It's that time of the year – time to do your taxes. While many 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. And 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 like H&R Block. Be vigilent 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 like Liberty Tax Services or others.
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.
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?
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.
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). 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 $1,000 for preparing your tax return.
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:
- Tax Return Anticipation Loans
- Retirement Accounts
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.
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?