|
 1. What Services Do You Offer? Most tax advisors prepare tax returns. We use the term "tax advisor" because most of us in the tax business do more than simply prepare returns. Many advisors can help you plan and file other important documents throughout the year. Some firms can also assist you or your small business with bookkeeping, accounting, and other financial planning. Having a single company provide all the services you require will often save you money, as it eliminates the redundancy of multiple people needing to understand your circumstances.
Ask your potential tax advisor how they work with clients. You're hiring a tax advisor because you lack knowledge of the tax system. If your tax advisor doesn't ask questions and explore your situation, you may be dealing with "the blind leading the blind." A proficient tax advisor will help make sure that you aren't overlooking deductions or making other costly mistakes that may lead to an audit, penalties, and interest. Beware of "tax form preparers" who simply take the numbers and you give them and enter them on a tax form. |
|
| 2. Do You Have Areas Of Specialty? This question is very important! If a tax advisor works mainly with clients who work a 9 to 5 job, that advisor may have little expertise in helping small business owners complete the mountains of paperwork that the IRS requires. Or if you are a high net worth individual, the advisor may be inexperienced in the nuances of portfolio and estate implications. Find out what expertise the advisor has with your unique situation. For example, if you need help completing an estate tax return for a relative, ask how many estate returns the advisor has completed. Nearly one in every seven estate tax returns are audited, so you don't want a novice working for you. |
|
| 3. What Other Services Do You Offer? Ideally you would want someone who is 100% dedicated to taxes, as they would most likely have maximum knowledge about tax laws and procedures. In the real world, tax work can be a seasonal business, so advisors may understandably (and reasonably) offer other services to balance their income. If your advisor does not maintain a fulltime focus on taxes, look for advisors who at least work in "related fields", such as accounting or estate planning. While these folks may not spend 12 months a year preparing returns, they still need knowledge of tax laws to be proficient in their related areas of work, which increases the probability that they make an effort to stay current of tax law changes. Beware the tax advisor who works with tax matters from Jan 1st to April 15th, then sells used cars the remainder of the year! |
|
| 4. Who Will Prepare My Return? If you are working with a solo practitioner, the answer to this question should be the individual. But even then ask to make sure the individual is not sub-contracting the preparation of your return to someone else less qualified. In a larger firm with multiple practitioners, ask what level of involvement other people will have with your return. It isn't necessarily bad if a junior-level person performs the preliminary work on your return, as long as your advisor will review and scrutinize the final result for completeness before giving it to you. In fact, this type of scenario could save you money if the senior practitioner is scrupulous about only billing you for actual expertise involved in preparing your return. However, be wary of firms that bill you at senior practitioner rates for work performed by junior associates or assistants. |
|
| 5. How Aggressive Are You Regarding Tax Law? Some tax advisors, unfortunately, view their role as enforcement agents of the IRS. Fearful of being the subject of an actual IRS audit, they use only the safest and most conservative methods in preparing returns. While you may never be the subject of an IRS audit by employing such an advisor, you will almost surely pay more taxes than you are legally obligated to pay. On the other side of the spectrum, some preparers are too aggressive and try tax maneuvers, if not outright tax fraud schemes, that put their clients at great risk of an audit, including additional taxes, penalties, and interest. Finding an advisor with a balance between the two extremes is not easy, but a little judgment on your part can go a long way. Ask the advisor how many returns (and what percent of their returns) have been audited by the IRS. As a benchmark, about 1 percent of all returns are audited. For higher income clients and small business owners, that number is usually between 2 and 4 percent. Also ask for references of clients for whom the advisor has helped find some overlooked opportunities to reduce tax bills. |
|
| 6. What Is Your Experience With Audits? If your would-be tax advisor proudly proclaims zero client audits, ask a few more questions about the practice. Such a claim could indicate that the advisor is overly conservative, and may not want to claim deductions to which you are entitled, for fear of an audit. On the other hand, there is no shame in conducting business "by the book" as long as all legal deductions are claimed. Ask questions about the advisor's client base, level of training, expertise, and ongoing commitment to continuing education. An advisor with mostly middle income clients may be claiming every legitimate deduction allowed, and because the returns don't contain any glaring red flags to the IRS, may never be audited. If the advisor has had some audits, ask about the results. Were the audits routine "compliance" audits that resulted in no additional taxes or penalties to the client? Or did the client end up paying additional taxes because of the audit? Were there any penalties? Who was really liable, the advisor for the strategies used, or the client for lack of proper record keeping? If you are not comfortable with the advisor's answers, ask for a references of clients who have been through an audit. |
|
| 7. What Is Your Fee Structure? Tax advisor fees, like fees for many professional services, can vary widely, from $50 an hour to more than $300 per hour. Many tax advisors charge flat-rate fees "per tax form", this can be advantageous to the client in that it helps prevent surprises when the bill arrives. A good advisor should be able to give you a dollar estimate after an initial consultation, either by describing the number and type of forms that will need to be prepared if you are billed by the form, or an estimate of the number of hours and hourly rate if you are subject to time-based billing. Run, don't walk, if the advisor bases fees on the dollar amount of your refund. This has no correlation to the amount of time required to prepare your return, and can induce the advisor to be overly aggressive in preparing your return, potentially putting you at risk of an audit and penalties. |
|
8. What Are Your Qualifications? Like their fees, tax advisors can be found in a wide variety of flavors, shapes, and sizes. There is no formal definition or requirements of the term "tax advisor" or "tax preparer", anyone can claim and use the title. However there are a few designations, discussed below, which require more robust qualifications to use. While these designations alone don't guarantee competence in the tax arena, they do indicate a minimum level of knowledge, as all require passing a standardized test before a practitioner is allowed to use them. They can also be a good indication of the practitioner's intent to be proficient in the field and to provide a credible service to clients. The designations are as follows (listed in order of generally most expensive to least expensive):
Tax Attorney: Requires a law degree, which usually entails 3 years of post-bac education. Tax attorneys are generally lawyers who had a specific focus and additional credit hours of study in tax law, business law, or estate planning during their legal education. They should also be a member of the state bar association in their home state of practice, indicating that they passed the infamously grueling "bar exam" for their right to practice law. They generally specialize in more complex tax matters, such as business taxation, advanced tax shelters, and estate planning, and are required to complete annual continuing education requirements. They are usually also the most expensive to retain on an hourly basis, so if you only need your form 1040 prepared, try someone with a few less credentials.
Certified Public Accountant: CPAs hold a Bachelor's degree, with an emphasis in accounting, have passed an intensive exam to obtain their certification, and complete continuing education requirements every year. The CPA exam includes matters of tax law, but as a formal accountant, they may or may not make tax related matters their field of expertise. If their focus is strictly on accounting, which has numerous laws and rule changes issued every year to keep up on, they may not be overly knowledgeable on specific rules of taxation. But their knowledge of accounting also makes them very familiar with the impacts of taxation on a company's business, so they may provide a slightly different scope of expertise than a Tax Attorney. Many CPA's do specialize in business and personal taxation, expect to pay from $100 per hour and above for their services.
IRS Enrolled Agent: EAs may or may not hold any formal education. They must pass a very comprehensive 2 day exam on tax law and code procedures, which confers on them the right to represent the public in IRS audits (a right held only by Tax Attorneys, CPAs, and EAs). Unlike Tax Attorneys or CPAs, EAs choose to specialize in a specific form of taxation, from personal or corporate taxes to partnership, trust, and estate taxes. EAs must also clear an FBI background check performed by the IRS and complete at least 72 hours of continuing education every year.
Tax Advisor, Tax Preparer: There is no formal professional requirement needed to use this title. It does not confer any minimum level of expertise, so use judgment when enlisting their services accordingly. Note that Tax Advisors or Tax Preparers may also be EAs or CPAs, which do indicate a minimum proficiency.
Accountant, book-keeper: Again, no formal professional requirements, though CPAs are often colloquially referred to as accountants. Be extra thorough in checking the background and suitability of someone who just uses the title "accountant" or "book-keeper". |
|
| 9. Do You Carry Liability Insurance? If a tax advisor makes a major mistake, or renders poor advice, you could lose thousands of dollars. The greater your income, assets, and the importance of your financial decisions, the more harm can be done. You probably aren't a litigious person, but your tax advisor should carry goof-up insurance, often known as "liability" or "errors and omissions" insurance. While you can always sue an uninsured advisor, and hope the advisor has sufficient assets to cover a loss, don't count on any recovery or the ease of which you will obtain it. |
|
| 10. Can You Provide References? You need to know that a tax advisor has handled situations similar to yours. While many tax professionals may be hesitant to provide a long list of clients out of respect for client confidentiality, you have every right to expect them to provide a few references which have agreed to field such inquiries. When speaking to a reference, be sure to ask their relationship to the advisor. Do you believe they are impartial, or are they an in-law, family friend, or golfing buddy? |
|
