Using a Tax Preparer – Or Not

12/11/12 – 8 Tips for Tax Prep

Not too long ago, I had a conversation with a colleague who writes for a well-known national magazine.  We were talking about finding a tax preparer, and other questions an individual might ask about income taxes.  Here are a few tips on the subject of finding the right preparer – or not, and doing it yourself:

·       Choose someone you trust, or someone known to your family, friends, or colleagues.  Interview them – you are hiring them to do a job for you, as if you were hiring someone to care for your children or fix your plumbing.  If you don’t “feel” the right vibe, move on to someone else.  Not every preparer/client relationship works the first time. 

·       Tax preparers are required to be registered with the IRS and have testing and continuing education requirements to receive a Preparer Tax Identification Number (PTIN) which every paid preparer is required to provide on the return along with their signature.  A red flag is paying someone to prepare your tax return and not seeing their signature and PTIN.

·       Look to see that a CPA is licensed – most of us hang our diplomas and our license on the walls of our offices.  But also look for national and state professional association affiliations – AICPA and State CPA Societies – they have standards of practice that we all follow in addition to the requirements of the IRS.  Most, if not all, state CPA Societies have a “find a CPA” function on their website – use it!

·       If you use a chain tax preparer, know that they must meet the same IRS tax preparer standards and registration requirements as CPAs, though CPAs can usually do so much more for you than a chain preparer, particularly with estimates and tax planning.  In general, chains do decently well with most individual returns BUT not always as well with business returns, including Schedule C sole proprietorships, or individuals with investment activity or rental property – ask if the specific preparer has experience with your tax return items.  I have found that when preparing a fairly simple return for an individual client, I can meet or beat the chain’s fee.

·       In my perfect world everyone should consult a professional preparer.  But it can make sense to DIY if you have a very simple return—employed persons with one or two W-2s, less than $50K income, no children.  The IRS has links on their website to free file if the taxpayer falls within certain parameters, but be aware not all states have free file – check your state’s tax website.

·       When DIY is appropriate, make sure you still check your return for simple errors like transposing numbers, inserting information on the wrong line, etc. – it’s the best way to avoid the letter from the IRS that begins, “Dear Taxpayer, Some of the information that you provided to us does not agree with the information we received from other sources.”  Also, know what tax credits or deductions are available in your state – they can be different from what is available for your federal return.  In Idaho, we have tax credits for charitable contributions to educational entities and selected welfare and rehab facilities, and we have a deduction of up to $8000 on a jointly filed return for contributions to a qualified education savings account – great for couples with children!

·       Some of the biggest mistakes I see taxpayers make is not filing when there is a requirement to file; not filing when there is no requirement but the taxpayer may be due a refund of withheld tax or from a credit; not paying on time; not having investment basis information readily available.  Not responding to an IRS letter.  Getting a $5,000 refund.  Underreporting income or not taking advantage of all the tax deductions, credits and other benefits allowed because of ignorance.  All of these are good reasons to seek out a professional and get guidance.

·       One question I get a lot is how long should a taxpayer save records – my answer is it depends, but three years of filed returns and source documents is the norm.  But you should also save any records that may affect a return in subsequent years – investment basis information, carried over credits, deductions, or losses that can net against income in years to come, closing docs on your primary residence and second home and any payments made for improvements (but not routine decorating or repairs) – these all come into play a long time after the actual transaction takes place.