If you’re reading this then you’ve probably realized that filing your own taxes might be more trouble than it’s worth and you’d probably be better off hiring a CPA or tax accountant.
You’ve probably hit up your friends for recommendations and scoured Yelp reviews for the best tax pro in your area. Now the challenge is narrowing down the responses to find the best match. Here are a few key questions you should ask when evaluating a CPA or tax accountant in order to filter the best from the rest.
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Does your CPA or tax accountant have a valid PTIN?
A PTIN is a preparer tax identification number assigned by the IRS, and it is required for anyone who prepares or assists in preparing federal tax returns for compensation. The PTIN must be valid for the tax year in question, so a 2020 PTIN will be necessary for the upcoming tax season.
CPAverify.org is a free CPA lookup tool populated by official state regulatory agencies that you can use to verify the status of a tax pro, make sure they are licensed and in good standing with the state, and confirm that they have a PTIN. The information in the database is provided by the State Boards of Accountancy, and all fifty states with the exception of Delaware, Hawaii, and Utah participate in providing CPAverify.org with licensing data. Guam, Puerto Rico, and the U.S. Virgin Islands are also participants. Most, but not all, states provide data on both individuals and firms. Click the link for more information on the participating state that matters to you.
What type of license does your CPA or tax accountant have?
So you’ve gone ahead and verified that your prospective CPA or tax accountant all have PTINs – great! Now you should identify which license these professionals hold.
There are three different license types: CPA, EA, and tax attorney. While oftentimes these terms are used interchangeably, there are some notable differences that you should be aware of as they may influence your selection.
CPA – Certified Public Accountant
A CPA, the highest level of accountant, is a tax adviser who has passed the rigorous CPA Exam and met work experience requirements necessary to receive licensing by the state.
A national effort promoting CPA mobility now permits most CPAs to practice across state lines. It’s important to note that not every tax preparer who holds a valid PTIN is a CPA. Reputable CPAs maintain the highest standard of knowledge and ethics. They set themselves apart by taking continuing professional education courses in order to maintain their CPA certification. These individuals should understand the nuances in the tax code and can help you obtain the highest tax refund to which you’re entitled.
CPAs can be auditors, business advisers, decision-makers, tax consultants, and accounting consultants. Not all CPAs act as tax preparers for compensation (i.e., a business might only hire a CPA to do bookkeeping), in which case, the CPA will not need a PTIN.
A good CPA has vast knowledge and can assist individuals and enterprises in financial planning, investments, taxes, even mergers and acquisitions. Many CPAs also provide consulting services and are relied on by both private and public organizations for insights and thought leadership in financial and strategic areas.
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EA: Enrolled Agent
Enrolled Agents are tax practitioners who are licensed at the federal level by the IRS, which is one of the key differences that set them apart from state-licensed CPAs. These professionals are also highly trained and must pass a three-part Special Enrollment Examination which covers all aspects of the tax code. This exhaustive exam requires the agent to demonstrate proficiency in federal tax planning, individual and business tax return preparation, and representation.
Alternatively, one can become an EA by working at the IRS for five years in a position that requires tax code interpretation and application on a consistent basis. In addition, EAs must complete 72 hours of continuing education every three years.
The work of an EA is generally related to tax issues with a focus on collections, audits, and appeals. These professionals usually find employment at tax preparation franchises or working under a CPA. If you’re evaluating different tax preparation services and have IRS and federal tax-related issues, then an enrolled agent may be your best bet since dealing with Uncle Sam is their forte.
As you can probably guess, a tax attorney holds a law degree. Tax attorneys specialize in the legal side of tax preparation. Say you’ve come into some riches and wanted to use it to provide for your family and heirs down the road; a tax attorney that specializes in trusts and estates can assist in establishing the proper wealth transfer arrangement. Tax attorneys are also highly skilled at tax planning and can create ways to structure your assets and minimize your tax liability.
While CPAs, EAs, and tax attorneys are all capable of providing assistance when dealing with tax authorities, the lawyer is the one you should absolutely hire when you’re in trouble with the government. Leveraging their skills and legal knowledge, tax attorneys can stop Uncle Sam from garnishing your wages or imposing levies, and they are especially skilled at negotiating compromises with the IRS or state franchise boards to adequately satisfy all parties.
The bottom line is that if you have a serious tax problem, are dealing with tax agents, or facing potential charges of tax fraud, then it’s crucial you hire legal counsel who can provide representation in the matter.
Is your CPA or tax accountant a member of any professional organizations?
Becoming a member of a professional organization is a great way for tax practitioners to demonstrate their bona fides and signal that they are reputable experts. The IRS Pro Associations Partner page lists some of the top organizations which include:
- American Academy of Attorney – CPAs (AAA-CPA): The only organization comprised of individuals who are dually-qualified as Attorneys and Certified Public Accountants.
- American Institute of Certified Public Accountants (AICPA): The world’s largest member association representing the accounting profession.
- National Association of Enrolled Agents (NAEA): A professional society representing enrolled agents.
- National Association of Tax Professionals (NATP): The largest nonprofit organization focusing specifically on federal tax preparation.
- National Conference of CPA Practitioners (NCCPAP): A professional organization that advocates on issues important to CPAs.
- National Society of Accountants (NSA): NSA is dedicated to preserving the public trust and confidence in the accounting and tax profession and has a strict code of ethics that all NSA members must follow.
- National Society of Tax Professionals (NSTP): NSTP assists members in attaining the greatest expertise, proficiency, and competency in all areas of tax compliance to effectively provide professional tax preparation services for clients.
If your tax professional is a member of any of these organizations, its likely that they are respectable and reliable.
How much will your CPA or tax accountant charge you?
If you’re entitled to a nice refund then you’re not going to want to fork over a huge slice to your tax preparer. To get the best value, you need to find someone who can locate all those amazing credits and deductions for a reasonable price.
According to the latest report from the National Society of Accountants, the national average fee for a professional to prepare and submit taxes are as follows:
- $176 for a Form 1040 Individual Income Tax Return and state return with no itemized deductions.
- $273 for an itemized Form 1040 with Schedule A and a state tax return.
- $457 for an itemized Form 1040 with Schedule C and a state tax return.
- $656 to prepare Form 1065 (partnership).
- $826 to prepare Form 1120 (corporation) .
- $809 to prepare Form 1120S (S corporation) .
Tax preparation fees vary by region, firm size, population, and economic strength of an area. Check out the average tax preparation fees for an itemized Form 1040 U.S. Individual Income
Tax Return with Schedule A and a state tax return for the census district where you file:
- New England (CT, ME, MA, NH, RI, VT) – $333
- Pacific (AK, CA, HI, OR, WA) – $329
- Middle Atlantic (NJ, NY, PA) – $290
- West South Central (AR, LA, OK, TX) – $271
- South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV) – $268
- Mountain (AZ, CO, ID, MT, NV, NM, UT, WY) – $263
- East North Central (IL, IN, MI, OH, WI) – $249
- West North Central (IA, KS, MN, MO, NE, ND, SD) – $214
- East South Central (AL, KY, MS, TN) – $210
Not all tax pros bill clients the same way, but as a rule of thumb, if you have a complex financial situation then you should expect to pay more. Also, if you walk into a consultation with a shoebox of disorganized receipts or missing tax documents, then you’ll probably also face higher fees. There are various methods used by tax professionals to set prices, and some are more preferable than others. These include:
- A fixed fee for each tax form or schedule.
- A fee based on the previous year’s fee with an additional charge for any changes in the client’s tax situation (i.e, marriage, divorce, children, retirement, purchase of a new house)
- A minimum fixed base fee, plus additional fees determined by the complexity of the client’s tax situation.
- A value-based fee based on the subjective value of the tax preparation service.
- An hourly fee based on time spent preparing the tax return.
- A fixed fee for each data entry item.
No one likes surprises – as a customer, you should demand a fixed fee up front so you know exactly what you’ll be paying. Be sure to compare the quoted price with district averages to confirm that you’re getting a fair shake.
How does your CPA or tax accountant handle document transfer?
If you’re outsourcing tax preparation then you’ve likely got at least a few documents and receipts that need to get to your accountant. There are three common methods of getting the necessary materials to your tax accountant, but not all are created equal.
Mail – Ship your hardcopy documents to your tax pro via US Postal Mail, or a private company like FedEx or UPS. This method is not only the slowest, it’s also fraught with possible complications. Documents can get lost or damaged in transit, so it’s important to send copies rather than originals. Plus, it’s likely that you’ll forget a form or two, delaying your return as you make another trip to the post office.
Email – With the world gone digital you can scan paper receipts and attach them to an email along with W2 forms, 1099s, and any other tax documents you may have. But there are real security concerns surrounding this method as you never know who might have access to your accountant’s email and gain access to your sensitive materials.
Secure online portal/software – The preferred method for document transfer is instantly uploading the materials to a secure online portal accessible only by your tax preparer. The best interfaces, including the one that Picnic Tax has built, will guide you around the documents you need and allow you to upload a document to its specific place (i.e., expenses to the expenses folder).
Filing taxes electronically can ensure returns are received quickly so that refunds hit your bank account as soon as possible, all without killing any trees. In addition, the IRS maintains that e-filing returns reduces errors, lowering the chances of an audit. In fact, the error rate for a paper return is 21% while the e-file error rate is a scant 0.5%.
Even if you choose to outsource tax preparation to a professional, you want to make sure they e-file your return. In fact, Section 6011(e)(3) of the Internal Revenue Code sometimes known as the e-file mandate requires tax return preparers to electronically file certain federal income tax returns including forms 1040, 1040A, 1040EZ, and 1041. Then again, those same forms cannot be e-filed if they have attached forms, schedules, or documents that the IRS does not accept electronically. It can get complicated, but click the link if you want to learn more about the e-file mandate.
In order for tax preparers to file returns online, they need an Electronic Filing Identification Number (EFIN). The IRS assigns an EFIN to firms or sole proprietors who complete an application and pass a suitability assessment to become an Authorized IRS e-file Provider. You should definitely ask your tax preparer for proof of an EFIN before you hire them.
Assuming that your tax preparer has an EFIN, the four steps involved in submitting a return are as follows:
- You, the taxpayer, first signs an authorization form that allows the professional preparer to create the taxpayer’s five-digit PIN tax return signature.
- The preparer must verify and attest the taxpayer’s identity by signing the same authorization form.
- The preparer uses the newly created five-digit PIN to e-sign the return for the taxpayer.
- The preparer then e-signs the tax return by inputting their own 11-digit PIN (six-digit EFIN plus five-digit self-select PIN).
Will your tax preparer represent you in an audit?
Uh oh, your return has been flagged and you’ve won the unlucky lottery of being selected for a tax audit. According to the IRS, an audit is a review/examination of financial information to verify that the reported amount of tax is correct. Audits are selected at random and via computer screening based on a statistical formula. Basically, if your tax return greatly differs from “norms” for similar returns, then it sets off an alarm.
Your income level also plays a part in the probability that you’ll be selected for an audit. According to the Washington Post, high-income taxpayers reporting more than $1 million have a 4% chance of getting audited. You have a 1.25% chance of being audited if you earn $200,000 or more. In total, individual taxpayers have less than a 0.625% chance of being audited. These probabilities are way down from the figures reported in 2011 due to budget cutbacks at the IRS. Even still, a million or so taxpayers will be selected to undergo the dreadful process.
Depending on the level of severity, the IRS will conduct one of three audits to assess your particular situation.
- Correspondence (Mail) Audit – Most audits are conducted and resolved through the mail. The IRS simply tries to correct routine errors due to bad math or missing documents using correspondences.
- Office Examination Audit – In this case, you’ll be asked to schedule an office examination with your local IRS branch where they will assess whether you’ve reported all of your income and that the deductions you’ve itemized are legitimate.
- Field Audit – If your tax return sets off major warning signs then an IRS agent will come to your home, business or accountant’s office to personally examine records and verify the accuracy of the reported tax information.
Even if you don’t personally prepare your return, you, the taxpayer, are on the hook for all items reported. That’s why it’s a good idea to review your return and check for inconsistencies in entries before it’s signed and filed. Good news is that if it’s determined that an error was caused by the negligence of your tax accountant, then the IRS may waive penalties, although the proper tax will still need to be paid.
Your CPA or tax accountant can represent you at the audit, taking the pressure off of you since, after all, they’re the experts. In fact, some tax preparer services offer audit protection that will take care of everything from representation to paying for penalties and interest due to their error. This type of guarantee provides greater peace of mind, which for some individuals, can be priceless.
Should I hire a CPA or tax accountant directly or use a service like Picnic that matches me with one?
It’s up to you, but we think that using Picnic is the way to go. We save you a lot of the initial diligence and research headache by verifying the PTINs, EFINs and professional licenses of all of the CPAs and tax accountants on our platform.
Further, all doc transfer happens through our secure online portal as does the e-signing of your return prior to your accountant submitting it.
Best of all, we have a transparent and formulaic pricing methodology which means you will know exactly what you will be paying before you even start filling out any of your background info.
Interested in the best online tax solution? Try Picnic Tax: