Tax Return Preparation

Temporarily necessitated by the Civil War, federal income tax did not become a permanent fixture in the United States until February 1913, when it was ratified as the Sixteenth Amendment to the Constitution. Subsequent revenue acts were codified in 1939 and again in 1954 as the Internal Revenue Code, which was recodified in 1986 after passage of the 1986 Tax Reform Act. 

The 1913 income tax produced a degree of chaos because of the haste with which it was introduced and the lack of guidance offered to those preparing returns. As late as 1939, less than 6 percent of the population was affected by federal tax. By the end of World War II, more than three-quarters of the population were subject to federal tax. This major increase in scope set the stage for tax return preparation services to assume a heightened importance and presence. In a fairly short period of time, a service industry of rapidly growing dimension took shape. 

Traditionally, tax returns have been filed through U.S. postal mail. Indeed, as midnight draws near on April 15, post offices are congested with long lines of last-minute filers rushing to mail their returns before the tax deadline. A paper tax return received by the IRS through the mail is processed through what the IRS calls “pipe-line processing.” Once received, the return must go through sorting, batching, numbering, coding, data entry, error resolution, and storage. The entire process can take between six to eight weeks to complete. Not until this process is completed can a return be processed for refund. During peak filing periods, refunds can take as long as eight weeks to be returned to the taxpayer. While paper filing is still common today, the age of computers has introduced electronic filing of tax returns. 

Championed by the IRS, the trend toward electronic filing is growing. Electronic filing reduces the amount of time it takes for a taxpayer to receive a federal tax refund and provides a greater guarantee to the taxpayer that the return is mathematically correct. An electronically filed return eliminates the initial steps of “pipeline processing.” Electronic filing uses automation to replace most of the manual steps needed to process paper returns, resulting in faster and more accurate processing. Tax preparers who are registered with the IRS as Electronic Filing Originators (EFOs) can file returns electronically to the IRS for a fee—typically $15 to $25. Using this method, a refund takes about three weeks to be returned; refunds may be received sooner if a taxpayer chooses to have the refund deposited directly into a savings or checking account. 

An eligible electronic filing customer may also apply for a refund anticipation loan (RAL). Within one week after the date of filing, the filer receives a check in the amount of the loan, less the bank’s transaction fee and any tax return preparation fee. The IRS then directly deposits the filer’s actual federal income tax refund into a designated account at the bank in order for the loan to be repaid. The bank charges interest on the loan. 

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