Whenever tax season approaches, it's time to start thinking about how you'll prepare your income taxes. Many people prepare their taxes themselves, usually with the aid of tax preparation software such as TurboTax. Such software makes preparing your own returns far easier than it used to be, and it will save you money. Most tax professionals would likely charge somewhere between $250 and $500 to prepare your return. Tax preparation software costs less than $100.
If you’ve kept good records and have a relatively simple return, doing it yourself can work just fine. This can work out particularly well if you used a tax pro to prepare your return for a prior year and your return for the current year is much the same. However, preparing your return will take time--time you might prefer to spend doing something else. Moreover, if your return is complex, you have poor or no records, or have begun a business, it may be wise to hire a tax professional.
It’s important to understand that tax pros are not all alike. There are three types, and they differ widely in training, experience, and cost.
As the name implies, tax preparers prepare tax returns. The largest tax preparation firm is H & R Block, but many mom-and-pop operations open for business in storefront offices during tax time. If your return is very simple, a tax preparer can work out fine. However, tax preparers are not a good choice of businesses or any taxpayer with a complex return. A study by the Government Accountability Office underscores this. Posing as taxpayers, GAO investigators visited 19 outlets of several commercial tax-preparation firms and asked them to prepare returns based on two hypothetical situations. The 19 preparers arrived at the correct refund amount only twice. The GAO said that several of the preparers gave very bad tax advice, particularly when it came to reporting business income.
Enrolled agents (EAs) are tax advisers and preparers who are licensed by the IRS. They must have at least five years of experience or pass a difficult IRS test. They can represent taxpayers before the IRS and in administrative proceedings, circuit court, and, possibly, tax court, if they pass the appropriate tests. Enrolled agents are the least expensive of the true tax pros and are reliable for tax return preparation and more routine tax matters. They're a good choice for most individual taxpayers.
Certified Public Accountant
Certified public accountants (CPAs) are licensed and regulated by each state. They undergo lengthy training and must pass a comprehensive exam. CPAs represent the high end of the tax pro spectrum. In addition to preparing tax returns, they perform sophisticated accounting and tax work. CPAs are found in large national firms or in small local outfits. The large national firms are used primarily by large businesses. Some states also license public accountants. These are competent but are not as highly regarded as CPAs. CPAs are generally the most knowledge and expensive tax pros.
How to Find a Tax Pro
Often, the best way to find a tax pro is to obtain referrals from friends or business associates. If this doesn’t work, there are a number of professional organizations that have online databases of tax preparers. These include the:
- National Association of Enrolled Agents
- American Institute of CPAs, and
- National Association of Tax Professionals
You can find other directories at Accountant-Finder.com, AccountantsWorld.com, CPAdirectory.com, and Teaspiller.com.
Note that you don’t have to go to a tax preparer’s office to do your return. Tax return preparation can be handled completely online or by email. There are no laws preventing you from using an accountant online. Thus, you can use a preparer in another city or even another state. However, it’s wise to stick with a preparer located in your home state because he or she will likely be more knowledgeable about your state’s taxes.