More people are hiring a professional to file their taxes. Here's how to find someone you can really trust.
If adulthood has taught me anything, it's that my predictions of my future are about as accurate as Miss Cleo's Psychic Hotline. But if there's one prediction I can make with reasonable certainty, it's where I'll be on the eve of April 15. Gazing into my crystal ball, I see myself huddled in the dingy waiting room of a tax-preparation service somewhere here in New York City.
Now, the fact that I use a tax-preparation service at all is somewhat ridiculous. I mean, I regularly edit and write stories about taxes — not to mention that my taxes are really pretty straightforward. But being a procrastinator, and after previously wrangling with tax software, I've suffered this sorry fate for the past few years. And this year probably won't be any different. After all, I figure it's still better than the horror of doing my taxes myself.
Does this sound familiar? To some of you it must, given that a remarkable 56% of all individual taxpayers (i.e., noncorporations) used some sort of paid tax preparer in 2002, according to the most recent figures available from the Internal Revenue Service.
The scary thing is, though, no matter who you hire to assist with your returns, it's you who are ultimately responsible for any errors on them. And errors — often pretty stupid ones — do happen, warns law professor Karen Kole of Indiana's Valparaiso University. Kole operates a tax clinic that provides assistance to people having trouble with previously filed taxes. She says the number of errors she's seen made by tax preparers has increased as the tax code has become more complicated. Her advice? If your taxes are even a little bit unusual, you need someone truly reputable. Going to a local mom-and-pop shop that closes up once tax season is done just isn't going to cut it.
Unfortunately, finding someone you can trust can be difficult. That's because the tax-preparation industry as a whole isn't regulated, which means "that in many states, pretty much anyone can hang out a shingle and be a tax preparer," warns Eric Tyson, co-author of "Taxes for Dummies." "It never ceases to amaze me how little homework people do when they hire somebody," he says. "Taxes are a big deal. If you hire someone and they don't know what they're doing, it can cost you a lot of money and cause you a heap of trouble with the IRS."
The first step in finding a decent preparer is to understand just what type of professional you need. After that, some due diligence is required to find that special person you're willing to trust with your W-2s. Here's a guide to many happy returns.
You've got four choices when it comes to finding a tax pro. Certified public accountants (CPAs), enrolled agents (EAs), tax attorneys and nonlicensed tax preparers are all champing at the bit for your 1099s. Just which one makes the most sense for you depends on the complexity of your returns (and the thickness of your wallet).
Keep in mind, however, that should trouble arise, only CPAs, EAs and tax attorneys can represent you in front of the IRS. That said, for simple returns, a reputable tax preparer could be a fine — and inexpensive — way to go. The average return at H&R Block, for example (which mostly uses tax preparers trained at H&R Block, rather than CPAs or EAs) costs $140, including state taxes. No matter what, just be sure to find a firm that stands by its work, says Brenda Schafer, H&R Block's senior tax-research coordinator. You should also look for a firm that operates year-round. After all, when that audit notice rolls in (although, honestly, in 2004 that only happened with 0.8% of all filings), you don't want to find that Joe's Tax Shop has become Jane's Taco Hut.
When people say they're looking for a personal accountant, what they often mean is that they're looking for a CPA. For folks with complex taxes (for example, those with freelance work or a small business) who are looking for an ongoing relationship with a tax adviser who can suggest tax-saving strategies, a good CPA can be a godsend.
That said, you need to do careful research to find a CPA who's worth the expense. "CPAs are like all other people, there are some good ones and some bad ones," says Laurence Foster, a CPA and personal financial specialist (PFS) at Richard A. Eisner & Co. in New York. And keep in mind, not all CPAs necessarily specialize in individual taxes — many focus on corporate accounting.
When researching a CPA, you can check with the State Boards of Accountancy to make sure he or she is licensed and hasn't been subject to any disciplinary actions. All CPAs are licensed at the state level, although the requirements can vary dramatically from state to state, notes Kim Ellis, spokeswoman for the National Association of State Boards of Accountancy. For example, as far as the general education requirements are concerned, CPAs in the Virgin Islands simply need a high-school diploma, while those in other states, like Alabama and Idaho, have revised their standard to include 150 hours of college education, with a concentration in accounting.
You can also check to see whether a CPA is a member of the American Institute of Certified Public Accountants (AICPA), a professional organization that offers some disciplinary oversight. Of the roughly 577,000 licensed CPAs in the U.S., 334,000 are AICPA members, although many of these members don't focus on individual returns.
For many tax filers, a good EA will be a better choice than a CPA. This group of approximately 40,000 professionals is dedicated to preparing individual tax returns and offering tax advice — and an EA typically charges about one-third less than a CPA, Tyson estimates.
Enrolled agents are licensed by the IRS, and like tax attorneys and CPAs, they must meet certain criteria in order to practice before the IRS, explains Tony Bardi, chair of the public information committee of the National Association of Enrolled Agents (NAEA). Unfortunately, though, this group isn't regulated at the state level, and the IRS won't inform you of any ongoing complaints, although you can call to see if a particular EA has been suspended or disbarred (313-234-1280). So if you do decide to go with an EA, you're going to have to do some research on your own. To start your search, you can find local EAs by visiting the NAEA Web site.
This one is easy: If you anticipate a serious legal tangle with the IRS, you'll want a tax attorney at your side, says Richard Lipton, chair of American Bar Association's tax section. This could happen, for example, if you had a complicated sale of a small business last year or if you've failed to file your taxes for several years. Occasionally, tax attorneys are also used to file returns dealing with complicated estate and trust issues. Assuming that none of these scenarios apply to you, however, there's simply no need to pull out the big guns. Tax attorneys shouldn't be used to file standard taxes — something you would probably fully realize once the bill rolls in. "I don't even do my own (taxes) — I use an accountant," says Lipton.
Unfortunately, no state board or professional organizations is going to protect you from mild incompetence. So you need to make some sort of judgment on your own. Be sure to get recommendations from people you trust — friends, co-workers or other professionals you work with, such as a financial planner. You can also look up a firm or an individual through the Better Business Bureau's national database. Keep in mind, the BBB will only have records of marketplace disputes — i.e., payment problems, explains Holly Cherico, for the Council of BBBs. You might also want to get in touch with your state BBB to pull up a list of local BBB members.
Once you have a few names, you should then interview your candidates and ultimately go with the one who seems the best fit. You shouldn't have to pay for an initial consultation, says Foster. Here are 10 questions suggested in Tyson's "Taxes for Dummies" book:
1. What tax services do you offer?
2. Do you have areas that you focus on?
3. What other services do you offer?
4. Who will prepare my return?
5. How aggressive or conservative are you regarding the tax law?
6. What's your experience with audits?
7. How does your fee structure work?
8. What qualifies you to be a tax adviser?
9. Do you carry liability insurance?
10. Can you provide references of clients similar to me?
And here's one final bit of advice: No matter what service you use this tax season, make sure you fully understand what's included on your return before you sign on the dotted line, says Tyson. You also should check the return for any errors. Now, I completely understand the inclination to sign the papers as quickly as possible so you can rush to the nearest bar, drink red wine and complain about the U.S. tax code. (OK, maybe that's just me.) But postponing your post-tax-filing celebration just long enough to do a final review could circumvent future contact with Uncle Sam. And that's something we all can raise a glass to.