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Abstract -
In recent years, the percentage of individual taxpayers using paid preparers and software has increased, while the share of taxpayers who self-prepare without software has dropped sharply. Using the Individual Taxpayer Burden Model developed by IBM Business Consulting Services for the IRS, we simulate the effects of preparation method on time and money costs of preparing tax returns. When we correct for self-selection bias, we find that each group on average selects the preparation method that costs the least for them. For example, software costs more than self-preparation for current self-preparers, but costs less than self-preparation for current software users.
INTRODUCTION
In the past decade, there has been a dramatic shift in the way individual income taxpayers prepare and submit tax returns. In 1993, according to data reported in the IRS Taxpayer Usage Study (TPUS), 41 percent of taxpayers prepared their own tax returns without software, while 51 percent used paid preparers and only 8 percent prepared their own returns on a computer. By 2003, the share of self-prepared returns without software had dropped by two-thirds to only 13 percent. The tax software share tripled in a decade to 25 percent in 2003, while paid preparer use-the most common preparation method-rose to 62 percent (Toder, 2005).1
Overall, counting both paid preparers and self-preparers, the TPUS data also show a dramatic rise over time in the share of returns prepared on a computer. Over 85 percent of tax returns were prepared on a computer in 2003-97 percent of the 62 percent of returns paid by preparers and 66 percent of the 38 percent of returns prepared by taxpayers. In contrast, in 1987, only 13 percent of tax returns were prepared on a computer.2
The increase in computer-prepared returns has been accompanied by an increase in the proportion of taxpayers who file their returns electronically instead of on paper. The percentage of returns filed electronically quadrupled over ten years from 12 percent in 1993 to 48 percent in 2003. The 2004 tax year will be the first year in which over 50 percent of returns are filed electronically. TPUS data show that through May 13, 2005 the share of individual tax returns filed electronically for tax year 2004 was about 54 percent.
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