Do you pay someone to prepare your annual tax return? If so, you've got plenty of company.

As the U.S. tax code has become increasingly complex, roughly 80 percent of the nation's taxpayers have turned to paid preparers and computer software to complete their annual returns. The bad news: Paying a professional won't necessarily make your return accurate -- and it won't absolve you of liability if your preparer messed up.

"Anyone can prepare a federal tax return for anyone else for a fee. There is no national standard for return preparers and no federal oversight," said Internal Revenue Service Commissioner Doug Shulman at a news conference last week. "At the end of the day, it's the taxpayer, not the return preparer, who is on the hook."

Shulman, who used the launch of tax season to propose regulations that preparers be licensed and tested for competence, said the IRS was stepping up scrutiny of preparers this season. The agency said it planned to send out thousands of letters and launch "knock and talk" meetings where IRS agents -- sometimes covertly -- will show up at preparation offices to find out what type of advice the firms provide their clients.

By next year, Shulman plans to require all preparers to register with the IRS and be assigned a preparer identification number (which will eventually be used to track bad operators), take competency tests and update their knowledge with continuing education courses every year.

Tax attorneys, certified public accountants and enrolled agents, who are authorized to prepare returns by the IRS, will be largely exempt from the new rules because their current education and testing requirements are already stricter than what's being proposed.

However, the proposal, which still needs to go through a regulatory approval process, will eventually affect an estimated 800,000 individuals, who now need do little more than hang up a shingle to prepare returns.

Though industry experts were uniformly supportive of the IRS proposals, the licensing and education requirements will not be in effect this year. Worse, they may not help much.

California, for example, has required tax preparers to be licensed and meet continuing education requirements for decades. And yet a 2008 study by the Government Accountability Office found that paid preparers in California made more mistakes than paid preparers in other states, where no licensing was required.

Disturbingly, paid preparers also had a higher error rate (56 percent) than individuals preparing their own returns (47 percent), according to the GAO.

The prognosis for this tax season is even worse, according to many industry experts. The reason: Congress passed a litany of complicated one-time, short-term and, sometimes, revised tax breaks in 2009 that further muddled an already byzantine code.

"The tax code has become so complicated that individuals can't be expected to accurately prepare their own returns anymore," said Grant Niman, a certified public accountant in El Segundo, Calif.

"If you can afford a high-priced CPA to complete your return, great. But the tax law is almost more complex for lower-income people who can't afford that."

Many of the new tax breaks, for example, are income tested, locking out those who earn more than set amounts.

Niman's clients generally earn too much to qualify for the credits for education expenses or first-time homebuyers, for example, which means there's less for them to miss. But missing tax breaks worth thousands of dollars would be tragic for a middle-income family, he said.

So how do you hire a competent tax preparer in such a dicey environment?

Check credentials: There are four types of tax preparers -- tax attorneys, certified public accountants, enrolled agents and preparers. In California, all preparers must be licensed. Anyone operating without a license is breaking the law, notes Celeste Heritage, spokeswoman for the California Tax Education Council.

Oddly, the one designation that's difficult to check is enrolled agents, who are licensed by the IRS. However, many enrolled agents join professional groups, such as state or national enrolled agent associations, which have lists of members.

Ask questions: You should know how long your preparer has been in business and where he or she was trained, said Elaine Smith, master tax advisor and an enrolled agent with H&R Block. Ask whether your preparer gets additional training every year and where you can find the preparer after April 15, she added.

"This is not a seasonal business for the IRS," Smith said. "They send notices all year long. You need to make sure you can find your preparer and get help if you get a notice in November."

Heritage added that there are even preparers who put a shingle outside their mobile home or van. It's not a good sign if they don't have a permanent office, she said.

Other questions you should ask:

-- Do you specialize? If you have a small business or self-employment income, or if you're a teacher, firefighter, police officer or public service worker, you may have unique deductions and credits available. You'll get better tax advice if your preparer is seasoned in your specifics.

-- What tax laws went into effect this last year that might affect me? And what sort of information do I need to give you to see if I qualify? If your preparer can't rattle off half a dozen significant changes, it's a sign that he or she isn't keeping up, said Philip J. Holthouse, partner at Santa Monica, Calif., tax law and accounting firm Holthouse Carlin & Van Trigt. Many new breaks are worth thousands of dollars. Your advisor should be able to tell you whether you qualify.

-- Do you stand behind the returns you prepare? If there's an error on the return, will you fix it free? If your advice results in an audit that results in additional tax and penalties, do you pay that or do I?

Expect questions To complete an accurate return, preparers always need to ask questions about lifestyle changes, such as whether you married or divorced, had a child or sent one to college.

This year, they also may need to know whether you put solar panels on your home or bought an energy-saving refrigerator or air conditioning unit. There are big breaks if you did.

Even if you take a standard deduction, your preparer will also need to know whether you suffered a casualty loss in an area that was declared a disaster zone (there's a special tax deduction in 2009) and whether you pay property taxes, because there are add-ons to the standard deduction for those who say yes.

Look for red flags: There are a few things that legitimate preparers never do. They don't tell you that you can get a huge refund before they see your tax information. They don't charge based on a percentage of your refund. They don't ask you to sign a blank return that they'll fill out later, and they never ask you to sign in pencil.

If they're reluctant to sign the return they prepared, you should be reluctant to give them a check, said H&R Block's Smith.

"No matter who prepares your return, you sign it and you're held responsible," she said. "You need to feel comfortable that you're dealing with someone you can trust."

 

 

 

Personal Finance How to Hire a Tax Preparer | Personal Finances and Saving

(c) 2010 Kathy Kristof