Every year, as April 15th rolls around, there is a flurry of activity as most Americans seek to file their tax returns. There are many ways to get all those forms filled out and sent off to the Internal Revenue Service (IRS). You could do it yourself by filling in the form manually. You could also use one of the many popular tax software programs currently available, from the free to the very simple and inexpensive to the very complex and very expensive (remember you get what you pay for). You could also seek out a tax preparer who will fill out the forms for you and charge you for their services. 

But, as with the software programs, there are many options and skill levels available. And what about filing the return, should it be mailed or does it have to be filed electronically? Finally, what if you need to file an extension.

Furthermore, the new tax law passed in 2018 has radically changed the format of the tax return to the point that it is almost completely different from prior years.

How to Prepare Your Taxes for Your Tax Preparer

We will assume that you must file a tax return (some people don’t but that is the subject of a different discussion). We will also assume that you are either an individual who works for a company or one who owns a company. Both individuals and companies have to file a tax return.

Choosing how to prepare your taxes begins with the complexity of your financial affairs.

I work for a company and all I have is a W-2

In this situation, you most likely could do it yourself. There is a box on the tax return where you fill in your wages from your W-2 and one for how much tax was withheld and paid to the IRS for you by your employer. However, the new tax law passed 2018 changed where the boxes are, and some confusion could happen.

I get a W-2 but I have other types of income such as interest and dividends

Again, you probably could do this yourself but it’s more likely that you would look to tax preparation software to help you. These programs typically ask you questions and/or provide boxes for you to fill in the numbers. The challenge here is to make sure you find the right boxes and answer all the questions correctly (don’t miss any!), which isn’t all that different than filling out the return yourself. 

The benefit of the software, if used correctly, is that it will calculate the tax you owe correctly and may point you in the direction of other items you may need to consider to properly complete the return (or it may not). It will also give you a lot of papers that are confusing and are, frankly, given to you to protect them.

I get a W-2 and have basic but also more complex types of income and deductions

If you have any of the following types of income, tax software may still be appropriate, but now a tax preparer is more likely to become necessary:

  1. Sales of stock (capital assets)
  2. Distributions from a retirement account
  3. Rental properties
  4. Social Security
  5. Gambling winnings
  6. Unemployment benefits

If you have deductions, you have to determine whether you can itemize them or take the standard deduction.  Even though the new tax law has simplified this, there are still many potential deductions that you may have to consider. A professional can determine for you what is deductible based on your situation as opposed to a software program making assumptions or guessing at it.

I have any or all the above and I own or have an interest in a business

Business Tax Preparation

Your situation will depend upon the type of business interest you have.  

  1. If you own a sole proprietorship or a single-member LLC, you must include a Schedule C with your personal tax return and your income will be subject to self-employment tax. There may be inventory to account for and equipment or other property that needs to be depreciated.
  2. If you are a partner or are a shareholder of a business, your needs will depend on the nature of your ownership. Most likely these will be a closely held business which means that you are the owner or one of a few principals owning the business. Those two types of businesses must file their own tax return (typically by March 15th) before you file your personal one (typically by April 15th) because the income from them is reported to you and you, not the business, pays the taxes. Their tax returns are for informational purposes only and are a lot more complicated to fill out if you haven’t done one.

Attempting to prepare these types of returns and then properly reporting the results on your personal return, without the proper level of knowledge, skill and experience, is risky at best. In fact, only the most expensive software programs, which are normally only used by tax professionals, even offer a package that allows you to do it yourself – most of the popular programs don’t offer business programs.  

In this case, it is almost imperative that you seek out a tax preparer.

How Do I Select a Tax Preparer?

At this point, then, we will assume that you don’t want to do the return yourself and you want a comfort level that most software packages can’t give you. 

In searching for someone to help you, anyone who is paid to prepare a tax return must meet certain requirements.

According to the IRS:

Any tax professional with an IRS Preparer Tax Identification Number (PTIN) is authorized to prepare federal tax returns. However, tax professionals have differing levels of skills, education and expertise. An important difference in the types of practitioners is “representation rights.” 

Certified Public Accountants, Enrolled Agents and Attorneys can prepare tax returns and represent clients in all matters before the IRS regardless of whether they prepared that client’s return. 

Certified Public Accountants (CPA)

These are professionals licensed by state boards of accountancy who have a degree in accounting, have passed a rigorous exam and met certain experience requirements in addition to completing a specified number of hours of continuing education each year. While most all provide individual and/or business tax services, the focus of their practice may also include business bookkeeping, accounting, consulting and financial audit services, so it pays to evaluate what your needs are accordingly when seeking out this type of help.

Enrolled Agents (EA)

These professionals are licensed by the IRS and have also passed a rigorous exam and are subject to continuing education requirements as well. While they may provide other services, their primary focus will be in the area of taxation and can service both individual and business needs. They are not required to be CPAs or attorneys, but some are.

Attorneys

These professionals are generally not focused on taxes except in very specific fields and tax preparation may be a limited, although very professional, part of their practice.

Anyone else with a PTIN can prepare a return but are much more limited in their ability to represent a client before the IRS. They can only do so if they prepared and signed the return in question. In either case, anyone who prepares a tax return for compensation must have a PTIN and it must be entered on the tax return when it is filed. While many are excellent at what they do, they are not subject to the same rigorous rules as the three mentioned above.

In seeking tax preparation services, make sure that the preparer has a PTIN. This will give you some reasonable assurance that you are dealing with who has at least met IRS requirements. Beyond that, however, the IRS stated that “tax professionals have differing levels of skills, education and expertise” should guide you in your search for the right preparer. 

You should also focus on the business model that the preparer follows. There are many options available to get your tax return done, but essentially there are two business models that you should consider – tax preparers and tax professionals.

Tax Preparers

Tax preparation firms come in all sizes, specialties, and levels of expertise. Many are national companies which you have probably heard of through their advertising or whose offices you have seen in shopping malls. Others are much smaller and, in fact, maybe one of the three types mentioned above. The key is to see how they operate their business. Their focus is normally to take in and process as many tax returns as possible from February to April 15th and then extend the ones remaining to be completed by October 15. Volume is the business model and most returns are for individuals, although business returns are certainly not ruled out.  

The advantage of a tax preparation firm is that it will be relatively inexpensive (though not always). If your return is easy, this is often a good choice if you don’t want to do it yourself.  This type of firm will benefit most taxpayers and is far and away the most popular way to have someone prepare your return.

Disadvantages of a Tax Preparation Firm

Accuracy

The more complex your return, the more likely the person preparing it may not be qualified or have enough experience. Many tax preparation firms, while owned by a professional, may have tax preparers who are essentially data entry clerks. They gather the information from the taxpayer and then input it into their software, which all such firms now use, let the software do the return and then print it out and give it to the taxpayer. Then move on to the next one as quickly as possible. This is fine if the return is simple or if the owner or professional is monitoring the finished product, but this is not always the case. The risk is that the original information is incorrectly gathered and/or input and no software program can correct that. 

  1. Tax planning. Taxpayers are so conditioned to get a tax refund. Much of the advertising these types of firms present focuses on getting a refund. Many even extend loans against the refund which you have to pay back when you get it. There may not be interest charged on this loan but there will almost certainly be a fee for the service. In addition, the focus on a refund obscures the benefits of proper tax planning, a function that does not lend itself to the profitability of a volume tax preparation firm. Tax planning involves the following:
    1. Identifying strategies to legally minimize your tax liability;
    2. Coordinating taxes withheld with your tax liability so that it is as close to zero on April 15th as possible. If you are getting a refund, you have just used the IRS as a savings account at 0% interest.
    3. Avoiding a big surprise on April 15th because not enough was paid in during the year.
  2. In the rush to get as many tax returns done as possible, tax planning will often be an afterthought in these types of firms.
  3. Lack of personal attention.
  4. Tax Professionals
  5. The tax professional is not consumed by volume. In many cases, tax preparation is only one part of their business. Many professionals specialize in the type of work they do. For example, they may work primarily with business owners who have needs throughout the year and simply do the business tax returns and the personal returns of the owner. Or they may supplement their normal work with taxpayers who have more complicated returns. 
  6. A taxpayer should expect the following from a tax professional:
  7. They are almost always a CPA or Enrolled Agent or both;
  8. When you meet with them, they will look over prior year returns to see if there are any corrections that could be made to your benefit;
  9. They will ask you questions to make sure that all information required to complete the return is present and what else might be needed;
  10. Based on their experience, they should know what the return should look like after the software has processed it. Even if they rely on staff to input the return, there will always be a thorough review process to make sure that the return makes sense after processing;
  11. Tax planning is performed throughout the year, especially if the taxpayer is self-employed or otherwise required to estimate their taxes and make payments on specific dates as prescribed by the IRS;
  12. They make every effort to legally minimize your taxes. They understand and apply the tax laws but don’t get you into trouble.
  13. Random audits do happen; if you are audited on work they have done or if you have other special tax matters, they will represent you in front of the appropriate tax agency if they are a CPA or Enrolled Agent.
  14. You should expect to be able to talk to your tax professional at any time as part of their fee for service.

The tax professional is almost always going to be more expensive than the tax preparer. However, the tax professional should make up the difference through proper tax planning, application of the tax laws and the avoidance of costly mistakes due to input errors or lack of experience.

Final Thoughts of Selecting a Tax Preparer

There are many factors to consider in deciding how to prepare your tax return. The complexity of your return, your ability, and experience in doing it yourself or in using a tax program, your desire to avoid entanglements with the IRS and your budget are all important. 

Most tax professionals, rather than simply gathering your information when you show up at the office, will offer you a free consultation to evaluate your situation, inform you of their business model and how it applies to your return and give you an estimate of the cost of their services.

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