From the Mailbag:
I recently finished Marc’s book (loved it!) and became a Member of The Oxford Club. One big lesson I’ve picked up is to “speak with your tax advisor” for advice on various tax implications. Problem is, I don’t have one.
What is your recommendation for finding someone? Is it preferable to go to a large firm, boutique firm, etc.? What are the signs of a bad tax advisor?
Like most things in life, when working with a tax advisor, you get out what you put into it. That is why it is so important to ask a lot of questions. Finding a tax advisor is an interview process. The goal is to find a tax advisor whom you can trust, who charges a reasonable fee and who will work with you for years to come.
You should never hire someone to give you tax advice on a whim…
Late last March, my friend was walking into a grocery store when a car with a magnet advertising tax preparation services drove by. My friend had not done his taxes yet and was running out of time.
So he called and hired her.
After a few meetings at a coffee shop, his taxes were filed and he had a small refund check. The tax preparer had her fee. He called her back the first of June to ask her a question about this year’s taxes and her number was disconnected.
How do you know you have a good tax advisor?
They have a loophole named after them.
Point is, when hiring a firm or individual to prepare your taxes, you need to be reasonably sure that the individual or firm will be around to answer questions about your return months and even years after it has been filed.
The firm may be large or it may be a smaller “boutique,” but either way, you want someone who is experienced, has been in business for more than a few years and won’t disappear when you need them.
A tax preparer at a smaller firm may provide a more personal touch, but they may not have the resources or time to answer your calls or emails quickly. In a larger firm, the professional you hire may not prepare your return. They usually delegate to subordinates who have less experience and training.
If you choose to work with a larger firm, ensure that the person you hire is, at the very least, reviewing their subordinate’s work prior to signing off on your form.
There are three types of tax preparers that have unlimited practice rights and may represent their clients during IRS audits: certified public accountants (CPAs), tax attorneys and enrolled agents (EAs).
Alternatively, you can choose to have your taxes prepared by a professional at a tax preparation chain or outlet. Usually, these tax preparers cannot represent you before the IRS, but they may offer audit advice.
Tax preparation chains are best for people with basic tax returns who don’t want to complete their returns themselves. For most taxpayers, these tax preparers offer limited value beyond data entry. Some of them even use the same software to prepare your taxes that you can download at home.
Although usually the cheapest option, there is minimal advice and tax planning, and your return is typically completed by a general tax preparer. Many of the tax preparers are seasonal hires and will not be available after April 15.
CPAs are more appropriate for people with complex tax returns, investors or small business owners who pay higher income taxes. Hiring a CPA will cost more than hiring an EA or tax preparation chain, but it may be well worth the money.
Besides preparing your return, CPAs will give advice on tax strategies to take or avoid based on their interpretations of tax codes and historical IRS rulings.
Hire a tax attorney only if you need to make a complicated estate plan or file an estate tax return, or if the IRS has accused you of tax fraud.
EAs, unlike CPAs, focus only on taxes. These tax preparers have either passed a comprehensive IRS test covering individual and business tax returns or are former IRS employees. They must complete continuing education courses every three years and are members of the National Association of Enrolled Agents. EAs are suitable for individuals looking for tax return preparation, tax advice and strategic planning as well as audit representation, if needed.
Anyone who prepares tax returns for a fee must have a Preparer Tax Identification Number (PTIN). All tax preparers are required to sign and enter their PTINs on any return they complete on behalf of a paying customer. If the preparer does not sign your return or fails to enter their PTIN, that’s a huge red flag.
- Look for a tax preparer whose clients are financially similar to you.
- Ask if the preparer will represent you before the IRS in case you ever need help with an audit. Many CPAs and EAs will represent you, but you may have to pay extra.
- Ask for a price quote in advance. Sometimes preparers will say they cannot tell you how much they will charge until they see which forms you need. If your tax situation has not changed much from last year, show them last year’s forms. Also, ask for a list of all fees to get a better estimate.
- Find a professional who provides tax planning, not just preparation.
- Ask lots of questions! Remember, you get out of it only what you put into it.
Red Flags: The tax preparer…
- Bases your fees on your refund
- Guarantees a refund
- Will not sign your tax return and/or enter their PTIN
- Won’t answer your questions
- Jumps from firm to firm every few years
- Comes off as dishonest or talks about playing fast and loose with tax codes
- Works in a temporary location.
When hiring someone to prepare your taxes, be picky. This person will have access to your most important financial information. You need someone you can trust.
A good tax preparer will look at your situation today and then make suggestions as to how to save on taxes now and in the future. They may even suggest to enlist the help of another professional like an estate attorney.
Lastly, make sure you find an advisor with a level of risk tolerance similar to yours. Sometimes, the tax code is “clear as mud” and comes down to interpretation. Some tax advisors are happy to interpret the code in favor of the taxpayer while others side with the government.
At the end of the day, you are responsible for the information on your return. Even if you have a professional complete your return for you, it’s a good idea to double-check the math. Trust, but always verify.