Small Business Taxes & Management^TM--Copyright 2017, A/N Group, Inc.

Choosing a Preparer

Looking for a tax preparer or CPA? If your personal or business return is fairly simple and you don't require financial statements that have been signed by a CPA, you may only need a tax preparer. If you're looking for a preparer, here are some points to consider:

All return preparers must have a PTIN (Preparer Tax Identification Number, e.g., P00000000)

Virtually all preparers must be able to file electronically (there's a very small exception).

Avoid preparers who claim they can obtain larger refunds than other preparers.

Avoid preparers who base their fee on a percentage of the amount of the refund.

Refunds should be deposited into your own bank account, not that of the preparer.

The return preparer must sign your tax return and provide you with a copy for your records.

Consider whether the individual or firm will be around to answer questions about the preparation of your tax return months, or even years, after the return has been filed. Look for one who has an office or who lives locally, and is available year round.

Review your return before you sign it and ask questions on entries you don't understand. You're not required to be a tax expert, but you'll be responsible for errors that you should have spotted such as large charitable contributions when you told the preparer your only contribution was $100 or the preparer fails to report a substantial amount of income.

No matter who prepares your tax return, you're ultimately responsible for all of the information it. Therefore, never sign a blank tax form.

Find out the person's credentials. Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.

Find out if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.

Check how long the preparer has been in business and check with the Better Business Bureau for any questionable history.

Ask questions. Do you know anyone who has used the tax professional? Were they satisfied with the service they received? Tax evasion is a risky crime, a felony, punishable by five years imprisonment and a $250,000 fine.

Provide tax records. A good preparer will ask to see your records and receipts and ask questions about children, child care, employee business expenses, etc. to make sure get all the deductions and credits you're entitled to, and report all the income you should.

The IRS now offers a Directory of Federal Tax Return Preparers with Credentials and Select Qualifications on IRS.gov. You can use this tool to help you find a tax return preparer with the qualifications that you prefer. It includes the name, city, state and zip code of:

Attorneys.
CPAs.
Enrolled Agents.
Enrolled Retirement Plan Agents.
Enrolled Actuaries.
Annual Filing Season Program participants.

You can report abusive tax preparers and suspected tax fraud to the IRS on Form 14157. If you suspect a return preparer filed or altered a return without your consent you should also file Form 14157-A.

If you're using an attorney or CPA, you should be able to find out if they're in good standing by going to your state's professional licensing web page. Some states also license return preparers.

CPA, Attorney, Enrolled Agent or Annual Filing Season Program Participant?

CPA, tax attorney, enrolled agent, annual filing season participant, unenrolled preparer? What's the difference? A CPA (Certified Public Accountant) has taken accounting and tax courses and passed a rigorous set of exams. He or she is also required to take continuing education courses in accounting and/or tax to maintain his or her license. That doesn't guarantee the individual is tax expert. They may spend most of the year doing accounting (or even nonaccounting) work and prepare taxes only during the tax season.

A tax attorney generally specializes in taxes. He's an attorney first, and tax specialist second. He may have an LLM (Master of Laws in Taxation) and may also be a CPA. You'll probably pay more than for another other professional, but you might consider his or her services if you have complicated tax issues.

An enrolled agent is a person who has passed a rigorous test given by the IRS and must meet continuing education requirements in taxes. Often they are ex-IRS employees.

Annual Filing Season Program Participant. This voluntary program recognizes the efforts of return preparers who are generally not attorneys, certified public accountants, or enrolled agents. It was designed to encourage education and filing season readiness. The IRS issues an Annual Filing Season Program Record of Completion to return preparers who obtain a certain number of continuing education hours in preparation for a specific tax year.

An unenrolled preparer is an individual who has none of the above creditials but simply prepares returns for a fee. He or she may be an accountant, but not a CPA. A limited number of states require such an individual to register and meet continuing education requirements.

There's another designation--an MST or Master of Science in Taxation. The individual may or may not be a CPA, but has gotten a Master's in taxation.

In theory, you could find an unenrolled preparer who has been doing taxes for many years and is as good or better than a CPA who has been out of school only a couple of years or prepares only a few returns. The big advantage to the CPA, tax attorney, and enrolled agent is that they're licensed and generally take great steps to protect that license. In addition, they must meet continuing education requirements.

If you're got a simple return with just some interest and dividends and itemized deductions, you may not need a CPA, etc. You may be able to do the return yourself with commercial software, or use most preparers. Check prices in your area. You may find that a CPA or enrolled agent is the same price or only slightly more expensive than an unenrolled preparer.

If your tax situation is more complex, you should definitely seek a licensed professional. Tax attorneys are likely to be more expensive, but if you've got complex estate issues, trusts, limited family partnerships, etc. they could be your best choice.

If your own a business you should strongly consider a CPA. Even if you have a simple return, you may go for a bank loan, refinance a mortgage, etc. The other party may request financial statements signed by a CPA, a letter from a CPA, etc. If you've got a relationship with a CPA, it'll make things easier.

Picking a CPA

There's more than one time in the life of a business that you may be faced with selecting a CPA. It may be at the start, when the business has expanded in size or complexity beyond the capability of you or your bookkeeper to handle the work, or perhaps you're just dissatisfied with your current accountant. How do you pick a CPA? It's not as easy as it was even 10 years ago. Accounting, taxes, computers, and a host of other issues have all become more complex. That means your CPA has to be sharper and may specialize. It also means you'll probably rely on him more heavily.

Here are a number of points that should be useful in checking out a prospective CPA.

Is he competent in your business area? Does he have other clients in that same line? How many? There are many areas of taxes and accounting that require specialized knowledge. For example, accounting and taxes for a construction firm involves a number of special rules. Even in general retailing, a CPA who has several clients in this area will become familiar with your business more quickly. Obviously, the more at home the CPA is with your business, the more he can help you, not only with accounting and taxes, but general business issues. It may also mean that the CPA doesn't have to research as many issues. And there are more specialized tax rules than most people realize.

Type of service desired. If you're interested only in accounting services, there are three levels of financial statements CPAs can issue--a compilation, review, and an audit. Most CPAs will do compilations and reviews. Some, however, shy away from audits. The amount of work involved and the potential liability may be more than the CPA wants to undertake. Most small to mid-sized firms don't need audited financial statements. (These are sometimes required by a bonding company, a bank or other lender, a government agency or other outside source.) However, the larger your business becomes, the greater the chance reviewed or audited statements will be needed. Make sure the firm can do the work.

Range of competency. Some accountants specialize in taxes, viewing accounting as a necessary evil. Others are crackerjack accountants, but may not be able to handle sophisticated tax issues. You need a firm that's competent in both areas. Moreover, most business owners rely on their accountants for a lot of other information--advice in buying or selling a business, valuing a business, pensions, general business issues, etc. The CPA chosen need not be a expert in all areas, but he should be able to wear more than two hats. A good CPA can be your primary source of outside advice.

Size of the firm. Generally, you don't want to be the firm's largest client, nor do you want to be one of the masses in a large firm. You should choose a firm where you're an important client. That can insure good service. The large national CPA firms have been aggressively pursuing small firms in recent years. They may not be a good choice. While they have the resources to deal with many questions, that can be expensive. More than likely you'll only deal with a partner occasionally. Finally, the staff of most large firms don't have the entrepreneurial expertise many small CPA firms possess.

What's the makeup of the staff? If your business is small, a sole practitioner (no staff) may be all you need. However if your business is bigger or growing rapidly, you should check out the staff. How many of the employees are CPAs? Often, less than half will be. That's ok. However, there should be at least one non-partner CPA to every three or four accounting staff employees. If there are no non-partner CPAs, you'll pay partner rates for some work that may not require a partner's expertise. Also inquire as to how long employees have been with the firm. Turnover in the industry is usually high for younger employees, but the average stay should be two years or more.

Number of partners. If your business is specialized and/or relatively large, a firm with more than one principal is preferable.

Years in public practice. Look for a CPA who has been in public practice for at least five years.

Age. You want someone with experience, but avoid a practitioner who is nearing retirement, unless he's grooming a replacement you like.

Rates. In most cases, you get what you pay for. A CPA who charges much lower rates than the competition is either adding hours or buying business. Don't forget, comparing services is difficult. That's not to say there aren't some true bargains, but they are difficult to find. The issue is somewhat different if your business is located in a more urban environment. If office rates, living expenses, salaries, etc. are high in the neighborhood of your business, consider using a CPA further out of town. Recommendations from business associates could help here.

Bids and caps. If you want an audit or similar work done, you can put the job out to bid. The value of that approach is open to question. (We've heard of bids on the same job ranging from $2,000 to $6,000; something has go to be wrong with one or more of them.) The same can be said for an unreasonable cap. The CPA may agree to do the job at his hourly rate, with the cost not to exceed a certain amount. When there's a cost overrun, something will have to give; that could be the quality of the work, the failure of the accountant to bid your job again, etc. That's not to say you shouldn't price shop; just be reasonable.

Versed in computers. Even many old-time CPAs, while slow to react, have embraced computers. Make sure the firm you pick is well versed in this area. Your CPA can be a good source of advice on hardware, software, using computers in your business, etc. Moreover, a firm that uses computers extensively in accounting and tax work can save you money by reducing billing hours.

Check out the firm's library. Every practitioner today needs tax and accounting reference materials. A well-stocked library doesn't guarantee competency. An ill-equipped one does reflect poorly. (Checking out the library is now more difficult than in the past. Many reference sources are now on CD-ROM or on-line, so you may see few books.)

Check the firm's affiliations. Almost every firm will be a member of the AICPA (American Institute of Certified Public Accountants) and a member of a state society of CPA's. If the firm isn't a member of both, ask why.

Distance from office. All other factors being equal, choose a firm that's relatively close to your office. You'll get better service and you won't be paying for travel time. While the Internet would seem to make this less of an issue, you may want your accountant next to you when going for a bank loan, negotiating to buy a business, etc.

Business in other states? If you have offices in other states you may or may not need a regional firm. If your businesses are located in adjacent states, a local firm shouldn't have a problem. Headquarters in Massachusetts and a small operation in Colorado? A local firm can probably use another firm to do any required local work in Colorado.

Business in other countries? If you have offices in other countries you should look into forming a relationship with someone who is familiar with a country-specific taxes.

Ask for references. Talk to several current clients. Don't forget, you're buying expertise and service. Make sure you can get along with the CPA and that he or someone knowledgeable on staff is available to answer your questions.

Personal fit. While the CPA you met at the club may be more than competent, don't make a choice on personal affiliations. On the other hand, you should be able to work with the individual or firm. You want to deal with individuals who will offer suggestions and advice and not simply prepare your return or financials.

The list above is not exhaustive, but should be a good guide. You may find that no firm meets all the requirements. If that's the case, make sure the critical ones are satisfied.

Many of the above suggestions on picking a CPA apply to picking other professionals, such as attorneys, consultants, etc.

How do you find a CPA? Ask a business associate or inquire at your local Chamber of Commerce or your bank. You should be able to come up with some names. You might also try your state society of CPAs. We've got a link to all the state societies at www.smbiz.com/sbrl041.html. Many provide listings of local CPAs. If all else fails, you can just use the yellow pages. But if you pick a CPA at random, use more screening techniques to make sure it's a good fit.

How Much Should it Cost?

Pricing can depend on a number of factors. While the franchise store-front preparers sound like the cheapest option, they're often only slightly less than a modestly priced CPA or enrolled agent, and sometimes more expensive. For a CPA price will vary depending on the area of the country. Highest prices are in the northeast and far west and usually cheaper in rural areas and more expensive in urban environments. It can also depend on the competition.

A basic Federal Form 1040 and state return with a Schedule A (itemized deductions) and some interest and dividend items is likely to cost between $150 and $200. The store-front preparers generally charge for more complicated returns on a per form basis. For example, a single rental property might be $50 additional. Schedule C (sole proprietorship) can be more complicated and likely to be higher. Many CPAs also charge on a per form basis. Some preparers start with a minimum charge (e.g., $150 for a Form 1040 and state return) and bill additional on an hourly basis. Some use a per-item charge (e.g. $2.50 for each additional interest or dividend item). In the long run the billing approach probably won't make much difference. If your preparer charges $50 for a simple Schedule D and you have 40 transactions, you'll pay for the extra transactions. Got a rental property or you're a partner in a partnership with operations in another state? You'll probably need a second state return, adding to the cost.

Because tax law has gotten so complicated even high volume preparers may not encounter an issue and have to research it. For example, Fred prepares 275 returns, but has only one individual in the military. Sue on the other hand has a practice in Newfolk News, VA and 35% of her returns are for Navy personnel.

There are some ways you can hold down the costs. First, don't give your preparer a shoebox of receipts. You'll be charged on an hourly basis and even if he or she uses assistants, they're likely to be billed out at $45 to $75 an hour. The less "dog" work the preparer has to do, the more he can concentrate on the details of getting the return right and maybe offering some tax or business advice. The same goes for other transactions. Group all your W-2s, interest 1099s, dividend 1099s, etc. together. If the preparer can enter all the interest 1099s together he or she won't have to skip around on forms. Second, if the preparer gives you an "organizer" with last year's data and blanks for this year's, use it as much as possible. That's particularly true for a sole proprietorship and rental properties. Third, open the envelopes. Probably over 30% of taxpayers simply give their preparer an unopened envelope with the 1099.

Some preparers have special charges for certain situations. Give your info to the preparer on April 12 and say you need the return done by the 15? Some charge an extra $125 or more. Need an extension on the 14th? There could be an $80 charge.

--Last Update 02/10/17