Certified Public Accountants (CPA) provide a variety of services but almost all provide a full range of personal and business tax services which can be broken down into three areas.
What Tax Services Does a CPA Provide
Personal or business CPAs provide tax services in the following three areas: tax preparation and compliance, tax planning, and tax representation.
Tax Preparation and Compliance
Preparing and filing tax returns is the most common tax service a CPA provides and normally include personal (Form 1040) and business (Forms 1120, 1120S and 1065) services.
All individual taxpayers are generally required to file a tax return by April 15th of each year. A return can be extended to October 15 of that year, but it is only an extension to file the return – the taxes must be paid by April 15th even if the amount owed must be estimated while waiting to complete the return.
The only reason to file an extension is if there is information necessary to file the return that is missing, such as a Form K-1 from a partnership. Many tax preparers, including both CPAs and non-CPAs, will extend a large number of returns because they have taken on more returns than they can process by April 15th. This, of course, means that if you are entitled to a refund, you have to wait until after the return is filed (normally 4-6 weeks).
Some preparers will provide tax refund loans in the interim but be aware that these can be costly, and the loan fees and interest are deducted from your refund when it finally comes.
The best practice is to find a preparer who limits their tax preparation to certain types of returns that meet the taxpayer’s needs and focuses on getting their return done right and on time.
Businesses are also required to file a tax return each year, but the form and due dates will vary depending on the legal classification of the business and its year end. Most businesses have a year-end of December 31 (calendar year-end) so their tax returns are due on March 15th (for partnerships (Form 1065) and S-corporations (Form 1120S) or April 15th for C-corporations (Form 1120).
In both cases, these business returns can be extended as well, September 15th for partnerships and S-corporations and October 15th for C-corporations. For companies that have a fiscal year-end (any date other than December 31) the returns are due 2 months and 15 days (Form 1065 and Form 1120S) or 3 months and 15 days (Form 1120) from the year-end date with a 6-month extension if necessary.
Note that sole-proprietors don’t file a business tax return but the business income and expenses are reported on a Schedule C which is attached to an individual’s tax return subject to the filing rules mentioned above in order to determine the tax liability in conjunction with any other income the taxpayer may have.
In all but a very few instances, the Internal Revenue Service (IRS) requires that tax returns be filed electronically which is a service that most CPAs provide.
There are other compliance services that a CPA may provide
- Reviewing prior year returns and amending them if it would provide a significant benefit or if a serious error is found that needs to be corrected or because the IRS has done an audit and requires amended returns;
- Preparing past-year returns that haven’t been filed;
- Preparing quarterly and year-end payroll returns;
- Preparing trust and estate tax returns (Form 1041).
Tax preparation and compliance is an after-the-fact service that will make sure that returns are properly filled out in accordance with IRS rules but there is little that can be done to change what has already occurred. This is where tax planning comes into play.
The real value of a CPA comes from the tax planning that they can provide for their clients. Tax planning is an on-going process throughout the year when plans and strategies can be implemented to legally minimize a taxpayer’s liability.
At a minimum, the CPA should be monitoring whether any estimated tax payments are required and their appropriate amount to eliminate or minimize penalties for not paying enough taxes throughout the year. We have a pay-as-you-go tax system in the United States and that means that taxes have to be paid on income when it is earned, not once in March or April.
Most taxpayers accomplish this by having taxes withheld from their paychecks, but if you have any other sources of income, particularly from investments or from owning a business, there might inadequate or no withholding to cover the taxes. This can lead to unnecessary penalties and interest which can be avoided with the help of a CPA, though proper tax planning and timely payment of required estimates.
Beyond making timely tax estimates, there are strategies, depending on the taxpayer’s income and life situation, that may be helpful in reducing taxes. A good CPA will aggressively identify and implement the appropriate strategies available (without, of course, crossing the line). Some general examples might include:
- In the case of individuals
- Using retirement plans to their maximum effect
- Saving for college educations
- Health savings accounts
- In the case of a business
- o Identifying all ordinary and necessary business deductions
- o Planning the tax effects of capital expenditures
- o Implementing employee benefit programs
- o Potential expenditures to take advantage of business tax credits
CPAs can represent taxpayers in matters before the IRS.
Typical examples would include:
- Tax notices
- Requests for waiving penalties (not interest), if qualified
- Suspension of tax collection efforts, if qualified
- Payment arrangements, including offers in compromise, if qualified, for back taxes
A taxpayer is allowed to represent themselves in such matters, but it is in their best interest to have a CPA handle this. In order for a CPA to represent a taxpayer, they must first get a signed Form 2848 (Power of Attorney) from the taxpayer and present it to the IRS.
The CPA has a special phone line directly to IRS personnel who are more adept at handling many of these issues than the taxpayer may encounter calling for themselves. Further, IRS agents are well trained and professional and will have much more knowledge than a typical taxpayer which the CPA can match or exceed.
Tax representation services are not cheap but the potential savings in time and penalties can more than pay for them. CPAs can talk to the IRS for you and make sure you are treated fairly and professionally while working out an arrangement within the rules that will be to your best advantage.