Do You Need to Hire a Tax Preparer?

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On Personal Finance

Do You Need to Hire a Tax Preparer?
Rande Spiegelman
CPA, CFP®, Vice President of Financial Planning, Schwab Center for Financial Research
March 22, 2004

It’s a common refrain at the end of most every tax-related article you might read: "Please consult with your tax advisor." But what if you don’t have one? Many people choose to prepare their own tax returns without consulting a professional tax preparer. As your financial situation becomes more complex, however, paying for tax advice and preparation may become worthwhile.

Why hire help?
As taxpayers, we’re required to file timely and accurate tax returns. Unfortunately, the tax code is complicated—meeting these requirements becomes increasingly difficult as a person’s income and deductions rise.

Generally, taxpayers with only wage, interest and dividend income who are taking the standard deduction should be able to prepare their own returns. Even taxpayers with simple income and deductions, though, might opt for professional help for several reasons, ranging from ease of preparation to making sure they receive the myriad deductions and credits for which they qualify.

Many taxpayers opt for professional help once they begin to itemize their deductions by filing Schedule A. This might occur in the first year of owning a home and paying mortgage interest, or when deductible taxes exceed the standard deduction. In states with high income taxes such as California and New York, simply paying deductible state income tax can kick a taxpayer over the standard deduction.

Once a return begins to include items such as self-employment income, rental real estate income, home sales or the dreaded alternative minimum tax, you should consult a tax professional. Also, consulting with a tax preparer before undertaking a large taxable event can help prevent nasty surprises. For instance, if Angie owns a rental property with $100,000 of appreciation, simply selling the property would incur a sizeable tax bill. A tax professional, however, might suggest rolling the gain into a new property using what's known as a section 1031 exchange. This exchange (which is subject to a great number of rules) defers the taxable gain until the sale of the subsequent property.

Software programs
Many people turn to tax-preparation software programs, which might cost $50 to $100 (plus state add-ons). While most of these programs have begun to offer electronic filing and other bells and whistles, tax returns created using these programs are still considered self-prepared—in other words, the software manufacturer isn’t responsible for the accuracy of any prepared returns. Why? If you input your data incorrectly or answer questions about tax credits or itemized deductions inaccurately, your tax return will be wrong. Still, for simple returns and for taxpayers who are comfortable with the items on their returns, software is faster and easier than doing things by hand.

Unenrolled tax preparers
In many states, paid tax practitioners must be licensed. For instance, in California, preparers who are not enrolled agents (EAs), Certified Public Accountants (CPAs) or attorneys must register with the California Tax Education Council. In Oregon, such tax preparers are licensed through the Oregon State Board of Tax Service Examiners. Contact your particular state revenue agency for more information.

From the perspective of the Internal Revenue Service (IRS), such state-licensed preparers are considered “unenrolled” and are limited in their capacity to represent a taxpayer. Unenrolled preparers can prepare and sign tax returns, but may only represent a taxpayer on audit regarding a tax return that they actually prepared. Also, once a return enters the appeals or collection phase, a taxpayer cannot be represented by an unenrolled preparer.

EAs, CPAs and attorneys
The IRS grants enrollment to practice for those who demonstrate tax competence by passing a two-day special enrollment exam—hence the term enrolled agent. EAs can prepare and sign tax returns as well as represent a taxpayer for audits, appeals and collection actions, even if the EA didn’t prepare the return under examination.

CPAs and attorneys are automatically eligible to practice before the IRS without taking the special enrollment exam. CPAs may be of particular value if you also need financial planning, business consultation or bookkeeping services.

How to hire a tax professional
By far the best method for hiring a tax preparer is to get a referral from someone you trust. If someone you know has their taxes done by a professional, you might ask: Are you happy with your tax person? How long have you been with them? Do they get back to you quickly?

You can also check on the Web. Most states have professional societies for CPAs and/or EAs, with online resources to search for professionals in your area.

Once you’ve found a candidate, give them a call and ask some questions. Most consultants are more than happy to tell you about themselves and their practices as long as you don’t call on April 14. Ask about their certifications, their continuing education requirements, their customer base (how many, what kind), their experience, their tax preparation process, and whether they outsource data entry on the returns they prepare.

They’ll ask some questions of you as well, mostly relating to your tax situation, your past experiences with tax preparers, and how you found them. It’s important to remember that not everyone is a good fit. Maybe they specialize in real estate taxation and you need help with incentive stock options, or perhaps they simply aren’t accepting new clients.

Next will come the all-important question about fees: always ask. Generally, tax firms will follow one of two fee systems. The first is a per-schedule charge. For instance, preparing Form 1040 might cost something like $100 and each additional schedule will produce an extra flat fee ($75 for Schedule A, $100 for Schedule E, etc.). The second method is a per-hour charge for time spent meeting with you and preparing the return. Hourly fees will vary depending upon the experience of the preparer and where you live. EAs and CPAs will usually charge somewhere between $75 and $200 per hour. Tax attorney fees might easily top $300 per hour. Note that, depending upon the consultants, the per-schedule and per-hour charge might be about the same for the same return.

Before embarking on a discussion about fees, be sure the consultant knows what your return will look like. Increasingly complicated returns will warrant a higher fee under either system. Given enough information, a reputable tax preparer should be able to quote an approximate fee for preparing your return.

The bottom line
Not everyone needs the help of a tax preparer, but if you have questions or need assistance, hiring a professional can be money well spent—especially as the tax rules become more and more complex. Using a pro is easier, may save you from paying more tax than you should, and is less costly than a nasty tax surpise or a visit from the IRS audit department.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed.

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