As tax laws become more complex each year, returns become more time-consuming. That means fewer taxpayers are sitting down with pencil and calculator to tackle IRS forms on their own. According to the Tax Policy Institute, 62 percent of U.S. taxpayers used paid preparers to do their returns, while another 25 percent used tax software for assistance.
From software like TurboTax to sophisticated tax attorneys, there are many ways to get your forms filed to the IRS, with varying levels of experience and appropriateness to your personal situation. But you need to take the initiative to make sure you’re getting the right advice since anyone can print a business card and call themselves a tax preparer, as there are no nationwide regulations on their expertise (only California and Oregon have licensing requirements). Selecting the right tax preparer could make the difference between receiving a healthy tax refund, or at the other extreme, being audited by the IRS.
Nearly a quarter of Americans use software, such as Intuit’s TurboTax and H&R Block TaxCut Standard, which is usually the cheapest tax preparation methods you’ll find. Software is best for those with relatively simple returns who use the 1040EZ or 1040 short form — if you earn most of your income from wages and you take the standard deductions, or if you have only a few itemized deductions.
But if you think the software will also save you time, think twice. According to IRS statistics, the average 2004 itemized tax return took an average of 33 hours to prepare, and those using software spent nearly ten hours more to complete their taxes than those who didn’t. Although software is updated annually to address the changes, using a software program requires time and it only works if you know what information to enter, says Chris Siolka, a tax curriculum specialist for the National Association of Tax Preparers.
“First, you have to learn how to use the software, then you have to make sure you’re inputting data in the right places for the calculations to be correct. And the software doesn’t give answers to your specific questions so you may have to call the support center for more help.”
Storefront tax preparers
Professionals at the national tax preparation chains, such as H&R Block, or local outlets charge less than full-time tax pros. If your return is a fairly simple one, such as a short form, then this could be an appropriately inexpensive option, although you could pay $200 or more for itemized state and federal returns with additional schedules.
Also, the preparers’ training and experience could be at any level. The chains offer in-house tax training, but the minimum credential required for part-time seasonal staff is usually a high-school diploma. Many of them are paid not much more than minimum wage plus commission, and they may be preparing tax returns as a second job. If you go to a chain, ask for the most qualified person available, such as an enrolled agent. If your return is complex or has tax situations specific to your industry, some preparers may not know how to maximize those particular deductions.
If you are audited, the office may or may not assist you depending on its sales agreement, although some preparers offer an insurance policy for an additional fee that covers interest and penalties incurred because of errors they may have committed. They are allowed to accompany you to a meeting with the IRS if you need to explain information on your return, but they do not have the legal standing to appear in place of a taxpayer at the IRS.
As the only federally licensed tax specialists, enrolled agents must pass a national qualifying exam and take 24 hours of continuing education on tax law to renew their license each year. Many are former IRS agents or employees. They can handle complicated individual returns as well as those of small businesses and corporations, and they can also represent you with the IRS in the case of an audit. “They’re essentially interchangeable with a certified public accountant,” says Siolka, herself a licensed enrolled agent.
Enrolled agents usually charge more than a chain-store tax preparer and less than or comparable to a CPA. Many limit their work to a given tax area, however, so you should inquire about an agent's area of expertise. Another downside is that there are only 40,000 enrolled agents out there, a far smaller amount than the number of CPAs available. You can find an enrolled agent through the National Association of Enrolled Agents or the National Association of Tax Professionals.
Certified public accountants
A CPA has passed a state's exam for accounting and are thus qualified to prepare financial statements as well as income taxes and represent you to the IRS. But not all CPAs specialize in taxes — some are credentialed financial planners, while others also sell investments and insurance — so they may not be the ultimate expert on matters of taxation.
The CPA’s strength is that they can configure an overall tax plan and can guide you through complex financial situations. If you've recently divorced, retired, opened or closed a business, or had any other lifestyle changes that significantly impact your financial situation, a CPA may be your best bet. But first be sure to ask about their tax experience and how they keep up with changes in the tax law.
To find a CPA in your area, the American Institute of Certified Public Accountants has a state directory, and the National Association of Tax Professionals also has a search tool. Since CPAs can charge $100 and up per hour, ask for references to check before you settle on the professional you want.
Tax attorneys have passed a state bar exam and trained in the field of tax law. They also represent clients in disputes with the IRS and other agencies, and defend them in court. “Tax attorneys are the most experienced as knowing the ins ands outs of tax court,” says Siolka. For their time, they can charge you at rates starting at $200 per hour and up.
A tax attorney may be a specialist on the latest tax laws and in tax disputes but most of them don't prepare individual income-tax returns. Therefore, a tax attorney may be your best choice if you want to shelter part of your income or if your situation involves complex corporate matters. They can also plan your estate, draw up wills and trusts, and structure business deals to reduce tax liabilities.
Regardless of which tax preparer you pick, the most important thing to remember is that you are legally responsible for paying the taxes you owe no matter who prepares your return. If you follow poor advice and end up with unpaid taxes, only you bear the consequences.