As you gather your w-2's, 1099's and other tax documents, here are a few things to consider when choosing someone to prepare your tax return.
First of all, the tax field is totally unregulated. The guy who mows your lawn probably has a license. The guy who unclogs your toilet and the gal who cuts your hair probably do too. The person who prepares your taxes may not.
Congress has never regulated the industry and the IRS is trying, but its efforts are tied up in court (Loving vs. IRS). Currently, the only requirement to become a paid preparer is to pay a nominal fee to purchase a PTIN -- Preparer Tax Identification Number. No background check, no competency testing, no continuing education, nothing.
According to recent IRS estimates there are currently about 750,000 active PTINs, and about half of these PTIN holders have no formal credentials at all. It doesn't mean they don't know what they're doing, but they have not demonstrated any tax competency to federal or state regulators and are not bound by any ethical or continuing education requirements. So before you share all your intimate personal information with your tax guy, it might be a good idea to ask about his credentials.
Second, all tax preparers are not created equal. This chart, compliments of IRS.gov, provides an overview of the various categories of individuals who may prepare federal tax returns for compensation: http://www.irs.gov/Tax-Professionals/Overview-of-Tax-Return-Preparer-Requirements.
As you can see, the Enrolled Agent credential is the most expensive license granted to a tax professional by the IRS. To become an Enrolled Agent, one must pass a comprehensive three-part exam that covers individual tax returns, business tax returns and representation before the IRS. EA's must have a PTIN, pass a tax compliance check and complete a minimum of 72 hours of continuing education every three years. EA's generally have unlimited representation rights before the IRS. For more on the Enrolled Agent program see IRS publication 4693A.
Certified Public Accountants and attorneys may also prepare income tax returns if they have a PTIN. They are licensed by their individual state boards and adhere to those standards and practices. Their specialized training and continuing education may or may not be in the field of taxation; many specialize in tax but others do not.
When choosing a tax professional, make sure to ask for credentials and find one who has the skills and experience that best match your current situation.
Finally here are a few signs that you may need a new tax preparer:
If your situation doesn't change much from year-to-year, your refund or balance due shouldn't, either. Beware of a new preparer who generates a refund that sounds too good to be true.
Legitimate preparers are available year-round and stand behind their work. If your preparer's office has wheels, or he uses a disposable cell-phone and a free Gmail account, you might want to find someone different to share your personal information with.
Finally, paid preparers are not to accept your refund. Under no circumstances should all or part of your refund be directly deposited into a preparer's bank account. If a preparer offers this service, run screaming from the room.
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Jerry Gaddis is Founder & CEO of Tropical Tax Solutions, a full service firm in Key Largo offering tax consultation, preparation and representation services. He is enrolled to practice before the Internal Revenue Service and is a Fellow in the National Tax Practice Institute. You can reach him at www.TropicalTax.com or follow him on twitter (@TropicalTax).