This is another addition to the series “Mistakes made when choosing a paid tax preparer”. The author is anonymous.
Things your tax preparer may not tell you
“The big name doesn’t mean superior service.”
Roughly 135 million Americans file tax returns, and of those, two-thirds pay for help. Though solo acts like CPAs and so-called enrolled agents have plenty of clients, almost 20% of taxpayers go through a big franchise like H&R Block, Jackson Hewitt or Liberty Tax Service to get their refunds — last year an average $2,255 per return.
The problem is, tax preparation and advice depend on the preparer, and in a system of franchises, that means thousands of seasonal employees and limited quality control. The results can be dangerous. When staffers from the Government Accountability Office (GAO) went undercover to get returns done by the big chains, they found “nearly all of the returns prepared for us were incorrect to some degree,” according to the report.
Worse yet, lawsuits allege that the owners of 125 Jackson Hewitt franchises cost the government $70 million in tax fraud and created an environment “in which fraudulent tax-return preparation is encouraged and flourishes,” according to the Department of Justice. Jackson Hewitt says it stands behind its compliance procedures as well as its nationally standardized educational curriculum.
“You wouldn’t believe it.”
Complaints about tax preparers, including allegations of inaccuracies and returns that weren’t filed on time, are up 80% in the past five years, says the Council of Better Business Bureaus. But when it comes to the Internal Revenue Service policing problem preparers, “the lifeguard is asleep,” complains Sen. Chuck Grassley, R-Iowa, who took the agency to task for inaction last April.
Less than 1.5% of returns get audited, and while that may pacify nervous taxpayers, audits are the primary way to catch bad tax pros. The GAO found that a year after it reported poor preparers by name to the IRS, the agency had failed to audit a single one. Professional organizations, such as the American Institute of Certified Public Accountants and the National Association of Enrolled Agents, pack even less of a wallop because they often wait for the IRS to act. Then the institute will strip membership and report bad accountants to the relevant state-licensing group. How to find out if your CPA’s been disciplined? Visit the agency’s Web site.
“You’d be better off.”
Maybe you’re hiring a tax preparer because you’ve got better things to do with your weekend or numbers make you dizzy — more power to you. But if you’re hiring a pro because you think he’s smarter than you, think again. On average, tax preparers make more mistakes, and costlier ones, than John Q. Taxpayer does.
According to a study of IRS data, 56% of professionally prepared returns showed significant errors, compared with 47% of those done by the taxpayer. And audited taxpayers who used preparers owed an average of $363, while those who filed themselves owed $185.
Of course, tax preparers often see more-difficult returns, which could lead to more errors.
For a family with one W-2, mortgage interest and a couple of kids, TurboTax is just fine. If, on the other hand, you’re attaching a schedule for self-employment income or capital losses, consider getting help. And even then, if a return is made complicated by a one-time event — say, the birth of a child or the acquisition of a rental property — you might need only one year’s worth of advice. If nothing changes, you should be able to copy it from year to year, so long as you keep up with tax law changes to your situation.
“What are your qualifications?”
Every April, Grassley calls IRS officials before the Finance Committee to grill them on taxpayer protection. He’s increasingly concerned about unethical, unlicensed tax preparers and what he calls “sharks in the water.” “Anyone can call himself a tax preparer,” Grassley laments. Many do. There’s no mandatory national licensing, and Oregon and California are the only states that require tax pros to take a test. That means as many as 600,000 tax preparers are unregulated, according to the National Taxpayer Advocate, the taxpayer assistance wing of the IRS. Some may set up shop in a local real-estate office, but many work for the big chains.
Translation: There’s no universal standard for qualification. Licensed preparers, who are usually CPAs or enrolled agents, are tested and must meet ongoing education requirements. Unlicensed preparers do neither.
“If it’s February, you’re late.”
A savvy tax pro may be able to cut your tax bill or juice your refund. But don’t expect to find one come Feb. 1. From that point through April, tax pros are generally too busy to talk to new clients. So if you don’t already have a preparer lined up, by the time you actually have your W-2s in hand, you’re probably not going to get good service.
That means you should be talking to tax preparers in October and November. They’ll have time to answer questions, look over your old returns and suggest changes. Not only that, but talking to a tax pro in the fall means you still have time to plan. If you wait until you have all your W-2s, you’ve locked in all your income for the year. But in the fall a good preparer can help you figure out ways to manipulate your income by increasing your 401(k) contributions, deferring a bonus until the new year or taking taxable losses.
Wait until spring and a professional can help you make small decisions, like whether to itemize or think about different deductions, but you’ve lost most of your flexibility.
“You hired me, but your return is being done by someone else.”
Some accounting firms have begun outsourcing return preparation. That means your data might be sent as far away as India — or as close as a local H&R Block, since the chain contracts with CPA firms to do returns. Either way, your accountant isn’t obliged to tell you. Your most sensitive information may have gone halfway around the world, and you have no idea.
Indeed, sending Social Security numbers, names, addresses, birth dates and account numbers overseas electronically makes some people uneasy. For while the origins of identity theft are often hard to pinpoint, returns contain so much in one bright, package — that’s a great gift to the identity thief.
The number of outsourced returns is still small, but they’re becoming increasingly common. An overseas company can process a return overnight for as little as $50, much less than a CPA’s hourly rate.
“Taxes, whatever — let me see what else I can sell you.”
The real money in tax prep has nothing to do with 1040 forms and W-2s. For the big-chain preparers, as well as your local accountant, the register really lights up only when they persuade you to take a loan, open a retirement account or buy insurance. Chances are you don’t need what they’re selling, but the sales pitch may blur the issue. GAO staffers reported that when they visited the big-chain tax preparers, loans were described as “options” or “bank products”; on one visit a customer was asked to sign a loan application without being told what it was. RAL means Refund Anticipation Loan.
Worse, these extras can do you more harm than good: More than 80% of those who opened an “Express IRA” at H&R Block, for example, paid more in fees than they earned in interest, according to a lawsuit filed by the New York attorney general. (H&R Block says most Express IRA accounts opened between 2001 and 2005 have yielded “positive net tax savings benefits and interest earnings,” even as the company “has lost money operating this program.”)
CPAs, too, are in the sales game, ever since the AICPA allowed members to sell insurance products. When commissions can be $20,000, it’s easy to get greedy.
“If I screw up, I’ll pay up.”
Worried about an audit? H&R Block and Jackson Hewitt are happy to ease your mind — for a price. Both offer the option of buying a geared-up guarantee that promises to cover any back taxes you owe, plus interest, fees and penalties.
Here’s what they don’t say: You don’t need the extra protection. If it turns out you owe back taxes, the big chains’ basic (read: free) guarantee already covers fines, penalties and interest. Many CPAs and enrolled agents will do the same; they often have insurance for that very purpose. Just be sure to ask about it before one does your return. But what about the back taxes?
True, they could amount to a bigger expense than the fines and penalties, which may be why some chains can sell that extra guarantee. But H&R Block and Jackson Hewitt will cover you only up to $5,000 and exclude the most complicated returns. If you’re tempted, know there may be an unintended consequence: If someone pays your taxes, the IRS considers that taxable income.
In other words if you buy the guarantee, and H&R Block ends up paying your back taxes, expect to get a 1099 next January.
“Tax preparation is an art, not a science.”
A recent law tightened penalties for tax preparers who play fast and loose with the tax code, taking far-fetched positions because they know 99% of returns never get audited. That said, for anyone with a complicated or unusual financial life, there’s still lots of wiggle room, I’ve ever heard “It’s about 10% black, 10% white, and everything else is in the middle.”
Chances are good you have room to maneuver if you have income in a category the tax code treats flexibly — you’re self-employed, for example, or own rental property. Ditto if you’ve earned big capital gains or incurred high or unusual medical expenses. In short, if you’re attaching a schedule to your return, a good tax preparer will pay for himself.
Now, that may mean raising a red flag with the IRS, and a good preparer should explain if he’s taking risky positions. If you can’t stomach the specter of an audit, you’ll want a pro to travel on the side of caution.
Think twice before paying someone to look for loopholes if your income picture is relatively simple. If you’ve got one W-2, you don’t need someone fancy, there’s not a lot we can do for you.
“You should shop around.”
There’s no standard price for doing taxes. Some preparers charge by the hour, others by the form; either way the cost depends on where you live, the complexity of your situation and the qualifications of your tax pro. Consider: The average H&R Block customer pays about $150; a CPA may charge 15 times that.
People rely too much on word of mouth; they don’t shop prices. If they did, they might be surprised. A licensed local pro may not cost much more than a national chain. (I charge by the form, and a simple return could cost just under $150.00 – not much more than what you might pay at a big chain.)
Even among franchises, prices vary. The return that cost $90 to prepare at one big store cost more than three times that at another, according to the GAO study. To be fair, it may be hard to know what your return will cost before the preparer actually spends time on it. Ask for estimates using last year’s return — that’ll give you a point of comparison to find the best price.
In red comments are my own injections.
© 2008, Bruce Mc. All rights reserved.
Anon-
I read with interest your guest post. I have several comments – and have broken them down by your categories below:
“The big name doesn’t mean superior service” – I certainly agree that going to a “fast food” commercial tax preparation chain (especially the names you mentioned) to have your return prepared is a very bad idea.
“You wouldn’t believe it” – I expect that the increase in inaccuracies is a result of increased use of the “fast food” chains. As for returns not filed on time – there is absolutely nothing wrong with filing an extension. There are indeed many reasons why this is often necessary – especially now that brokerage houses send several “corrected” Consolidated 1099 statements late in the season. I do agree that the IRS should be more aggressive in seeking out fraudulent preparers.
“You’d be better off” – As a professional tax preparer for over 35 years I take a bit of offense from your statement “But if you’re hiring a pro because you think he’s smarter than you, think again.” It is not exactly that I am smarter in general than most of my clients – it is that because of my experience and education I am certainly smarter than they are when it comes to the subject of federal and NJ state income taxes, which is why many continue to come to me year after year. Most of the independent experienced and competent tax professionals out there are smarter than the general public when it comes to tax matters – just as my auto mechanic is smarter than I when it comes to the operation of a car, and my doctor is smarter than I am in regards to medical matters.
I agree with Bruce’s comment that because return preparers see more complicated returns there is more potential for error. I also believe that the increased error % has a lot to do with, again, the “fast food” commercial tax preparation chains – as the GAO and other studies have proven. Also, most tax preparers use software to prepare returns (I do not), and the use of software increases the potential for errors.
“What are your qualifications?” – I agree that there should be some kind of registration, and perhaps even licensure, for all tax preparers, and that newer preparers should be tested. There should be a “grandfathering” in of more experienced preparers.
“You hired me, but your return is being done by someone else.” – This problem exists pretty much exclusively with CPA firms. To be honest, you probably have a better chance of having your 1040 prepared properly and accurately if done by an outsourced Indian preparer than if done by an American CPA. As has been presented in this blog in the past, including in comments made by me, a CPA is not necessarily the best choice for preparing a 1040.
“Taxes, whatever — let me see what else I can sell you.” – A wise woman told me many, many years ago that only Sherwin Williams can “cover the world”. I certainly agree that a tax preparer should limit himself/herself to being the best preparer he/she can be and stay away from selling investments, insurance, usurious Refund Anticipation Loans, IRA accounts that are guaranteed to lose money, fee-laden debit cards, etc, etc, etc. I agree that this is where Henry and Richard and their ilk make their money, and that it is unethical and a conflict of interest.
“If I screw up, I’ll pay up.” – No argument here.
“You should shop around.” – I also have no argument with this statement. While it is not true that the average H+R return will cost about $150 (probably a lot more) and that CPA’s charge 15x as much (probably only 4 or 5 times) the point is well made – both Henry and Richard and CPA firms are more expensive than is called for with the average or slightly above average 1040. However you should not choose a tax preparer simply because he/she is the cheapest (i.e. you do sometimes get what you pay for) – there are a lot of other factors that should be considered. And as long as you stay away from “fast food” commercial chains and CPA firms you will do much better.
TWTP
I can certainly understand why the person posting this wanted to remain anonymous. He/she would make a great Democrat propagandist. There are several facts in the posting that certainly are facts without dispute, however those facts are then distorted and a message promoted that is totally false.
I posted some remarks on this blog before, and then made the decision to stop reading after receiving insulting remarks. However Bruce ask me to reconsider and make a guest posting of my own. I choose to make comments regarding two different situation that are in the posting that in reality tie into each other.
A. “For a family with one W-2, mortgage interest and a couple of kids, TurboTax is just fine…”
Why would a professional preparer that has a thorough knowledge of taxes ever make such a statement? Couple kids it says, if one of the children is 19 yrs old and is not in college but lived all year with his parents and had an income of say $15K. The other child is 17 yrs old and is in high school with no income. Pretty common scenario is it not? Tell me where in a TurboTax software it will give advice that the 19 yr old should claim his sibling instead of the parents. If the parents have an income of $50K the 17 yr old is worth $350 on their return. On the 19 yr old’s return the sibling is worth over $3000.
Now lets say that both children are under the age of 17, but instead of one parent working out of the household both work (isn’t that a lot more common where you live?). They have always filed MFJ. But should they file MFJ in the year 2008? Probably not, but is the TurboTax going to give them that advice? How much money will be saved if they file MFS returns and just one parent claims both children? How much money is saved on the 2008 tax return if just one parents claims three children that are eligible for the child tax credit?
B. “Worse, these extras can do you more harm than good: More than 80% of those who opened an “Express IRA” at H&R Block, for example, paid more in fees than they earned in interest, according to a lawsuit filed by the New York attorney general. (H&R Block says most Express IRA accounts opened between 2001 and 2005 have yielded “positive net tax savings benefits and interest earnings,” even as the company “has lost money operating this program.”
To me this again is an example of where people that know not of what they speak try to mislead, including the Democrat Attorney General of New York that is mentioned. That Attorney General is none other that Mr Spitzer, does anyone that reads this blog not know of his problems? If he was not a democrat he would be heading to prison by now.
I completely agree that there almost never is positive net interest earningson HRB’s Express IRA’s. However to say there are not net tax savings is almost always a total false fabrication. The reason HRB has not made any money in that program is really simple to understand. A very large percentage of the persons that have opened those are small amounts. Those were opened by preparers like myself with no intent of making money in the Express IRA account itself. But if you don’t understand why they were opened, then I would say you probably did a poor service in preparing returns for taxpayers of a low means. I will do my best to illustrate a typical tax return that had monies put into an HRB Express IRA without too much belaboring:
1. Single mother with one child W-2 shows box 1 taxable income $23,800.00 box 12 shows $1400 paid into a 401k. She has one child living with her, therefore she qualifies as head of household. If she filed that return TurboTax like the poster suggested. She would receive $1505 EITC on a 2007 tax return. She would have $9150 taxable income for a tax of $938 paid for with a $280 retirement savings credit and $658 worth of child tax credit allowing $342 of the child tax credit to become refundable. Therefore a total refund of $1847 on the return plus whatever was withheld. Now if I “steal” $550 of her refund an put into an Express IRA (do you believe she would go out and get an IRA on her own if allowed?) What happens to the return? She now has an AGI of $23250.00 which then works out to a taxable income of $8600 taxable income for a tax of $863 for with a retirement savings credit of $725. retirement savings credit and $375 worth of child tax credit allowing $625 of the child tax becoming refunable. The EITC is now $1601 instead of $1505. Therefore a total refund of $2226.00 less the $550 put into the IRA $1676. In the State of Indiana that maneuver also allows a savings of $30. Therefore of the $550 in the IRA $131 is her monies and $419 is the taxpayers. And Mr Eliot Spitzer you think I should be concerned that the IRA did not in of itself make any monies?
Yes the numbers were skewed by me, but the persons that actually opened Express IRA’s are always persons that making the contribution into the account were savings on a tax return of a very high percentage of the account. If that above mother did it for just 3 years and then used the monies for some meaningful purpose and even with the penalties on the withdrawal, she would have almost $1500 and do you really believe she would have it otherwise?
I have had some taxpayers that made contributions to the IRA and even after the contribution their “take home” refund was larger than if the contribution had not been made. Take the 19 yr old in 1st example, I would have him claim his sibling, which is legal. He would be giving his parents $700 of his refund (so they doubled what they would get). He would put $400 into an express IRA and he would still have more than $2000 than if he listened to you and just filed his tax return online on TurboTax. And the $400 in the IRA probably the only money he ever saved in his life. But I am to worry that the IRA doesn’t grow? I am to worry that I charged him aproximately $200 to do his return? I say he paid entirely too much to get his taxes done for free on TurboTax. I say he got a bargain for my expertise.
How many tax returns have you prepared that you computed a contribution to an IRA that saved almost the entire amount put into the IRA and they went out to the neighborhood bank and made the contribution?
Yes I work for HRB and yes, I agree the biggest boys on the Block are always the easiest to target.
Jeff Day EA
Evansville, IN
I goofed in my example of the mother. She would only need $138 of child tax credit to finish paying off the tax instead of $375.00 Therefore none of the contribution to the IRA is out of her pocket. Even after the contribution is made her actual refund amount she receives is larger than without the contribution.
Jeff-
Let me begin my saying that I expect that the author of the guest post is not a professional tax preparer – but just a reader or personal finance blogger who responded to Bruce’s request for posts.
I agree with you regarding the statement about Turbo Tax being ok for some taxpayers. I constantly say that no tax software is a substitute for knowledge of the tax law, and no tax software is a substitute for a competent tax professional.
I do wish to speak on your statement – “I completely agree that there almost never is positive net interest earnings on HRB’s Express IRA’s.”
The point of the author’s comment was just that – employees of Henry and Richard talk low income customers into investing in an IRA that will not earn any money! The purpose of an IRA is to save for retirement via tax-free compounding. This purpose is certainly defeated if there are no earnings on the money contributed! Any current tax savings is certainly wiped out by the loss of earnings and actual reduction of principle invested!
How can any person in good conscience sell a customer an investment that is guaranteed to lose money! Obviously contributing to an IRA is a good thing, whether it is deductible or not – but only if it actually pays net positive interest! Why not just send the client to his/her local bank to open an IRA that will actually earn interest?
You can’t tell me that Henry and Richard do not make any money by pushing the Express IRA. H+R wouldn’t do one damned thing that did not put money in the pocket of its corporate headquarters.
H+R wouldn’t be so easy to target if they behaved ethically.
TWTP
Well I work for HRB and I usually have 30-50 clients make contributions to an Express IRA. Those persons that I help make a contribution to a HRB Express IRA, almost always have no savings on their own otherwise. ALWAYS the contribution I am helping them make are a tax savings of a very high percentage if not the total amount of the contribution.
I feel that if someone can make a contribution of a small amount (say $400) and it saves over $300 on their tax return, I would be doing a disservice of not showing them. Dont know where you live but in our area most banks won’t even allow an opening of an IRA for that small of amount. I have had more than a few persons that put into an IRA small amounts and then after 3-4 years had say $1500 in the account and the only time in their lives they had saved anything. And you think I should feel guilty the IRA itself didn’t make any return on the investment?
It wasn’t their money, it was ours, the taxpayers, but it is a manipulation that is within the law and does help them save something albeit a small amount. And that is the overwhelming preponderance of persons that opened Express IRA’s. If the persons didn’t “steal” their money from the Express IRA I suggest after they get an amount built up they transfer to the local bank and yes there are not enough to do it.
But if TurboTax or a preparer doesn’t understand that say a young person making aproximately 10K-15K can put an amount into an IRA and society is paying virtually the whole amount, Who is doing the disservice? If TurboTax doesn’t illustrate to a head of household who has an income in the $20K-$23K area should be contributing to an IRA, who is doing the disservice? It/they or me that helps them save something? And realize even if they can go out and make the contribution after I point out the advantage, virtually none would go get the IRA. But your suggestion is for them to go get the IRA first with monies they don’t have?
Who has no conscience, me that have the clients save something that they received for virtually nothing that has little return on the investment that was given to them for making the investment. or the preparer that doesn’t help them save something that they received for virtually nothing that if they didn’t save wouldn’t receive the investment?
And I write the way I do, when persons want to belittle my employeer. Yes there are lots of persons within HRB that have no business in the business. But the percentage is no more than the percentage of CPA firms that hire temps to do returns that massacre them. I assure you, I have represented more persons at no charge, that have various IRS issues, than any CPA firm you know.
How many persons have you personally helped pro bono that are poor and have EITC issues with the IRS? I met a married couple this week from Chicago area, HRB had not prepared their tax returns. Between themselves and an unscrupulous self-employed preparer in Chicago they each filed returns 2005-2006-2007 tax returns fraudulently each claiming as head of household, although they live with each other. But the IRS had disallowed the claims by him for each of the years. Unlike the self-employed practitioners, I didn’t coerce them into filing fraudulent tax returns, unlike the self-employed practitioner I am going to help them put this chapter behind them. What is the name of the CPA firm you know that would help these folks out, pro bono, that have a total income of less than $20K a year?
Aproximately two months ago, I met a man that had owned a business that went bankrupt. The business was a local beauty college that he and his wife bought 7 years ago. In 2007 the wife was diagnosed with a reoccurence of cancer and she was unable to work in the business and his attentions was to his wife. By April, 2008 he was closed and in bankruptcy. He had a local CPA firm doing all the accounting and taxes for their S Corporation for all those years. The firm was charging $18K a year. He then owed them aproximately $2k that was included in the bankruptcy. Therefore they refused to do anymore work for this couple, the firm refused to give them any copies to allow an easy transition. It is obvious from what I have found that the CPA (who he said he had never met in all 6 years) had never personally been involved. I anticipate amending several returns. And you would have readers thinking that the CPA firm was ethical? The man owes HRB for my services to prepare the S Corp and his personal tax return $400 for the year 2007. Unlike the CPA firm, I didn’t help bankrupt those folks, unlike the CPA firm I am going to help the put this chapter behind them.
Since you don’t think HRB is ethical when I next meet someone that has issues like these (usually I have 5-6 a year) I can send them to you and you will be glad to help pro bono? Just send me your email address/phone number and I will have them contact you. My name is Jeff Day, I am an enrolled agent with HRBlock in Evansville, IN my email address is jad012547@yahoo.com. You have my permission to write me anytime, what is yours so I can send some of these to you?
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great post hope to see some additional comments next Tuesday…adios