Choosing a Tax Preparer.
Choosing a Tax Preparer
Hopefully, by this time of the year you know or are at least thinking about how your income tax returns will be prepared. For most landlords there are basically two choices – do it themselves or hire a professional.
There are a number of reasons why a landlord might want to utilize professional tax return preparation rather than do it himself/herself. Reasons include:
- The landlord feels unqualified, perhaps because of some unusual current tax issue,
- The landlord prefers preparation by an expert with better knowledge and more experience,
- Using a preparer provides a buffer between the IRS and landlord and having a CPA’s signature on the return might even reduce the chances of an audit, or
- The landlord simply hates doing taxes.
There are several options for having your income tax return prepared if you don’t want to do it yourself. In order to choose a professional to prepare your tax returns, it is helpful to understand the different designations. They are as follows:
Certified Public Accountant (CPA)
To become a CPA, one must meet a state’s educational requirement, work for a specified period for another CPA, pass an exam administered by the American Institute of Certified Public Accountants, and have been issued a certificate of public accounting from the state Board of Accountancy.
CPAs are required to complete appropriate continuing education in order to be eligible to practice public accounting. In addition to offering bookkeeping, accounting, and auditing services, many CPAs also offer tax, business,
and investment advice. Furthermore, most large CPA firms have staff CPAs with extensive education experience in specific subject areas.
Enrolled Agent (EA)
These are federally licensed professionals who have passed a rigorous two-day exam or worked at least five years for the IRS. Although it’s possible that EAs are CPAs, they usually specialize in representing people before the IRS and seldom practice general accounting.
Tax Attorney (TA)
A tax attorney is a member of the bar who specializes in tax matters and usually has special training and experience in that area.
Tax Preparers
By this title we mean someone who has no professional designation after their name or a firm that has none on staff.
Only CPAs, EAs, and TAs are authorized to represent a taxpayer in all IRS-related matters, including audits, collection actions, and appeals. Therefore, if you use a department store or other tax preparer who is not one of these or
whose employer doesn’t have one of these on staff, you will have to hire one of these to help you in any future dispute.
There are many other tax preparers who are not CPAs, EAs, or TAs, but who are highly experienced and very competent. However, one should take extra care determining qualifications of such preparers, the easiest way being recommended by a trusted source who uses that preparer. Under this same category we put employees of the larger tax preparation firms, H&R Block being a well-known example, where there may be CPAs and/or other qualified personnel within the company, but where the undesignated preparer may be filing returns without oversight from above.
Most large chains provide training and continuing education for their preparers, as do most small firms who have been in business for at least several years. However, it is important that you have a good preparer, no matter which way you go.
Some preparation firms, particularly the large chains, have high employee turnover, which means you may not be able to use the same tax preparer every year. If developing a long-term relationship is important to you, seek out a
preparer with a lot of experience that has been in the community for some years.
Which Designation?
Few people need to routinely use a TA or EA except when fighting with the IRS or for some special esoteric tax advice matter beyond the expertise of a CPA. Furthermore, tax attorneys and enrolled agents do not usually offer the wide variety of services provided by CPAs. Accordingly, for the typical real landlord, a CPA is usually the best choice
If your tax return is fairly straightforward, even a CPA may provide more firepower than you need. Keep in mind that it is much better to hire more competence than you need rather then less, but, if you are certain that you don’t have a complicated situation and you really need to save a few dollars, you can consider using a competent tax preparer. This can be either one of the big chains, a small local firm, or a sole practitioner.
How to Choose the Professional
Do you choose a doctor or lawyer without checking the individual’s credentials? Hopefully, you don’t. Just as when choosing a doctor to perform critical surgery or a lawyer to defend you in a big lawsuit, you should use care in choosing a tax preparer.
Don’t just choose one at the mall while out buying shoes. Don’t fall for the line, used by preparers with desks at some of the big retail stores, claiming that you’ll get 25 percent off because you are that retailer’s customer. Ask yourself 25 percent
off of what? It’s almost certainly 25 percent off of a price list where everything’s been marked up by one-third (75% of 133.3…% of something equals the something) or worse.
Don’t choose the one with the biggest ad in the Yellow Pages. The best professionals, including tax preparers, get most of their new business from referrals from satisfied existing clients.
The best way to select a tax preparer is the same as the best way to select a dentist, lawyer, or real estate agent; by having personal knowledge of the individual and of their abilities and experience. The next best way is to get a referral from a
trusted acquaintance who has personal knowledge. If neither approach is possible, be sure to check credentials with the appropriate licensing agency or with relevant professional organizations.
The worst way to choose a preparer would be to choose one at random from the Yellow Pages or by the size of the ad. Professionals make their money by whom and what they know, not by an ostentatious advertising.
Caution
Unfortunately, strong demand for tax preparation also has attracted some questionable preparers. Some are only incompetent, overlooking deductions and credits that could lower your tax bill or taking improper deductions that might
result in penalties. Others are crooks who manufacture phony expenses in an effort to pump up your refund, resulting in potential taxpayer liability for penalties or even possible IRS accusations of fraud.
Fortunately, the bad guys aren’t usually very creative. Habits of dishonest tax preparers, no matter what their designation, who should be avoided include:
- Guaranteeing a refund, or promise to deliver a bigger refund than the competition.
- Refusing to discuss the fee in advance. Although the exact amount may not be certain for complicated returns, they should at least explain exactly how the fee is calculated.
- Charging a fee based on a percentage of your refund, most likely resulting in illegally increased refunds to increase their profits.
- Requesting you to sign a blank return so that the preparer can insert false information or divert your refund to his own account.
- Encouraging you to provide information you know isn’t true, e.g., fictitious charitable deductions, casualty losses, medical expenses, or business expenses.
- Suggesting that they know of a legal loophole that will allow you to evade paying income taxes. The IRS has aggressively pursued preparers who promote these scams.
- Refusing to sign your return as being the preparer and, as required beginning this year when a fee is paid, failing to provide an EIN.
- Using tax preparation as a pretext to sell other costly products and services, such as high-interest refund anticipation loan and/or other products or services.
Taxpayers are always responsible for information on their tax returns, even if it was prepared by someone else. If the IRS determines that a return contains fraudulent information, the individual will be liable for the unpaid taxes, not the preparer. It is even possible that both will go to jail. To this will be added interest and penalties assessed by the IRS and state taxing agency, maybe even significant costs for a CPA and/or an attorney.
Even when no fraud is involved, but additional taxes are assessed due to “honest” errors, taxpayers will be liable for penalties and may even have to pay another preparer to straighten things out if the original preparer is no longer around.