It's that time of the year - time to do your taxes. While some Americans will attempt to do their taxes at home, the majority will seek some type of professional help (about 80% either use a paid preparer or tax software).
If you're pressed for time or uncomfortable with taxes, hiring someone to do them for you can be a great help. But, just like with anything you outsource, you need to do your homework to make sure you don't get scammed. Tax preparation is no different.
Here are three things you need to think about when going to get your taxes done. These issues are common, even at major tax preparers. If you want to do your taxes yourself, check out our list of the best tax software this year.
Be vigilant to these three things that your tax preparer is probably not going to be upfront with you about.
1. How Long They've Been Doing Taxes
Did you know that just about anybody can be a paid tax preparer? Literally, anybody. There are very limited requirements for any type of certification, training, registration, or competency testing.
The IRS tried to put new measures into place, but the courts have an injunction in place for the time being. While many big companies like H&R Block send their employees through in-house training, that may not always be the case with franchised tax preparation companies.
That means the first thing you want to consider is how long the paid preparer has been doing taxes. Since there is no mandatory qualifications that must be done, you need to check their experience. Is this their first year doing taxes, or are they a seasoned professional with 20 years under their belt?
Have they even filed their own taxes before? Seriously...there is nothing stopping a high school student from being a paid tax preparer.
Now, there is nothing wrong with using a new tax preparer. In fact, they may be cheaper, or more tech savvy than someone who's been doing it a long time. But, if you have a complex return, you may want someone who has experience doing that type of return to help you with your taxes.
2. How Much Experience They Have
Along with how long they've been preparing taxes, you also want to understand how much experience they have and whether that experience matches your needs.
For example, a high school student could be a great tax preparer for a simple return - plug in your W2, enter your interest income from your 1099-INT, check standard deduction, and done.
But what if you run a small business? What if you've derived income from multiple sources, including royalties or partnerships? If you have a rental property, how will they help you understand your expenses and the type of depreciation schedule you need? Are you doing a trust tax return?
At this point in time, you may also want to consider if a paid preparer is right for you? Maybe you would benefit more from someone that does have an advanced certification, like a Certified Public Accountant (CPA)?
The bottom line is that you need the experience of the person preparing your taxes to match your needs.
You can also look at services like H&R Block Tax Pro Go, which is a nice hybrid of doing it yourself and having someone with experience help you. Plus, you're backed by a national brand, which can be useful if you experience any issues.
3. How Your Tax Preparer is Really Making Money
Finally, it is always important to understand how your tax preparer is really making money. And it may not be very obvious from the start.
First, the tax preparer will probably get either a flat fee for processing your return, or will bill you hourly depending on your setup. If you have a basic return, you can probably expect to pay up to $150 (which was the average receipt at H&R Block for tax filing in 2014).
However, if you utilize a CPA and have a business that requires multiple returns, 1099s to be mailed, and more, you could easily pay over $1,500 for preparing your tax return(s).
But the real money in taxes doesn't come from doing returns, but from selling add-ons.
Tax preparers big and small benefit by up-selling their customers on a variety of products.
The most common additions are:
The one you're probably most familiar with is the refund anticipation loan. This is where the company agrees to let you walk out of the shop today with a portion of your return. That's a huge selling point, but it can cost you big-time.
For example, if you're expecting a $1,000 return, they may lend you up to $600 (or some other percentage). If you don't pay back the $600 by the date due, the tax preparer will keep use your tax refund to pay the loan, the interest, and fees associated with it. This is a very costly way to be impatient, because if you look at when to expect your tax refund, you'll know that 90% of tax refunds are issued with 21 days. Just wait it out!
Another big product that tax preparers pitch is a retirement account to deposit your refund in. The preparer will then get a commission from the brokerage company where you open an account. While this isn't necessarily a bad thing, you want to make sure that the account actually aligns with your needs. Most people who sign up for this don't understand what they're getting into, and break the rules of the account (like withdrawing the money). This, in turn, makes them pay more in taxes and fees the following year.
Finally, many tax preparers and even some CPAs will offer their clients insurance as peace of mind for potentially getting an audit. They claim to offer protection to cover potential back-taxes, fees, penalties, and more. However, what they don't tell you is that you don't need to buy this insurance because you're already covered by the agreement you had with them to do your taxes! If you read the fine print of your contract (at all the big tax preparer chains and even most CPAs), they will typically have a guarantee that if they made an error, they will pay for the back taxes, interest, and penalties associated with it. If you're unsure, ask about it in advance. This is specifically what errors and omissions insurance is designed for.
Honest Ways They Should Be Making Money
A professional tax preparer should be compensated for their time, even if they provide little value. If you have a simple return with just a W2, it doesn't take much time and the price should be reflective of that - because you can probably file your taxes for free if you did it yourself.
A good tax preparer should be doing more than just filing your taxes once a year. Remember, for the most part, the preparation of a tax return is just data entry. A good tax professional helps you get the data right a year before your tax return is due!
And helping you in tax season is probably not the right time to ask.
A good accountant/CPA/EA should be helping you understand how to lower your taxes and effectively structure your financial life.
This is especially important for businesses, but it could also be the case with individuals approaching retirement, paying for college, or more.
A good tax professional is worth their weight in gold if they are helping you save on things like personal finance, home purchases, retirement planning and education funding. And you should expect to pay for this, but it's a really great value add beyond simple tax prep.
You Still Need to be Accountable
The bottom line is that just because your tax preparer won't tell you something means you can turn a blind eye to it. Now that you know what to look for, you need to ask in advance. That is the best way to protect yourself before you pay for a bad service, or worse, have to deal with an audit from the IRS. The choice is yours: do your research or cross your fingers in ignorant bliss.
I know I have some CPA readers...what else should you look out for when paying someone to prepare your taxes?