My post on choosing a #taxpro mentions that price should be a concern, but not the only concern. Still, I recognize that people want to have at least some idea of what they will be charged for return preparation. The problem is that it is extremely difficult to estimate charges without at least seeing last year’s return. My fees are based on a set price for a Form 1040 and then an additional fee for each additional form or schedule required. If I don’t know the forms and schedules you will need, it is hard to give an accurate estimate. Even if I have last year’s return to make a more accurate estimate, changes in your tax situation or in, for example, IRS due diligence requirements for certain tax credits means that you may need to file forms that weren’t necessary last year. Occasionally your tax situation changes in your favor and forms that were required the previous year (maybe you were able to itemize deductions or maybe you had some capital gains or losses) aren’t required this year.

Preparing an accurate return and working to ensure that you are in tax compliance (that is actively working to prevent ‘nasty surprises’) sometimes means that estimates (no matter how carefully they are created) don’t always conform to the reality of a given situation. The longer you work with your chosen #taxpro the easier it is to get an accurate estimate. I encourage my clients to call during the year with questions. A certain amount of basic Q&A is built into the cost of your tax return preparation fee and if your questions get more complicated, I will always warn you that you are straying into “billable hours” territory before we proceed. Usually if we stray into that territory I will ask you to make an appointment to come in for a consultation that is billed at an hourly rate.

If you landed here simply wondering how much Tax Therapy charges for return preparation, please download and complete a Quote Request and return it to us via snail mail, e-mail, or fax (505-352-0362). Please do not include your SSN or any other sensitive information on the request. I can assure you that we work hard to keep our prices near national averages and that we are committed to providing value for your return preparation dollar.

Remember, the lowest bidder is not always your best option. When choosing a #taxpro, choose wisely, choose well.

A colleague recently posted the following on a tax humor group:

Posted in local community group—Need recommendations for someone to prepare tax returns – looking for someone that is good and may do them on the side – not looking for an HR Block or pricey accounting firm.

You may be wondering why professional tax practitioners find this humorous. You may be thinking  “I don’t need a big firm or a big name either, my tax return isn’t that complicated.” We’re laughing because if you don’t do taxes for a living it’s easy to look at the output (the actual tax return) and think “this can’t be that difficult” or “my return just isn’t that hard.” And maybe it isn’t. But maybe it is. The first rule of tax return preparation is…

The person who posted this comment could be walking into tax trouble—or worse. But first let me say that there are many excellent, reputable, professional taxpros working part-time from home or virtual offices. Some of them have retired from larger practices but still want to keep their skill set, so they keep up with the tax law changes and do some returns every season. Some are simply the second, supplemental income in a multiple income household and this type of seasonal work is a good fit for their lifestyle and schedule. Others may be full-time bookkeeping professionals that offer tax return preparation during filing season to generate additional income. Any of these people may be good choices. And low overhead (not renting an office, not having staff, etc.) often translates into a lower price for return preparation even on relatively complex returns.

Nevertheless, one thing you are going to read over and over on this blog is that while price should be a consideration, it should not be the only consideration when choosing a tax professional. When you pay someone to do your tax return, you are typically placing your entire financial identity into that person’s hands. And even tax professionals working from a home office are required to have a written security plan and should be aware of their obligations and actively working to protect their data and your information. That effort is built into the cost of most professionally prepared tax returns. So is continuing education. Year-round tax professionals are pretty much constantly immersed in tax law. It’s our full-time job and we are typically monitoring and aware of tax law changes (or even interpretations) that affect the types of clients we work with all year long. If you are considering hiring a seasonal preparer you want to be sure that they are, at a minimum, keeping themselves up to date on the most important tax law changes. It amazes me how many muggles (non taxpros) I have spoken to that are unaware of the sweeping tax legislation passed by Congress in December of last year! If you are a DIY tax person that could be a problem this year. And if you hire a seasonal professional who is not conscientious about keeping up with the laws that could be an even bigger problem. You are trusting that person to know what they may not know. And you may not realize that your return was prepared incorrectly until a year or more later when the notices start appearing in your mailbox.

Finally, sometimes seasonal preparers don’t always know what they don’t know. Enrolled practitioners (EAs, CPAs, attorneys) are bound by Treasury Circular 230 which has a “competence clause.” We are not supposed to accept work that we are not capable of completing correctly. This can play out in many different ways depending on who you hire. Big CPA firms may not be the best for individual returns. Indeed many only do individual returns if they are also doing the business return because business returns are their primary focus. Really small, seasonal preparers who do mostly individual returns may not be a good choice for your small business, especially if it is an S-corp or a partnership, because those entity returns have specific requirements and the knowledge required to prepare the entity returns is vastly different from that required to do an individual return. Even an experienced, well-rounded, tax general practitioner may not be the best choice for certain specialized returns (clergy, airline pilots and flight attendants, over-the-road truck drivers, international taxpayers, etc.). Who is the best option for you? Like so much in the tax business “it depends”.

Tax Therapy specializes in individual and micro business returns. Returns that large CPA firms may not want to do because they don’t see them as profitable enough. That’s not wrong of them. Their business model is designed around serving clients with specific needs. Mine is designed around a completely different set of clients. If you’re too large, I might refer you elsewhere because taking on your business wouldn’t allow me to meet the needs of my existing customers. Or your entity structure might be beyond my competence level. Taxes are more complicated than you think and competent tax professionals come in a range of business styles and prices. Don’t assume that a franchise-prepared return will be cheap. Don’t assume that someone with an office will be prohibitively expensive. And never choose based on price alone!

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 many tax credits, especially the Earned Income Credit and those related to education expenses add complexity to returns as does buying healthcare insurance through the marketplace. If you claim child or education related credits, are filing head of household, or bought marketplace health insurance you still may want to consult a tax professional even if the rest of your return is fairly simple. Tax Court was held in Albuquerque last week and over half of the cases related to these types of issues many of which could have been avoided with proper return preparation.

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, clergy, 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)

I took the test to obtain this credential early last month. The exam is extremely difficult, is only offered in Washington D.C. every other year, and has a pass rate of less than 20%. I will find out if I passed sometime in April and if I did then I have to complete my application to practice (including getting letters from two practitioner sponsors). Pass or fail, I know much more about your representation rights than I did when I started studying.

Update September 2019: I passed. The pass rate was, once again, under 20%. 143 people sat for the exam; 22 passed. I can now represent you beyond IRS Appeals and into Tax Court. A proper attorney, licensed by a state bar, will be required if appealing the Tax Court decision is necessary.

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 or U.S. Appeals Courts). 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 at all levels of the IRS and in U.S. Tax 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) – That’s Me.

“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 return 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.

Still not sure? Read what the IRS has to say here.

This post brought to you by someone on my FaceBook tax forums and by National Tax Security Awareness Week (December 3-7, 2018). This happened back in 2016 but unfortunately stuff like this still goes on today.

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 [now four 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. I also have concerns about professional preparers who use free internet products to save costs but that is a post for another day.

A gym membership fee is an inherently personal expense since it is desirable to be physically fit regardless of one’s profession. Thus, such expenses are not deductible for tax purposes. In Battle v. Comm’r, T.C. Summary 2007-27, a professional firefighter claimed a deduction for physical fitness dues with respect to his gym membership. He argued that fitness was mandatory since a healthy body was important to the performance of his duties as a firefighter. The court denied the deduction and noted that the taxpayer did not offer any evidence to show that his gym expenses were different from, or were in excess of, what he would have spent for personal reasons.

In Rev. Rul. 78-128, the IRS ruled that a police officer could not deduct health spa expenses incurred to improve his physical fitness. The IRS cited Code Sec. 262, which prohibits deductions for personal, living, and family expenses.