THE RETURN OF MAYBE MY FAVORITE POST - CHOOSING A TAX PROFESSIONAL – DON’T ASSUME

It’s 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/her 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 40 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. 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 required of the 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.

As I have said before – once the return preparer regulation regime is fully phased in, only those individuals with the initials EA or RTRP will have proven competence and currency in 1040 preparation.   

2) Don't assume that H+R Block, or any other “fast food” commercial preparation chain, 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 high-fee H+R debit card, or a Block-sponsored high-fee, low-yield investment that is practically guaranteed to lose money.  Thankfully they no longer attempt to force Refund Anticipation Loans (RALs) on lower-income clients.

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 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. 

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 and the like 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%.  

Other undercover operations, by TIGTA, local tax agencies, and consumer protection organizations, have found similar results.  It was these studies that started the ball rolling on the preparer regulation regime.

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).

And I end on my usual caveat. 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. But 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