CHAPTER 4 Choosing a Tax Professional

AS THE PREVIOUS CHAPTER pointed out, millions upon millions of people can, and do, prepare their own tax returns. But should you? Let’s explore criteria for why you may need to consult a tax professional, as well as what kind of tax professional you should hire if you need one.

Tip #26:

Financial issues that require a professional. Don’t prepare your own tax returns if you have these issues in your financial life:

• A business of any kind—whether it’s as a sole proprietor, partnership, corporation, LLC, farm, ranch, multilevel marketing, network marketing, affiliate sales, pyramid schemes, and so on.
• Hobby income—whether you believe it’s a business or not.

• Disability income, workers compensation, or other insurance proceeds that you’re not certain are not taxable.

• Lump sum income from Social Security Disability or SSI (after several years) or pensions.

• You are (or a family member is) age 72 or over and have IRAs and/or pension accounts. They require mandatory distributions.

• Divorce, alimony, child support, family support, or disputes about dependents.

• Dependents who don’t live at home, who are out of the United States, who don’t have Social Security numbers, ITINs, ATINs, or other US-identifying numbers.

• Complicated investments including short sales, wash sales, stock splits, PFICs, flipped real estate, racehorses, and other things you may not understand all that well. If you don’t know what the initials stand for or what something means, don’t invest in it without consulting a tax pro first.

• Sales of any assets at all—especially real estate, business assets, collectibles, and eBay-type sales.

• Rental real estate of any kind, like roommates, bed and breakfast, short-term rentals (like AirBnB), studio rentals, time-share rentals, and so on.

• You are a first-time home-buyer.

• Complicated mortgage issues—you refinanced with balances higher than the original loan, loan modifications, balances over $1 million, multiple homes, private lenders, or your name is not on the loan or title.

• Scholarships, stipends, grants, prizes, winnings of any kind.

• Kiddie tax issues that you may not even realize you have.

• Gambling winnings and losses—casinos, clubs, bingo, lottery, and so on.

• Employee business expenses.

• Investment interest and other investment expenses.

• Complicated or high charitable contributions—especially for volunteer work, donations of high-value goods (art, vehicles, securities, more than $1,000 of clothing and household goods), and other things that require more substantiation, appraisals, or expertise.

• Military service—there are special benefits for both state and federal you don’t want to miss.

• Disasters, casualties, forced easements—whether personal or business, all have special benefits you can use to your advantage.

• Gifts that you made or received of $14,000 or more per person to/from any individual, including money you received from crowdfunding sources like GoFundMe, KickStarter, and so on.

• You have ownership or signature authority over any financial accounts overseas—whether for yourself, your (elderly) parents or clan, your children, an estate, trust, or business. You own a share of the family business. You have a vacation home outside the United States.

• You have any extra taxes, like the Net Investment Income Tax (NIIT), the extra Medicare tax on wages or self-employment income, household employee taxes, excise taxes, and so on.

• You might be entitled to tax credits for your child(ren), low income, education, energy, retirement, or a whole raft of other things you might not know are available to you from the IRS and/or your state.

• If you have any questions and really want to sit down and talk to a tax professional.

Tip #27:

All paid preparers must have a Professional Tax Identification Number (PTIN). There are more than 700,000 US tax professionals with PTINs. In 2015, the IRS launched their database of all PTIN’d tax professionals. You can look up your tax pro here: http://irs.treasury.gov/rpo/rpo.jsf. If the tax pro you are paying is not in the database, you can contact the IRS Office of Professional Responsibility (OPR) by sending an email to epp@irs.gov and providing the name, address, business name, and any other specific information you have about this individual. The IRS will let you know if there is an error in the database or if this person is operating illegally. You can also contact the IRS OPR to get more information about a tax pro’s status if they are not in the database.

Tip #28:

Signature requirements. Sometimes tax professionals use TurboTax or some other consumer software to prepare your tax returns and don’t sign your tax return as the preparer. That tax professional is operating illegally. You can report that person to the IRS by filing a Form 14157. You can find more information on the IRS website here: https://www.irs.gov/Tax-Professionals/Make-a-Complaint-About-a-Tax-Return-Preparer. Incidentally, if you think this person has been squirreling away a lot of money or preparing fraudulent returns, consider turning them in to the IRS for a refund. Use Form 211: https://www.irs.gov/pub/irs-pdf/f211.pdf.

Tip #29:

Volunteer tax preparation services. This is the one category of tax professionals who will not be in the database, who do not need valid PTINs, and who will not sign your tax returns. If you meet certain income and/or age criteria you can get free in-person tax preparation and tax problem resolution from these sources. You may have heard about these programs. To find a VITA or TCE site in your area, please call 800-906-9887.

• VITA—Volunteer Income Tax Assistance centers help people who earn less than $53,000 (indexed for inflation), are elderly, have disabilities, have trouble with English, or are military families. Volunteers can prepare and efile returns and help with fundamental returns, including a variety of credits like the Earned Income Credit, Child Tax Credits, and Retirement Credit.

• TCE—Tax Counseling for the Elderly centers will help seniors with all the same things as VITA does. In addition, TCE provides counseling on a number of issues related to retirement, Social Security, and other government-related issues—and can help seniors avoid scams. TCE centers are often run by AARP (American Association of Retired Persons) at their Tax-Aide locations. You can find them all over the country: http://www.aarp.org/money/taxes/aarp_taxaide/. For more information, call 888-687-227.
• AFTC—The Armed Forces Tax Council provides tax assistance specifically for members of the military and their families. They have on-base coordinators, worldwide, for the Marine Corps, Air Force, Army, Navy, and Coast Guard. Both the IRS and the states offer quite a number of special deferrals, allowances, and benefits for active-duty service people and their families. So, if possible, use the AFTC advisors to help you. To get more information, ask your commanding officer or call the main IRS phone number at 1-800-829-1040.
• LITC—Most people have never heard of these Low Income Taxpayer Clinics. They are overseen by the National Taxpayer Advocate Service. Often affiliated with colleges or universities, LITCs offer free or low-cost services to taxpayers in trouble. They represent low-income individuals in disputes with the Internal Revenue Service, including audits, appeals, collection matters, and federal tax litigation. LITCs can also help taxpayers respond to IRS notices and correct account problems. Some LITCs provide education about taxpayer rights and responsibilities for low-income taxpayers and taxpayers who speak English as a second language (ESL). Use the LITC map to find one in your area: http://www.taxpayeradvocate.irs.gov/about/litc.

Tip #30:

How many kinds of tax professionals are there? These are the main categories of tax preparation and consultation professionals you should choose from. (Numbers in parentheses are the PTIN holders in each category):

• Enrolled agents (EA; more than 50,000)—EAs are the nation’s tax specialists, with the highest credential that the IRS issues to tax professionals. They are licensed to work anywhere in the country and overseas, with respect to your IRS and state issues. They must complete an average of 24 hours of tax education every year (30 hours if they are a member of the National Association of Enrolled Agents). They are a perfect choice if you need individual and business tax preparation, tax planning, tax audit representation, or you have tax debts. These are their areas of specialty. Some EAs also handle estates, trusts, and nonprofit organizations. Many also offer bookkeeping and payroll services year-round.
• Certified public accountants (CPA; more than 213,000)—CPAs are the best-known tax professionals. They are licensed by their state CPA society and/or consumer affairs departments. Their practice tends to be limited to their own state unless another state offers reciprocity. However, the IRS will accept their credentials anywhere in the United States or overseas. CPAs must also get continuing professional education, but there is no mandatory tax education requirement. Most CPAs prepare all kinds of tax returns. Some are adept at IRS audits, while a few are skilled at tax debt representation. So if you have that kind of problem, ask about their experience first. CPAs are great if you have a high-value business—especially if you are hoping to go public one day. For many CPA firms, write-up (accounting) is their lifeblood. Some firms primarily prepare tax returns for their business clients, related parties, and referrals. They are excellent if you have a nonprofit organization, which often requires an annual audit. Some offer certified audit services.

• Tax attorneys (more than 31,000)—These people are also licensed by their state Bar and/or state consumer affairs agencies. Like CPAs, their practice tends to be limited to their own state, unless another state offers reciprocity. However, the IRS will accept their credentials anywhere in the US or overseas. Like CPAs, attorneys must also get continuing professional education, but there is no mandatory tax education requirement. You generally do not need an attorney to prepare your personal tax return. Some tax attorneys (often members of the American Bar Association Tax Section [http://www.americanbar.org/groups/taxation.html]) will have extensive, complex, high-level tax backgrounds and continuing education. Use attorneys for estate and gift planning, business succession planning, and criminal tax issues. You need their help on all contracts and agreements, especially with respect to real estate, business agreements, trusts, wills, and so on. You don’t generally need a tax attorney to help you with IRS debts. EAs and CPAs can help you with that. You might need an attorney to represent you on complex foreign bank account and asset issues. However, some EAs and CPAs can help with the noncriminal areas of foreign account reporting.

• State-licensed professionals—Of all fifty of the United States, only three have any licensing requirements for tax professionals. They are California, Oregon, and Maryland. Tax preparers in these states must pass a test and take a certain number of hours of continuing education in taxes and ethics each year. If you live in one of these states, make sure your tax preparer is either licensed by the state or is an EA, CPA, or attorney. Note: Attorneys and CPAs licensed in other states, but practicing in CA, OR, or MD, may have to register with these states’ tax preparer programs. No one else may charge you to prepare a tax return. These tax professionals are limited to preparing a tax return and to answering the IRS’s or state’s questions about the tax return that they prepared. That’s it. They are not permitted to represent you at any levels of the IRS with respect to balances due, collections, appeals, notices, or anything else. However, they may be able to help with some of your state tax department issues.

• Annual Filing Season Program Certificate of Completion (AFSP; more than 43,000)—In 2014, the IRS instituted a voluntary program to allow unlicensed tax professionals in 47 states to demonstrate a higher level of training and expertise. These people have all the same rights as the state-licensed preparers when it comes to dealing with the IRS. They may represent you at IRS audits on the tax returns they prepared. They cannot speak for you before the IRS collections or appeals divisions.

• Unlicensed tax professionals who have PTINs (more than 375,000)—These people are permitted to prepare your tax return and to file your tax return electronically. Period. Some are highly experienced and do get a great deal of education and training throughout the year. Many are not, so beware. To determine if the unlicensed tax professional of your choice is reliable, here are some steps to take:
- ◦ Ask if they are a member of any professional tax organizations. Some reputable organizations include the National Association of Enrolled Agents (NAEA), National Association of Tax Professionals (NATP), National Society of Accountants (NSA), National Association of Tax Consultants (NATC), and American Society of Tax Problem Solvers (ASTPS), among others: https://www.taxsites.com/associations.html. All these organizations require their members to maintain high standards of continuing education.

Tip #31:

Avoid tax preparation outfits within certain retail establishments. Services offered at car lots, stereo stores, and other high-ticket stores where they provide free or low-cost tax preparation services are often really designed to help you get a refund to use toward a store purchase. The preparers may be unlicensed, untrained, and only know how to generate high refunds in ways that may not be legal.

Tip #32:

Avoid tax offices that push refund anticipation loans (RAL)—especially if they tell you that you must get one. With current IRS efiling protocols, you will probably get your refund deposited directly to your bank account within about ten business days or less. So there is absolutely no need to pay someone a high fee to get your own money. The IRS frowns on this practice and has posted alerts to the public about what to watch out when being offered RALs: http://www.irs.gov/uac/Tax-Refund-Related-Products.

Tip #33:

Read your tax return before you sign it. By law, all tax preparers must give you a copy of your tax return before you sign the Form 8879 or Form 8453 to file electronically. It doesn’t have to be on paper; an electronic copy is OK. But do take the time to read and review it before you sign the electronic filing forms or before mailing in your paper tax return. If the preparer made an error, it’s your problem and your responsibility. So read the whole return and ask questions if you don’t understand something.

Tip #34:

Amazing and magical refunds are too good to be true. Some unscrupulous preparers attract clients by promising huge refunds. They make up numbers on Schedule A, Itemized Deductions—like mortgage interest (even when you don’t own a home), tax credits like the American Opportunity Credit for education costs, or other credits that don’t apply to you. If your refund is strangely high, ask them how it got that way. Do not file a fraudulent tax return. If you do, the IRS will catch you. You will face all the original taxes, plus high penalties and interest on the taxes and penalties. The preparer? He or she will be long gone and impossible to find.

Tip #35:

Find a tax pro with whom you can establish a long-term relationship. Get to know this person and return to that firm year after year. In fact, since it’s difficult to do tax planning during the tax preparation appointment, schedule a planning appointment for May or June so you can discuss your financial goals, planned large purchases, or expenses (home, dental work, college, retirement, etc.).

Tip #36:

Always call your tax pro for a consultation before you take any large step financially. It breaks our hearts when you call after you have already done something. We can help guide you before the fact and often help you find a tax-free way to use your retirement funds or make investments or get credits. Once you’ve already taken the step, fixing it may be impossible—or time-consuming and expensive. Believe me, that one-hour consultation in advance may save you thousands of dollars later.