The U.S. tax code grows more complicated every year and currently spans thousands of pages -- even government experts can't agree 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, 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. In fact, the IRS has ramped up prosecution of tax preparers who file fraudulent returns, garnering an 85.3 percent incarceration rate in 2009 alone.
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.
Depending on the complexity of your financial situation, you may be able to self-file using low-cost commercial tax-preparation software like TurboTax, H&R Block or TaxACT. Many of these products are available free to taxpayers whose adjustable gross income is less than $57,000 if they e-File via the IRS website; however, such filers may pay extra for state returns.
If you need professional assistance, here are some 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. Ask that billing terms be spelled out in writing.
- 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 fee 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 if you were to be audited -- sometimes that's part of the package.
- Also find out their policy for reimbursing you for fines, penalties and interest if it turns out your owe back taxes on a return they prepared -- many have insurance for that purpose.
- 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.
Hopefully, the tax preparer you choose will be law-abiding, but the IRS identifies several tactics often used by dishonest practitioners to watch out for:
- Preparing fraudulent Schedule C (Profit or Loss from Business) forms, claiming deductions for expenses not paid by the taxpayer to offset Form 1099 (Miscellaneous Income), or falsifying income earned from outside employment.
- Including false and inflated itemized deductions on Schedule A (Itemized Deductions) for charitable contributions or medical expenses.
- Claiming false Schedule E (Supplemental Income and Loss) losses.
- Claiming false dependents.
Some bad apples have even been caught selling or using their client's personal information to perpetrate tax refund identity fraud (See my recent blog, "Avoiding Tax Refund Identity Fraud." You can report suspected tax fraud or abusive return preparers to the IRS on Form 3949 A. Rewards based on the amount of additional tax, penalties and interest owed are sometimes made to individuals who report fraud.
If you need help calculating your taxes and cost is an issue, several free options available to seniors, military and low- and middle-income taxpayers:
- The IRS sponsors the Volunteer Income Tax Assistance Program (VITA) for people who earn less than $51,000 and Tax Counseling for the Elderly (TCE) for seniors. Read Free Tax Preparation on the IRS website for information.
- AARP Tax-Aide volunteers, who are trained by the IRS, provide free tax preparation to low- and middle-income taxpayers, with special attention to people over age 60. You can submit a question online or visit a volunteer in person (click here to find a site near you).
- Military personnel and their families worldwide can get free assistance through a program overseen by the Armed Forces Tax Council and offered through VITA. Check with your base for details.
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 legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.
To participate in a free, online Financial Literacy and Education Summit on April 17, 2013, go to Practical Money Skills for Life.