By Terri Johnson, CPA
Every year, taxpayers must decide whether to self-prepare their returns or to pay for a professional to assist in filing. Many found out last year that the 2017 “simplification” of the tax laws did not mean simplification of tax forms: as the tax laws became more specific it resulted in providing more details and spending more time on preparation. If you are considering relieving some of the burden by hiring a professional, this blog provides information that may assist you in choosing the right tax preparation path for your specific needs. As with hiring any professional, you must do your due diligence and hire the one who best suits your situation and budget. Remember, not all tax returns are created equal : some have very basic business, rental, or investment income, while others may involve complex tax issues such as passive income or personal use limitations from rentals, investment regulations (such as new cryptocurrency laws), or business income situations.
Certified Public Accountants (CPAs)
CPAs are licensed by their respective state board of accountancy, have passed the Uniform CPA Examination, and must have a minimum number of years of work and educational experience before becoming certified. They will have a degree in accounting from a college or university, and they must complete continuing professional education (80 hours every two years in Pennsylvania) to keep their license active. CPAs also have the ability to represent clients before the IRS if a problem or question should arise. Some CPAs specialize in tax preparation and tax planning.
Some attorneys have a background in tax law and can assist in various tax preparation tasks. This is especially true among those specializing in estates, trusts, or business law. Like a CPA, an attorney has a college degree, has passed a rigorous examination to become licensed (the bar exam), and must complete annual professional education to keep their license active. An attorney, too, can represent clients before the IRS if a problem or question should arise.
An enrolled agent is licensed by the IRS and has passed a three-part examination to prove their competency in tax preparation, tax planning, and IRS representation.1 They must complete 72 hours of professional education every three years, and are able to represent clients before the IRS. A college degree and a comprehensive accounting background are not required to become an enrolled agent.
Annual Filing Season Program Participants
These individuals do not fit into any of the above classifications, but have received a certification from the IRS for a specific filing season, meaning they have taken a certain number of education hours specific only to the upcoming tax season. They have limited representation rights before the IRS.
Preparer Tax Identification Number (PTIN) Holders
These individuals have an identification number with the IRS, which allows them to legally prepare tax returns for compensation. They may have prepared returns for many years and have a wealth of knowledge and expertise, or not. They have no required education, no credentials, no continuing education needs, and no oversight requirements. The IRS does not recognize these individuals as representatives of taxpayers. If a problem arises, a taxpayer will need to seek the help of an authorized IRS representative (CPA, attorney, enrolled agent, etc.). There continues to be discussion in Congress to require all paid tax preparers to be licensed and to show a minimum amount of training, but this is still in the discussion phases with the IRS.
Self-Prepared Free Filing
This service is available to individuals with income below $69,000 for 2019 tax returns, and may be a great option for those with basic returns. The IRS has contracted with software companies to provide software to file simple returns, using some of the most common forms. However, be on alert for additional fees creeping in. When preparing your return, you may need to add a form or schedule that is not included for free, in which case you could be directed away from the IRS website and wind up being charged a fee. You can find more information at www.irs.gov.
Weigh All the Factors
When comparing tax preparation costs, be aware of additional fees, such as audit insurance or e-filing, that some businesses add on. A reputable tax preparer will ask a lot of questions, especially if you are unknown to them and it's their first year preparing your return. If you give them complete and honest information, the risks of issues on your return should be minimal. If a tax preparer makes an error, talk to them about how it can be made right. Understand that, in preparing your return, a third party is taking on risk in representing you before the IRS as the paid preparer. They must attach various checklists and schedules confirming with the IRS that they did their due diligence or risk stiff penalties, especially with certain tax credits (such as child, education, or earned income). You are not only paying for the time of the paid preparer, but also for the years of education and expertise that they bring to your particular situation.
The IRS has a directory of tax preparers and their qualifications. You can look up a tax preparer and his or her IRS designation.
When you find the right path for you, filing taxes does not have to be an arduous task. Best wishes on a smooth and stress free tax season!
1 According to the IRS, certain IRS employees may become enrolled agents without passing an exam by virtue of their past technical experience.
Terri Johnson, CPA, is a sole practitioner in Hollidaysburg, Pa., and is a past president of PICPA’s Central Chapter.
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