The only two significant changes to tax preparation services from 2015 to 2016 stem from changes the IRS implemented to hold tax preparers financially responsibility for tax fraud.
IRS knows that a significant amount of fraud comes from two types of tax returns:
- People who file for refundable tax credits like Earned Income Credit, Child Tax Credit or American Opportunity Tax Credit
- Small business taxpayers who file tax returns without having computerized bookkeeping records, payroll, and estimated tax payments throughout the year. These businesses have a greater tendency to make up figures and support them with a shoebox filled with receipts rather than bank-reconciled electronic accounting records.
IRS response to the problem is clear and simple: Increase the number of examinations using new audit technologies and hold the tax preparer financially responsible for improperly submitted returns. What’s worse, the IRS does not care so much whether the tax return was properly prepared, per se, but rather whether the documentation underlying the tax return is available in the format they prefer. IRS also knows that self-prepared returns are highly likely to contain errors but this article only focuses on the impact on returns submitted by paid preparers that would otherwise tend to have fewer errors.
As a result, the financial risk for preparing one of these two types of tax returns is substantially more than the fee charged for preparing the tax return. A tax return that might have been completed for a $600 fee now comes with thousands of dollars risk that extends years into the future.
The only logical response is to increase tax preparation fees in these two circumstances and take additional precautions to reduce the risk. I anticipate that tax preparation fees for refundable tax credits will add $300 or more per return across the industry and that businesses without bookkeeping and tax services throughout the year will increase by $2,000 to $3,000 on average as compared with small businesses with proper accounting records.
There are ways to reduce the risk and therefore reduce tax preparation fees in both of these circumstances. Please discuss these issues far in advance of tax preparation deadlines.