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What Is Tax Preparation?

Tax preparation is the process of accurately filling out a tax return.
Having a tax return professionally prepared may decrease the taxpayer's chances of being audited.
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  • Written By: Mary McMahon
  • Edited By: Nancy Fann-Im
  • Last Modified Date: 26 January 2015
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Tax preparation is the process of filling out a tax return with accurate financial information to determine tax liability and find out if a taxpayer owes money or is entitled to a refund. Taxpayers may do this themselves or hire a professional to do it if they are concerned about filling out the paperwork correctly or want to see if it is possible to save money on taxes. Professional tax preparers must have licenses to practice and can provide information about their training and certifications on request from customers.

The process of tax preparation requires obtaining the correct tax form for a taxpayer's needs, along with any additional worksheets and paperwork. For some, this may be easy, as they can use the basic tax form with no additional paperwork. Others may have more complex taxes because they are running businesses, handling complex income, or engaging in other financial activities that make their tax declarations more complicated.

With the form in hand, taxpayers can gather their supporting materials, including official tax declarations sent from employers, banks, and other sources; receipts from financial transactions; and any other financial documentation they may have. It can help to scan the form and generate a list of necessary supplies so the taxpayer can gather these before starting. Taxpayers using a professional for tax preparation will usually receive a list of the information they need to bring.

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The next stage involves filling out the paperwork, taking care to make sure declarations are accurate and complete. At the end of the tax preparation process, the taxpayer will consolidate all the information on the forms as directed to find out what her taxable income is, and will use this as the basis to find out the total she should have paid in taxes over the course of the past year. If she overpaid her estimated taxes, she gets a refund. If she underpaid, she must submit a payment to make up the difference.

Professional tax preparation can save money. Accountants, tax attorneys, and similar professionals are very familiar with the tax law and know all of the tips and tricks for reducing tax liability. They can conduct an interview before the tax preparation session to identify areas of savings, such as deductions people are not claiming, or incorrectly filed statements. For basic tax preparation it may be possible to pay a flat fee, while complex taxes usually require an hourly rate.

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Discuss this Article

Feryll
Post 3

@Laotionne - I use the online tax services to complete my taxes each year. The amount I am charged has always been minimal and in many cases there is no charge. Even if you have itemized deductions, the online programs guide you through each step and make the process as painless as possible.

As long as you do not put in any false information, you shouldn't have any problems. Of course, one of the benefits of using a professional tax preparer to do your taxes is that you have a scapegoat if the IRS decides to audit you. This is assuming you provided all of your correct information.

Drentel
Post 2

Laotionne - If you are able to fill out the short form for your taxes then you should do the preparation yourself. A person doing tax preparation professionally is just filling in the blanks on those forms anyway. He or she is copying the information from the forms you provide. You could definitely do this yourself.

On the other hand, if you have a lot of deductions and issues with bank accounts and real estate and mortgage deductions then maybe you are making the correct choice by having a professional do the work for you. This can get complicated and confusing when you don't have experience working with the forms.

Laotionne
Post 1

Every year around tax time, I am torn as to whether I should try to fill out my own tax forms or take them to the local tax preparing company. I know plenty of people who say they do their own taxes, so I think I could do mine. However, I am always concerned that I will miss something and not get back as much of a refund as I am entitled to.

It's always a tough call, but every year I end up going with the professional income tax preparation company, and paying them the fee. I always wonder if I could have done the same as they did and then I would have been able to keep the fee money for myself.

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