This is another addition to the series “Mistakes made when choosing a paid tax preparer”.

MISTAKES MADE WHEN CHOOSING A PAID TAX PREPARER

by Robert D Flach – the internet’s “Wandering Tax Pro”

I have been professionally preparing 1040s for individuals in all walks of life since February of 1972. In my opinion the two biggest mistakes a taxpayer can make when choosing a tax preparer are –

· Assuming that because a person has the initials “CPA” after his name he is an expert when it comes to federal and state income taxes.

· Assuming that H+R Block (or other chains such as Jackson Hewitt or Liberty) will charge a reduced, or even reasonable, fee for preparing your tax return.

1) The CPA designation means that a person took a very difficult test at the beginning of his/her career, possibly many, many years ago, only a small part of which dealt with federal income tax. It is no guarantee that he/she is current on federal and state tax law.

Whenever I get a new client I ask to see the last three (3) years’ tax returns, to make sure I do not miss any carry-forwards and to see if there are any errors that I could correct on an amended return. In my 35+ years of preparing tax returns I have found more mistakes on 1040s prepared by CPAs than by any other class of preparer, including the taxpayer himself.

Many, many, many years ago I was a “para-professional” in the Small Business Services Department of one of the then “Big Eight” accounting firms. While reviewing the prior year’s federal and state tax returns of a client whose current returns I was preparing I found a very obvious error on the state tax return that caused the client to pay much more tax than necessary. Under the firm’s policy, the return, which had been originally prepared by a CPA, was reviewed by his “manager” (also a CPA), and signed-off on by the head of the department (a CPA) and a member of the Tax Department (a CPA). Not one of these CPAs picked up the obvious error!

A student in one of the tax planning/preparation courses I taught at local adult schools also many, many years ago asked me what was the difference between a tax return prepared by a CPA and one prepared by me (I am obviously not a CPA). My answer was “at least $100.00″ (that number needs to be adjusted for inflation!).

FYI – the only initials that have any meaning when it comes to tax preparation are “EA” – Enrolled Agent (I am also not an “EA”). The name is misleading. An EA is not an agent of the Internal Revenue Service, but a private tax professional who is “enrolled” to act as a taxpayer’s “agent” in proceedings with the IRS and in tax court. To become an Enrolled Agent one must pass a difficult test that is 100% federal tax law. In order to maintain their enrolled status, EAs must have a mandatory number of continuing education credits in taxation each year.

2) When my mentor and I got a hold of the H+R Block fee schedule back in the late 1980s we were in complete shock. Henry and Richard ain’t cheap! In my opinion they are very expensive, especially considering the value of the service provided. They charge gourmet restaurant prices for fast food service! Plus they will attempt to squeeze even more money out of you by trying to push you into a usurious “Refund Anticipation Loan” or to make your IRA contribution to a Block-sponsored high-fee, low-yield investment that is practically guaranteed to lose money.

It appears that H+R has to charge outrageous fees in order to pay the costs of the many legal settlements and court judgments they have been faced with over the years.

There are a multitude of reasons why you should not have your tax return prepared by representatives of Henry and Richard or other firms of their ilk. Their excessive fee is only one. Returns prepared by commercial chains, particularly H+R, are second to CPAs in terms of errors I have discovered on 1040s over the years. My mentor always said that he wished H+R Block would move next door to our office – we would make a fortune fixing their mistakes!

A couple of years ago the Government Accountability Office (GAO) conducted a study which resulted in a report to Congress titled “Paid Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors”. The GAO sent undercover agents with two different tax scenarios to a total of 19 offices of 5 “fast-food” commercial tax chains, including H+R Block, in a metropolitan area. In only 2 instances was the correct refund calculated, but all 19 returns contained errors. A similar undercover operation was conducted this past February and March by the office of the Treasury Inspector General for Tax Administration (TIGTA) with similar results.

To be perfectly fair, over the years I have come across CPAs who actually knew their “stuff” when it came to income taxes, and even some who charged somewhat reasonable fees. Several of my fellow tax bloggers have the initials CPA after their name, and, judging by their blogs, they certainly are knowledgeable, quite savvy in fact, in federal income taxes. But in my experience these are the exception that proves the rule. And I am sure that there are probably a couple of competent, ethical and professional H+R Block preparers out there somewhere, too – although you couldn’t prove it by me.

While it may actually be possible that the best tax preparer, at the best price, for your particular situation is either a CPA or an H+R Block employee, this is only because of the education, experience, ability, temperament, and other factors that are specific to that individual preparer.

Here are some other mistakes to avoid when choosing a tax preparer –

* Do not use a tax preparer who guarantees you a bigger refund, or who guarantees a refund period. No tax preparer anywhere can guarantee you a refund if your individual facts and circumstances – your actual numbers – do not warrant a refund unless he/she makes up deductions or exemptions or purposely does not report all your income. Either way that is tax fraud! The only claim or guarantee any legitimate tax preparer can make is that by using his/her services you will pay the absolute least amount of federal and state income taxes possible for your individual situation.

* Do not choose a preparer who charges as his/her fee a percentage of your refund or of the amount of tax he/she has saved you. Chances are the person will illegally inflate your refund or savings to increase his/her fee. The fee for preparing a tax return should be based solely on the amount of time involved and/or the number of forms and schedules required.

* Do not choose a tax preparer solely for the reason that he/she tells you that you can walk out of the office with a check in your hand. That person or firm is not selling competent and accurate tax preparation – they are selling usurious Refund Anticipation Loans, which you should avoid anyway (but that is the subject of another post). You want to use a tax preparer that is experienced and knowledgeable in tax law and not a loan shark.

* Do not choose a tax preparer who will not sign your finished returns. All tax preparers are required by the IRS to sign all tax returns which they have been paid to prepare. If a person prepares your return and refuses to sign it you should refuse to pay him/her and take your “stuff” elsewhere.

* Do not choose a “box” as your tax preparer. I cannot stress this strongly enough – no tax preparation software is a substitute for knowledge of the Tax Code. And no tax preparation software is a substitute for the services of a trained tax professional! As with any software program the rule is “garbage in – garbage out”. And when the IRS comes after you for errors on your tax return you can’t blame it on the software – the US Tax Court has on two separate occasions rejected the “Turbo-Tax Defense”. The IRS estimates that do-it-yourself software users spend an average of 10 to over 20 hours longer on a return than if they used a paid tax preparer, depending on complexity of the return. The bottom line is – if you don’t know what you are doing do not rely on a tax preparation software package to make up for your lack of tax knowledge. Using a real live tax professional will save you time, aggravation and money.

When looking for a tax professional, as with any other professional, it is best to get a referral from a trusted friend or relative.

TTFN

COPYRIGHT © 2008 BY ROBERT D FLACH

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Thanks Robert for the guest post. For more from THE WONDERING TAX PRO be sure to visit his blog daily. I do.

Again, I want to invite any and all guest post on this subject. I want to hear from all bloggers or just readers with their own input. Let’s see what you see I am missing. If you have some words of wisdom on this subject please let us share it with everyone, if it is something that has already been covered, so what, I am looking for others to tell what they know or have learned about finding a paid preparer. Repetition drives the point home.