Data from the Internal Revenue Service (IRS) reveals that just over half of U.S. taxpayers seek assistance from paid preparers to file their tax returns. If you are among those who rely on a tax professional or are considering hiring one for the first time, here are some valuable tips to help you find the right person for your specific tax needs.
Types of Tax Return Pros
You have the freedom to choose anyone, whether it’s your uncle, neighbor, or best friend, to prepare your tax return. However, if you decide to pay for this service, it’s crucial that the person is registered with the IRS and holds a current preparer tax identification number (PTIN), which is issued annually to qualified preparers.
Qualified paid preparers fall into various categories depending on their education, certification by professional organizations, and continuing education requirements:
- Attorneys: These professionals have earned a law degree and passed a bar exam. They are licensed by states or state bar associations to practice law and are subject to continuing education requirements and a code of ethics.
- CPAs (Certified Public Accountants): CPAs have passed the Uniform CPA Examination and are licensed by state boards of accountancy. They also have continuing education requirements. Some CPAs specialize in tax preparation and planning.
- Enrolled Agents (EAs): EAs have passed a three-part Special Enrollment Examination that demonstrates their competency in federal taxation. They are licensed by the IRS and are required to complete 72 hours of continuing education every three years.
- Annual Filing Season Program Participants: This voluntary program recognizes tax return preparers who are not attorneys, CPAs, or enrolled agents. Participants have completed an IRS program and obtained continuing education for a specific tax year.
- PTIN Holders: These individuals have an active PTIN, but they do not have any other professional credentials or participate in the annual filing season program. They are not subject to oversight by a state, a professional board, or the IRS, and they do not have the authority to represent clients before the IRS (except for returns they prepared and filed before Dec. 31, 2015).
The IRS provides an online directory of preparers with PTINs, including attorneys, CPAs, enrolled agents, and annual filing season program participants. You can search for a preparer by their credentials, ZIP code, and distance from your location, or verify a tax preparer’s credentials.
Storefront preparers like H&R Block and Liberty Tax often employ a variety of tax professionals, primarily enrolled agents, CPAs, and attorneys. If you choose to visit one of these preparers, they will likely assign you to an individual whose skills align with the complexity of your tax return.
How Much Does a Tax Preparer Cost?
The cost of tax preparation services often varies based on the credentials of the person handling your return. Generally, you can expect to pay the highest fees for services provided by attorneys, followed by CPAs, and then enrolled agents. On the other hand, annual filing season program participants and preparers without any specific designations typically charge lower fees.
The actual fees can vary significantly across the country and depend on various factors, including the type of preparer and the complexity of your return. For instance, if you have a sole proprietorship and need to file a Schedule C, have complex investment transactions, or own multiple rental properties, the fee may be higher.
Most tax preparers charge a flat fee per return, and the cost may increase if additional schedules are required. According to the National Society of Accountants, the average fee for preparing Form 1040 with the standard deduction was $220 in 2020. If you needed to itemize on Schedule A, the average fee rose to $323. Adding other schedules also impacted the fees, with averages of $42 for Schedule B, $192 for Schedule C, $118 for Schedule D, and $145 for Schedule E in the same year. Keep in mind that these figures are based on 2020 data and may have changed since then.
Which Type of Tax Preparer Is Best?
When choosing a tax preparer, the cost is just one of many factors to consider. Depending on your specific tax situation, other considerations may be equally important. One crucial aspect is whether you might need the preparer to represent you in case the IRS raises questions or concerns about your tax return. Here are some general guidelines for each type of preparer:
- Attorneys: If you are dealing with cutting-edge tax issues that may require litigation or if there are potential criminal activity concerns, using an attorney is advisable. Disclosures made to an attorney are generally privileged, offering a higher level of confidentiality.
- CPAs: Certified Public Accountants (CPAs) are well-trained to handle complex tax matters and special issues, such as delinquent returns. They have the authority to represent clients at all levels of IRS interactions, including audits and appeals within the IRS. However, the privilege between a CPA and a client for federal taxes is limited, and it does not cover matters disclosed for tax return preparation. If a CPA suspects criminal issues, they may engage an attorney for further disclosure.
- Enrolled Agents: Enrolled agents are professionals who can handle most tax matters. They have unlimited representation rights before the IRS and can represent clients during IRS audits and appeals. Similar to CPAs, they also have limited privilege concerning federal tax matters.
- Annual Filing Season Program Participants: Individuals who have completed the Annual Filing Season Program can prepare your tax return, but their rights to practice before the IRS are very limited. They can only represent a client in interactions with IRS agents and customer service representatives.
- PTIN Holders: Preparers with a Preparer Tax Identification Number (PTIN) are appropriate for simple returns that do not involve complex tax issues. Clients can give them authority to discuss items on the return with the IRS, but these types of preparers cannot represent a taxpayer in IRS audits and appeals.
When selecting a tax preparer, consider the complexity of your tax situation and your potential needs for representation before the IRS. Depending on your circumstances, one type of preparer may be more suitable than another. It is essential to choose a qualified and reputable professional to ensure that your tax matters are handled accurately and efficiently.
Red Flags
Once you have decided on the type of tax preparer to use, it is crucial to avoid unscrupulous individuals who could create problems for you. If the IRS suspects any shady actions by a preparer, their clients’ tax returns may come under special review. Here are some red flags to watch out for:
- Charging based on the size of a tax refund: Ethical preparers should not base their fees on the amount of your tax refund. This practice goes against the code of ethics that preparers must adhere to.
- Offering to cash refund checks for you: Preparers should not offer to cash refund checks on your behalf, as this is against the rules, and it may indicate questionable practices.
- Preparing returns without asking for documentation: It is illegal for a preparer to sign off on your tax return without verifying the supporting documentation. Reputable preparers will always ask for the necessary documentation to ensure accurate reporting.
- Guaranteeing refunds or no tax liability without considering your specific situation: Ethical preparers will never guarantee specific outcomes without thoroughly assessing your individual tax situation.
If you have any concerns about a tax preparer, you can check with the Better Business Bureau to learn about any complaints filed against them. Additionally, you can check for complaints against CPAs with the appropriate state board of accountancy or consult their state bar association for complaints against attorneys.
Can you report a tax preparer for misconduct?
Yes, you can report a tax return preparer to the Internal Revenue Service (IRS) if you suspect misconduct or improper practices. While most tax return preparers are professional, honest, and trustworthy, the IRS takes any allegations of misconduct seriously and is committed to investigating such cases.
If you believe that a tax return preparer has acted improperly, you can make a complaint to the IRS. Some examples of misconduct that you can report include:
- Filing a return without your knowledge or consent: If a tax preparer files a tax return on your behalf without your authorization, it is considered misconduct and should be reported.
- Altering your tax return documents: Any unauthorized changes or alterations made to your tax return documents by the preparer should be reported to the IRS.
- Using an incorrect filing status to get a larger refund: If the preparer uses a filing status that you are not eligible for to increase your refund amount, it is considered improper and should be reported.
- Using false exemptions or dependents to get a larger refund: Misrepresenting exemptions or dependents to inflate your refund is considered misconduct.
- Adjusting income to get a larger refund: If the preparer artificially adjusts your income to increase your refund, it is improper and should be reported.
- Creating false expenses, deductions, or credits to get a larger refund: Any fraudulent creation of expenses, deductions, or credits to boost your refund should be reported.
- Misdirecting your refund: If the preparer diverts your tax refund to their own account or takes unauthorized actions with your refund, it should be reported to the IRS.
To make a complaint about a tax return preparer, you can visit the IRS website and follow the instructions provided. The IRS takes such complaints seriously and will investigate the alleged misconduct to ensure the integrity of the tax system and protect taxpayers from unscrupulous preparers.
Who is allowed to prepare tax returns?
Anyone can assist with your tax return, but paid preparers must be registered with the IRS and have a PTIN. Attorneys, CPAs, and enrolled agents can represent you on all tax matters. Others have limited representation rights for certain issues. Choose a preparer based on your needs and complexity of your return.
Should tax preparers e-file returns?
Yes. The IRS has processed over 1.2 billion e-filed individual tax returns since electronic filing started in the 1980s. E-filing is considered the safest and most accurate way to file according to the IRS.
According to Section 6011(e)(3) of the Internal Revenue Code, paid preparers who expect to file more than 11 returns in the year must e-file. If a tax preparer doesn’t offer e-filing, it might indicate limited experience or a low volume of tax returns prepared.
