Tax Preparation

Tax preparation is the work of gathering a completed year's income and expense records, applying the rules to facts that are already fixed, and filing the return. It is backward-looking by nature, which is what separates it from tax planning, the forward-looking activity of arranging matters before they happen. A reader who confuses the two buys the wrong service at the wrong time of year.

When the work is done for money it has a statutory name. Section 7701(a)(36) provides that "the term 'tax return preparer' means any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax imposed by this title or any claim for refund of tax imposed by this title," and preparing a substantial portion of a return counts as preparing the whole of it. The paragraph then excludes four categories from the definition, among them a person who furnishes only typing, reproducing or other mechanical assistance, an employee preparing the return of the employer who regularly employs them, and a person preparing a return as a fiduciary. So a friend who helps for free and a bookkeeper who only types are not tax return preparers; the person you pay is.

The federal entry requirement is one number. The IRS states it directly: "Any tax professional with an IRS preparer tax identification number (PTIN) is authorized to prepare federal tax returns." There is no federal examination, no federal education requirement and no federal license for preparers generally. Some states impose their own requirements on preparers operating there, but at the federal level the credential landscape is voluntary above the PTIN.

The Annual Filing Season Program is the voluntary tier, and the IRS says so in as many words. Asked whether the program is mandatory, the IRS answers: "No, it's voluntary. Anyone with a preparer tax identification number (PTIN) can prepare tax returns for compensation." A participant completes 18 hours of continuing education including a six-hour federal tax law refresher course with a test, renews their PTIN, and consents to the practice obligations in Circular 230, Subpart B and section 10.51. Someone who has passed certain recognized tests takes a reduced 15 hours. Completing it produces a Record of Completion, not a license.

Representation rights are where the tiers actually bite, and they matter most at the worst moment. The IRS divides preparers into three groups. Enrolled agents, certified public accountants and attorneys have unlimited representation rights and "may represent their clients on any matters including audits, payment/collection issues, and appeals." Annual Filing Season Program participants have limited representation rights: they "can represent clients whose returns they prepared and signed, but only before revenue agents, customer service representatives, and similar IRS employees, including the Taxpayer Advocate Service." A preparer who holds a PTIN and nothing else has none at all; for returns prepared after December 31, 2015 the IRS says such preparers "will only be permitted to prepare tax returns" and "will not be allowed to represent clients before the IRS." The consequence is concrete: if the return is examined two years later, the person who prepared it may be unable to speak to the IRS about it.

The signature is the checkable safeguard. A paid preparer is required by regulation to sign the return and to furnish an identifying number on it. Section 6695, headed "Other assessable penalties with respect to the preparation of tax returns for other persons," imposes a penalty at subsection (b) for failing to sign and at subsection (c) for failing to furnish the identifying number. A preparer who charges a fee, prepares the return, and then leaves the preparer section blank has not made an administrative slip; they have avoided the one record that ties them to the document. The IRS publishes a searchable Directory of Federal Tax Return Preparers listing attorneys, certified public accountants, enrolled agents, enrolled retirement plan agents and enrolled actuaries with valid identifying numbers, along with Annual Filing Season Program participants, which is the practical way to check a name before handing over documents.

The routes available, from most to least self-directed. Commercial tax software puts the work on the filer with the software supplying the rules. IRS Free File offers guided software at no cost through IRS.gov to filers under an annual income limit, and Free File Fillable Forms offers electronic forms with no income limit and no guidance. Volunteer programs provide in-person help free of charge to people who qualify. And a paid preparer, at any of the three credential tiers above, does the work for a fee. Whichever route is used, the taxpayer signs the return under penalties of perjury and remains responsible for what it says.

Preparing a return, whoever does it, runs in the same order.

1. Assemble the information returns. Forms W-2, 1099 and 1098, brokerage statements, and the Schedule K-1s from any partnership or S corporation interest. The IRS already holds copies of most of these, which is why a mismatch generates a notice.

2. Assemble what nobody reports for you. Business income and expenses, charitable acknowledgments, medical costs, basis records for anything sold, and the prior-year return for carryovers.

3. Apply the rules to fixed facts. Filing status, dependents, whether to itemize, and which credits the facts support. Almost nothing at this stage is a choice, which is the defining feature of preparation as against planning.

4. File and pay. Electronic filing with direct deposit is the fastest route, and the payment obligation is independent of the filing one, so an extension of time to file is not an extension of time to pay.

5. Keep the records. Substantiation is the taxpayer's burden if the return is later examined, and the person who prepared it is not the person who has to produce the receipts.

Choosing a paid preparer, in practical order. Confirm they hold a current preparer tax identification number and check the IRS directory. Establish which representation tier they are in, since that determines what happens if the return is questioned. Ask how the fee is set before work begins, and note that a fee quoted as a share of the refund gives the preparer a financial stake in the size of a number they are also the one computing. Confirm they will sign the return and enter their identifying number. And read the return before signing it, because the signature under penalties of perjury is the taxpayer's.

What the current system does well

• The entry requirement is low, so paid help is widely available and inexpensive at the simple end of the market.
• Free routes exist and are real: guided software through IRS.gov below an income limit, fillable forms at any income, and in-person volunteer help for those who qualify.
• The three credential tiers are published by the IRS, along with a searchable directory, so a taxpayer can verify a preparer before engaging one.
• The signature and identifying number requirements create a durable record of who prepared a return, backed by a penalty.

What is genuinely wrong with it

• There is no federal competency standard for an unenrolled preparer, so "professional tax preparer" describes a business rather than a qualification.
• The credential tier that matters most, representation rights, is invisible at the point of sale and only becomes relevant years later.
• The taxpayer signs under penalties of perjury and carries the liability for errors, including errors the preparer made.
• A preparer who refuses to sign leaves the taxpayer holding sole responsibility for a return they did not prepare, and the arrangement is usually presented as normal.
• Fees are not standardized and are often quoted only after the work is done.