting low-volume preparers to mitigate barriers. A parallel debate emerged around the IRS Direct File pilot, launched in 2024 under the Inflation Reduction Act's funding for modernization, allowing free electronic filing for simple returns in select states to bypass private preparers and reduce reliance on potentially error-prone services. The program faced vehement opposition from industry leaders like and , who lobbied extensively—spending millions annually—arguing it inadequately covers complex scenarios, duplicates offerings, and diverts resources from core IRS enforcement, though pilots showed high user satisfaction and low costs (under $10 per return). In July 2025, the program was terminated by executive action, reverting emphasis to private-sector partnerships and underscoring tensions between government-provided alternatives and industry-driven preparation, with proponents citing $23 billion in potential annual savings from avoided fees and missed credits for low-income households.

The Tax Preparation Industry

Major Companies and Market Leaders

The U.S. tax preparation industry is bifurcated between assisted services (in-person or professional preparers) and digital self-filing software, with leading the former and Intuit's dominating the latter. , founded in 1955, operates over 10,000 retail offices and reported $3.8 billion in total revenue for fiscal year 2025, primarily from tax preparation, with an estimated 24.6% market share in the tax preparation services segment as of recent industry analysis. Its model emphasizes franchise and company-owned locations, supplemented by online tools, serving complex returns through certified preparers. Intuit, through its TurboTax product launched in 1984, commands approximately 90% of the consumer tax preparation software market, processing tens of millions of returns annually via intuitive, algorithm-driven platforms that integrate IRS e-filing. In fiscal 2025, TurboTax contributed to 's overall revenue growth, with online paying units up 6% year-over-year, driven by features like live expert assistance and mobile accessibility, though total units faced slight declines amid competition from free alternatives. This dominance stems from aggressive marketing, data analytics for upselling add-ons, and partnerships with financial institutions, positioning as the go-to for simpler individual filers. Jackson Hewitt, established in 1982 and franchised widely, ranks as the second-largest assisted preparer with around 5,000 locations, focusing on refund anticipation loans and year-round services beyond peak season. It trails in scale but maintains a niche in low-to-moderate income segments through storefront accessibility, though exact revenue figures remain private as a subsidiary of a since 2019. Liberty Tax Service, rebranded from JTH Tax in 1997, operates about 3,000 franchises emphasizing rapid preparation and marketing gimmicks like costumed wavers, but has ceded ground to larger rivals, holding a smaller slice of the assisted market estimated at under 5% of total industry returns. Its revenue lags significantly behind leaders, with historical data indicating vulnerability to economic cycles and franchisee churn.
CompanySegment FocusEst. Market ShareFY 2025 Revenue (Tax-Related)
Assisted/Retail24.6% (services)$3.8B total
(Intuit)Digital Software90% (consumer software)Contributes to Intuit's $15B+ total (specific undisclosed)
Assisted/Franchise~10-15% (assisted)Private
Assisted/Franchise<5% (assisted)~$200M (est. historical)
These firms collectively handle over 50 million returns yearly, leveraging seasonal demand while facing pressures from IRS direct-file pilots and options.

Tax Software Innovations and Adoption

The introduction of computers by the (IRS) in 1961 marked an early milestone in automating tax processing, shifting from manual tabulation to electronic computation for federal returns. This laid groundwork for private-sector , with tax preparers adopting personal computers in the 1980s to reduce errors in calculations previously done by hand or . A pivotal innovation arrived in 1986 with the IRS's pilot program for electronic filing (e-filing), initially tested in to transmit returns via , enabling faster refunds and reducing paper handling. By the early 1990s, consumer tax software proliferated for personal computers, with at least 15 programs available by 1991, including early versions of from , which used step-by-step interviews to simplify form completion for non-experts. The IRS mandated e-filing for certain high-volume preparers by 1991, accelerating software integration with government systems. Subsequent advancements included online filing in the late 1990s, coinciding with broader , and mobile apps by the 2010s, allowing smartphone-based preparation. Cloud-based platforms emerged around 2010, enabling real-time data import from financial institutions and multi-device access, while reducing local storage needs. Recent innovations incorporate for automated deduction optimization and ; for instance, algorithms now scan documents via to pre-populate forms, cutting preparation time by up to 50% in some cases. The market for AI-powered tax software includes tools offering features such as automating tax filings, categorizing expenses, and explaining payroll taxes; examples include TaxGPT, which provides AI-assisted tax research, answers to complex questions, drafting memos, and document analysis for professionals, and Symmetry's Tax Logic AI, which delivers instant, audit-grade explanations of payroll tax calculations integrated with compliance software. In 2025, consumer options included TurboTax, which employed agentic AI to automate data entry for 90% of common forms, maximize refunds, and provide year-round assistance, and H&R Block's AI Tax Assist for real-time guidance and reduced preparation time; professional tools included Thomson Reuters' CoCounsel Tax for tax research, document analysis, and workflow automation, as well as Sphere for global compliance automation. In early 2026, leading AI-powered tax software tools for professionals such as CPAs, accountants, and tax preparers focused on research, planning, return review, and workflow automation, prioritizing audit defensibility and tax-specific accuracy over generic AI solutions. Notable options included CPA Pilot for comprehensive end-to-end AI supporting tax planning, research, advisory workflows, and client outputs to reduce review time and standardize quality; TaxGPT as an AI Tax OS platform for research, return review with error and audit risk detection, writing, document analysis, and client management; Blue J Tax for predictive AI in tax research, case law analysis, and probability-based insights suited to complex positions; Thomson Reuters tools such as Checkpoint and Ready to Review with AI-enhanced research and agentic automation for data extraction, return preparation, and advisory services; and others like CCH Axcess from Wolters Kluwer with AI research integration, Filed for AI-assisted return preparation, and TaxPlanIQ for scenario modeling. No single tool is universally best, as suitability varies by needs such as research focus versus preparation automation. Adoption of tax software has surged alongside e-filing mandates and technological accessibility. In 2024, 93.3% of the 161.1 million returns—totaling 150.3 million—were filed electronically, predominantly via software used by taxpayers or professionals. During the 2024 filing season, this rate reached nearly 97% for returns processed, reflecting near-universal reliance on digital tools over paper forms, which comprised only 10.8 million filings. Self-filing via software accounts for roughly 40-50% of returns, with surveys indicating 46% of Americans used standalone tax software in recent years, while professionals handled another 25-30% using similar tools. Overall, approximately 90% of filers employ software either independently or with assistance, driven by accuracy gains and IRS incentives like faster refunds. Market leaders dominate self-preparation: holds about 70% share among software users, followed by H&R Block's online offerings at around 18-20%. For tax year 2025 returns filed in 2026, TurboTax is frequently rated as one of the best options for maximizing refunds, offering a Maximum Refund Guarantee whereby it refunds the purchase price if a larger refund or smaller tax liability is obtained using another paid tax preparation method, along with comprehensive guidance to identify deductions, credits, and tax-saving opportunities. H&R Block is a close competitor, earning top marks in reviews such as CNET's best overall for 2026, with its own Max Refund Guarantee and strong support features. For simpler returns, affordable alternatives like FreeTaxUSA or TaxSlayer also guarantee maximum refunds at lower costs. The "best" software depends on tax complexity, with TurboTax excelling in thorough deduction hunting for complex situations. The U.S. tax software market reached $6.4 billion in 2024, with projections to $12.9 billion by 2032 at a 9.3% CAGR, fueled by AI enhancements and integration with APIs for seamless data pulls from employers and banks. Despite high adoption, barriers persist for low-income or elderly filers, who comprise much of the remaining paper submissions, though IRS —used by 3.1 million in FY2024—expands software access without cost.

Economic Role, Employment, and Consumer Benefits

The tax preparation industry in the United States generates substantial economic activity, with reaching $14.3 billion in 2024 and projected to grow to $14.5 billion in 2025, reflecting a of 2.9% over the prior five years. This sector facilitates the processing of a significant portion of individual returns, as paid preparers handled nearly 85.4 million such returns in 2024, enabling efficient compliance with federal tax obligations amid a complex that includes thousands of provisions. By bridging gaps in knowledge and computational demands, the industry supports broader economic functions, such as accurate reporting of income and deductions, which underpins collection exceeding $5.1 trillion in 2024 and funds public expenditures. Employment in tax preparation services averaged approximately 95,000 workers annually in 2022, with the occupational workforce comprising around 89,300 tax preparers in 2023, many in seasonal roles concentrated during filing periods. This includes a mix of credentialed professionals, such as over 208,000 certified public accountants and 64,000 enrolled agents authorized to practice before the IRS, alongside non-credentialed preparers who handle over 60% of paid returns. The industry's labor peaks in the first quarter, providing flexible opportunities often filled by part-time or gig workers, and contributes to local economies through franchise operations and small business services under NAICS code 541213. Consumers derive benefits from paid preparation primarily through time savings and enhanced deduction identification, as professional assistance reduces the hours required for even straightforward returns, allowing individuals to focus on productive activities. Studies indicate that returns prepared by paid professionals exhibit lower effective liabilities compared to self-prepared equivalents with similar characteristics, attributable to better exploitation of credits like the . Paid preparers also commit fewer mathematical errors than self-filers, improving filing accuracy and reducing risks, though taxpayers perceive these advantages variably based on and . Overall, the sector's role in minimizing compliance burdens—estimated to cost individuals significant effort under a voluminous code—yields net value for many users, particularly those with self-employment or intricate finances.

Controversies and Criticisms

Tax Code Complexity as a Driver of Industry Demand

The , comprising Title 26 of the U.S. Code, contains approximately 4 million words and spans over 6,000 pages, excluding interpretive regulations and rulings that expand its effective scope to more than 16 million words. This volume reflects layers of provisions added over decades, including targeted deductions, credits, and exceptions influenced by , which introduce inconsistencies and require extensive cross-referencing for accurate application. Annual legislative updates further amplify this, with thousands of amendments enacted since 1986, necessitating ongoing reinterpretation by taxpayers and professionals alike. Tax compliance imposes substantial burdens, estimated at 7.9 billion hours annually for individuals and businesses in 2024, equivalent to an of $546 billion when valuing time at market wages. On average, individual filers spend 13 hours per return, plus $290 in out-of-pocket expenses for preparation, recordkeeping, and learning the law. These figures, derived from IRS data and extrapolated by organizations like the , underscore how opacity in rules—such as phase-outs, alternative minimum calculations, and itemized deductions—elevates error risks for self-filers, prompting reliance on specialized assistance to avoid audits or penalties. This complexity directly sustains demand for the tax preparation industry, as evidenced by surveys showing 90% of taxpayers using paid preparers or , with over half paying more than $100 for such services. Empirical studies identify tax code intricacy as a key predictor of , where higher-income or business filers with multifaceted situations (e.g., investments, ) face exponentially greater hurdles, driving toward professional expertise. Consequently, the industry processes roughly 100 million returns yearly, generating billions in fees that correlate with compliance costs rather than inherent filing simplicity. Reform analyses from the National Taxpayer Advocate highlight that simplification could reduce this dependency, potentially shifting more filings to low-cost or free self-service, but entrenched provisions perpetuate the cycle. While software innovations mitigate some burdens through automation, they too thrive on decoding the code's nuances, reinforcing industry viability amid stagnant base-broadening efforts. Thus, complexity not only extracts resources from taxpayers but channels them into a ecosystem adapted to its perpetuation.

Lobbying Against Government Free Filing Initiatives

The tax preparation industry has historically opposed direct government-provided free tax filing options, viewing them as competitive threats to their reliant on paid services and software. This stance dates back to the early 2000s, when the IRS launched the program in 2000 as a public-private allowing participating companies to offer free filing to low-income taxpayers in exchange for the IRS agreeing not to develop its own electronic filing system. Industry leaders, including and , supported the partnership but lobbied aggressively against any IRS expansion into direct free filing, arguing it would duplicate existing private offerings and inefficiently use taxpayer funds. Opposition intensified with proposals for IRS Direct File, a government-operated pilot program tested in 12 states starting January 2024, enabling eligible taxpayers to file federal returns directly with the IRS at no cost. Major firms like (maker of ) and ramped up expenditures; from the Free File program's inception through 2023, spent over $43.3 million on federal , while expended nearly $42 million, with the broader industry surpassing $90 million in the two decades since. In 2023 alone, Intuit's outlays reached record levels amid Direct File threats, totaling millions directed at and the executive branch to block or limit the initiative. spent over $3 million that year, focusing on arguments that Direct File would undermine the and fail to handle complex returns adequately. Lobbying tactics included direct advocacy to lawmakers, particularly Republicans, alliances with conservative groups like , and public campaigns emphasizing innovation in private software over bureaucratic alternatives. Critics, including Democratic senators such as , have accused companies of misleading tactics, such as Intuit's alleged covert efforts to sabotage Direct File through inflated cost projections and suppression of free filing awareness via "dark patterns" in software interfaces. These claims, while sourced from congressional inquiries and investigations, contrast with industry assertions that private firms provide superior accuracy and support for the 70% of filers ineligible for basic free options due to complex situations like itemized deductions. By early 2025, sustained pressure contributed to the Trump administration's decision in April to terminate Direct File nationwide, framing it as an overreach that benefited corporations by preserving market dominance estimated at billions in annual fees. Despite the pilot's reported success—over 140,000 users in 2024 with high satisfaction rates—the program's end underscored the industry's influence, as continued into 2025 with allocating $240,000 in the first quarter alone on tax-related issues. This outcome highlights a causal dynamic where via sustained expenditures protects incumbents from competition, even as empirical data from pilots indicated potential consumer savings exceeding $100 million annually if scaled. Sources tracking these expenditures, such as .org, provide transparent data from federal disclosures, mitigating biases in partisan critiques from outlets like congressional press releases.

Data Privacy Issues and Corporate Practices

Tax preparers in the United States, classified as financial institutions under the Gramm-Leach-Bliley Act, are required by the Federal Trade Commission to develop and implement Written Information Security Plans (WISPs) to safeguard sensitive client data, including Social Security numbers, income details, and financial records. The Internal Revenue Service reinforces these obligations through guidance such as Publication 4557, emphasizing risk assessments, employee training, and incident response protocols to mitigate breaches that could enable identity theft or fraudulent filings. Despite these mandates, enforcement relies on self-reporting and reactive measures, with the IRS advising preparers to notify affected clients and authorities within 24 hours of discovering unauthorized access. Data privacy issues have intensified due to the of tax filing, where software platforms collect vast amounts of personal information vulnerable to , , and insider threats. In 2023, the FTC issued warnings to five major tax preparation firms, including and , threatening civil penalties for potential misuse of confidential taxpayer data collected during filing for purposes beyond tax preparation, such as marketing or analytics without explicit consent. Investigations revealed that companies like and (operated by ) shared sensitive financial details with third parties including Meta and via tracking pixels, enabling based on income levels and filing status, practices that prompted congressional scrutiny. A 2024 class-action lawsuit against alleged inadequate cybersecurity following a February breach exposing and user data, including names and addresses for approximately 1.4 million accounts, highlighting failures in and access controls. Corporate practices vary but often prioritize revenue-generating data uses alongside security investments. H&R Block's privacy notices detail multi-layered protections, including encryption, firewalls, and annual audits, while prohibiting unauthorized disclosures except as required by law or with consent. Intuit similarly claims robust measures like two-factor authentication and compliance with IRS e-file security standards, yet faced criticism for embedding trackers that transmitted data to advertisers before users completed filings. The Consumer Federation of America documented in a 2025 report how such practices impose a "privacy tax" on users, with firms monetizing aggregated tax data for loans or insurance leads, increasing exposure to breaches amid rising phishing attacks on preparers, which affected thousands of firms in 2024. In October 2024, Democratic lawmakers petitioned the Department of Justice to probe these firms' data-handling amid evidence of non-consensual sharing, underscoring tensions between commercial incentives and taxpayer protections.

Regulation Debates: Consumer Protection vs. Market Barriers

The debate over regulating paid tax return preparers in the United States centers on balancing consumer safeguards against potential restrictions on market entry and competition. Proponents of enhanced regulation argue that the industry's low barriers to entry—requiring no formal credentials, exams, or ethical standards for most preparers—expose taxpayers to significant risks, including erroneous filings, fraudulent refund claims, and abusive practices targeting low-income filers. A 2006 Treasury Inspector General for Tax Administration report identified over 1.3 million instances of preparer misconduct, while a 2014 Government Accountability Office analysis found that returns prepared by unregulated individuals had error rates up to 58% on Earned Income Tax Credit claims, compared to 45% for credentialed professionals, leading to billions in improper payments and subsequent audits, penalties, and interest borne by consumers. Advocates, including the National Taxpayer Advocate, contend that federal competency testing, continuing education, and disclosure requirements would reduce these errors by ensuring minimum proficiency, akin to regulations in fields like medicine or law, without unduly burdening ethical practitioners. Opponents counter that such mandates erect unnecessary occupational licensing barriers, stifling competition and raising costs for consumers, particularly those reliant on affordable, neighborhood-based services. The Institute for Justice and allied groups highlight that licensing regimes, as seen in states like and New York, correlate with fewer preparers overall—reducing supply by 10-20% in licensed occupations per economic studies—and higher fees passed to filers, disproportionately affecting low- and moderate-income households who file 60% of returns via paid preparers but often choose low-cost options. Empirical evidence from a 2024 study shows no consistent superiority in compliance or accuracy between licensed and unlicensed preparers, with some unregulated ones facilitating legitimate deductions overlooked by credentialed firms focused on audit avoidance. Critics, including free-market analysts, argue that market incentives—such as reputational risks, client retention, and IRS enforcement tools like the Preparer Tax Identification Number (PTIN) requirement upheld in 2014—already deter misconduct without broad mandates, and that past federal efforts, like the 2011 Registered Tax Return Preparer program mandating exams and education, were invalidated by the D.C. in Loving v. IRS for exceeding statutory authority under 31 U.S.C. § 330, illustrating overreach rather than necessity. These tensions persist in legislative proposals, such as Section 504 of the draft Taxpayer Assistance and Service Act of 2025, which sought to impose federal licensing but faced opposition from over 20 organizations citing reduced access for small preparers and immigrant entrepreneurs who comprise 40% of the industry. While a voluntary IRS Annual Filing Season Program since 2014 offers limited oversight for participants, surveys of tax professionals in 2024 reveal divided views, with 60% favoring some IRS regulation for quality but cautioning against mandates that could consolidate the market toward large firms like , potentially harming competition. State-level variations underscore the trade-offs: Regulated states report fewer complaints but 15-25% higher average preparation fees, per National Society of Accountants data, fueling ongoing federal debates on whether targeted enforcement of existing rules suffices or if new authority is needed to prioritize consumer outcomes over incumbency protection.

Achievements in Accessibility and Efficiency

The widespread adoption of electronic filing (e-filing) represents a major advancement in tax preparation efficiency, with 94% of the 160 million individual federal tax returns processed by the IRS in 2022 submitted electronically, up from lower rates in prior decades. This shift has accelerated refund processing, with e-filed returns typically receiving refunds within 21 days compared to six to eight weeks for paper filings, enabling faster access to funds for millions of taxpayers. E-filing's integration with tax software has also minimized transcription errors inherent in manual , contributing to higher overall accuracy rates in return submissions. Tax preparation software has democratized access to complex calculations previously requiring professional expertise, allowing individuals to handle deductions, credits, and compliance rules independently with reduced time burdens for straightforward returns. For instance, self-preparers using software averaged 17 hours on filing activities, often leveraging automated features that apply current tax codes consistently to avoid mathematical discrepancies. Innovations such as guided interview formats and real-time error checks have further enhanced efficiency, enabling over 90% of e-filers to complete processes without paid assistance in many cases. By 2025, emerging AI integrations in platforms like those from major providers have reported up to 66% reductions in preparation cycle times for firms, extending similar gains to individual users through predictive data matching and . Government initiatives have bolstered accessibility, particularly for lower-income filers, through programs like the IRS Direct File pilot launched in 2024, which enabled over 140,000 taxpayers in 12 states to file directly with the agency at no cost, with 90% rating the experience as excellent or above average for its simplicity and trustworthiness. Complementary efforts, including expanded alternative formats like Braille and large-print forms, have improved usability for disabled taxpayers, aligning with broader digital accessibility standards. These developments collectively lower barriers for underserved groups, fostering greater participation in self-filing while maintaining compliance integrity through built-in validations.

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