IMPACT ON TAXATION & FINANCE

Choose Your Tax Preparer Carefully

Not because your tax preparer has a big name means you are getting better service. On the contrary, you may be shortchanged during the process, since the large conglomerates outsource, train and hire individuals who do not necessarily execute in your interest.

There are tax preparers; and there are tax preparers. Anyone can call himself/herself a tax preparer. Although many do, there's no mandatory national licensing. There is no national standard for qualification. Oregon and California are the only states that require tax preparers to actually take a test. That means as many as 600,000 tax preparers are unregulated, according to the National Taxpayer Advocate, which is the taxpayer assistance wing of the IRS. Licensed preparers, who are usually CPAs or enrolled agents, are tested and must meet ongoing education requirements. Unlicensed preparers do neither, which is a general accepted principle. Some set up shop in local real estate offices, but many work for the big chains.

For instance, H&R Block hires over 120,000 people to prepare returns during the tax season. What most people do not know is that in the event of an audit, only a tax preparer with a license or a lawyer can represent you before the IRS. If you need stores like H&R Block to represent you at the audit, you have to pay extra for that service.

The problem is, tax preparation and advice depend on the preparer, and in a system of franchises, it equates to thousands of seasonal employees and limited quality control.

Roughly 135 million Americans file tax returns, and of those, two-thirds pay for assistance.

While individual CPA’s and so-called enrolled agents have plenty of clients, almost 20% of taxpayers go through a big franchise like H&R Block or Jackson Hewitt to get their refunds. 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 were incorrect to some degree.

Maybe you're hiring a tax preparer because you've got better things to do with your weekend, or numbers is just not your thing. 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 as well.

Outsourcing

Some accounting firms have begun outsourcing return preparation, which means your data might be sent as far away as India or as close as a local H&R Block, unknown to you, since the chain contracts with CPA firms to do returns. Either way, your accountant is not obliged to tell you who does the actual preparation.

Clearly, your most sensitive information may have gone halfway around the world, and you are none the wiser. Sending Social Security numbers, names, addresses, birth dates and bank account numbers overseas electronically makes some people very uneasy. This could also be a haven for professional hackers. 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, but the big question "Is it worth the while?"

Tax Scams — what else I can sell you?

The real money in tax preparations 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 when they persuade you to take a loan, open a retirement account or buy insurance with your valued refund. Chances are you don't need what they're selling, but the sales pitch may blur your vision.

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. Worse, these extra proposed options can do more harm for consumers than good: for example, more than 80% of those who opened an "Express IRA" at H&R Block paid more in fees than they earned in interest.

Risky

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. The chances are good that you have room to maneuver if you have income in a category the tax code treats flexibly. If you're self-employed, for example, or own rental property or if you've earned big capital gains or incurred high or unusual medical expenses, you fit that profile.

Pricing Your Return

You could probably find a much better deal if you 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. On average, an H&R Block customer pays about $150; a CPA may charge $300, while Joe Blow across the street charges $50. Even among franchises prices vary. The return that cost $90 to prepare at one location may cost more than three times at another. To be fair, it may be hard to know what your return will cost before the preparer actually spends time on it.

Advice

Ask for estimates using the previous year's return that’ll give you a point of comparison to find the best price before the preparer starts the return. 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. A sound professional can help you make small decisions, like whether to itemize or think about different deductions working for you and not against you. Choose your tax preparer wisely.

EDGAR HENRY is a Licensed Tax Preparer and can be reached at:
(718) 469-0183