Despite being an annual event, filing your taxes is far from straightforward. With various rules and formulas to know, plus a number of forms to fill out, it can be easy to make a mistake if you go it alone. It’s no wonder then that more than half of tax returns are completed by professionals, according to the IRS.
If you’re looking to find a tax preparer — and a good one at that — how can you be sure you’re making the right choice? Referrals are a great place to start, but you should still do your due diligence. Not only do you want to ask the right questions, you also want to be on the lookout for the right answers. Here are five questions to ask a tax professional before you decide to hire one.
Do you have a preparer tax identification number?
Anyone who charges a fee to prepare taxes must register with the IRS and receive a preparer tax identification number (PTIN). In addition to signing your completed return, the tax preparer is required by law to enter this number on any return he or she prepares.
“In the past, anyone was allowed to prepare a tax return — even if they had no knowledge of how to do it,” says Dennis Cole, a certified public accountant and managing partner of Beers, Hamerman, Cohen & Burger. “The IRS now requires tax preparers to have a PTIN.”
This is the first question you should ask any tax pro. Why? Because if you end up hiring someone who doesn’t have a PTIN, the IRS could hit you with a slew of penalties, fees and other legal actions.
Which type of representation right do you have?
Tax preparers fall into one of two main representation categories. Those who have “unlimited representation rights” can represent clients on any matter, ranging from audits to collection issues to appeals. Those who carry “limited representation rights” can only intervene on behalf of people whose returns they prepared and signed, and only under specific circumstances.
According to the IRS, tax professionals with unlimited representation rights include attorneys, certified public accountants (CPAs) and enrolled agents (EA), or those who have passed a three-part IRS enrollment exam. While an EA is not an employee or representative of the government, he or she can act on a taxpayer’s behalf when it comes to dealing with the IRS. In order to retain their licenses, enrolled agents must complete a minimum of 72 hours of continuing education every three years.
Both attorneys and CPAs are required to obtain licenses according to the rules and regulations of the states in which they conduct their business. However, this does not necessarily mean that they will be tax experts. While some attorneys do specialize in tax planning and preparation, keep in mind that most perform a range of other duties. So their focus may not be on filing returns for clients. Similarly, CPAs may perform many duties outside of tax preparations, and many specialize in other areas of finance. So before hiring either type of professional to prepare your tax returns, make sure you are comfortable with their level of expertise.
Is your experience a good fit for my situation?
If you know your tax situation is not typical, make sure the professional you hire is someone who has completed returns similar to yours.
Working with a tax preparer who is familiar with your line of work can be the difference between claiming all the deductions you’re eligible for and forfeiting money. If your taxes are more complicated than the average person’s — you’re self-employed, own a business or rental property, live in one state but work in another, have received an inheritance, or have worked abroad — your tax preparer should be well-versed in handling these specific situations.
“We do a lot of foreign tax reporting, which is very specialized,” Cole says, “and failure to properly file can result in substantial penalties. In these instances, it is critical to have a knowledgeable preparer.”
What is your fee?
Before you agree to hire any kind of tax preparer, make sure to discuss what you can expect to pay. “Costs vary from preparer to preparer,” Cole says. “Typically an EA would be less costly than a CPA, but also would most likely not possess as advanced tax knowledge — which might be necessary for complicated returns.”
Some tax professionals may charge their clients based on the number of forms and schedules that must be filed with the return. Others may charge hourly, while others may do a combination of both. However, the IRS recommends avoiding a preparer who wants to charge you a percentage of your refund.
It’s also a good idea to note what the average price might look like so that you can be certain you are being charged fairly. According to a recent survey conducted by the National Society of Accountants, the typical firm charges an average fee of $220 to submit a Form 1040 without any itemized deductions. For itemized deductions, the fee averages $323. While you might assume a commercial tax preparation chain will charge a lower fee than an independent professional, it's still a good idea to ask for an estimate or range before you commit to using any tax professional.
Do you belong to any professional organizations?
Being a member of a professional organization is not a requirement to be a tax preparer, but it can be a sign that whoever you are considering is serious about the profession. Many organizations offer members high-quality continuing education and access to research to ensure tax professionals stay up-to-date with current tax developments and recent tax law changes. In addition, most organizations, including the National Society of Accountants (NSA), the National Association of Enrolled Agents (NAEA), and the National Association of Tax Professionals (NATP) hold members to a special code of ethics, which may give you additional peace of mind.
This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.