Hiring your professional tax preparer is like hiring any other employee: You wouldn’t do it without a thorough interview or checking their references. Once you have narrowed your choices down to at least a minimum of three, schedule a face-to-face meeting with the most promising candidates to find out the following:
- You need to evaluate their styles and the chemistry you sense between you. What characteristics and qualities do you think your tax pro should have? Good communication skills, ability to apply knowledge and creativity, someone you could ask “stupid” questions, and just how comfortable you feel with this person when sharing the most intimate details of your financial life.
- Is the tax pro willing to explain what he or she is doing and why? You need a professional tax preparer that will explain things to you. Not someone who hands you doubletalk, or says a proposed strategy is too complicated to explain. This usually means they don’t understand it and certainly doesn’t want you to understand either. Bottom line, how are they keeping you informed about upcoming tax changes? Do they provide education classes or updates via newsletters etc.? All tax pros must complete continuing education every year to practice. Ask about the type of education the tax pro and his staff receive – if they only ever get tax continuing education, then they can’t help you with a business purchase, retirement planning or other item that might come up.
- Does your tax pro present you with Advanced Tax Planning by Choice or merely Tax Compliance? There is a difference! You need to understand that your tax pro does NOT take care of your taxes. All of the numbers included in your tax return are your responsibility. You create the numbers not your tax pro. In fact, your tax pro depends on you for the numbers and information. And if you’re like most people you take your information to them during the busiest time of year. Consequently, your tax pro doesn’t have time to think through every business deduction that may be coming to you. So the question is, what system does this tax pro have in place to make sure they are communicating with you throughout the tax year vs. sending you once a year reminders that it’s time to file your tax return?
A side note: One of the biggest issues that tax professionals face is that the client does not inform them about every possible deductible expense. What I mean is that so many people decide for themselves what they think may not be deductible so they never talk to their tax pro before they make a major financial decision. By talking to them before entering into a transaction your tax pro can inform you the best tax advantaged way to handle it. This is worth repeating. You have to talk to your tax advisor before you make major financial decisions or it will potentially cost you thousands in lost tax benefits.
- Is he or she asking you lots of questions, too? Not every approach will work for every person. No two individuals share identical financial situations so a good tax pro will customize their advice for each client. The only way they can do that is to ask lots of questions to get to know you and your business. You need someone that listens to what you have to say and not someone who assumes he or she already knows everything there is to know about you.
- Do they offer a free initial consultation to see if the match is good for both of you? If they do make sure you come prepared. Bring your last 3 years’ tax returns, a projection of income and expenses for the current year and your specific questions to give them a quick glance of your personal circumstances. Also, this is the time to establish a good understanding of the level of service (bookkeeping, payroll, tax returns) you want and are willing to pay for. Do you want them to contact you every quarter, twice a year, or be available every month to review your financials?
- Ask about their fee structure. Remember that tax professionals sell time, which is their only product. While the fees are a consideration they should not be the only influence on your decision. However, you want to make sure that if you call with a quick questions or send an email, how do they charge to answer those questions as well? Often times, many offices have staff accountants that do a lot of the preliminary work at a lower rate. Make sure you understand how they determine your fee to prepare a tax return. Is it a fixed fee or an hourly rate? And when do they require payment? I also recommend that you find a tax pro that specializes in your type of business. If they are familiar with the particulars of your industry, they don’t have to do a lot of research at your expense
- How do they handle deadlines? You don’t need the extra stress of a tax pro who’s cavalier about deadlines or returning your calls. If they are too busy to meet a deadline they may be short-changing you. A tax return that is filed late or full of errors means penalties and interest for you. Also, what’s their back-up plan when they are out of town? Who is available to answer your questions? And certainly, when can you expect to receive the completed tax returns from back from you?
- Look for someone whose tax philosophy mirrors your own. Even with thousands of regulations and millions of pages of discussion, opinion and court decisions, interpreting tax law is as much an art as a science. There’s no one-way to handle many tax questions. The range stretches from very conservative (“Let’s avoid an audit at any cost”) to very aggressive (“Nothing ventured, nothing gained!”) You need someone who is going to discuss the pros, cons and consequences of each approach. If you’re very aggressive, they should explain the possible costs you may suffer with regards to penalties, time, loss of privacy and certainly personal anxiety!
- Do not hire friends or relatives as your financial advisers. It can be dangerous to entangle your interpersonal relationships with your business dealings, particularly your personal finances. Even though Sister-in-Law Jane may be a perfectly competent CPA, family strains can be amplified if something goes wrong. You have plenty of qualified non-relatives to choose from so don’t get caught in this trap!
- Do they believe in filing extensions? Filing an extension is a cardinal rule of tax-reduction planning. If the tax professional does not like to file extensions because they just want to get your return done and out of the way, you get them out of the way and find someone else!
- If you’re audited, will they represent you? Amazingly enough, there are CPAs who will not represent their clients on an audit. They will respond to IRS correspondence but will refer them to someone else for examinations or collection issues. Certain returns, such as Schedule C/Self-employment returns, are audited at a much higher rate, so you want to know where you stand. (AND IT’S IMPORTANT THAT YOU NEVER CORRESPOND OR COMMUNICATE WITH THE IRS DIRECTLY!)
What’s the difference between an Enrolled Agent (EA) and a Certified Public Accountant (CPA)?
EAs are considered tax specialists. They have a vast knowledge of anything that pertains to income tax, inheritance tax, gift tax, estate, payroll, retirement, and non-profit taxation.
An EA is authorized by the U.S. Department of the Treasury to represent taxpayers before the IRS for audits, collections, and appeals. EAs advise, represent and prepare tax returns for individuals, partnerships, corporations, estates, trusts and any entities with tax-reporting requirements.
In order to become an enrolled agent, they must take the EA exam or have at least 5 years of IRS work experience under your belt. Once they have passed the EA exam, they are federally recognized as a tax specialist.
Choose an Enrolled Agent when:
When you have out-of-state returns. Enrolled agents are the only taxpayer representatives who receive their unlimited right to practice from the federal government (CPAs and attorneys are licensed by the states). That means if you need to file in more than one state and eventually need representation before that state in an audit or resolution case, the same EA can do it.
When you need help resolving an IRS dispute or expect to owe. People who don’t have the resources to pursue a taxation attorney often hire EAs instead for civil resolution cases. Not only do EAs rates tend to be more affordable, they can use their tax law expertise to represent clients in tax proceedings, audit hearings and appeals. EAs help ensure clients are treated appropriately by the IRS, work out payment plans on the best possible terms, and ensure the IRS follows laws that protect taxpayers.
Certified Public Accountant
CPAs have a broad range of knowledge on all topics related to accounting, including auditing, taxes, business law, finance and more.
CPAs must first complete the education requirements and take the CPA exam of the state in which they plan to practice. CPAs are licensed at the state level and can only practice in that state. This is one of the biggest differences between CPA’s and enrolled agents, who are licensed on a federal level.
Choose a CPA when:
A little accounting guidance wouldn’t hurt. If you own a small business, hiring a CPA with a bookkeeping and reporting background can help you get organized and on track for the next year. “When you have a couple million dollars in business, some of the accounting can get complicated. They make sure everything is in the right bucket.”
An audit of your business deductions, expenses and income is in order. A CPA’s main differentiator is the ability to attest an audit, which means it affirms to the IRS that financial statements are truthful. To do that, a CPA will request bank statements and other proof, which limits the possibility of mistakes. But make sure any professional you hire will guarantee their work on your returns. That means they agree to represent you later pro bono if there’s a problem with the return.