Tax Industry Trends
Trend : As OLF usage grows, ERO per-site volume drops.
It only stands to reason that as more taxpayers file their own returns over the web, there will be fewer tax clients available for practitioners to serve. Adding to the downward trend for practitioners: IRS adds anywhere from 6,000 to 20,000 new EROs each year, thereby creating more sites to chase after a gradually shrinking pool.
Trend: As OLF usage grows, taxpayer fraud increases.
Below are the number of individuals who have been prosecuted by IRS for filing fraudulent legal-source returns, questionable refund returns, and frivolous returns. The vast majority of these individuals, a few of whom are unscrupulous return preparers, filed multiple fraudulent returns electronically prior to being apprehended. A large percentage of these individuals use identity theft schemes to commit their crimes. In TY03 IRS instituted better safeguards for tracking online filing fraud, but that has not changed their historical rate of successful prosecutions - IRS continues to successfully prosecute about half of all fraudulent legal-source criminal investigations.
Below are the number of individuals who have been prosecuted by IRS for filing fraudulent legal-source returns, questionable refund returns, and frivolous returns. The vast majority of these individuals, a few of whom are unscrupulous return preparers, filed multiple fraudulent returns electronically prior to being apprehended. A large percentage of these individuals use identity theft schemes to commit their crimes. In TY03 IRS instituted better safeguards for tracking online filing fraud, but that has not changed their historical rate of successful prosecutions - IRS continues to successfully prosecute about half of all fraudulent legal-source criminal investigations.
Trend: As OLF usage grows, tax return errors & omissions increase.
As might be expected, the number of math error notices IRS sends to taxpayers has actually declined over the years as more returns are prepared on computer. However, the number of underreported income notices IRS sends to taxpayers, as represented in the graph below, has increased dramatically along with do-it-yourself online filing. The 4.3 million unreported income notices mailed to taxpayers in TY09 resulted in a total of $7.2 billion in additional tax assessed.
Trend: OLF reject rates are substantially higher than ERO reject rates.
As expected, tax professionals have a much lower e-file rejection rate compared to online filers, likely due to the more sophisticated tax software professionals use, as well as their familiarity with the data entry requirements of efile. Interestingly, if you take away the Big Three online filing companies (TurboTax, HRB at Home, TaxAct handle 86% of OLF volume), most of the remaining online filing companies have very high reject rates of 25-50%.
