At Tax Time, No Advice Is Better than Bad Advice. Good Tax Preparer is All You Need

Ah, February, when the airwaves are filled with the shrill declamations of those who insist they can get you more money back from the government faster. One of the major U.S. tax firms has grabbed the lion’s share of that advertising segment for 2014 with its declaration that last year American taxpayers who prepared their own returns left a billion dollars in the hands of the IRS, money that should have been theirs. Do your own tax return and you’ll swindle yourself out of part of your refund! is the implied message. Of course, if you read the fine print—and as tax experts we always read the fine print, naturally—you will learn that only one in five self-prepared returns had errors.

Still, six in ten American taxpayers will pay someone else to deal with the hassle of all that tax paperwork this year, even though these days most of that paper is virtual (and trees everywhere sigh with relief). While you might think that the wholesale movement of tax preparation into the virtual world of the Internet and software would have decreased that number, the fact is that the percentage has remained fairly constant thus far into the century.

Do you need professional help (with your taxes, we mean)?

Those who have fairly simple tax lives—little or no income other than wages, not enough expenses to itemize, and so forth—qualify to file the 1040EZ. If you have never seen this form, it is a miracle of bureaucratic brevity: one page for the return and only 42 pages of instructions. Most people eligible to file the 1040EZ could probably do so on their own, although even with such a simple form there are potential complications such as the Earned Income Tax Credit or non-taxable combat pay for military service members who deployed to a combat zone in 2013.

Once your tax situation moves to the 1040 (plus some of its many supporting forms, schedules, and worksheets) or even the “streamlined” 1040A, it is probably time to look for professional assistance. In a move we find profoundly discouraging, the “time burden” estimate required by the Paperwork Reduction Act of 1980 is an average of 15 hours to complete Form 1040, seven hours for Form 1040A, and four just for Form 1040EZ. (The IRS also estimates that 68 percent of taxpayers will file Form 1040.) This is not a challenge you likely want to tackle on your own, even leaving aside questions of accuracy or obtaining the most beneficial possible outcome.

Why hiring the right preparer matters—a lot

Here’s a fact that might trouble your sleep if you don’t choose your tax preparer well: no matter who prepares your return, and regardless of whether you pay that person or not, you as the taxpayer bear the legal responsibility for the accuracy of your tax return. Should the IRS come a-calling with questions—or a full-blown audit—you will be the one on the hot seat, not him or her.

Yet mind-boggling though it might be, the federal government does not regulate tax preparers, and only four of the 50 states choose to do so. That’s right: the person who cuts your hair must have a license, but the person filing your taxes need not. To its credit, the IRS tried to put in place some measure of regulation involving examinations and continuing education requirements back in 2011, but that move was promptly challenged in the courts, and earlier this month a lower court ruling rejecting the regulation was upheld in a federal appeals court. So don’t look for any help from that quarter.

Fortunately, there are certain designations that do have licensing requirements: certified public accountants (CPAs), enrolled agents (EAs), and certified financial planners (CFPs), plus of course attorneys. While such designations are no magic bullet, they do carry minimum educational standards and more importantly continuing education requirements. Critically, a preparer who is not a CPA, EA, or attorney is not permitted to represent their client in an audit except at the initial level, and moreover they can only represent those whose tax returns they signed as preparer. By contrast, a licensed practitioner of one of the aforementioned types can represent any client.

Finding the right tax preparer

Clearly, credentialing should be your first screening criterion. But if your tax situation has any significant degree of complexity, you should look for a specialist. Hopefully you would not consult your podiatrist about your persistent abdominal pain or shortness of breath after climbing a flight of stairs, and you should apply the same logic to finding a tax preparer.

If you are a business owner, for example, or have a complex state or local tax situation because you work in one state and/or municipality but live in another (such as working in New York City but living in Connecticut), you should look for someone who is experienced in handling returns of that particular sort. As a quick example, most states that levy income taxes have reciprocity agreements with neighboring states to avoid double taxation of those who live in one and work in the other, but that is not always the case.

Choosing an individual or a firm to handle your taxes

There are plenty of competent individuals working as tax preparers. The main advantage to using an established CPA or tax law firm is that in addition to whatever registration or licensure is required for preparers, the firm will also ensure that its employees meet certain quality standards. No reputable firm will want its reputation damaged by one individual of mediocre competence, so in effect there are two levels of verification.

Finally, make use of resources that are easily available to verify the quality of a given preparer. The Better Business Bureau is a good start; an online check for complaints (and their resolution if there were any) is easy. But that is only a start, because in most cases a situation must be truly bad for a consumer to pursue a BBB complaint. Specialized sites like Angie’s List and social media outlets like Yelp are quick and easy ways for people to rate the service they’ve received, and while social media in particular often means weeding through a certain percentage of questionable or outright useless opinions, it should be easy to see a trend—predominantly positive or something else. And don’t forget about that pre-digital social media option: word-of-mouth referrals from people you know and respect.

Tax season will probably never be easy, but choosing the right preparer can make the difference between a season that is painful and one that is as close to painless as anything associated with the IRS is likely ever to be. Do your part by keeping good records throughout the year and by asking your preparer for advice for the upcoming tax year and then following it.