Monthly Archives: January 2016


5 Questions to Ask Your Tax Return Preparer

Last month, The Tax Girl (Kelly Phillips Erb) posted 12 Questions to Ask When Choosing a Tax Preparer. It’s a great post, especially if you have actually narrowed the list of possibles to a few probably qualified candidates. My list of 5 questions overlaps some with hers, but is geared more toward finding that short list in the first place:

  1. What are your credentials? (CPA, Attorney, EA, Annual Filing Season Program Completion, etc.) Kelly covers that in her post or for more information, click here or read this earlier post. You might also ask about professional affiliations. Is the practitioner a member of the NATP, NAEA, AICPA, etc? While membership in professional organizations does not necessarily indicate competence, it may indicate a certain level of seriousness about the profession.
  2. How much continuing education do you normally do each year? Each credential comes with its own requirements. Note that CPA and Attorney continuing education requirements do not necessarily have to be in tax matters while those for Enrolled Agents and the AFSP are specific to tax matters and professional ethics. In my opinion 15 hours of continuing tax education each year is the bare minimum for maintaining professional competence.
  3. How long have you been preparing returns and how many returns do you prepare each year? Experience isn’t always required, but it is helpful. I was talking to someone recently who said that she had a former IRS employee interested in buying her tax practice. She said that during her first conversation with him it came up that he had never actually prepared a tax return. Depending on the complexity of your return, that could be important. The number of returns prepared per year speaks both to the preparer’s experience and to his or her availability. My personal opinion is that even with outstanding office processes and a certain amount of support staff it is difficult for any one preparer to handle more than 200 or so returns per year. Now, if that preparer is part of a larger office where interviews and data entry and other tasks are handled by support staff the number could be larger (even much larger). This is more of a judgment area for you. How much personal interaction do you need/want with your preparer? Are you willing to pay more for more/better access (some preparers offer ‘concierge’ service for a premium)? The answer to those questions may help you to determine if your potential preparer is right for you.
  4. How much experience do you have with my type of return? If you have rental properties; live abroad; are clergy; are in the military; have income from multiple partnerships, trusts, etc.; or if the return is a business entity return (or any number of other highly-specialized situations) it is important that your preparer have experience with that type of return. People who routinely work in multiple states (truck drivers, pilots, flight attendants) need specialized support as do farmers, ranchers, and professional fishers. It’s OK to go with someone who has only limited experience, but you should be comfortable with their ability and willingness to research the necessary issues (which is one reason why that continuing education question is so important). For example, I recently declined a potential client because I don’t generally do returns for retail businesses (the business return side of my practice focuses more on the needs of freelance professionals and personal service providers).
  5. How will you protect my information? Don’t expect an extremely detailed explanation, but your preparer should have computer security policies in place (firewall, malware protection, and update schedules are the bare minimum). In addition to computer security policies, the preparer should also have policies on staff training (if applicable) and physical protection of your information (how paper files, laptop and desktop computers, and backup media are secured). Finally, you should ask about their data storage and backup plans. This post contains a few more specific questions related to computer security. Again, don’t expect specifics, just enough information to ensure that your data is reasonably protected from being damaged, lost, or stolen.

Notice that not one of these questions is “How much do you charge?” Preparer fees exist on a continuum and those competing on price alone are rarely your best option. Cost is always a concern and, as someone who also does personal finance consulting, I would be remiss if I told you to simply throw caution to the wind and to hire whomever you want. Many preparers can and will give you an estimate based on prior year’s tax returns if the current year’s return is expected to be similar. When evaluating cost consider the preparer’s credentials and continuing education (those are expensive to maintain), the office overhead (support staff and large offices are obviously more expensive to maintain than a lone preparer working out of a home office), and level of service provided (can they represent you, are they in the office all year, etc.). As with all financial decisions trade-offs exist. Find the preparer that best meets all of your needs and realize that may not be the lowest cost option. Of course it is important to remember that higher price is not a guarantee of quality service. Choose wisely, choose well.


Things that make you go hmmmm…

Many years ago, when my kids were still little, I mentioned to my friend, Julia, that we were having a birthday party at a kid-oriented pizza franchise (to remain nameless). She promptly responded “I have a strict policy of not eating at restaurants that have rodents as a mascot.”

I remembered this on the drive back from lunch recently when I saw the guy (talking on the cell phone) dressed as the Statue of Liberty waving the sign for one of the big tax franchises. I’m not against tax franchises in general. Some of the best, most experienced preparers I know either got their start at a franchise or own/operate a franchise.

I’ve said often that price should not be one’s primary consideration when choosing a tax preparer. I blogged recently about the importance of having a preparer who is serious about technology and information security issues. I guess another consideration should be a certain seriousness about the profession. The person preparing your tax return is holding your financial life and identity in their hands. You don’t necessarily want to choose the lowest bidder and you maybe want to reconsider choosing the one with the mascot.


Choosing a Tax Professional – What do all those letters mean?

I’m no fool. I know three things usually come to mind when people start to think about doing their taxes: TurboTax, CPAs, and that big franchise that does all the advertising. All of those are perfectly viable solutions, but there are other options. You should choose the option that best meets your needs.

Do It Yourself With Software: Whether you choose a package like TurboTax or file online for free through the IRS website, this option will work for many people who have a basic understanding of what needs to be done and whose tax situation is relatively uncomplicated. When I say “relatively uncomplicated” I mean that you are a W2 employee with a minimal number (or no) itemized deductions and only basic banking and investment accounts. Of course, the requirements of the Affordable Care Act (a.k.a. Obamacare) are adding a level of complexity for everyone this year. If you changed jobs, had a gap in coverage, or received the Premium Tax Credit, you still may want to consult a tax professional even if the rest of your return is fairly simple.

Pay a Professional: If you own your own business, have a rental property, have brokerage accounts that are not retirement accounts, are eligible for the Earned Income Tax Credit, have higher education expenses, have income in more than one state, or any number of other “complicating factors” it may be in your best interests to consult a tax professional. I know that the tax software companies want you to believe you can have a rental property or own your own business and still do your taxes yourself, and maybe you can, but the consequences of failure are relatively high so maybe you don’t want to. If you decide you don’t want to it’s important to realize you have more options than a CPA or a Tax Attorney. You can choose an Enrolled Agent or what is known as an “unenrolled preparer.” What follows is a brief description of each type of professional and what they can and cannot do for you.

CPA (Certified Public Accountant)

CPAs are licensed by a state licensing authority (and many states recognize other states’ licenses). CPAs are authorized by the IRS to represent taxpayers before the IRS (including collections and appeals) in the event of an examination (an audit). They cannot represent taxpayers if the tax matter is elevated to Federal District Court or Tax Court, for that you will need an attorney. It is important to note, however, that not all CPAs are experienced in tax preparation. CPAs are, by definition, accountants. Many specialize in financial accounting and auditing, but have little to no knowledge of tax accounting and/or tax return preparation. That’s OK, but it is important to ask, if you are considering hiring a CPA to prepare your tax return, how much tax return preparation experience s/he has. It’s also important to ask if s/he specializes in individual or business tax returns or has other specialized experience that you may need. Tax returns for truck drivers, pilots and flight attendants, and expatriates and other international clients have unique requirements and not all tax professionals have experience in those areas.

Pros: CPAs are licensed and can represent you before the IRS (whether they prepared your return or not).

Cons: Can be expensive and might be “overkill” for some taxpayers. Not necessarily experienced in tax return preparation so check to make sure.

Tax Attorney

Like CPAs, attorneys are licensed to practice by their state bar and, again, many states recognize other states’ licenses. Tax attorneys are also authorized by the IRS to represent taxpayers in examinations and before collections, and in appeals. They are also authorized to represent taxpayers in Federal District Court and Tax Court. Again, however, not all tax attorneys have experience actually preparing income tax returns. If you need representation in an audit or before the IRS or a court in a tax matter an attorney is a great option. For preparing returns an attorney may not be your best option unless your tax situation is highly complex and you need someone with a thorough background in tax law. It is important to keep in mind that while all attorneys can represent you in tax matters, not all attorneys specialize in tax matters. If you have a tax matter for which you are hiring an attorney it is in your best interest to get one who specializes. The tax code is too big and too complicated for most general practitioners.

Pros: Attorneys are licensed and can represent you before both the IRS and in Tax Court and Federal District Court (whether they prepared your return or not).

Cons: Same as with CPAs, they can be expensive, might be overkill for basic return preparation, and may be more experienced in representation than with actual return preparation matters.

USTCP (United States Tax Court Practitioner)

USTCPs are basically tax attorneys in all but name. They are not licensed by a state bar, but they are authorized to represent taxpayers before the IRS and in Tax Court (but not Federal District Court). The interesting thing about many USTCPs is that they often start as paid tax return preparers and decide to add advanced taxpayer representation to their services offered.

Pros: Can represent you even if they didn’t prepare your return everywhere except Federal District Court. Specialize in representation involving tax matters so they are tax law experts. Often experienced in tax return preparation.

Cons: Might be expensive. Hard to find (there aren’t many of them).

EA (Enrolled Agent)

I’m currently awaiting official word that I have obtained this credential. I have met all the requirements I just need to hear that the IRS has approved my application. Should be any day now. You’ll hear it here first!

“An enrolled agent is a person who has earned the privilege of representing taxpayers before the Internal Revenue Service. Enrolled agents, like attorneys and certified public accountants (CPAs), are generally unrestricted as to which taxpayers they can represent, what types of tax matters they can handle, and before which IRS offices they can represent clients.”

Additionally, many EAs had experience preparing tax returns before deciding to obtain the EA credential and many offer both return preparation and representation services. Note that some EAs may specialize in one area or the other, but they are usually competent at both.

Pros: Many offer different price structures for return preparation and representation. Can represent you before all levels of the IRS. Credential and continuing education focus exclusively on tax matters and ethics. Credential covers all aspects of federal taxation: individual, business, return preparation, representation, professional ethics.

Cons: Cannot represent you in Tax Court or Federal District Court. You’ll need a USTCP or an attorney for that.

Annual Filing Season Program Record of Completion

This program is open to unenrolled (non-EA, CPA, Attorney) PTIN holders. It offers limited representation rights to tax practitioners who fulfill the requirements. AFSP participants receive a record of completion that allows them to represent clients before IRS customer service staff (not collections or appeals officers) and only for taxpayers whose returns they have prepared. AFSP participants are required to pass a 100-question basic knowledge test each year, obtain a minimum number of continuing education credits during the previous year, and agree to abide by Treasury Circular 230 (whose requirements govern enrolled preparers). It’s the most basic credential one can obtain as a paid tax preparer. That said, it does provide a limited amount of evidence that a CPA or an Attorney has some experience in tax matters. Many EAs, and some CPAs and attorneys, choose to hold this designation in addition to the higher credentials simply because of how the IRS promotes the program.

Pros: The record of completion is fairly easy to obtain and hold so it may be easier to find a practitioner who holds it. Because of the lower requirements it is also less expensive to hold and this may be reflected in the price of your return. Demonstrates a certain level of seriousness or commitment to the return preparation profession.

Cons: Representation rights are extremely limited. In the absence of any other credentials, it’s the absolute minimum level of credentialing for a competent tax preparer in my opinion.

Unenrolled Preparer (PTIN Holder)

While those who have obtained the AFSP record of completion are also considered unenrolled preparers they do have limited rights to represent you if they prepared your return. Unenrolled preparers who have only a PTIN are not even allowed to write a letter for you even if they prepared your return. Some of them may do it, but they are acting outside the scope of their authority.

Pros: Probably widely available. Probably lower prices. No continuing education or ethics requirements. Little (if any) accountability.

Cons: May not be available outside of tax season. No representation rights. If you have a problem you will have to hire another professional to represent you.

Many tax practices (both independent and the franchises) have more than one type of credentialed tax preparer in the office. You should always choose a tax professional based on your needs, but sometimes it’s OK to choose a less-credentialed preparer if they have access to a more experienced and/or more credentialed person in the office (and you feel confident that they can recognize when they need help and that they will get it when they need it). Deciding on price alone is rarely the best option. Remember, your tax professional often maintains your entire identity (both financial and personal) in their files. Take your time to find the right practitioner and to build a lasting relationship with him/her. You won’t regret it.


That’s gotta hurt…

Another one from Facebook’s tax forums. A preparer just got hit with a $63K (no that’s not a typo) fine for failure to do due diligence on Earned Income Tax Credit (EITC) returns. She was asking what were her options for getting the fine reduced. The general consensus as of this morning was “hire an attorney.”

Give that some time to sink in…a tax preparer just got assessed a mid five-figure fine for failing to comply with requirements that have been in place for more than five years. As a professional preparer I’ve got several issues with this situation:

  • She said “I did the due diligence verbally. I didn’t know I was supposed to write everything down.” Yikes. Just yikes. This is a person who gets paid to prepare tax returns. She owns her own business (at least according to her Facebook page). What type of professional does not document client responses to questions? A careless, negligent, or just plain oblivious one. Which brings me to my next concern…
  • If she didn’t document the due diligence (and therefore cannot prove it was done) and the client’s EITC claim is denied, the client’s return for the year(s) in question may get adjusted and the client may be looking at one whopper of a tax bill. They are now going to have to repay (the EITC is a refundable credit) plus penalties and interest. Since the EITC is a credit designed to help the working poor, this person’s clients are the people who are least likely to be able to afford this sort of nasty surprise.
  • The failure to do due diligence fine is $500 per return. That’s 126 EITC returns. That’s a lot. I don’t know the size of this woman’s practice or the demographics of her client base, but for one preparer (even more than one in a small office) that is a lot of EITC returns. I’m wondering if there’s a bigger issue here that she wasn’t willing to discuss in a semi-public Facebook group. I know for a fact that the IRS has algorithms that check the percentage of EITC claims filed by preparer. If you are above average, they will take a closer look.

Why does this matter to you, my readers and clients? If you are one of my EITC clients you know that I do my due diligence every year and apologize about having to get, I think “all up your butt” is the term I normally use. Well, this gives you an idea of why I’m such a pain.

I’m also posting it as one more cautionary tale about how important it is to choose a tax professional carefully. From a cursory look at her Facebook page and a quick Google search, this woman is an unenrolled preparer. That’s OK. Many unenrolled preparers have years of experience and tax education and are highly competent professionals. In this particular case, however, it means that she cannot represent clients who may now have a tax problem because of her error. Those clients will have to hire an EA, CPA, or an attorney to represent them and again, these are people who are the least likely to be able to afford that type of expense.

I cannot say whether or not this woman competes on price for her clients. I cannot say whether or not she is overcharging for her (apparent) level of competence. I can’t even adequately assess her level of competence other than to say that as a paid preparer you have to have been living under a rock not to understand the full implications of EITC due diligence and not to understand that you had to have documentation of that due diligence. (As a side note, Anna has had clients who appeared eligible for the EITC not return to the office to finish their return after she has asked them to come back with the documents we require to demonstrate that we have done our due diligence.) If you have friends or family who are eligible for EITC who are choosing a preparer for lack of hassle or based on price, please encourage them to use caution. Sometimes that big refund now can result in big problems later.


Identity Theft, Information Security, and Your Tax Preparer

Today’s post brought to you by someone on my FaceBook tax forums.

Said person was seen complaining that his tax software provider (also my tax software provider) was no longer supporting, wait for it—Windows XP. Yes, that’s right, Windows XP. In case you missed the memo, Windows XP was released in August 2001 (no, that’s not a typo) and Microsoft stopped selling it in 2008. Microsoft stopped supporting it in April 2014. That’s almost two years ago. What’s the big deal you ask? Well, to put it succinctly, security patches. The “support” Microsoft stopped providing to XP users in 2014 was, among other things, security patches.

I try to run a tight ship and to provide value for my customers, so I’m not constantly upgrading my computers and software. I do, however, take information security and identity theft extremely seriously. Indeed I see them as one of the largest threats to the viability of my tax practice. Identity theft issues erode my customers’ trust in the computers and software that are necessary to my job. Should my practice ever experience a data breach, the costs of complying with the laws concerning customer notification and restitution could make it difficult for me to continue in business (even with good insurance in place). Consequently, I consider it negligent to be running software that is no longer getting security patches.

Given the prevalence of identity theft and the sensitivity of the information used to prepare your tax return it is important for you to consider how your paid preparer protects that information. While it is unlikely that you will get your preparer to divulge all of the details of his or her security plan, he or she should be willing to answer some questions, for example:

  • What version of Windows are you using?
  • Are you running a firewall, anti-virus, and anti-malware?
  • How often do you update your virus definitions and run scans?
  • What are some of the other measures you take to protect my information?

If your tax professional cannot or will not answer these questions it may be time to start looking for a different preparer. In my next post I will give you my best tips on how to choose a preparer that meets your needs.


Why We Won’t E-mail You Copies of Your Tax Return

The main reason we will not e-mail you copies of your tax return is that it is illegal for us to do so unless the e-mail is encrypted. Not password protected…encrypted. I’ll be the first to admit I am not an information security expert, let alone an information security professional, but I am pretty paranoid. Simply sending you a password-protected PDF file is not enough to meet the required standards. The type and level of encryption required to send tax documents via e-mail probably eliminates the reason for doing so in the first place, namely convenience.

I have many clients tell me that they “don’t trust the mail” and would rather use e-mail. E-mail may seem (may be) more reliable than postal mail or a commercial carrier such as Federal Express, but it is nowhere near as secure. With a hardcopy mail carrier your information leaves its destination in a sealed envelope (I like to use Tyvek envelopes because they are also less easily ripped and don’t disintegrate when wet). It also arrives in that same sealed envelope and it is usually pretty easy to tell if it has been mishandled or tampered with somewhere along the way. E-mail provides no such security. Once your “envelope” leaves your mail program it is routed through whatever computers make most sense to the internet. And unless you are a cyber security expert, there is no way to tell just how many stops your message made or if it was opened and read along the way before arriving at its destination. It’s similar to the difference between mailing a letter in an envelope and mailing a postcard. That’s why we are required to encrypt your private information if we are going to send it via e-mail. That ensures that anyone who tries to read it can’t (your “postcard” message is written in a really strong code that can only be decoded if the person who sent the postcard originally gives you the key to unlock the code). Again, most people are looking for a convenient way to send/receive documents electronically and all this code making and breaking is extremely inconvenient.

You are, of course, welcome to e-mail your documents to us, but I recommend that you don’t. I prefer that you don’t. To make it easier for you to send and receive electronic documents I have, this year, implemented a secure file portal that is integrated with my tax software. A secure file portal is an internet location where each user registers and is provided access to only those documents intended for him/her. It is the best and legal option for electronic delivery of documents (to me or to you). Nevertheless, the secure portal is still storing your documents “in the cloud.” Consequently I will be password protecting them as well as limiting the amount of time they are available for download.

We appreciate the opportunity to meet your tax preparation needs and want to assure you that your privacy and information security are extremely important to us.


How We Process and Prepare Your Tax Return

I mentioned in the last post that I do not do returns “while you wait.” Anna will occasionally make an exception for 1040-EZ filers in Tonopah, but such cases are rare. To ensure that we give your return our full attention and our best effort we have developed the following process for accepting, preparing, and filing your returns:

  • Reminder postcards for returning clients (and for new clients who have asked to be on the mailing list) are mailed in early January.
  • When you get your postcard, call your preparer (me or Anna) and we will arrange to get you an organizer. If you are a new client or moved and didn’t get your postcard, no big deal, just give us a call and we’ll get you an organizer. Organizers are either mailed or downloaded from a secure file portal (or you can come pick one up at either office) and are there to help you collect the information necessary to prepare your tax return and to remind you of any questions you may have pertaining to this year’s return (or even future returns). Organizers also contain the engagement letter that outlines our terms of service and a copy of our privacy and security policy that must be signed before we begin working on your return.
  • When you’ve completed the organizer and have collected all of your supporting documents you can either drop them off at the office, mail them to us, or upload the information to the secure portal (Albuquerque clients only). If you would like an estimate of the cost for preparing your return we can provide you with one, but only after we have received a completed organizer. We prepare tax returns on a first in, first out basis. Incomplete packages will be moved to the end of the line, so please be sure to include all of your W2s, 1099s, 1095s (new forms required by the ACA/Obamacare), Social Security statements, etc.
  • We’ll contact you if we have questions or require additional information when we are preparing your return.
  • When the return is ready to sign, we will contact you to either come in for a review appointment or to download it and to make arrangments for an in-person or a remote review session (via phone or Skype). We can make final adjustments to the return at this time, but a recalculation/rework fee may apply if significant new or changed information is provided.
  • Once you have signed and returned Form 8879 (that gives us permission to e-file) and the associated state e-filing forms (if necessary) and made payment arrangements we will file your return.

Our clients are important to us and so is our accuracy. We implement these processes, not to be a pain in your behind, but so that we can maintain our accuracy and provide you with affordable service.