Tax preparation is the process of preparing tax returns, often income tax returns, often for a person other than the taxpayer, and generally for compensation. Tax preparation may be done by the taxpayer with or without the help of tax preparation software and online services. Tax preparation may also be done by a licensed professional such as an attorney, certified public accountant or enrolled agent, or by an unlicensed tax preparation business. Because United States income tax laws are considered to be complicated, many taxpayers seek outside assistance with taxes (59.2% of individual tax returns in 2007 were filed by paid preparers).
Some states have licensing requirements for anyone who prepares tax returns for a fee and some for fee-based preparation of state tax returns only. The Free File Alliance provides free tax preparation software for individuals with less than $58,000 of adjusted gross income for tax year 2010. People who make more than $58,000 can use Free File Fillable Forms, electronic versions of IRS paper forms.
Until 2011, the U.S. Internal Revenue Service (IRS) did not have a requirement for national registration of paid tax return preparers in the United States. However, effective January 1, 2011, new rules require the registration of almost all paid federal tax return preparers. The new rules require 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 are required to register, but are not required to take the exam and are not subject to the continuing education requirements. CPAs and attorneys are licensed on a state-by-state basis, and are subject to state-imposed continuing education requirements to maintain their licenses. For purposes of the registration requirement, the IRS defines a “tax return preparer” as “an individual who, for compensation, prepares all or substantially all of a federal tax return or claim for refund.”
All tax return preparers, including those tax return preparers who are attorneys, certified public accountants, or enrolled agents, are required to have a practitioner tax identification number (PTIN). This rule is effective for preparation of any federal tax returns after December 31, 2010.
Beginning in mid-2011, tax return preparers (other than CPAs, attorneys, and enrolled agents and a few others) have generally been required to take and pass a competency test to officially become a registered tax return preparer.
Tax return preparers who have PTINs before testing becomes available have until Dec. 31, 2013, to pass the competency test. After testing becomes available, new tax return preparers will be required to pass the competency test before they can obtain a PTIN.
A new continuing education requirement of 15 hours per year has been imposed on tax return preparers (except for CPAs, attorneys, enrolled agents, and a few others). The IRS has indicated that the new rules apply to all kinds of federal tax returns, including income taxes and payroll taxes.