The U.S. tax code grows more complicated every year and currently spans thousands of pages – even government experts can't agree on exactly how long it is. So it's not surprising that millions of Americans hire professional tax preparers to complete their returns.
Relinquishing the onerous task of calculating your taxes to a professional may save you time and give peace of mind – they know more about tax law than you do, right? But remember: you're still legally responsible for all information on the return. So if the preparer makes a mistake or intentionally defrauds the government, you'll be on the hook for any additional taxes, interest, and penalties – even possible prosecution.
The IRS notes that although most tax return preparers are professional and honest, and serve their clients well, taxpayers should use the same standards for choosing a preparer as they would for a doctor or lawyer and be on the lookout for incompetence and criminal activity.
There are several basic types of tax preparers: certified public accountants, IRS-designated enrolled agents, tax attorneys, storefront agents (think H&R Block), and self-employed preparers.
The first three types must meet their own licensing agency's continuing education and licensing requirements and are bound by ethical standards; they're also the only professionals authorized to represent you before the IRS on all tax matters, including audits, collection, and appeals. Others may only represent you for audits of returns they actually prepared. Always ask whether they belong to any professional organizations with continuing-education requirements.
Here are tips for choosing the right tax return preparer:
- Request an initial free consultation at which you can share last year's return and discuss how your situation has changed.
- Ask how their fees are determined – some charge by the number of forms (schedules) filed, others by the hour. You might pay anywhere from $100 to many thousands of dollars, depending on the complexity of your situation, where you live, the agent's credentials, etc.
- One good way to get a sense of fees is to ask what they would have charged to complete your last year's return.
- Be wary of tax preparers who claim they can obtain larger refunds than other preparers. No one can estimate your refund without first reviewing your financial information.
- Avoid preparers who base their fees on a percentage of the refund.
- Consider whether the individual or firm will be around to answer questions about the return months or years after it's been filed.
- Check their credentials and find out if any complaints have been filed with the Better Business Bureau.
- Reputable preparers will ask to see receipts and will ask multiple questions to determine whether expenses qualify for deduction.
- Ask whether your return's preparation will be outsourced, which means your personal information could be transmitted electronically to another firm, possibly outside the U.S.
- Ask about their experience with IRS audits and what their fees would be to represent you in an audit.
- Ask about their policy for reimbursing you for fines, penalties, and interest if it turns out you owe back taxes on a return they prepared – many have insurance for that purpose.
And finally, don't muddy the waters by linking your tax-return fee to buying another product the preparer may be trying to sell, such as a refund-anticipation loan or check, retirement savings account, or insurance policy.
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.