MORE DON'T ASSUME - CHOOSING A TAX PREPARER

Now that I have told you what you need to give a tax preparer to properly prepare your return it is time again for what has become an annual pre-tax season posting on choosing a tax preparer. Let me preface my comments by stating that I am not seeking, nor will I accept, any new 1040 clients this year. OK, so here it is:

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 small part of which dealt with federal income tax. It is no guarantee that he is current on federal and state 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 carry-forwards and to see if there are any errors that I could correct on an amended return. In my 35 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 25+ years ago I was a "para-professional" in the Small Business Services Department of one of the then "Big Eight" accounting 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!

The only thing you can be sure of with a CPA is that you will be charged twice the price for half the service.

A student in one of the tax planning/preparation courses I taught at local 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 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!

CPA firms obviously outsource their 1040 preparation to save money. But you can be damned sure that a CPA will not charge you less for a return prepared in India that he would for one prepared here in the USA.

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 reduced, 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.

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!

Last year 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 somehow).

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 in my experience this is the exception and not the rule. And I am sure that there are probably one or two competent, ethical and professional H+R Block preparers out there somewhere, too – although 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 employee, this is only because of the education, experience, ability, temperament, and other factors that are specific to that individual preparer.

TTFN