Tuesday, January 18, 2011

IT’S BACK! CHOOSING A TAX PROFESSIONAL – DON’T ASSUME

It is that time of year again! Time for one of my favorite all-time posts – and one of my most commented-upon – the one that tells you not to make assumptions when looking for someone to prepare your tax return.

As usual, I begin with 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), and tell you that 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 passed a very difficult test at the beginning of his career, possibly many, many years ago. Only a very small part of this test dealt with federal income tax, and usually with “entity” tax issues (corporate, partnership, estates and trusts) and not 1040 issues. It is certainly no guarantee that he/she is competent or current on federal and state individual income tax law, or that he/she has actually prepared a Form 1040 for a client since passing the test.

Whenever I would get a new client (which I do not anymore – as I do not accept any new 1040 clients) I ask to see his/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 39 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 (Deloitte Haskins + Sells). 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 many 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!). I have often said that having initials after one’s name often causes one to charge twice the price for half the service.

CPAs have higher overhead costs than most currently “unenrolled” preparers, for malpractice insurance for example. These higher overhead costs usually apply to their audit work, but are still passed along to 1040 clients.

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 what I say in this post is correct. I will be glad to provide online references. For example, 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 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.”

The post ends 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. Both the initial competency test and the CPE requirements are more strict than those that will be required of the new Registered Tax Return Preparer.

While the IRS was right to exempt Enrolled Agents from the testing and CPE requirements of the new regulation regime, it was dead wrong to exempt CPAs (and attorneys). The higher ups at the IRS know full well that the initials CPA (or JD) have nothing to do with competency in federal income tax matters, but feel they are statutorily restricted from placing additional requirements on those with these initials.

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!
They, and others of their ilk, are very expensive, especially considering the quantity and quality of the service they provide. 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 unnecessary, but profitable to them, products like a usurious “Refund Anticipation Loan”, a high-fee H+R debit card, or 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.

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

As always, I must be perfectly fair. Over the years I have come across CPAs who were extremely competent and current in 1040 matters, and even some who charged reasonable fees. But this is not a “given” based on the initials only. And I am sure that there are probably some competent, current, ethical and professional H+R Block preparers out there somewhere (though you couldn’t prove it by me).

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, or other fast-food chain, employee, this is only because of the education, experience, ability, temperament, and other factors that are specific to that individual preparer.

So bring on the comments!

TTFN

6 comments:

Anonymous said...

Neither having CPA or EA after your name means you know jack crap about taxes. It is not hard to get either designation - mostly, they mean you're pretty good at memorizing a bunch of crap that is mostly useless for tax preparation and auditing. Furthermore, there are thousands of CPAs who do nothing but prepare taxes; it is the industry standard designation whether you go to work in audit or tax, at a large firm or a smaller firm. Honestly, I bet if your returns were reviewed by a CPA, he/she would find some errors on those returns as well - it is the nature of preparing hundreds or thousands of tax returns in a 3.5 month period.

To me, it sounds like someone is a bit bitter they never completed the CPA exam and can't charge the same rates as someone who has those three letters after his/her name. Whether you like it or not, the EA is often considered an inferior designation, even on the tax side, than the CPA designation. Hell, the EA test is laughable in difficulty in comparison to the CPA exam - to match your entirely anecdotal evidence, many of the tax students and practitioners I know have easily passed the EA exam on the first try, while they have struggled with even the REG portion of the CPA exam.

Robert D Flach said...

Anon-

Thank you for your comments.

While having the initials CPA after one’s name does not mean you know jack crap about taxes, having an EA there certainly does (I am not an EA). You have obviously never taken, or passed, the EA exam – as you know jack crap about it. While the EA designation does have its misconceptions, it is certainly not considered an “inferior designation” by anyone of knowledge.

I have no doubt that the CPA exam is a difficult one – I only know that it has minimal, if any, questions on 1040 preparation.

No bitterness here. I have never in my 39 years in “the business” had any desire whatsoever to have the initials CPA appear after my name – nor the initials EA for that matter. I had no desire to audit financial statements, or to represent taxpayers before the IRS. And I can charge whatever I wish, but would not wish to charge the disproportionately high rates of some CPA firms.

TWTP

Anthony said...

H&R Block employs plenty of Enrolled Agents. So at H&R Block you can get e-filing, year round audit assistance, and preparation by an enrolled agent, all for no extra charge. If you want an enrolled agent to prepare your return, then when you schedule your appointment at H&R Block you should ask for one!

Disclaimer: I am an Enrolled Agent and an H&R Block employee, but this comment is my own and does not necessarily represent H&R Block's positions, strategies, or opinions.

Anonymous said...

I know plenty about the EA exam, but you are correct, I have never sat for it, nor do I ever anticipate sitting for it. My firm provides no incentive to earn an EA license, while there are significant bonuses to tax professionals for earning the CPA designation. I am, however, completing a Master's degree in Taxation and the EA exam material is about as difficult as midterm or final in most of my basic research, partnerships, and corporations tax courses. Coincidentally, quite a few of the students in the tax program I attend have had no difficulty passing the EA exam with minimal studying. Personally, I don't think that 100 multiple choice questions on individuals adequately shows your effectiveness as a 1040 preparer (nor do I think that the AUD section of the CPA exam shows how effective you'll be as an auditor).

The EA exam shows your knowledge of tax about as much as the CPA exam shows your knowledge of auditing or financial statement preparation - very little. It isn't overly difficult to memorize a bunch of facts and mechanical calculations to pass an exam - being either a CPA or an EA really has little bearing on your effectiveness as a tax preparer (which I'm sure you will agree with since you are a reputable tax preparer without either designation).
In general, I take issue with any assumption that someone with a few letters after there name is competent just because of those letters, however, the majority of the accounting and taxation world, definitely holds CPA as the pinnacle of designations.

Shyloh said...

A while ago this stuff was really hard for me to understand until I hired an enrolled agent. Trust me when I say they will save you money, teach and help you through certain process high school didn't even tell you existed! http://fastforwardacademy.com

Christine @ cpe and cpa said...

A very interesting post. Everything you have posted is true.

It's great that I found your post. Thanks a lot for sharing!