Soled & Thomas: Regulating Tax Return Preparation

Jay A. Soled (Rutgers) & Kathleen DeLaney Thomas (North Carolina), Regulating Tax Return Preparation, 58 B.C. L. Rev. ___ (2016):

Every year the U.S. government collects nearly $3 trillion of income and employment taxes, a large share of which is used to deliver social welfare benefits to the poor. With respect to these collections and deliveries, the Form 1040 (U.S. Individual Income Tax Return) seeks to ensure taxpayer accuracy. In the twenty-first century, there are two sets of key players that dominate the Form 1040 preparation and submission process, namely, tax return preparers and tax return preparation software companies. The former hand-hold taxpayers through the entire tax return preparation and submission process while the latter provide taxpayers with the necessary tools to complete and submit tax returns on their own. These two groups – tax return preparers and tax software companies – thus stand as vital intermediaries between the government and taxpayers, assisting in the preparation of over 90 percent of all individual tax returns.

Despite the essential role that tax return submission plays in government function, Congress has exercised virtually no oversight over the process. Currently, regardless of education, knowledge, or experience, any person can prepare tax returns for compensation. Similarly, there are essentially no checks in place to ensure the substantive accuracy of tax returns prepared with tax software. As a result, millions of flawed tax returns are filed each year, which shortchange the government of much needed 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 reform of the tax return preparation process. It urges Congress to regulate both tax return preparers and tax preparation software companies. Regulatory oversight would include measures such as competency examinations for tax return preparers and mandatory software content designed to improve taxpayer compliance. Adoption of one or more of the reforms we propose should lead to more accurate tax returns, protect taxpayers, and ensure a fairer and more efficient tax system.