If you have already made the decision not to do your own taxes (check here for free tax preparation resources), here are a few points to think about when selecting a practitioner to complete your Federal Income Tax return.
You should consider hiring a CPA or Enrolled Agent. All tax practitioners are not created equally. A skilled and knowledgeable practitioner can help you plan to reduce your tax bill over multiple years and will also be available to answer your questions or provide other services to you during the rest of the year.
Merely being “registered” does not guarantee a practitioner’s qualifications or reliability, since every person who prepares federal taxes for compensation is required to be registered with the IRS. When you hire a Certified Public Accountant, you already know that your practitioner is subject to a strict code of professional ethics and continuing professional education requirements.
Registered preparers who are not credentialed professionals (CPA, EA, attorney, etc.) are not required to meet minimum or continuing education standards. Additionally, in the event that your return is selected for an audit, a registered preparer is extremely limited in how he or she can represent you before the IRS unless also a CPA, an EA, an actuary, or an attorney. If not, then you are on your own.
You should be aware that certain common practices are either not allowed or strongly discouraged by IRS rules governing professional ethics. These include:
- Charging a contingency fee for an initial / non-amended return, i.e. when your preparer says that he’ll charge you a percentage of your refund rather than an hourly rate or a flat fee. This is discouraged because contingency fees give the practitioner a financial interest in inflating your refund with improper deductions or credits.
- Making a refund advance loan directly to a client or negotiating a refund check in a client’s name. This occurs, for example, when your practitioner writes you a check for your refund (minus his fee) in exchange for having your refund deposited directly into his account. A refund advance loan or payment from refund arrangement must be made by a bank or other party who is independent from your tax preparer.
- Refusing to return a client’s personal or business documents before the bill is paid. Practitioners are prohibited from retaining client records, even when the client doesn’t pay. A practitioner isn’t required to file a return for a client whose bill is past due, but she is required to return the client’s personal or business documents within a reasonable period of time after being asked to do so. The practitioner is not required to turn over his proprietary work papers, including your unfiled return.
If your practitioner does any of these things, it is likely that he or she has broken the law. If you would like to know more, review Treasury Circular 230.
You should understand that even though your return was accepted last year or the year before, this does not mean that it was correctly prepared by your tax practitioner. Many taxpayers believe that if the IRS sends a refund and doesn’t contact them within a few months after tax season, then their return must have been okay.
When a return is “accepted”, it means that the IRS has checked the return for mathematical accuracy and other obvious errors, such as incorrect or non-existent Social Security numbers or a mismatch between reported and declared income. Unless you have under-reported income on your return that was previously reported to the IRS (e.g. if you omit a W2 or a 1099), or claim an unusual amount of deductions or credits, it may take years for an examiner to actually review your return, if ever.
You should consider whether your practitioner is likely to be around if you run into trouble later. Whereas an established CPA or other professional can be a resource to you for years to come, a seasonal preparer in a temporary kiosk at your local big box retailer probably won’t.
What if your situation is complex or unique and requires substantial work over multiple tax years? What if you lose your records to a fire or other disaster and need copies later? What if you are selected for an audit? The IRS has three years to audit your return from the date you filed it (six years if you underreport income by 25% or more) and you have three years to claim any refund due to you (with interest!).
The IRS has ten years to collect taxes once assessed. There is no statute of limitations if you file a fraudulent return or if a fraudulent return was filed on your behalf. What this means is that you could find yourself under audit years later because of something that your practitioner did or didn’t do. While most good practitioners will warrant their own work against defect to some extent, no warranty can be enforced if your practitioner can’t be located or is out of business.
These are just a few things to think about when considering who you should retain to prepare your taxes. In the end, most taxpayers select a practitioner based on price or personal affinity and continue to use the same one year after year because it is convenient to do so. It is important to choose well at the start of the relationship- whether by choice or necessity, you may end up with it for a while.
Contact us for a free consultation.