It’s a new year and a new tax season. You may be starting to wade through tax records preparing to fill out your return. However, it can be daunting and time-consuming.
In 2007, it was estimated that the average person spent 24.2 hours preparing their tax return (National Taxpayers Union). Hiring a tax professional saves you time you’d otherwise spend filing a return.
You wouldn’t be alone either: about 53.5 percent of taxpayers use a tax professional to prepare their tax returns (IRS). It’s important to choose well since you are ultimately responsible for the accuracy of your Form 1040.
“Tax professionals provide an incredibly valuable service to taxpayers and our nation’s tax system,” says IRS Commissioner Chuck Rettig. “We encourage people to carefully choose who they trust with their most sensitive tax and financial information.”Source: Internal Revenue Service
What is a tax professional?
A tax professional is someone familiar with tax laws, procedures, and best practices for filing taxes. They can calculate, file, and sign tax returns for you or your business. A tax professional’s fees can vary depending on the complexity of your tax situation.
Tax preparers prepare your taxes according to the guidelines issued by the Internal Revenue Service (IRS). These guidelines can be complicated and can change from year to year for specific situations.
Do you need a tax preparer?
If you are the DIY type, you probably prefer to prepare your taxes every year. With ongoing tax code changes, is it time to utilize a professional tax preparer? How should you decide?
You can expect to spend around $20 to $50 using basic tax filing software. For straightforward tax situations, it’s free using the IRS’ Free File service or Turbo Tax’s Free Edition. Hiring a tax professional to file your basic form 1040 and corresponding state and federal tax return costs, on average, between $176 and $273 (National Society of Accountants).
Here are three simple questions to ask yourself when considering hiring a tax professional:
- How much time do you have?
- How much will it cost?
- What is your level of comfort doing your own tax return accurately?
Those are basic considerations, but there are more:
- Do you have a business? If this is the case, you may need guidance from someone with tax preparation experience in that industry.
- Have you had a significant life change? Marriage, divorce, children, adoption, death of a spouse, becoming a caretaker for elderly parents have special tax codes associated with them.
- Are you on an income-driven repayment plan for your student loans? Remember, forgiven debt will be considered taxable income for that year.
- Did you receive an inheritance? Even if this is well below the exemption, it is still a good idea to consult with a tax professional.
- Did you have employment or residency in multiple states? Understanding your obligations to each state is important.
- Do you have foreign assets? You are required to report foreign bank accounts and investments, as well as income and inheritances from overseas.
- Did you trade cryptocurrency? Find a tax professional that is well acquainted with this type of transaction.
- Are you dealing with a tax problem? It’s best to have expert guidance when you’re dealing with complicated tax issues.
- Your tax record keeping hasn’t been great: Consulting with a tax professional can help you deal with (and correct) a rocky tax history.
Types of tax professionals to consider in your search
- Tax return preparers (e.g., H&R Block) can help you complete tax forms. But their experience and expertise vary since many are not full-time tax professionals. This option is best for those with straightforward tax returns.
- Enrolled Agents (EA) can assist taxpayers with tax preparation or represent clients in IRS disputes. They must pass an IRS-issued exam or have at least 5 years of experience working with the IRS.
- Certified public accountants (CPAs) are qualified to help you maintain your business’s financial records. Not all CPAs prepare tax returns, however. CPAs are also qualified to represent taxpayers before the IRS. If you need a tax strategy to deal with the complex financial issues from personal or business, hire a CPA.
- Certified financial planners (CFPs) can advise you on your personal finances, investments, insurance, and general tax issues. Some, not all, offer tax prep services to clients.
- Accredited tax accountants (ATAs) and accredited tax preparers (ATPs) specialize in personal and corporate tax return preparation. To get the designation, these individuals must complete a taxation exam.
- Tax attorneys interpret the details of the IRS tax code. They tend to specialize in trusts, estate planning, tax disputes, and business tax law. They must have a Juris Doctor (JD) degree and be admitted into the state bar. Some prepare returns, though it’s usually at a premium cost. They can also represent you in audit, collection, and appeals before the IRS.
Questions you should ask every tax preparer
1. Do you have a Preparer Tax Identification Number (PTIN)? This is absolutely essential to consider when you’re hiring a tax professional. Anyone who is paid to prepare tax returns is required to a PTIN.
2. What type of returns do you prepare? You want someone who knows your needs. If you’re an LLC, for example, it’d be best to hire someone who’s experienced in preparing and filing taxes for LLCs.
3. How are your fees determined? When you’re hiring a tax professional, avoid those who operate on a commission. They usually resort to dishonest practices to get you a higher refund to increase their own payment.
4. Are you available all year or just during tax season? You may need help throughout the year. A good tax strategy consists of more than hunting for tax deductions and tax credits at the last minute.
5. What kind of help will you provide in an audit? Having back-up is important if this happens.
6. Will you file electronically? This is the fastest and typically the most accurate.
7. Who will sign my return? The PTIN and the preparer’s signature must appear on the return.
Mistakes to avoid when hiring a tax preparer
- Looking for the cheapest. Hiring a tax professional based solely on price is misguided and usually costs you more in the end.
- Only hiring a professional during tax season. Look for someone who can advise you throughout the year. This lets you make well-advised improvements throughout the year that improve your tax return.
- Getting non-professional advice. You want someone educated and qualified, not your neighbor, who thinks he is an expert because his business was audited a year ago.
- Trusting a scam artist. Trust, but verify. You want to save as much as you can legally without raising any red flags for the IRS. A good tax advisor knows what types of things draw negative attention to your return.
Remember, you are ultimately responsible for the accuracy of your tax return. For this reason alone, it is critical that when you choose the right tax professional for your needs. Hiring a tax professional can be a great investment in your business’ long-term financial health, as long as you take care to consider your choice.
As a full-service accounting firm, we provide tax services for our accounting and bookkeeping clients. Our team is highly skilled, experienced, and available for practical advice and informed guidance throughout the year. We believe that the best tax seasons are achieved through accurate accounting and bookkeeping – not a tax season “sprint.”