Whether -- and how -- to pick a tax preparer

More than 40 million taxpayers will hire someone to help them prepare their taxes this year. Choosing the right one can make the difference between a properly figured return that includes all legitimate deductions and one that lets the taxpayer shell out too much or -- even worse, considering the penalties -- too little to Uncle Sam. Yet many people, especially those who have not used a tax preparer before, first have to figure out if they need a preparer; then, if they do, to decide what kind.

Probably the easiest way to see if you can do your own taxes is to sit down and try. If all you have to deal with are wages and interest on the income side and mortgage interest, taxes, and charitable contributions on the deduction side, you may have no trouble filling out the forms yourself.

If you are a fairly active investor, bought or sold a house last year, own rental property, have self-employment income, or own a farm, you are probably a candidate for a tax preparer. Or you may be just one of these people who simply do not have a friendly relationship with numbers or tax forms, who even find the 1040EZ confusing. For you, $10 or $20 to avoid mistakes is money well spent. But many people, once they give it a shot, find it's not that bad.

``Before deciding to go to a preparer, at least read the instructions and see if you can do it yourself,'' counsels Rod Young, a spokesman for the Internal Revenue Service.

The preparers, not surprisingly, say that that piece of advice could cost taxpayers more money than they might spend on professional help. The fact is that the argument is correct for many people.

If you are one of these people, there is a wide range of choices. The three largest categories are chains like H&R Block, accounting firms, and lawyers. Then there are private individuals -- accountants doing free-lance work, relatives, friends, or just someone down the block who likes to prepare tax forms. There's nothing wrong with any of these, provided the person preparing your return is competent and informed about new tax laws and regulations.

``The most common problem we hear about is preparers who are not up on the latest changes,'' says Laverne Forster, director of education at the National Association of Tax Practitioners. ``We really think people should have some sort of continuing education.'' Even if the preparer has several years' experience -- another requirement for you -- he or she should be able to show you evidence of at least six to eight hours of additional course or seminar work each year to stay up to date on the latest changes in tax laws. ``But we prefer to see 20 to 30 hours,'' Ms. Forster adds.

She also likes tax preparers to be ``enrolled agents,'' meaning they passed an IRS exam, or be accredited in taxation, which means they passed an exam given by the Accreditation Council for Accountancy.

An exam is also given by the Institute of Tax Consultants. Preparers are certified if they pass this exam, but they also have to take 60 hours of classes and seminars every two years.

Consumers should also make sure the preparer or the firm is available year-round. This does not mean that major chains which seem to shut down in the spring should be avoided. While some H&R Block storefronts do close after April 15, the firm has staff in district offices to help if problems come up after that date.

Also, Forster warns, ``be aware of anyone who promises you that you'll get a refund. They can't do that.'' Some preparers also say they will base their fee on a percentage of the refund. They can't do that, either.

If you know your tax situation is too complicated for one of the chains, or if you just feel more comfortable with a certified public accountant or tax attorney, how do you find a good one? Most people, Forster says, start by asking friends or the people they work with. If you do this, try to find out if your friend's tax situation is similar to yours. If you invest in real estate, for example, your preparer should have experience in this area. Another preparer might know more about capital gains and dividends from investments in the stock market.

Once you meet the preparer, there's nothing wrong with asking him or her about some of these tax areas, or asking for evidence that the preparer is keeping current on new tax laws. If you need a good reason for asking preliminary questions, try this: If things get sticky with the IRS, you are the one responsible, not the preparer. The preparer, however, is required to sign the return and give you a copy.

There is also nothing wrong with asking for a cost estimate before work begins on your return. While this figure could go up if complications arise, it at least gives you a basis for comparison.

Last year, the average fee charged by H&R Block was $41, which paid for a 1040 and a state return where there were some itemized deductions and a few tax credits. Accounting firms usually charge by the hour. At smaller firms, fees can run from about $45 to $60 an hour; larger ones usually charge from $50 to $75 an hour. Tax lawyers' fees can be more than $100 an hour, although some people who want a lawyer's advice often use an accountant or chain to fill out the forms, then take them to a lawyer to check.

The best way to get the most out of any preparer is to keep good records throughout the year, then spend plenty of time gathering them all together before the visit. If you can organize all this material -- bills, receipts, record books, check stubs, and canceled checks -- into some sort of order before you go, you'll do even better, especially if you are being billed by the hour.

If you would like a question considered for publication in this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.

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