The Role of Tax Preparers in Individual Tax Optimization

• In Event: Tax Policy, Compliance, and Fiscal Capacity

Abstract

We examine the role of paid tax preparers in tax optimization of individual taxpayers. First, using the universe of annual personal income tax returns in the US from 2011-2020, we provide novel descriptive evidence characterizing the paid tax preparers and the users of their services. Second, we develop new measures of tax optimization and quantify the effects of paid preparers on tax optimization, leveraging the rotation of clients among preparers. Our findings suggest that one standard deviation better tax preparers reduce the effective tax rates of their clients by 0.5 percentage points, on average, with better tax preparers offering larger reductions and charging higher fees. The size of tax savings in levels and as a share of gross income also increases in income taxpayer rank. We further find that tax preparers who are better at lowering their clients' tax obligation are also suspected more frequently of under-reporting by the tax authorities. Our results highlight the significant role that paid tax preparers play in shaping post-tax income disparities.

Authors

• Jakob Brounstein, jakob.brounstein@gmail.com

• Katarzyna Bilicka, Utah State University

• Alexander Yuskavage, Department of the Treasury

• Felipe Lobel, University of California, Berkeley