Selecting the right tax advisor is no different from picking a dentist, plumber, or auto mechanic. You entrust an important part of your life to somebody who you are comfortable with, and who (hopefully) knows what he or she is doing. There is no fail-proof way to ensure good service up front, no matter how carefully you choose. Use your common sense. And remember: you don’t need a college math professor to tutor a second-grader.
No matter who gives you tax advice or prepares your tax return, it’s always YOU who is legally responsible. This is why you always have to sign your returns, even if prepared by somebody else. It may be unfair, but in case your attorney gives you a wrong advice or your not-so-competent accountant messes up your tax return, you will still end up paying all the taxes, plus penalties, plus interest. (Penalties can usually be dropped if you prove you’d been given a poor advice.) It is similar to the situation when your driving instructor tells you to run the stop sign. He may lose his job as a result, but it’s you who will get the ticket.
Are tax preparers licensed?
Until 2011, there were no licensing or certification requirements for tax preparers. Anybody could legally prepare your tax returns and charge you for it. Starting from 2011, all paid tax preparers are required to register with the IRS and obtain a special number called PTIN. However, the only requirement for registration is the preparer being current with his own taxes. There’s still no competence check or background check, however the IRS announced that a basic competence test will soon be required, and background checks are also in the future plans.
Whenever the new IRS competence test will be implemented, I expect it will be very basic and will exclude only the blatantly incompetent people. It is certainly better than nothing, but if you’re looking for a true expert, you will still be on your own. And just like everywhere else, formal education, years of experience, and nice office do not necessarily ensure competence and quality of service.
What to look for
Charges vary at least as much as quality. In one recent study, the Money magazine hired 45 tax professionals to prepare exactly same tax return. It took the experts anywhere from 4 to 35 hours, with the bills totaling from $300 to $2,350. Most experts completed the job satisfactory or better, but few did some substantial and costly mistakes along the way. Moral? Your mileage may vary.
Annual federal return preparation in April is not the only tax-related service you might need. Others include:
- consultations before making important business and investment decisions
- preparing quarterly estimated returns for the self-employed
- representation in an event of an audit or any kind of dispute with the IRS
- bookkeeping and general accounting
- incorporating your business
- handling your state, local, sales, gift, and estate taxes if they apply to you
- keeping you up-to-date on the current law changes
Make sure your advisors can provide you with all the services you need and (very important!) whenever you need them. For example, some tax businesses are only open during the tax season.
Categories of tax professionals
It is common to associate taxes with a CPA – Certified Public Accountant. In fact, CPAs are only one of the many kinds of professionals doing the tax work. The three most important questions to consider when choosing a tax expert.
- Solo practitioner or an employee of a firm?
- Licensed or not?
- Specializing in taxes or not?
Private advisor vs. Tax firm.
You have a choice between a one-person business, huge national chains like H&R Block, and everything in between. The situation is very similar to choosing where to have your car fixed: at a local garage or a Firestone franchise. Typically, from large companies you receive predictable service, reasonable rates for simple jobs, and “big name” behind it. The down side is that the service is often indifferent, you don’t develop a personal relationship with your advisor, and she may not even be there next year. Beware that the big name by itself does not guarantee quality – it depends on the individual who actually does your job. From private practitioners, you get individual attention, flexibility, and the comfort of personally knowing the advisor. As always, quality varies.
Licensed vs. non-licensed.
As of 2011, no license is required to prepare tax returns, only registration. However a license is usually required to represent your interests in IRS disputes and audits. If, for example, you want your advisor to handle a possible IRS audit for you, you need a licensed one. An extra benefit is that all licensed professional must keep their knowledge current and stick to the code of professional ethics, just to keep their license.
There are 4 categories of tax professionals who can legally represent you before the IRS.
- CPAs (Certified Public Accountants). They must have an extensive background in accounting, pass tough exams, and maintain continuing education. Besides taxes, they practice in all areas of accounting and bookkeeping. They may be your best bet if you run a business and need a wide variety of services.
- EAs (Enrolled Agents). EAs are not as well known as CPAs but are at least as good, if not better, in income tax matters. To earn an EA designation, they have to either be a former IRS employee (minimum 5 years experience) or pass a comprehensive 2-day exam administered by the IRS. Then, there are continuing education requirements similar to those of CPAs. Unlike CPAs who study and practice in all areas of accounting, EAs specialize in taxes and IRS problems, only. On average, EAs charge less than CPAs. Many are members of the National Association of Enrolled Agents.
- Attorneys. They do not normally prepare tax returns, but they can represent you in your dealings with the IRS, just like CPAs and EAs. Most general practice attorneys do not specialize in tax law. Those who do (”tax attorneys”) are quite expensive. Attorneys can take your case one step further – to the US Tax Court. This is an expensive journey and is not worth it, unless a very substantial money is at stake. Most of the time, disputes can be resolved within the IRS system where CPAs and EAs can handle the job.
- Non-licensed tax preparers. Non-licensed practitioners can represent you only in the matters concerning returns that they personally prepared. Translation: if you prepared your own 2010 return and then need somebody to fight on your behalf – you will need a licensed professional.
Specializing in taxes or not?
Again, it’s an old question. Do you consult a family doctor or a specialist? An all-around mechanic or a transmission expert? A general dentist or a root canal surgeon? Of course, it depends. Keep in mind that, among all licensed tax professionals, only EAs (Enrolled Agents) make taxes their specialty. Some CPAs and attorneys concentrate on tax business as well, yet for most of them, taxes is only a part (sometimes a small one!) of their training and experience.