This proposal is about addressing vital issues in the tax collections process that directly affect the presidential budget receipts due to the wide spread use of self-preparation software and AI, mainly by untrained tax filers, ghost preparers, volunteers and tax filers who are not upheld to the same standards or penalties Tax Professionals are. This led to unregulated, unvetted and deceptive tax practices in the government and private sector that affect every taxpayer.
The Presidential Budget is a public record that I found many Americans are not familiar with and I want to show you how government agencies and the private sector directly affect the budget receivables. The “receipts” in the President’s Budget are funds collected from the public by the federal government, including taxes, fees, and other collections. These funds are also known as revenues.
The main sources of receipts for the federal government are:
- Individual income taxes
- Social insurance (payroll) taxes
- Corporate income taxes
- Excise taxes, etc.
According to available data, in 2023, approximately 48.7% of the Presidential Budget receipts came from taxes, with individual income taxes making up roughly half of that amount and payroll taxes accounting for around 36.6% of total revenue.
- Total revenue: The federal government collected around $4.47 trillion in revenue during the 2023 fiscal year.
*Individual income taxes: These comprised nearly half of the total tax revenue at around 48.7%.
*Payroll taxes: The second largest source of tax revenue, making up around 36.6% of total revenue.
How is the Tax Preparation affecting the Presidential Budget Receipts you would ask?
There are a few ways to prepare your taxes in the US:
- Tax attorney – trained on tax law and IRS representation of Taxpayers
- Certified public accountant – trained mainly on accounting and some tax law
- Annual Filing Season Program tax professional – trained on tax law with limited IRS representation
- Enrolled Agent - trained on tax law and IRS representation of Taxpayers
- Ghost tax preparer may not be trained and does not sign your tax return
- Self-preparation software
- The IRS’s Volunteer Income Tax Assistance (VITA ) and Tax Counseling limited tax law training requirements
I am a seasonal tax professional enrolled in the Annual Filing Season Program since the year of 2000. AFSP is a voluntary program designed to encourage non-credentialed tax return preparers to participate in continuing education (CE) tax law courses. IRS does not require AFSP or other tax practitioners, who are not enrolled in any Tax Law continuing education program to be Tax Attorneys, Certified Public Accountants or Enrolled Agents. The AFSP program ensures the tax professionals are taking annually, continuing education and voluntarily consent to the penalties outlined in Circular 230 but have limited taxpayer representation rights before the IRS - unlike Tax Attorneys, CPAs and EAs who are trained to represent tax payers. Although AFSPs are “non-credentialed” – meaning have limited representation rights of taxpayers, before the IRS, we and anyone in the tax industry play a vital role in collecting the presidential budget “receivables”. We are in an essence self-sponsored and self-motivated government aid in the private sector collecting the government receivables but our tax education and role in the preparation services have been overlooked and underestimated for years by the IRS and with the years each government administration enacted new tax laws and added extensive due diligence requirements that we must adhere to avoid the enormous tax professional penalties, which increased the necessity to dedicate more time, studying tax law and increased the cost of tax return preparation. IRS also started requiring tax training continuing education from credentialed trainers, such as the National Association of Tax Professionals, which made the self-study even costlier to us.
Since I started preparing taxes in 2000 at H&R Block, a lot was done to protect Taxpayers’ from Tax Professionals, including the avalanche of due diligence in pretty much every aspect of individual and business tax preparation by a tax professional. It takes a special training just to learn the complexity of the teared and escalation system of tax preparer penalties that are increasing for inflation annually. An entire division called Tax Payer’s Advocate service was opened to protect taxpayers’.
The PATH Act of 2016, introduced Due diligence tax law and additional tax forms, which increased not only the cost and time for tax training but the cost and time for tax preparation and with that, the accuracy and penalty liability for preparing even simple tax returns. As tax professionals we are relying in good faith to receive the correct information from taxpayers to prepare an accurate tax return and avoid penalties, which could quickly take us out of the tax industry. Compliant, Tax Professionals are since bearing a huge liability in preparing tax returns mainly to aid our government in collecting the budgeted receivables from individuals and businesses.
In contrast not much is done on behalf of the IRS to demand due diligence of taxpayers and the software companies offering the software to anyone without any due diligence or tax law training. To the contrary, a taxpayer has the freedom to file a “fraudulent” return on self-preparation software and get away with it, when and if ever gets audited.
Referring to the final Report issued by TIGTA (Treasury Inspector General for Tax Administration) “The IRS estimates that 23.8 percent ($15.6 billion) of EITC payments were issued improperly in Fiscal Year 2015”Also billions of dollars paid in fraudulent claims of the Additional Child Tax Credit, American Opportunity Tax Credit (all government credits).
As a result, form 8867 Paid Preparer’s Due Diligence Checklist was born in 2016, along with added Tax Preparer Due Diligence penalty of $635 (2024) per claimed tax credit, per return, that were also expanded to the ODC and HOH filing status under the TCJA in 2018. In other words, if a tax professional received fraudulent or incorrect information by the taxpayer for claiming any of the government credits CTC, ACTC, EITC, ODC and AOTC or the HOH filing status the tax professional is facing a penalty of $635 per any of the claimed credits and/or the HOH filing status. At any point preparing a return claiming five of the six a AFSP tax professional is facing $3,157 in penalties for one tax return. If any of these credits are calculated based on net profit of self-employment income in case of incorrect information from the taxpayer the tax preparer also faces accuracy penalties and income understatement penalties. As you can easily acknowledge the risks a self-employed tax preparer incurs during tax preparation, can quickly work a tax professional out of the tax preparation business. On the other hand, the IRS, the tax software companies and the credentialed tax training organizations are raising their revenue year over year, on the back of hard working and honest tax professionals.
In 2023, the IRS launched with taxpayer funded dollars the “direct file program”, available to anyone with supposedly “low income” of $79,000 or less. Considering that the average federal poverty rate in US for Family of four: The FPL for 2024 is $31,200; Individual: The Federal Poverty Level (FPL) for 2024 is $15,060. it is very easy to recognize that the direct file program is targeting not only low-income tax filers but also soliciting the medium income filers for free tax filing and gaining a significant amount of the market share from the self-funded tax professionals.
In a market economy where self-employed tax professionals are self-funded and being robbed out of competitiveness by lobbying Software companies, it is too much to take that now we are in competition with a government agency offering free filing for significant amount of the general population funded by tax payers. I just want to clarify here that there is nothing wrong with the IRS offering free software to low-income filers, or filers not claiming vital government credits or deductions, however, medium income filers and low income filers eligible to claim the government credits without any tax law or due diligence training is opening the door for fraudulent claims that contribute to further depleting the budgeted government receivables from tax revenue. If this is going to continue to be the case, eliminating the Due Diligence penalties for tax professionals would only be fair if tax filers are not subject to the same due diligence at the time claiming government credits as a tax professional is.
While IRS offering free filing is more recent the software companies have been competing with tax professionals over two decades and deceiving tax payers that they can prepare on their own any complexity of tax returns by answering interview-based questions.
Anyone who has used self-preparation software is aware that the software will allow finagling the interview responses and instantly showing the impact on the tax refund, using the software as what I call being from Las Vegas, a “progressive jackpot”. This has resulted throughout the years in various issues, such as taxpayers refusing the service of tax professionals, because they compare their refund results with ours and would rather get a big refund “now” or avoid balance due and deal with the tax consequences later, if they ever get audited by the IRS. Our due diligence is to warn the taxpayers of eventual consequences of filing a fraudulent tax return and yet we are robbed of the ability to file it correctly for them.
Using self-preparation software has also resulted in taxpayer “secret shoppers”, wasting the time of a tax professional and pretending that they intend to file a tax return and then trying to replicate it in their tax preparation software at home.
Another issue arising from untrained taxpayers using a self-preparation software is probing tax professionals, who are not preparing their tax return for the right answers to get a larger refund and qualify for credits or even worse consulting with Google. Software use by untrained taxpayers, has also contributed to challenging all the right tax advice that a trained tax professional would provide under the enacted tax law, because the self-preparation software lets tax payers get away, meeting the otherwise mandated under the tax law “due diligence” a tax professional is subjected to. This leads to diminished use of tax professional’s services for tax preparation because none of us would file a frivolous or fraudulent tax return on taxpayers demand.
Based on the IRS statistics, tax returns prepared by tax professionals are still more than tax returns prepared by self-preparation software, however on the rise of AI in tax preparation and the TIGTA report of 2015, it is easy to forecast that the government receivables from tax returns will significantly deplete if the software and AI continues to be widely available to the untrained tax filer. It is time for the government administration to recognize the vital role of a self-funded tax professional in enforcing the tax law and adhering to the due diligence established to mitigate the filing of fraudulent tax returns and tax evasion! It is also time to limit the sales of tax preparation software and AI for complex and business tax returns to tax professionals with registered PTIN.
Ghost tax preparers is also an issue at large that the IRS took pride in battling the last almost three decades I have been a tax professional and yet there are still many out there, who do not sign the tax returns they prepare but collect tax preparation fees and are not subject to Circular 230 and any of the penalties under it. The ghost tax preparers usually disappearing after the tax season to their country of origin and since they don’t carry liability of the tax return preparation, they will not assist the taxpayer in an IRS audit and consecutively penalty payments. Often many taxpayers are caught by surprise on the deductions and credits fraudulently claimed on their tax return and the penalties they must pay to the IRS retroactively and with interest on that tax return.
In conclusion, taxpayers are deceived by software and now AI advertising that they can prepare any tax return on their own regardless of complexity for the cost of the software. The software companies are not educating taxpayers of the due diligence they must meet by preparing their own tax return and the consequential penalties.
IRS has done very little to educate taxpayers that regardless of who prepares their tax return the taxpayer is solely responsible for the tax preparation, refunds, credits or balance due claimed on the return.
My proposal is as follows:
- IRS to limit the free “Direct File” program to low income filers, as they originally advertised and aligned with the Federal Poverty Levels. Limit to filers not claiming any government credits.
- IRS to uphold the IRS’s Volunteer Income Tax Assistance (VITA) and Tax Counseling to the same Tax Training, testing, Due Diligence and Circular 230 standards an AFSP professional is. Volunteering to prepare tax returns for free on behalf of taxpayers, should not be an excuse for lack of knowledge due to lack of required tax training. Incompetence under the tax law results in penalties to the rest of the paid tax professionals and anyone preparing taxpayer’s tax returns should be upheld to the same standards.
- Software Companies to sell tax preparation software for basic tax return preparation to taxpayers, not claiming any government credits.
- Software Companies to limit the sales of complex tax return preparation software to registered tax professionals or taxpayers, who have an active PTIN (preparer tax identification number) issued by the IRS and have passed a tax law training through the IRS AFSP voluntary program.
Define - Complex Tax Preparation software; Self Employment income, Business Tax Returns, Rental Tax Returns, Gain or Loss from sale of property, etc. - Limit the tax preparation software for used only in the USA and by USA PTIN holders. Little that any taxpayer knows, tax preparation is outsourced to India and other countries by US based tax preparation companies so someone, who is underpaid and undertrained with limited tax law vocabulary already has your data.
- Organizations such as National Association of Tax Professionals to start representing the tax professionals and address the issues the tax professionals are subjected to for years. This organization has been lobbying for further regulating on tax professionals and the public needs to understand that regulated tax professionals are not the threat to the budget receivables or any taxpayer, because we are fully trained, federal and state certified, fingerprinted and bonded and mainly fully aware of the tax penalties we are facing with any given tax return.
- In the case the IRS and the government administration firmly believes that limiting the software companies from selling self-preparation software and tax preparation AI to untrained and unvetted software consumers, claiming government credits and various deductions, that end up being funded is not the solution. I would recommend reducing and eliminating the enormous Due Diligence penalties for legitimate PTIN holding, trained tax professionals, who have not only been robbed of their ability to compete and gain market share in a market economy but also have been prevented from filing more accurate tax returns and enforce the tax law we are trained on.
Legitimate Tax Professionals are the trained independent financial consultant and guaranteed professional tax preparation on a taxpayer’s return that is much needed to prevent taxpayers from tax audits and IRS penalties and interest. We are the taxpayer’s assurance, that taxpayers are not working themselves out of vital credits and deductions they may be eligible to, by being misled that using a self-preparation software, AI or voluntary help from untrained volunteers, is right for untrained tax filers. We are also upheld by higher standards to safeguard taxpayer’s information.
On the other side of the desk, the only way to safeguard the budgeted government receivables and report accurate taxpayers’ revenue is to stop the frivolous use of self-preparation software to ghost, volunteer tax preparers and untrained or illegitimate taxpayers who are not upheld to the standards and the due diligence of the tax profession!
The tax professional community has been overtrained and overregulated and we have been the self-funded extension to government, aside from being government employees in collecting government receivables, while abiding by the tax law and the due diligence. We have been fully alert and aware of our mission to protect not only our client’s rights under the tax law, but our businesses and we understand that our hard work has a higher mission in safeguarding the presidential budget receivables by collecting the tax revenue. It is high time for a reform and my hope that the new administration will finally hear us, the Tax Professionals, and address the “big elephant’ in the room, that became invisible due to software companies and tax professional organizations lobbying for their business profits.