How to Choose a Tax Preparer
Who does your business’s taxes? Perhaps you still do them yourself. Maybe you use the services of a relative who happens to be an accountant.
No matter what your scenario, there comes a time when you should consider hiring a professional tax preparer.
A tax preparer for a small business is more than just a numbers cruncher—he or she should be a specialized advisor. A good tax preparer will not only prepare and file your taxes, but also display a thorough understanding your industry, offer you advice on how to make the most of your tax deductions, and explain how different legal structures for your business can help you save money.
A licensed attorney, a certified public accountant or an enrolled agent are all qualified to do tax preparation. Some states have licensing requirements for anyone who prepares tax returns for a fee; some have them for fee-based preparation of state tax returns only.
As far as preparers of federal tax returns, the IRS requires enrolled agents, CPAs and attorneys to have a Preparer Tax Identification Number (PTIN). This is an identification number that all paid tax return preparers must use on U.S. federal tax returns or claims for tax refunds submitted to the IRS.
To find a qualified tax preparer, start by asking local business owners who does their taxes and if they’re satisfied with the person. Make sure to ask for suggestions of tax preparers with experience in your industry, if possible. Before meeting with any candidates, the IRS suggests you understand the requirements for a tax return preparer, including credentials and qualifications. Make sure you know what tests they take, how often they need to take courses to refresh their education, and what practice rights are allowed.
After you’ve narrowed down your list of possibilities, ask the candidates for references and check them. Talk to several references to determine if there are any concerns, such as whether the person is hard to get in touch with or has any personality traits that could cause conflicts. Also check online reviews such as those on Yelp to see if any glaring criticisms stand out.
Once you’re ready to meet with a prospective tax preparer, here are some topics to discuss:
- Payment. Try to get a clear understanding of the cost early in the process. You can minimize your costs by making sure your tax prep documents are well-organized and your accounting system is up-to-date.
- Communication. Ask what is the best way to get in touch with the person in case you have a question or concern. Whether it’s text, email or phone, how soon can you expect to hear back?
- Personal touch. Sometimes, you may be dealing with multiple people from the tax preparer’s office. It’s important to meet and talk with the person or people who will actually be handling your account.
- Follow-up. Find out if your tax preparer will suggest ways for you to save on taxes next year or if he or she will contact you later if there are any new tax changes that could affect your business.
- E-file. Make sure your preparer offers the IRS e-file option. Paid preparers who do taxes for more than 10 clients generally must file electronically.
Questions That Can Help You Choose a Tax Preparer
If you’re like most people, you’d rather go with a pro during tax season: More than 83 million people pay someone to help prepare their federal tax return, according to IRS data. That shouldn’t come as a surprise: With so many rules to know, forms to fill out and formulas to follow, it’s easy to make a mistake if you go it alone.
But when it comes to finding a good tax preparer, how can you be sure you’re making the right choice? Referrals are a great place to start, but it’s still important to do your due diligence. Make sure you’re asking the right questions — and getting the right answers. Here’s what to ask a tax professional before you decide to hire them.
DO YOU HAVE A PREPARER TAX IDENTIFICATION NUMBER?
This is the first question you should ask any tax professional. Any person who charges a fee to prepare taxes for others must register with the IRS and receive a preparer tax identification number (PTIN). In addition to signing your completed tax return, the tax preparer is required by law to enter this number on any return he or she prepares.
WHAT ARE YOUR REPRESENTATION RIGHTS?
Tax preparers fall into one of two main representation categories. Those who carry “unlimited representation rights” can represent clients on any matters, ranging from audits to collection issues to appeals. Those who carry “limited representation rights” can only intervene on behalf of people whose returns they prepared and signed, and under specific circumstances.
According to the IRS, tax professionals with unlimited representation rights include attorneys, certified public accountants (CPAs) and enrolled agents (tax preparers who have passed a three-part IRS enrollment exam). While an enrolled agent (EA) is not an employee or representative of the IRS, he or she can act on a taxpayer’s behalf when it comes to dealing with the IRS. In order to retain their licenses, enrolled agents must complete a minimum of 72 hours of continuing education every three years.
Both attorneys and CPAs are required to obtain licenses according to the rules and regulations of the states in which they operate — however, this does not mean that they will be tax experts. Some attorneys do specialize in tax planning and preparation, but keep in mind that most perform a range of other duties and their focus may not be on filing returns for clients. Similarly, CPAs may perform many duties outside of tax preparations, and many specialize in other areas of finance. So before hiring either type of professional to prepare your tax returns, make sure you meet them and are comfortable with their level of expertise.
DOES YOUR EXPERIENCE FIT MY SITUATION?
If you know your tax situation is not typical, make sure the professional you hire is someone who has completed returns similar to yours.
Working with a tax preparer who is familiar with your line of work can mean the difference between claiming all the deductions you’re eligible for and forfeiting your hard-earned money. If your tax situation is more complicated than the average nine-to-fiver’s — you’re self-employed, own a business or rental property, live in one state but work in another, have received an inheritance, or have worked abroad — your tax preparer should be trained to handle it. Colleagues who are in a similar tax situation can be good sources for referrals.
Which Type of Tax Preparer is Right for You?
First, it’s important to understand the different types of tax preparer and their qualifications. Only enrolled agents, certified public accounts and attorneys may represent their clients to the IRS on matters such as audits, collection issues, and appeals.
Enrolled Agent (EA): An EA is a tax preparer that has been approved by the IRS to represent taxpayers. An EA must either have prior qualifying employment with the IRS or pass an intensive two-day exam on federal taxation and complete a background check. To maintain EA status, they must complete a specified number of credit hours each year of continuing education in accounting methods and tax regulations. An EA may work independently or as part of a firm and may specialize in specific areas of tax law.
An EA is a good option if you have a more complex tax situation. However, you’ll want to make sure their area of expertise applies to your personal situation. Fees and availability may vary, but you can expect an EA to charge less than a CPA. An EA is also qualified to help you with financial planning and give you tips that could help you reduce your taxes in the future.
Certified Public Accountants (CPA): CPAs have a college degree (or the equivalent in work experience). They are licensed after passing a state professional qualifying exam. They are highly skilled in accounting. This makes them good candidates for complex tax planning and preparation if they are experienced in handling tax matters and enrolled in continuing education programs that keep them abreast of the constant changes to tax laws. If your return is quite complex, a CPA may be your best choice for tax preparation, but keep in mind they will charge much more than basic tax preparers.
Attorneys: Tax often attorneys charge the highest fees as tax preparers. For taxpayers looking to legally shelter part of their income, or for those who need specialized advice on municipal bonds, estate planning, and the like, hiring a tax attorney is a good option.
Non-Credentialed Tax Preparers: There are about 700,000 people who work as non-credentialed tax preparers in the United States. They often work part-time or only during the tax season. These preparers must have an active preparer tax identification number (PTIN) through the IRS, but beyond that, regulating tax preparers done at the state level. In the vast majority of states, anyone can prepare tax returns for others without having to take an exam, get a license, or comply with other government regulation. Learn more about your state’s requirements here. Read more about “ghost tax preparers” here.
Most tax preparers are legitimate and competent, but keep in mind that without a national license requirement, they may be working off of their own personal research and experience. Because of this, it is important you conduct a thorough interview with the tax preparer before you hire them.
How to Choose the Right Tax Preparer:
When it comes to choosing the right kind tax preparer for you personally, much will depend on the complexity of your tax situation. After you’ve decided what qualifications your tax preparer needs, the following tips will help you choose someone who is trustworthy and competent:
- Review the tax preparer’s credentials. EAs, CPAs, and tax attorneys are all qualified to represent their clients to the IRS on all matters. Other preparers can help you with forms and basic matters, but cannot represent you in case of an audit. Don’t be afraid to ask about these or other qualifications before you hire someone.
- Be wary of spectacular promises. If a tax preparer promises you larger refunds than the competition, this is a red flag. Many such tax preparers base their fees on the amount of your return and may be likely to use shady tax preparation tactics. In addition, it’s wise to avoid tax preparers who offer “refund anticipation loans” as you’ll probably lose a large percentage of your return to commission fees.
- Get referrals from friends and family. One of the best ways to find a trustworthy tax preparer is to ask your loved ones for recommendations. Once you have a few options, check the BBB.org, paying careful attention to other consumers’ reviews or complaint details. This will give you a clear view about what you can expect.
- Think about availability. If the IRS finds errors in your tax forms or decides to perform an audit, will your tax preparer be available to help you with the details? Find out whether you can contact the tax preparer all year long or only during tax season.
- Ask about fees ahead of time. Before you agree to any services, read contracts carefully and understand how much the tax preparer charges for their services. Ask about extra fees for e-filing state, federal, and local returns, as well as fees for any unexpected complications.
- If things don’t add up, find someone else. If a tax preparer can’t verify their credentials, has a record of bad reviews from previous clients, or their business practices don’t seem convincing, don’t do business with them. Keep in mind that if you hire them, this individual will handle your sensitive personal information – information you need to keep safe from corrupt or fraudulent tax preparers.
Review your return before signing.
Before you sign your tax return, review it and ask questions if something is not clear. Make sure you’re comfortable with the accuracy of the return before you sign it.
Never sign a blank return.
Don’t use a tax preparer that asks you to sign a blank tax form.
Ensure the preparer signs and includes their PTIN.
Paid preparers must sign returns and include their PTIN as required by law. The preparer must also give you a copy of the return.