Friday, January 17, 2014

Which Tax Professional is Right for You

Many taxpayers are starting to receive W-2 statements, 1099 and other forms in the mail to report income earned in 2013.   Many taxpayers have begun to organize their documentation to prepare to file their taxes as early as this month.  There are many options available for taxpayers to file taxes such as: filing by paper and mailing your returns, filing electronically, hiring a tax professional or doing your taxes yourself. There are so many tax preparation software packages and tax professionals it can become overwhelming and confusing trying to decide which one is best for you. According to FranchiseHelp Holdings there are approximately 38,287 tax preparations companies in the U.S. Approximately 144 million taxpayers filed tax returns last year. 

They are several types of tax professionals: certified public accounts (CPAs), tax lawyers, enrolled agents (EAs) and people who learned how to prepare taxes on their own with or without appropriate education or training.  Prior to preparing your taxes you need to perform an assessment to see what type of tax professional you need or if you can file your taxes on your own using tax preparation software. 

Tax preparation software has all the tax laws integrated into the tool and can be helpful if your taxes are complicated such as running your own business or claiming tax credits or deductions. However, there may be some deductions that you are missing out by using a tax preparation software.

Accountant vs CPA
An accountant has to abide by specific rules and regulations, including Generally Accepted Accounting Principles (GAAP). CPA's are accountants who have passed a licensing examination in a state. All CPA's are accountants, but not all accountants are CPA's. An enrolled agent is not a CPA or accountant. They take classes, pass an exam and earn a certification from the IRS. 

An accountant or CPA can offer suggestions to minimize your tax liability that a tax preparation software may not be able to anticipate or inform you of.  An accountant or CPA can answer any questions you have throughout the year not just during tax time. An accountant or CPA is very familiar with the tax laws and can quickly perform research on a tax issue or question versus spending hours by someone who does not have the same education and training. 

If you are self-employed, have tax credits or deductions, have multiple income streams or investments, are itemizing or owed taxes in the past you should hire a CPA. Ask bank employees, lawyers, co-workers, friends or relatives for recommendations. 

I recommend using a CPA who specializes in tax preparation. Consider hiring a smaller CPA company that focuses on your particular demographic.  Large CPA companies usually focus on corporate taxes, court cases, audits and other complicated tax issues. They charge a higher fee for tax preparation and may not be willing to prepare taxes for an individual.

Tax Preparation Companies
Some tax preparations companies recruit students, stay-at-home moms or retirees to help them during tax season who may not be qualified to prepare taxes. Some may even call them data entry experts. The most popular tax preparation companies are H&R Block and Jackson Hewitt.  Not all employees at these types of companies are CPAs or accountants. Due to this you may miss out on deductions and credits. Mistakes may be made and you may be at higher risk for an audit.

Some tax preparations companies use a similar version of tax preparation software that taxpayers use. They ask clients questions regarding standard tax forms and enter the data.  These companies in some cases overcharge for their services charging per hour while some charge per form.  In some cases hiring an accountant or CPA is cheaper than going to a chain tax preparation company.
If you decide to use a tax preparation company and don’t want to pay their fee, you don't have to pay. You can take your paperwork, leave and look for another company to prepare your taxes.

Some chain tax preparation companies put a protection clause or an arbitration clause in their contracts which prevents taxpayers from suing them in court, and prevents taxpayers from filing a class action lawsuit due to mistakes made.

Avoid chain tax preparation companies that offer to sell you additional productions such as “rapid refunds”, “refund anticipation loans” which comes with a fee. In addition, these methods require approval, are not guaranteed and you are better off using direct deposit to get your tax refund faster. No one can guarantee when you will get your tax return back, not even the IRS.

 If a mistake is made by a chain tax preparation company you may be accountable for the mistake and it may cost you money. However, some chain tax preparation companies may sign your tax returns on your behalf or may offer a service to review your taxes to ensure you are not at risk for an audit - however this should be included in your tax preparation instead of an additional fee.  If you have not been audited it doesn’t mean you never will. The IRS can take up to 3 years to perform an audit or go back further if major issues are detected.

If a tax preparation company offers a short course on how to prepare taxes run. You cannot learn how to efficiently prepare taxes in one day or by taking one course. CPAs have extensive education, have to pass a test and have to keep their license active by taking continuing education classes. 

Be wary of people or companies that brag about getting you large refunds without ever seeing your taxes or knowing anything about you. When looking to hire a tax professional things to consider are:  qualifications, licensed in your state (some tax preparers will prepare taxes even if they are not licensed in your state), experience, past references, work hours, professional reputation, trustworthiness, professionalism, professional memberships, your specific tax needs, comfortability and capability.  

Tax Lawyer
You should hire a tax lawyer if you have received any notices from the IRS to appear in court, a lien or judgment has been filed against you by a tax authority, you owe a large sum of money to the IRS, you are a business owner with partners or investors, you need to raise capital for your business, or you founded a non-profit company. 


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