Thursday, August 13, 2009

A Wise Choice

Choosing a tax preparer is more than shopping price. There are varying levels of competence among tax preparers and it's possible to hang a shingle without any qualifications.

Tracking a tax preparer is difficult, even the IRS has little oversight (accountingToday Vol. 23, No. 12). Since your tax preparer is handling your annual reconciliation (tax return), it is in your interest to find the best.

Can you trust the IRS to weed out bad preparers? No. The IRS tracks paid preparers on 22 different systems and many preparers use different identifying numbers. The IRS admits it cannot follow-up on all preparer complaints. The IRS doesn't even know how many paid preparers exist.

Let me give two examples that highlight the problems finding a competent tax pro.

A few years back I completed an audit where the IRS auditor threatened me with preparer penalties. Her expression was amusing when I showed her two IRS letters providing advice on the complicated tax situation. What happened is that the IRS reversed its position. If this happens, you will owe the tax and interest, but no penalty. Preparer penalties are not in the cards since we trusted the IRS's advice. In reality, it was a rouge agent on an ego trip. She has since left the area.

Next, a new client arrives from a tax preparer that changed his information prior to e-filing. The preparer added credits the taxpayer wasn't entitled to, changed the taxpayer's address, and direct deposited the refund to his own account. We provided the IRS with all the details and they have done nothing. The preparer wasn't shut down. The taxpayer is headed for tax court to get his refund. He is out over $10,000 and pushing higher. The preparer in question had a good prep fee: $60. Any tax pro that charges $60 is pulling a scam, unlicensed, or unqualified. Remember the difference between price and cost. If you save $100 in prep fees and overpay your taxes by $500, is it really a good deal? And if you get lucky and find a crooked preparer, God have mercy on you, you'll need it.

Since the IRS is unable to help you choose a qualified preparer, what can you do? The two real examples above show how the IRS fails to protect you, the taxpayer. The IRS promises more oversight, but I doubt it will be anything more than token.

To increase your chances in finding a real tax pro requires a small amount of research. First, your tax pro should be an enrolled agent (EA), CPA, or attorney. Second, they should have several years of experience.

EA's are the only tax pros. CPAs are accounting pros that might focus on taxation; attorneys, legal pros. Once you find an EA, check to see how long they have been in the field. If they are starting their business, but have worked in a tax office for years, that is real experience.

Finally, ask around. Successful people have a good working relationship with their tax pro.

It is never too early to start looking. Now is the perfect time to cement a relationship with a tax pro. They have time now and are less likely to spend time acquiring new clients when they are working fifteen hours a day. It could be the best time you spend all year with a high return on investment.

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