Monday, January 18, 2010


It is that time of year again for one of my favorite posts – the one that tells you not to make assumptions when looking for someone to prepare your tax return.

Do you remember the episode of the ODD COUPLE television series where Felix explains to Oscar what happens when you assume (you make an ass out of u and me)? Making false assumptions when choosing a tax preparer can be costly!

1) Don't assume that because a person has the initials "CPA" after his name he is an expert when it comes to federal and state income taxes!

The CPA designation means that a person took a very difficult test at the beginning of his career, possibly many, many years ago, only a very small part of which dealt with federal income tax, and usually with “entity” tax issues (corporate, partnership, estates and trusts) and not those dealing with 1040 issues. It is certainly no guarantee that he is current on federal and state individual income tax law.

Whenever I get a new client I ask to see his or her last three (3) years’ tax returns, to make sure I do not miss any carryforwards and, more important, to see if there are any errors that I could correct on an amended return. In my 38 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.

Some 30 years ago I was a "para-professional" in the Small Business Services Department of one of the then "Big Eight" CPA 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 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 suburban adult schools 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 seriously adjusted for inflation!).

There has been some concern in the past about the practice of CPA firms “outsourcing” the preparation of 1040s to India. This should not be a cause for concern. Between you and me - you are much more likely to have your 1040 prepared properly and accurately by a contracted preparer in India than by a CPA here in the United States!

Many of my fellow tax bloggers, who happen to be CPAs, will tell you that they agree with what I say in this post. I will be glad to provide online references. Recently, in discussing the IRS decision to exempt CPAs and attorneys from testing and continuing education requirements in its proposal for regulating the tax preparation industry, a CPA tax blogger has said –

Being a licensed CPA or attorney is no guarantee of tax expertise. The licensing examinations do not emphasize tax law. Plus, neither is required to take any tax related continuing education to maintain their licenses. Truth is many CPAs and attorneys have little tax experience. I should know. I prepare tax returns for them.”

He ends his post with - “Virtually every new client I get is an amended tax return waiting to happen. Guess who prepared the returns I’m amending…mostly CPAs!

I have said it time and again – just because a person has the initials CPA after his/her name does not mean that he/she knows his/her arse from a hole in the ground when it comes to preparing 1040s.

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. You can find an EA in your area at the National Association of Enrolled Agents website.

2) Don't assume that H+R Block will charge a low, or even reasonable, fee for preparing your tax return!

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. They charge fancy 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.

While, like anything else, the market affects the price of tax preparation, the major factor affecting the fees charged is overhead. Let’s look at the overhead of these “fast food” chains.

Because the storefronts where these chains are located are usually in high traffic commercial areas, and often shopping malls, the rent is generally very high. And an important factor – H+R and Liberty and Jackson Hewitt storefronts are only open during the tax filing season, yet they must pay rent on the property for the entire year.

These chains have excessive advertising budgets during the season, spending millions of dollars on constant tv and radio spots as well as print advertising telling you not that they competently prepare accurate tax returns but simply to come into their office and walk out with a check. Hey, doesn’t H+R advertise during the Super Bowl.

H+R Block et al are corporations, and have highly compensated upper level corporate officers and employees with generous employee benefits. A while back the Associated Press reported that “H&R Block Inc. CEO Russell Smyth received compensation valued at $5.3 million in fiscal 2009, the year he took over leadership of the nation's largest tax preparer”.

And, most notable of all, Henry + Richard, Jackson Hewitt and Liberty need millions of dollars for legal fees and the settlement payments for the many, many lawsuits for deceptive advertising and other unethical business practices, most of which result from their usurious Refund Anticipation Loan offerings.

With commercial preparation chains I expect that the actual cost of preparing the return - salaries paid to the seasonal preparers and the training of these preparers - is one of the least expensive items in the budget.

Returns prepared by the employees of Henry and Richard 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 few 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.

Some of the more serious errors included –

• not reporting self-employment income in 10 of the 19 cases,
• claiming an Earned Income Tax Credit on an ineligible child in 5 of the 10 applicable cases,
• not claiming the education benefit (credit or deduction) that resulted in the least tax in 3 of the 9 applicable cases, and
• not claiming all available itemized deductions, or not itemizing at all, in 7 out of the 9 applicable cases.

I was told by the GAO that not one of the 19 preparers in the study had asked to see the undercover taxpayer’s prior year’s return!

The GAO agents also discovered unethical sales practices related to Refund Anticipation Loans (RALs). The annualized interest rate for the RALs offered to the “taxpayers” ranged from 380% to 470%. Henry and Richard have been sued repeatedly throughout the US because of these RALs, and have paid millions of dollars in settlements (probably why they are so expensive – they need to cover their legal and settlement costs).

Other undercover operations, by TIGTA, local tax agencies, and consumer protection organizations, have found similar results. Check out an earlier post on an operation by consumer agencies (click here).

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

To be perfectly fair, over the years I have come across some CPAs who actually knew their “stuff” when it came to income taxes, and even some who charged reasonable fees. But this is not a ”given”. And I am sure that there are probably some competent, ethical and professional H+R Block preparers out there somewhere.

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.

I look forward to your comments!