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Next Read: What Your Accountant Needs To File Your Small Business Taxes
A new wave of 1099 contractors and sole proprietors are redefining what it means to be a small business. Unfortunately, small, independent shops or one-person operations are held to the same rigorous tax reporting standards as big businesses. The financial penalties for getting something wrong can hurt sole proprietors a whole lot more.
With the challenges of running your business likely already consuming all of your available bandwidth, you might consider hiring a professional bookkeeper. This can ensure that you have a stress-free tax preparation season. Plus, it’s a gift that keeps giving all year long, providing critical answers to important accounting questions, no matter what the season.
While it’s true that hiring a tax preparer means taking on additional expenses, they often prove to be well worth the investment. Consider the marathon sessions you spend each year doing your taxes (or procrastinating on them), especially with your quarterly self-employment tax payments due every three months. Tax preparers eliminate that time commitment, as well as other significant potential expenses—like late fees, fines, or legal issues—that often result from amateur tax prep mistakes. Of course, they can also identify potential money-saving deductions.
In addition, a bookkeeper or tax preparer can perform cash flow forecasting far more effectively than non-financial people can to ensure you can make those payments.
There are several professionals who are licensed to prepare tax returns.
The best-known tax preparation professionals are Certified Public Accountants (CPAs). CPAs are licensed by each state’s Board of Accountancy. To obtain a CPA license, professionals must meet various education requirements, pass exams, and acquire the requisite experience. These requirements can vary by state.
CPAs are considered qualified to do taxes because of their extensive knowledge of accounting principles, tax laws, and regulations. They are trained to prepare and review financial statements, identify tax implications of financial transactions, and provide guidance on tax planning strategies. CPAs are also required to maintain a certain number of continuing education credits each year to stay up-to-date with changes in tax laws and regulations. This ongoing education and training help to ensure that CPAs are knowledgeable about the latest tax rules and can provide accurate and reliable tax advice to their clients.
Enrolled Agents (EAs) have studied taxation and passed IRS exams. They are also required to complete annual continuing education to maintain their credentials.
Moreover, they are trained to prepare and file tax returns for individuals, businesses, and trusts. They can also be a solid source of tax planning advice and assistance in resolving tax disputes with the IRS and tax-related financial planning.
These qualifications make EAs an especially effective resource at representing taxpayers before the IRS.
Attorneys may be better known for representing people in criminal cases or preparing trusts, but many attorneys also specialize in tax law. They have a thorough understanding of tax law and its application to specific situations. They can provide legal advice on tax matters, such as structuring business transactions to minimize tax liability, filing tax returns, and resolving disputes with the IRS. This specialization allows them to represent taxpayers in IRS issues and represent clients in tax court and other legal proceedings related to taxes.
Annual Filing Season Program Participants
The Annual Filing Season Program (AFSP) is a voluntary program offered by the IRS for tax return preparers who are not CPAs, EAs, or attorneys. The program provides education and training on tax law updates, ethical standards, and other tax-related topics. Participants who complete the program and pass a certification exam are recognized by the IRS as having a certain level of tax knowledge and are listed in a public directory of tax return preparers. The AFSP program does not require any specific education.
PTIN Holders
A Preparer Tax Identification Number (PTIN) holder is an individual who has registered with the Internal Revenue Service (IRS) and obtained a unique identification number that allows them to legally prepare and file tax returns for others. Anyone can obtain a PTIN, regardless of their qualifications or education level. While PTIN holders are not required to have specific qualifications or education, they are still subject to ethical and professional standards. They are expected to accurately prepare tax returns and provide advice that is in their client’s best interests.
Choosing an ethical and well-trained tax preparer is key to ensuring that your return is prepared accurately and according to current rules and regulations. There are several items you should keep in mind when looking for a tax preparer.
You should verify the credentials of any tax preparer you interview. Though they may have certificates hanging on their wall, you should look up their credentials with your state or the IRS to determine if they have kept their credentials current. Though an expired credential still implies that they passed the hurdles to achieve the credential in the first place, it also implies that the tax preparer has not kept up the continuing education necessary to maintain it.
Friends and family are often the best way to find a reliable tax preparer. Just be sure to evaluate the referrals. For example, a tax preparer that always gets your friend the largest refund may not be filing an accurate return. You should ask probing questions like:
You should feel comfortable questioning your tax preparer about their experience as it relates to your specific situation. If you own a business or are a trustee of a trust, you should ask whether they have experience preparing these types of returns.
Though every tax return is different, your tax preparer should be able to provide you an estimate of the tax preparation fee prior to starting your return. The price may change if your circumstances have changed significantly from your prior year’s return. Common changes include starting a business, buying a rental property, one-time credits (like solar or electric vehicle credits), or investment changes.
Prior to hiring a tax preparer, you should fully understand their fee structure. Will they charge by the hour if you have questions about your return or is it a flat fee for the return preparation? Is there a per-form charge?
You should be cautious if a tax preparer charges a percentage of your refund for the return. This incentivizes them to overstate your deductions and understate your income. Remember that you are ultimately responsible for the accuracy of the information on your return. CPAs are specifically barred from charging contingent fees.
Tax season is brutal for most tax professionals. Since all of their clients are attempting to get their returns prepared by mid-April, tax professionals are slammed during the spring. A good tax preparer is not the right preparer for you if you can’t get a hold of them. You should contact any firm you are considering to see if they are accepting and will be available for new clients.
Along with availability, you should consider how clearly your preparer communicates with you. If you leave every conversation a little more confused, then you haven’t found the right preparer. Clear communication is essential, especially since your tax preparer may need to communicate with the IRS on your behalf at some point in the future.
Hiring a qualified tax preparer can provide many benefits, such as saving time, minimizing errors, and maximizing tax savings. However, it is important to do your due diligence and thoroughly research potential tax preparers before hiring them to ensure they are trustworthy. This can involve checking their credentials, experience, fees, availability, and communication skills. You can also seek referrals from friends or other trusted sources and ask questions about their experience and expertise.
The decision to hire a tax preparer should be based on your individual needs and preferences. Whether you choose to work with a CPA, Enrolled Agent, attorney, or other tax preparer, make sure you are comfortable with their qualifications and experience and that they can provide the support and guidance you need.
Casey Long is a CPA with over 15 years of experience. She has spent her career explaining complex financial concepts to various audiences. She started as a bookkeeper and worked her way up, so she understands all aspects of accounting processes.
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