Do You Need a Tax Professional?
Not everyone needs the help of a tax professional. Many people successfully file their own taxes each year with the help of tax preparation software or the old-fashioned way -- with pencil and paper. But if you have questions, a complicated financial situation, or an aversion to preparing your taxes, you may be considering hiring a professional this year. Below you'll find some information to help you decide whether you need a professional and how to hire the right person.
What are the benefits and drawbacks?
A good professional can help you sort through the constantly changing tax laws, showing you how to take deductions that you may not have realized you qualify for and also saving you from making mistakes in claiming deductions that may no longer apply.
- know tax law and keep up to date with changes that you may not be aware of
- may be able to get you a bigger return or help you legally reduce the amount of tax you have to pay
- can save you time and frustration
- may be able to help you avoid some common tax filing pitfalls
- aren't as prone to mistakes or omissions as you might be
- can provide assistance in case of a future audit
Also, some financial experts recommend that if you have a relatively straightforward tax situation, it may be a good idea to prepare your own taxes because the process can help you gain a deeper understanding of your financial situation.
How do you know if it's time to get a professional?
Whether you need -- or want -- a tax professional is entirely up to you. Some people like to hunker down with their receipts and records and do their own taxes, while others dread it like the plague. But the following may be some good reasons to hire a professional this year:
- You don't mind paying a fee to avoid preparing them yourself.
- You are confused by the filing process.
- You have made filing mistakes in the past.
- Your taxes have become more complex. If you or a partner have become self-employed, sold a home, had a lot of investment income or sold investments, own an income property, or if you have a lot of itemized deductions you'd like to claim, your taxes may be fairly complex.
Types of tax professionals
There are several types of tax professionals, all with different levels of training and licensing.
- Enrolled agents. An enrolled agent is a tax specialist who is licensed by the federal government. Most enrolled agents have either worked for the IRS or passed a rigorous qualifying exam. Enrolled agents are typically hired by individuals who have issues with back taxes or other tax problems because the enrolled agent can represent you before the IRS. To find an enrolled agent in your community, check the National Association of Enrolled Agents Web site, www.naea.org.
- Certified Public Accountants (CPA). CPAs have passed their state's qualifying exam for accounting, but may or may not be experts on matters of taxation. CPAs who specialize in taxes can help clients develop an overall tax plan (above and beyond just preparing yearly taxes), and they can advise clients on how to handle complicated financial situations such as owning a business or receiving an inheritance. CPAs are also qualified to represent clients before the IRS. You can get a list of CPAs in your area by contacting the American Institute of Certified Public Accountants, www.aicpa.org. You can also find out whether a CPA's reputation has been tarnished by disciplinary actions or complaints by contacting your state board at www.nasba.org.
- Tax attorneys. Tax attorneys specialize in taxation, but they are not necessarily experienced in preparing returns. Tax attorneys often work with corporations or wealthy individuals to help them prepare an overall tax strategy rather than prepare yearly filings.
- Unenrolled agents or tax preparers. These are the specialists at most of the large tax preparation firms. They don't have any special licensing, but most companies require preparers to get yearly training. Unenrolled agents are typically the least expensive tax preparation professionals.
How to find a tax professional
Often, the best way to find a tax professional is to ask friends and family for recommendations. The licensing or certifying board that regulates tax professionals in your state may also be able to supply names of local tax professionals.
If you are a service member, you may be eligible for free tax preparation services. Many military base legal offices have a tax center that does free preparation of state and federal taxes. Also, TurboTax offers free and reduced tax preparation and e-filing services for military personnel. Check www.statetaxfreedom.com for more information and to find out if you are eligible.
Once you've identified a few prospects, be sure to contact each one and ask about his or her experience, including any certification and training, and what the charges are for his or her services.
Some important questions to ask include:
- How is the fee determined? Some tax preparers charge by the hour. Some charge a flat or base fee for returns, regardless of how complex, while others have a basic fee for a certain number of hours, with an additional hourly fee after that. Other tax professionals charge according to the amount of paperwork (basic return plus any additional forms, attached schedules, etc.). Find out up front how the fee is determined and get an estimate of what it will cost to do yours.
- What are your credentials? Ask about education, certification, and number of years in practice as well as how the tax preparer keeps up on tax law changes and if he belongs to any professional organizations. If you have an unusual tax situation, ask if he has handled cases like yours before.
- Who will be preparing your return? At some large tax preparation firms, the CPA or other professional you hire to do your return may actually delegate the number crunching to subordinates who may have less training and experience. It's important to find out who will actually be preparing your return and how accessible they will be to you if you have questions. At the very least, your CPA should speak with you first to discuss the tax materials you're submitting and then review his subordinate's work before signing your return.
- How accessible is the preparer? Whether you hire someone at a large firm or a lone tax preparer who works in a home office, that person should be accessible to you for questions and concerns. A small outfit may provide a more personal touch, but may not be able to answer your calls or e-mails quickly. On the other hand, a big, more impersonal firm may have the resources to hire people to answer questions promptly.
- What will you do if there's a problem? Most tax professionals will provide some assistance in the case of an audit or other problem but the level of assistance and the willingness to absorb financial penalties can vary a lot from provider to provider.
Even among trained, certified professionals, there are some bad apples. Even if your tax preparer comes highly recommended and has an office filled with certificates and accolades, beware if you see any red flags. In particular, you may want to steer clear of a preparer who:
- acts dishonestly;
- bases fees on your refund;
- guarantees a refund;
- won't answer your questions;
- doesn't want to sign your return;
Statistics show that more than half of all tax filers use a professional to prepare their return. But in the end, you are responsible for what's on your return. So before you send it in to the government, be sure to check for errors in your name, Social Security number, and other personal information, as well as checking the math. With a trained professional and your own diligence, you should have many happy returns at tax time.
Written with the help of Jonathan Hefner, M.A., L.P. Mr. Hefner is a licensed psychologist who specializes in financial and legal counseling in Minnesota. He is a manager of financial and legal services at Ceridian.
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