What You Need to Know About Tax Prep Firms

Before you hand over personal information to a tax preparer, make sure you're dealing with an experienced, reputable outfit. And read the fine print on every paper you sign.

By Vera Gibbons

From Kiplinger's Personal Finance magazine, April 2007

1. Computers and calculators are not credentials. According to the IRS, 61% of us left tax preparation to someone else in 2006, up from 42% in 1981. But the IRS estimates that as many as 500,000 paid preparers in the U.S. may have no formal training. Only California and Oregon require special education or licensing to prepare income-tax returns.

2. You want a surgeon, not a first-year resident. Ask the preparer whether he or she belongs to a trade association, such as the American Institute of Certified Public Accountants (AICPA), says Cindy Hockenberry, an analyst with the National Association of Tax Professionals. How many returns has the preparer done, and has he or she done returns similar to yours? If you think your return could be complicated -- say, you've recently gone through a divorce -- you may be better off with a certified public accountant (CPA) or a licensed enrolled agent (EA). If you're audited, only a CPA, an EA or a tax lawyer may represent you before the IRS.

3. Some preparers are ethically challenged. The uptick in demand has attracted not only some incompetent preparers, but also some unscrupulous ones -- preparers who base their fees on a percentage of your refund, refuse to sign the return (as required by law) or add fictitious expenses. Ask for an estimate of the fee before the return is prepared. With fraud on the rise -- 153 cases were recommended for prosecution in 2006, compared with 140 in 2005 -- you need to take extra care in vetting a preparer. After all, you are ultimately responsible for everything on your return.

4. You get what you pay for. In 2006, the Government Account-ability Office conducted an undercover investigation in which staffers posed as walk-in customers of storefront tax-preparation firms. Every one of the 19 returns prepared had problems. Some were serious, from failing to report nonsalary income to taking dependent deductions for ineligible children. Several preparers overestimated clients' refunds, and two would have cost the taxpayers more than $1,500 in lost refunds. "I wouldn't make generalizations about the entire commercial tax-prep industry as a result of our findings," cautions Michael Brostek, the GAO's tax-issues director, "but this should give taxpayers pause." Review your completed return carefully before signing it. (For more help, visit the Kiplinger Tax Center.)

5. You'll pay interest on that "rapid refund." A refund-anticipation loan is not a refund but a short-term loan based on an expected refund. Yes, you get your money within days. But a study by the Consumer Federation of America and the National Consumer Law Center found that taxpayers pay annual interest rates of 57% to 1,100%. In 2005, nearly ten million people paid $1 billion in loan fees. "Most taxpayers can get their refund in a couple of weeks -- free," says Jean Ann Fox, the CFA's director of consumer protection.

6. Your secrets aren't necessarily safe. Your most sensitive personal information is on your income-tax return. So how would you feel if your preparer shared the contents of your filings with credit-card companies and database marketers who want to sell you services and products? He or she can, if you sign a consent form. Many taxpayers do, says Fox, because they "get caught up in the paperwork flurry." Be sure to read the fine print before you sign anything.

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