Wednesday, December 17, 2014


Here are some random comments on two topics based on the report I discussed on Monday that resulted from the GAO undercover operation.

(1) The report included some statistics.  One table – Individual Taxpayers’ Estimated Use of Paid Preparers, by Various Groupings, Tax Year 2011 – indicated that 59% of taxpayers who claimed the Earned Income Credit used paid preparers, while the percentage for taxpayers not claiming the EIC was 55%.

In discussing the various fees charged by the 19 “fast food” chain offices visited by the undercover agents, the report stated “Paid preparers provided various reasons for the amount of the tax preparation fee, including (1) the EITC form is the most expensive form to file . . .

The rules for claiming the Earned Income Credit are indeed complicated, and it makes sense that many taxpayers who qualify, or think they do or may, turn to paid tax preparers for guidance. 

And it is true that, while it may not be the most expensive form to file (I would say Schedule C and Schedule D could cost much more – depending on the specific situation), because of the new overly-excessive due diligence requirements forced upon tax preparers, the fee for claiming the Earned Income Credit can be higher than the fees to file other forms and schedules.

The Earned Income Credit is in reality a federal welfare program.  Those who legitimately qualify for this credit are by definition lower income individuals.  Claimants may indeed truly need the additional monies provided by the refundable component of the EIC to properly care for their dependent children. 

Yet by distributing this welfare benefit via the Tax Code claimants are forced to pay a premium fee to tax preparers, very often truly justified because of the additional work involved, to request the benefit - money that they may not be able to afford to pay, or that could be better used elsewhere.

When applying for the traditional Aid to Families with Dependent Children welfare benefits are the families required to pay the county an application fee?  I think not.

The Earned Income Credit and the refundable Additional Child Tax Credit DO NOT belong in the Tax Code!

(2) The fee section of the report also states –

Often, paid preparers either did not provide an estimate of the fees upfront or the estimate was less than the actual fees charged.”

This is really not an issue – and should not be a criticism of the otherwise flawed preparers.  The only possible criticism is that the less than honest preparers may have given a low-ball upfront estimate to get the business, knowing full well that they would charge more.

To be perfectly honest, most of the time it is very truly literally impossible to know how much the fee for preparing a tax return will be until after the tax return has been prepared. 

The final fee depends on the number of forms and schedules needed and the time involved to prepare the return, and is certainly impacted by the level of organization of the client taxpayer.

When I was accepting new clients, and a prospective client asked me “how much will it cost to prepare my tax return?”, the only true and honest answer I could provide was “between $45 and $500”. 

To be fair, I could probably be able to “tighten” my fee range and perhaps offer a basic “good faith” non-binding estimate of “between $100 and $250” by looking at the prior years’ returns and the current year’s “stuff” and asking a few questions.  And, of course, I could provide an actual legitimate “quote” for truly simple “short forms”, reporting only W-2 income, minimal interest income, and no deductions or credits.

FYI - in my 40+ years of preparing 1040s, 99.5% of all returns described by potential clients as “easy returns” have NOT been easy returns.

The best a tax professional can do is provide a potential client with a fee schedule, listing the minimum fee or fee range for individual forms and schedules, and explain the guidelines used in determining the fee.


1 comment:

RachaelSable said...

Very useful article on Tax planning.