5 Reasons Why Choosing the Right Tax Preparer Matters
Tax filing season is upon us. For the next four months or so, our televisions will be dominated by tax preparation commercials reminding us of the imminent April 15th deadline to submit our tax returns. Peace of mind is important to many taxpayers who might not trust themselves with properly identifying all available deductions and loopholes. That’s why the tax preparation industry brings in billions of dollars every filing season. For those taxpayers who decide to hire a tax preparer, here’s some advice.
1. Understand that all tax preparers are not the same.
The tax preparation business, for the most part, is highly unregulated. This is a troubling fact for the general public. Consider this. The only legal requirement to prepare someone’s federal income tax return is to obtain a PTIN number from the IRS. Obtaining a PTIN takes about 15 minutes (according to the IRS website) and requires no proof of experience, knowledge, minimum competence test, or anything else that would demonstrate competence to prepare tax returns. Compare this to attorneys and CPAs who must undergo years of formal education, rigorous competence exams, and (for CPAs) experience requirements. Research your tax preparer’s experience, licensure, and education level. This is by far the most important step in determining which tax preparer to hire.
2. You are still liable in an audit if your tax preparer screws up.
This scenario plays out quite often with my clients. They hire a tax preparer that completely butchers their tax return. There are made-up deductions, income was missed, dependents weren’t properly claimed, etc. The IRS audits the tax return and assesses tax plus accrued penalties and interest. While there may be reasonable cause to remove the penalties, the underlying tax and interest are not negotiable. The taxpayer is on the hook.
3. Cheap is not necessarily a good thing.
Just because the tax preparation service located in the Wal-Mart parking lot offers tax preparation for $10 does not mean it is a good deal. As mentioned above, the taxpayer is ultimately liable for the income tax owed (plus any accrued penalties and interest). So if the preparer messes the return up and you end up owing thousands in accrued penalties and interest, that “deal” wasn’t very good.
4. Beware of preparers who make big promises.
Tax preparation is a mechanical process that involves detailed rules. If a tax preparer or preparation firm guarantees you will get a refund or guarantees you will get the highest refund without even looking at any of your financial/tax information, turn around and walk away. Preparers who make these promises are not following ethical rules and are more likely to “fudge” the numbers for a higher refund.
5. Ask about preparer fees.
This is a major problem for low-income taxpayers who may qualify for the Earned Income Tax Credit (“EITC”), a refundable tax credit for the working poor. Many tax preparation businesses in low-income communities charge exorbitant tax preparation fees that are deducted from the taxpayer’s refund. Many of these preparers charge fees in excess of $500 for a simple return. By comparison, the average fee for a CPA to prepare a 1040 with itemized deductions (which is arguably more complex) is $273. To make matters worse, these preparers often do not comply with the stringent EITC due diligence requirements and frequently miscalculate the credit in order to maximize the taxpayer’s refund. If audited, the taxpayer is liable for the tax plus penalties and interest. Ask up-front how your preparer’s fees work and make sure they are not contingent on how high your refund is. Low-income taxpayers should consider seeking help from the IRS VITA program.