More than 60 years ago, Albert Einstein observed that the hardest thing in the world to understand is the income tax. Sadly, today's situation is far worse. With the current complexity of the Internal Revenue Service Code, it is estimated that more than 60% of American households use paid tax preparers.
How do you go about finding the right tax preparer for you? As with any other professional, like a doctor or dentist, the best place to start looking for a tax professional is within your own circle. Ask for referrals. The only time you should ever accept tax advice from a family member, friend, neighbor or co-worker is when it comes to choosing a tax preparer.
Here are eight questions to ask a prospective tax preparer:
1. Have you registered with the IRS and do you have a Preparer Tax Identification Number?
This is the first, and most important, question to ask. Only someone who has registered with the IRS and received a PTIN is allowed by law to prepare federal income tax returns for a fee. Regardless of any other initials a tax preparer may possess, he or she must have a valid PTIN or the preparer cannot legally accept a fee to prepare your tax return. Paid tax return preparers are also required by law to sign all returns they prepare and to enter their PTIN on the returns.
If you engage a paid preparer who does not have a PTIN, or who does not sign your finished return, you will open yourself up for potential IRS penalties. The IRS promises to aggressively seek out individuals who use unregistered, and therefore illegal, preparers.
2. What are your credentials?
When choosing a tax preparer, you can choose to have an enrolled agent, a Certified Public Accountant, an attorney or an "unenrolled" (but not unregistered) tax professional prepare your returns. Tax preparers who register with the IRS and pass a test are designated as Registered Tax Return Preparers. These preparers must log a minimum of 15 hours of continuing professional education in federal taxation each year to maintain the designation. Currently registered preparers have until 2013 to pass the test.
An enrolled agent is not an employee or representative of the IRS; he or she is an independent tax preparer who is "enrolled" to act as a taxpayer's "agent" in dealing with the IRS. EAs must pass a very difficult test on federal tax topics and maintain an average of 16 hours of continuing education in federal taxation each year. When regulation is fully phased in, only the RTRP and EA preparers will have proved their competence and currency in federal tax law.
Do not assume a CPA is a Form 1040 expert. While a CPA or an attorney may be knowledgeable and competent in preparing a 1040, you cannot tell this by his initials alone if he is thoroughly trained, even if he has a PTIN.
3. Can you give me an idea of what it will cost?
It is important to know how your fee will be determined; some tax pros charge based on the number of forms and schedules included in the returns, while others bill at an hourly rate, and some, like me, use a combination of those approaches.
A survey of almost 8,000 tax preparers conducted by the National Society of Accountants showed the average fee for preparing a 2010 Form 1040 with Schedule A and a state tax return was $233. The more forms, schedules and worksheets prepared, the higher the fee. The average cost to prepare a 2010 Form 1040 and state return without itemized deductions was $128.
Fees vary by region, too. They are higher on the West Coast and in the mid-Atlantic states, and lower in the central regions. Also, as you might expect, CPAs charge more for a 1040 preparation than non-CPAs. As a general rule, the more organized you are, the lower the fee. If the preparer has to spend time wading through a shoe box full of receipts, it will be reflected in your bill.
Don't assume a commercial tax preparation chain will charge a lower fee than an independent professional. You may be surprised at what the chains cost. And never use a preparer who tells you the fee will be based on a percentage of your refund.
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