IRS Testing CriteriaI started my research by reading IRS Publication 1436, and found that tax software developers have to create their own test scenarios to ensure that the tax software is accurate, and the "IRS will provide limited testing criteria that all software developers must follow and include when developing their test scenarios."
Response from TurboTaxI contacted Intuit TurboTax about this, and Colleen Gatlin responded, "The IRS does do some testing for e-file partners, but in general they don't verify calcs (calculations) in any software. With TurboTax we have experts that do extensive testing year-round to ensure calcs and formulas are up to date with any changes the IRS makes. There are updates provided throughout the season, whenever necessary. Also, we have 100% accuracy guarantee so that if someone encounters an error due to calcs, we will pay penalties and interest."
A Tax Expert's Point of View
The response from TurboTax may not completely reassure all tax software users. But, before you ditch your tax software, consider these points from William Perez of About.com Tax Planning: U.S.:
- With tax software going through this formal testing, it is more reliable than a paper tax return.
- Tax returns created with tax software will allow the data to be processed and analyzed by the IRS computers more accurately and efficiently.
- Tax returns created with tax software lets the IRS to tend to more substantial audit efforts rather than spending time addressing inconsistencies in tax returns.
- Tax software interview questions "are informed by the publisher's own interpretation of the tax laws, regulations, court cases, and opinion letters from the IRS", just as tax accountants form their own understanding of tax law through research and formal or informal education.
Perez agreed that the IRS does not certify tax software although the IRS does certify e-file providers. Then he went on to fill me with some details regarding tax software and IRS compliance, the main points of which are:
- PATS testing is used to ensure that tax software transmits data with few validation or math errors (why not no validation or math errors?), required fields must post to the IRS Master File, and that tax software providers understand the ins and outs of IRS e-file.
- PATS testing ensures that the data submitted on tax forms are formatted properly (correct date format, etc.), that the date fields trigger the appropriate short- or long-term designation for appropriate tax-related events, and that calculations are correct. However, PATS testing may not test whether the tax software interview is asking the right questions to trigger, for example, an exclusion, whether an exception applies, and if so how the exclusion is calculated given that interpretations of what constitutes an exception might vary.
Perez then referenced a June 29, 2007 news release from the United States Senate Committee On Finance, part of which says that the Treasury Inspector General for Tax Administration (TIGTA) held tax software to a minimum standard, but testing all tax software for compliance is not feasible. But TIGTA says that the IRS could easily test software used as part of the Free File Alliance for common tax scenarios. In other words, most people have very similar tax reporting needs and have regular income in wages and salaries, pay withholding, and in Perez' opinion, "the IRS ought to be able to test software for such common tax situations in advance (since TIGTA itself was able to conduct such testing). If the IRS employs such testing, the American public will be assured "that such software is capable of determining with accuracy these common tax situations", which is achievable.
Perez says that citizens would benefit from the IRS developing a more robust online solution for the direct filing of tax returns. For greater efficiency, the IRS could develop the code for the tax software and then various tax software providers could develop the software.