Q: I’ve prepared my return in the past, but my tax situation has been getting more complicated each year.  I’m thinking of going to a tax preparer this year, but I’m not sure just how to pick the right person.  Any advice?

~ Taxed to The Max

A: A few weeks ago there was an article in the LA Times on this exact topic.  We sent it out into the twittersphere but promised to follow up with a blog post a little later.  Why the follow up you ask?  Well, let’s just say that a little more information is warranted as picking your tax guy/gal could be more involved than you initially think.

When it comes to preparing that ‘ol 1040, you can go a number of routes.  You can go the DIY route (which is okay if you have a simple return, have the time to do your taxes and are pretty confident interpreting the IRS code) or you can outsource it.  But who you outsource it to could be the difference between a $25 back alley shop and a $3,000 Attorney.

In the article, the following types of preparers were discussed:

  • Storefront preparers
  • Financial Planners
  • Enrolled Agents (EAs)
  • Attorneys
  • Accountants/CPAs

We won’t rehash what each has to offer in this post.  What we will highlight are the recent changes to the paid preparer environment.  When it comes to taxes, it really boils down to one thing, paying what you owe.  Pay too much (by not claiming all of your entitled deductions, exemptions, etc.) and you just gave the US Government free money.  Don’t pay the right amount (unintentionally or deliberately) and they will come and check you into your very own private suite; equipped with locking bars and a jump suit. 

Unfortunately, accurately paying what you “owe” requires you to have a degree in astrophysics, psychology, classical literature and differential equations.  And that is just to figure out what page of the Code the rules are on for your situation!  But in all seriousness, figuring out what applies to your situation can be complicated stuff at times.  Well, too often people were not getting it right, including your friendly paid preparer.  So what recently happened is the IRS began regulating preparers by instituting some changes for anyone who prepares a return for money.  These changes included:

  • Registration and obtaining a Preparer Tax Identification Number (PTIN)
  • Testing
  • Certification
  • Continuing education

What the above essentially did was ensure that those who prepare returns have a basic understanding of the rules, what documentation/proof should be obtained and just what is not allowed.  For example, if you have a dog and pay for veterinary (medical) care, can you deduct the expenses when you claim them as a dependent?  The answer is of course no (you can’t claim your pet as a dependent), but stuff like that use to happen back in the day before the IRS started requiring that all dependents have a SSN.  Thus, the regulation requirements help ensure that if you are using someone to make certain you pay what you owe, that they know just what they are doing.

 So, if you decide it’s time to begin employing the services of a professional, make sure that you do a little tire kicking before you just hand over your financial life to someone.  At a minimum here are some questions you should ask every preparer when you first meet:

  • How long have you been preparing returns?

You want someone who has been in the business for a while and knows that they are doing.  While there isn’t necessarily coloration between years in the business and competency, the longer the person has been doing it, the more likely it is that they know the fundamentals of accurate return preparation.

  • What is your experience with my return?

Using a preparer who hasn’t dealt with your situation could be a recipe for disaster.  Tax preparation is just like riding a bike, the more you do it the better you become.  Seek a preparer who has experience with your situation and your wallet will thank you.

  • How do you keep abreast of tax law changes?

Tax laws change faster than the weather in Chicago.  What applied five years ago (heck even last year) may be totally null and void this year.  If your preparer doesn’t keep up with the changes then you are running the risk of things being reported incorrectly to the IRS.  Want to know what happens when you report wrong?  Neither do we!

  • What stance do you take when preparing returns?

Some preparers are aggressive while others are conservative.  It’s best you know their approach BEFORE they do your return.  The responsibility for an accurately prepared return actually resides with the taxpayer, not the preparer.  If something is wrong, the IRS will contact you first.  Thus, make sure you know if your preparer is the type to push the envelope when flying in the gray area or if they tend to play it safe.  Nothing is worse than paying for your return and then finding out a year later that the IRS doesn’t agree with the stance that was taken and they want their money back (penalties and interest tacked on of course).

  • What is your audit rate and can you represent me if I get audited?

The IRS audits a subset of returns every year.  If you prepare returns long enough, some of your clients will eventually get selected.  In general, a preparer’s audit rate should be low.  However, if it is abnormally high, it may be a signal that they aren’t preparing returns correctly or they are being overly aggressive (or even fraudulent).  Most preparers can’t practice before the IRS (only EAs, Attorneys and CPAs can) so its good to know if your preparer can just in case you do get selected for an audit.  If they can’t, that just means that you’ll be the one who will have to present and defend your position to the IRS.

  • How is the price of my return determined?

Some preparers charge by the hour, some by the number of forms you file and others just charge a flat fee.  Ensure that you know their billing method up front to avoid any surprises at the end.  For example, if you walk into one office with a cereal box of receipts it could cost you nothing, whereas at another office it could be $500 of time spent sorting and classifying the expenses.

The above questions are only a smattering of things that come to mind when selecting a preparer.  In the next few weeks we’ll try to post some more topics and insights under the “tax talk” category to help you get prepared for the upcoming season.  Until then, stay warm and start getting those documents pulled together!