Quick quiz: What causes you the most dread?
a) The whine of a dentist’s drill.
b) Your family’s annual Thanksgiving Day gathering.
c) Preparing your income tax returns.
If you answered “c,” you have plenty of company. About 50 percent of the nation’s taxpayers share your fear and pay someone to prepare their returns. And, with the April 15 deadline fast approaching, many Miami Valley residents will become increasingly eager to gather their financial records and put them in the hands of qualified professionals.
Sure, many people prepare their own returns and rest comfortably knowing they have not overpaid the Internal Revenue Service. Plenty of tax-advice books and computer programs are available to help them.
But experts recommend anyone who has experienced significant changes in lifestyle and financial status, such as those caused by divorce or the loss of a job, should seek professional tax help.
“If they were laid off, they’re probably receiving unemployment compensation, and that needs to be included at taxable income,” said Gayla Martin, district manager for 16 H&R Block offices in the Dayton area. “If it’s a permanent separation, they could have received distributions from pension plans and profit-sharing. They can be complex, and some could have penalties associated with them if they are not handled correctly.”
What’s more, a tax professional can offer valuable tax and financial planning advice. He can recommend different strategies designed around your particular lifestyle, income and goals.
Finding a qualified tax pro in Ohio can be dicey if you are not careful. Anyone with a pencil and calculator can call himself a professional tax preparer. The state does not require any specific training or qualification.
So how do you find a good tax preparer who meets your particular needs?
First, it helps to understand the differences between the most common types of tax professionals. They are the commercial prepapers, enrolled agents, tax attorneys and certified public accountants or CPAs.
Commercial preparers range from one-person shops to the nationwide chains, such as H&R Block and Jackson Hewitt.
You will find a wide variety of experience at this level. Martin’s employees, for example, range from first-year preparers to 15-year veterans. Each, however, has taken 86 hours of basic tax preparation and computer training and passed a final exam with a score of 80 percent or better.
Jackson Hewitt preparers must complete comparable training and testing, said Sharon Brockman, manager of the chain’s three local offices.
Most commercial preparers charge according to the complexity of the return, meaning how many forms must be used. A simple federal, state and local return package costs between $50 and $70.
H&R Block also offers an Executive Tax Services for businesses and people with more complex returns. These offices generally have more experienced preparers and enrolled agents. Fees can vary widely, but an individual homeowner with a few investments and itemized deductions on federal, state and city returns can expecet to pay roughly $200.
Enrolled agents are tax specialists licensed by the federal government to represent taxpayers before the IRS. They must have five years of work experience with the IRS or have passed a strenuous two-day exam. They quite often are full-time tax prepapers and bookkeepers.
To retain their licenses, enrolled agents must take 72 hours of continuing education every three years.
Some taxpayers believe hiring a tax attorney rather than a CPA might be automatically advantageous. Caplan warns, however, that “if a lawyer is the preparer of your tax return, there is no attorney-client privilege. Attorney-client privilege exists only when the attorney represents you as a lawyer and not as a preparer of your return.”
CPAs often are the most authoritative – and expensive – tax professionals. Potential CPAs must go through a strict licensing procedure involving a series of exams. Only 15 to 20 percent of all prospective CPAs pass all four parts of the CPA exam pass.
In addition to continuing education requirements established by professional associations, most states have their own continuing education requirements for CPAs. In Ohio, CPAs generally must complete 40 hours of continuing education every year.
Tax attorneys and CPAs generally charge by the hour, often $50 to $100 an hour or more, depending on the complexity of the return and the attorney’s or CPA’s specialty.
Tax law has become so complicated that most people can benefit from hiring a CPA, even if their tax situations are uncomplicated, said Mark Schutter, a CPA at C.H. Dean & Associates Inc. in Dayton.
If you hire a CPA, be prepared to show him your tax returns for the previous two years and other financial records, Schutter said. He must understand your overall financial situation to give you the full benefit of his expertise.
What to look for
Do you want to hire a tax professional but don’t know where to begin? Martin Caplan, a certified public accountant and author of What the IRS Doesn’t Want You to Know (Villard, $13.95), suggests you:
* Make sure the professional has verifiable qualifications, such as an appropriate degree or license in full view. if there isn’t one, it’s perfectly acceptable to ask to see it.
* Ask the professional about his knowledge representing clients before the IRS. “You want your tax professional to be extremely familiar with tax law so that when the laws do change, your tax pro can tell how those changes will affect you personally. A sound question to open up this discussion is ‘Will you represent me at any audits.”‘
* Try to get a feel for the person’s style and method of operation. Whoever you hire should actually complete your return and not pass it off to junior staff person. Also, note whether the professional was on time and whether he appeared organized.
* Ask the professional what procedures are in place to double-check your return once it’s completed. What you are looking for is assurance that another pair of eyes will view your return before it is mailed in.
* Determine if the professional uses modern technology, such as a computer, to help prepare returns. Someone who uses no form of technology whatsoever is probably behind the times.
* Determine whether the professional will offer tax planning advice. Start by asking, “What new tax laws are being discussed in Congress now? Will they affect me directly? Are there any tax changes effective this year that I might take advantage of?”
* Inquire about fees charged on top of the hourly or flat rate.
Once you hire a tax professional, that person should begin to establish a special relationship with you as a consultant, expert and partner in preparing your annual tax return, Kaplan said. Take time to find someone right for you.