Wednesday, February 11, 2009

Choosing a Tax Preparer?


Writing the post about whether you need a W-2 to file, I remembered a tax preparer who insisted that it was OK to e-file without W-2's because that‘s what the client wanted (to my knowledge, he is no longer preparing taxes). One of the reasons I spend literally hundreds of hours studying tax law is so that I am as well-equipped as possible to do the best for my clients while keeping them from running afoul of the IRS (or other taxing authorities). I believe that the vast majority of other professional tax prepares share this objective, but there‘s always a few . . .

The IRS offers some good information about choosing a tax preparer, including a list of warning signs – here‘s some highlights:

  • “Be cautious of tax preparers who claim they can obtain larger refunds than other preparers”

    • Every case I personally have seen of a preparer who claims to have a special advantage for reducing tax liability has been committing some form of tax fraud. No exceptions. And you are liable for your taxes – even if it‘s your preparer who understated them. The schemes vary – some claim credits that their clients are not actually entitled to, some inflate deductions (As I recall, one preparer put $20,000 in work related expenses and $10,000 in charitable contributions on every single client's return), some sell social security numbers to their clients so they can claim fictitious dependents, etc. And a year or two later, when the IRS comes knocking at
      your door, the preparers are nowhere to be found.

  • “Avoid preparers who base their fee on their refund”

    • Even if it weren't generally prohibited for those enrolled to practice before the IRS (there are very few exceptions), clearly this is a bad idea. Not only does it give preparers a huge incentive to prepare fraudulent returns, but even if they‘re preparing accurate returns, it gives them an incentive to encourage you to have too much withheld from your pay. Your refund, barring certain refundable credits, is the money you've paid that you didn‘t actually owe, coming back to you. It‘s bad enough that they might encourage you to give the government an interest free loan – but now they're taking a percentage.

  • “Use a reputable professional who signs the tax return and provides a copy”

    • How can someone stand behind their work if they won't even admit they did it? I‘ve seen clients come in with extensive returns (and extensive bills) in fancy folders with company logos, etc, and then turn to page two of the 1040, and the preparer block is printed “self-prepared.” There are several reasons why a preparer may choose to do this (none of them good).

      • They don‘t want the IRS to be able to find patterns in the returns they do (what are they hiding?).

      • They don‘t want the IRS to know that they are making money preparing taxes (can you trust someone committing tax fraud not to prepare a fraudulent return in your name?)
      • In states that require preparers to be licensed, they‘re not licensed.
      • They are using software intended to help individuals prepare their own returns, rather than investing in a package designed for professional
        preparers.
  • [Check credentials, professional affiliations, etc.]

    • Obviously you don‘t want to work with someone who deceives you about their background. While it‘s not a definite indicator, I believe the most common reason for joining a professional society is to have better access to continuing education and advice from peers – both things I would want any professional I‘m working with to have.

  • “Ask friends and family whether they know anyone who has used the tax professional and whether they were satisfied”

    • One caveat – most people who are receiving large refunds like their tax preparer, but a large refund doesn‘t necessarily imply exceptional tax preparation.

      • Some factors contributing to large refunds (like high withholding relative to income) are completely out of the preparer‘s control – for example, if your daughter earns $4,000, has no other income, and has $1,000 withheld, barring extremely unusual circumstances, any competent tax preparer should be able to get her a $1,000 refund. If your neighbor makes $300,000 in taxable income, has no dependents, deductible expenses, or withholding, it's going to be pretty hard for any honest preparer to get them a refund.
      • Large refunds year after year generally mean that you are giving the government more money than you have to. For some of my clients, this works as a way to save up for big purchases, but for the rest, I believe that skilled tax planning includes bringing your withholding in line with your income.
    • Consider broadening your search to include the internet – not all tax preparers will be out there (some smaller firms still don't have websites), also, if you belong to a social networking sites see if they have a forum for recommendations.

1 comment:

RJ said...

Income tax preparers aren't the only tax preparers who can get you in trouble - at breakfast the other day, I overhead someone talking about his accountant who would call him on the sales taxes due date and say "I don't have time to get out there, so I'll pay them and you can pay me back." The next day or so, he would write the accountant a five thousand or so check and think he was getting exceptional service.

When the Board of Equalization audited his business, he discovered that his accountant was reporting and paying about one thousand a month - leaving him on the hook for the balance (plus interest and penalties) that he had already "reimbursed" his accountant for.