Kick the Tires When Picking a Tax Preparer
Storefronts for tax preparation chains have sprouted across the nation. They're starting to look like supermarkets, with window ads offering discounts and other enticements. But how many taxpayers really think it through when choosing a tax preparer?
The choice can have serious consequences -- the slightest misstep can land you squarely on the IRS's radar screen. Once there, the legal burden is on you to resolve any problem, regardless of who made the error. According to an IRS study, 94 percent of taxpayers who used tax return preparers generally followed their advice, and 62 percent indicated that they followed their tax preparer's advice all the time.
The good news is that in recent years the IRS has been working hard to better regulate the tax preparation industry. At a minimum, it requires that all individuals who prepare income tax returns for compensation obtain and annually renew Preparer Tax Identification Numbers (PTINs) and include them on every tax return they prepare. The IRS has also stepped up efforts to root out unscrupulous preparers.
Here's the generally recognized spectrum of income tax return preparers and a guide to some acronyms you may come across:
• Your cousin, the numbers whiz (who likely does not have a PTIN)
• Registered Tax Return Preparers (RTRPs) – individuals who have passed an IRS tax test and background check and are subject to continuing-education requirements. RTRPs have very limited practice rights before the IRS and may not provide tax advice, except to prepare the return. A recent federal court ruling has temporarily halted the IRS’s RTRP program, which means that testing and continuing education are voluntary until further notice. As a result, the IRS recommends that taxpayers ask about the preparer's qualifications, education and whether he or she attends continuing-education classes.
• Enrolled Agents – unlike registered tax return preparers, EAs, many of whom are former IRS employees, must pass an IRS tax test and background check. They are also subject to continuing-education requirements. EAs enjoy full practice rights before the IRS and may provide tax advice beyond the return.
• Certified Public Accountants (CPAs) -- people who have earned a college degree in accounting, passed a state professional exam, are licensed by and subject to disciplinary action by a state board and generally are subject to continuing education requirements. Like enrolled agents, CPAs enjoy full practice rights before the IRS and may provide tax advice beyond the return.
• Tax Attorneys -- those who have passed a state bar exam, are admitted to practice, are subject to disciplinary action by the highest court in the state and generally are subject to continuing-education requirements. Attorneys may practice before the IRS and the courts and may provide tax advice beyond the return.
Finding a match
Given all these choices, why would you hire someone who isn't willing to register, take a competency test and commit to continuing education for such a complex area of law?
No need to offend any class of tax preparer by ranking the above categories in any particular order of competence. (Your cousin may be smarter than a newly minted lawyer or CPA.) The best way to choose is to determine how simple or complex your personal tax and financial situation is, and how much time and effort you can dedicate to ensuring that the tax return you sign will not come back to haunt you.
For simple situations -- just a W-2, mortgage interest, property taxes and some cash donations to your favorite charities -- preparing your own taxes using one of the popular tax return software programs may save you time and money, and even let you file your return electronically, which will minimize math and other errors and speed your refund.
If the mere mention of taxes makes your eyes glaze over or you have a healthy fear of the IRS, having your taxes prepared by one of the nationwide commercial tax preparation franchises or a local tax service with e-filing capability may be a good solution. These offices are convenient and fees generally are determined by the number of forms and schedules. Ask about the background and experience of your specific preparer and his or her access to those with the knowledge and experience to handle tax research and gray areas. Most franchises hire preparers based on completion of their own tax school, which is only a few months long.
If you own a business, are self-employed or have a more complex situation, you may want to consider hiring an EA, CPA or a tax attorney. Such professionals often charge more, but the increased complexity is better handled by someone who has experience with and specific knowledge of matters such as business and retirement planning.
While you should still vet a tax preparer, one of the best ways to find a good one is to ask family, friends and co-workers whom they trust with their own financial and personal information. The IRS offers the following tips:
• Check the preparer’s qualifications, educational background and whether he or she has attended continuing-education classes.
• See whether the preparer has a questionable history with the Better Business Bureau. Check on license status and any disciplinary actions through state boards of accountancy (for CPAs), state bar associations (for attorneys) and the IRS’s Return Preparer Office.
• Ask about fees. Avoid preparers who base their fees on a percentage of your refund or those who claim they can obtain larger refunds than other preparers. Also, always be certain any refund is sent to you or direct-deposited in an account in your name.
• E-filing. Paid preparers generally must file returns electronically, unless the client opts to file a paper return.
• Confirm that your tax preparer is accessible. Can you contact the tax preparer after the return has been filed, even after the due date, if questions arise?
• Provide all records and receipts needed to prepare your return. Reputable preparers will request to see these documents and will ask you multiple questions to determine your total income and your qualification for various deductions, credits and other items. Don’t use a preparer who is willing to e-file your return before you receive your Form W-2, as this is against e-filing rules.
• Never sign a blank return. Avoid tax preparers who ask you to sign a blank or only partly completed tax return.
• Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.
• Make sure the preparer signs the form and includes his or her PTIN and provides you with a copy of the completed return.
(Kenneth Savell is a tax law editor for the IRS Practice & Procedure Group at Bloomberg BNA.)