How Accurate is Tax Software Required to Be?

Does the IRS require tax preparation software to be accurate? Does it test software to ensure the numbers are calculated appropriately? Or to phrase it bluntly, is your tax software reliable? This question arose in a conversation with my colleague Shelley Elmblad, About.com's Guide to Financial Software. As we began digging into the issue, it turns out that tax software does not undergo the sort of rigorous testing from the IRS that one might imagine.

In her research, Elmblad discovered that the software publishers conduct their own "extensive testing year-round to ensure calcs and formulas are up to date with any changes the IRS makes." From the IRS side, however, the federal agency tests software only to ensure that data can be fully processed by their computer systems. In my own research, I found a 2007 audit of the Free File software alliance, the Treasury Inspector General for Tax Administration (the watchdog agency in charge of auditing the IRS) discovered that the IRS does not verify the accuracy Free File or other tax software programs.

Why doesn't the IRS test the software programs that we rely on to prepare our tax returns? On page 37 of their audit report, TIGTA quotes IRS officials as saying that "The magnitude of the tax law itself and the interpretations of the enormous number of provisions of the tax law" prevent the agency from testing software for its accuracy with respect to the tax code.

Granted, such testing would pose a monumental challenge for the agency and software developers. Yet, doesn't this indicate a deeper problem here? Both Ms. Elmblad and myself are unanimous in our opinion that the "current tax code is a complicated mess that needs to be simplified so people know they are definitely paying the right amount of tax."

What do you think? Should we have a simpler tax code? Or is the answer in having the IRS develop a direct tax filing portal on their web site? Or is there some other solution?

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