Tax Preparation Industry is the Wild West of the 21st Century

Sat Jul 12, 2014 02:21:36AM

Internal Revenue Service HeadquartersBy: Joshua Doubek
The tax preparation industry is one of those industries that everyone loves to hate. Since the average American doesn't understand the tax code, these organizations step in and promise to take care of everything for you. All you need to do is give them a hefty fee and voila, your taxes are now done. If you're lucky, you'll get some money back. If you're not, you may wind up owing some money. And if you're really unlucky, you visited a sham organization and now owe the IRS thousands of dollars.

When you think about the tax preparation industry, it would be best to think of it as the Wild West redux. The Internal Revenue Service tried to enact something called the Registered Tax Return Preparer Test(RTRP) back in 2011, but the U.S. Court of Appeals for the District of Columbia ruled in Loving v Commissioner that they didn't have the authority to regulate tax preparers. Because of this ruling, there is now no governmental agency overseeing a multi-billion dollar industry. What's the worst that can happen? If you are to believe the New York Times, and millions of individuals, a lot can happen.

Tax preparation companies routinely and systematically target poor and uneducated individuals, often charging exorbitant fees for minimal work. Many individuals who go to these companies typically qualify for the Earned Income Tax Credit and are a ripe target for shady organizations who want nothing more than to squeeze as much money in fees from these unsuspecting individuals as possible.

This begs the question of what can be done by a lay person who doesn't necessarily understand the complex tax system that we have in this country. The simplest way is to file what is called a 1040EZ form. This form can only be filled out when you meet a certain criteria, however. You can fill out the 1040EZ form if:

1. Your filing status is single or married filing jointly
2. You claim no dependents
3. You, and your spouse if filing a joint return, were under age 65 on January 1, 2014, and not blind at the end of 2013
4. You have only wages, salaries, tips, taxable scholarship and fellowship grants, unemployment compensation, or Alaska Permanent Fund dividends, and your taxable interest was not over $1,500
5. Your taxable income is less than $100,000
6. Your earned tips, if any, are included in boxes 5 and 7 of your Form W-2
7. You do not owe any household employment taxes on wages you paid to a household employee
8. You are not a debtor in a Chapter 11 bankruptcy case filed after October 16, 2005
9. You do not claim any adjustments to income, such as a deduction for IRA contributions, a student loan interest deduction, an educator expenses deduction, or a tuition and fees deduction
10. You do not claim any credits other than the earned income credit

If you don't meet the criteria for the 1040EZ form, you may still be able to fill out another simple form called the 1040A. You can fill out a 1040A if:

1. Your income is only from wages, salaries, tips, taxable scholarships and fellowship grants, interest, or ordinary dividends, capital gain distributions, pensions, annuities, IRAs, unemployment compensation, taxable social security or railroad retirement benefits, and Alaska Permanent Fund dividends
2. Your taxable income is less than $100,000
3. You do not itemize deductions
4. You did not have an alternative minimum tax adjustment on stock you acquired from the exercise of an incentive stock option
5. Your taxes are only from the Tax Table, the alternative minimum tax, recapture of an education credit, Form 8615 (PDF) or the Qualified Dividends and Capital Gain Tax Worksheet
6. Your only adjustments to income are the IRA deduction, the student loan interest deduction, the educator expenses deduction, the tuition and fees deduction, and
7. The only credits you are claiming are the credit for child and dependent care expenses, the earned income credit, the credit for the elderly or the disabled, education credits, the child tax credit, the additional child tax credit, or the retirement savings contribution credit
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