NEWS AND RESOURCES

Financial Planning for February 2009

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Who Is a Taxpayer to Believe?

Now that February is upon us, most taxpayers should be receiving their Forms W-2 and 1099. To many, that means it’s time to get Turbo-Tax or some other tax preparation software and prepare their returns. Truthfully, this is probably a good plan for many taxpayers with easy returns, though some taxpayers prefer to pay a preparer. That’s what we are going to talk about this month – whether you should use a paid professional and how to find a good one.

First, let’s talk about why you might want to use a paid preparer. One of the main reasons is if you have a complicated return with numerous sources of income and possible deductions. In the interview process, a paid preparer will ask you questions designed to jog your memory that could help uncover deductions you might have missed.

A second reason you might choose to use a paid preparer is if you own your own business. Whether the business files its own return or not, it’s typically a good move to have a paid preparer work through the business numbers. Unless the business is relatively simple, what you don’t know about tax law can get you into trouble. There are numerous nuances in the tax law affecting the deductibility of business expenses, many of which don’t make sense to anyone except Congress and the IRS.

A third reason, and one that many people suffer from, is IRS phobia. Some people just sleep better if they know someone else has also looked at their return.

There are probably as many reasons to use a tax preparer as there are taxpayers, but how do you go about choosing one? Should you go to one of the big chains like Jackson-Hewitt or H & R Block? Maybe you should use a CPA (we like that one) or maybe there is an independent with a storefront office down the street.

The purpose of this article is not to tell you who to use, but rather how to go about choosing your preparer. Probably the first thing you need to know is that statistics can be misleading. One large national preparer is currently claiming to find errors on four out of five returns prepared by certified public accountants. Actually, a 2004 study showed the error rate for tax professionals, like CPAs and attorneys, to be 14.8% compared to the error rate for large national chains of 23.1%. A limited study by the Government Accountability Office found significant errors made by preparers at most of the 19 offices affiliated with “chain” companies that its personnel visited.

The information on the preceding statistics is not that ‘Chain A or B’ will always do a bad job on your return, or that a CPA will always do it right, just that you have to be careful about what you’re told by any tax preparer. You need to investigate the reputation and credentials of anyone who will be doing your return.

A good place to start is with your friends. Who do they use and how do they feel about the service they receive and the quality of the work done?

Once you have a few names from your friends, make an appointment with those they have referred and ask some hard questions, the first of which is what qualifications the preparer has. What most people don’t realize is that only two states have any licensing requirements for paid preparers. In the other 48, anyone can prepare your return.

Look for a preparer who has been trained to do returns. That means you need to find a professional, like a CPA, tax attorney, or enrolled agent or someone who is part of a large company like Jackson-Hewitt or H & R Block. CPAs, attorneys, and enrolled agents must pass difficult licensing requirements. In addition, they are bound to strict ethical standards. Large chains also require employees to be trained before they prepare tax returns.

Be careful of tax preparers who promise too much. There are preparers out there who will tell you that they can definitely get you a tax refund. While this may be true in some cases, such a statement should be made only after a careful review of your information.

Pick someone who is accessible. A reputable preparer will return your calls within a short period of time and will answer your questions fully. If you have difficulty contacting the preparer, this may be a sign that you need to look elsewhere.

For CPAs and attorneys, you can contact the state licensing board to determine if the preparer has a questionable history. You can also contact the IRS Office of Professional Responsibility if the preparer is an enrolled agent.

Make sure you know what you will be charged. A responsible preparer will have no problem telling you what their estimated fee is. Situations may arise that are outside the control of the preparer where the fee will be higher, but those should be discussed with you prior to rendering a bill. In most cases, a reputable preparer will stand by his or her fee quote.

Finally, make sure your preparer plans on signing the return - they are required to sign the returns they prepare. If they do not, they face heavy penalties. If the preparer you select will not sign the return, go elsewhere - this is likely a sign that the person is not to be trusted.

Regardless of whether you have someone prepare your return on not, you are ultimately responsible for the information in it. Make sure you review it and are comfortable with the results. If you have any questions, ask them. A good preparer is not only there to fill out the forms, but also to help you understand what they say and why. If you are looking for help with your tax return, give us a call - we have no problem meeting the standards of a reputable preparer.

Happy Valentines Day!

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