Page 5 - VTaxOnDemand Independent Industry Analysis of Accounting Industry

IRS

Abstract:

The relationship between the tax preparation industry and the Internal Revenue Service is
contentious. Stemming from the IRS Restructuring and Reform Act, signed in 1998, the federal
tax collection agency has been mandated to provide and administer a free filing option for
taxpayers. The tax preparation industry has spent considerable amount of capital on government
relations and lobbying efforts to keep any further regulation at bay. Through a partnership
between the IRS and tax software companies, the Free File Alliance, has being established to
provide free federal returns. Further Congressional Acts to finalize development and
implementation of a IRS administered options have being met with strong opposition by industry
trade groups, and have made their way into Free Filing Alliance agreements with the IRS,
whereby the agency cannot develop competing offers.

Around half of the tax preparation professionals (~600,000) are not registered or regulated,
causing significant difficulties for consumers to develop informed decisions around service
providers. Calls and regulations developed by the IRS have being struck down by federal courts
and there is no sign of Congressional support or appetite for introducing legislation to regulate
tax preparers. New York, Maryland, Oregon, and California are the only states mandating
registration and developing a framework for regulation of industry professionals. The
consequences of this lack of oversight in the industry is a lack of transparency in fees, a plethora
of costly financial products, and cyber security/identity theft risks. Leading tax software
companies, the IRS, and brick & mortar providers have all faced cyberattacks, in some shape or
form. For example, the IRS says there were 2.4 million returns with falsified names and social
security numbers filed in 2013. The industry has become plagued by scandals and there have
being massive tax return refund fraud cases, stemming from massive data breaches in major
retailers, and the utilization of the information to file fraudulent tax returns through some of the
industry providers.

Joint efforts between industry trade groups, representing the major players in the industry, such
as H&R Block, TurboTax, Liberty Tax Services, Jackson Hewitt, and Tax Slayer, and the IRS,
have embarked on substantial initiatives to address the growing cyber concerns. From January
through April 2016, the security initiatives have already led to the IRS stopping $1.1 billion in
fraudulent refunds claimed by identity thieves on more than 171,000 tax returns; compared to
$754 million in fraudulent refunds claimed on 141,000 returns for the same period in 2015.

Tax Preparation Industry

1.) IRS Restructuring and Reform Act
a. Signed in 1998, required the Treasury Department to develop, by 2008,
procedures for the implementation of a “return-free” filing system that would

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