Your best friend Tisha might appear to be somewhat of a “tax expert,” but with no formal education, no professional experience, and no accounting related licensure, you in fact are taking a huge gamble by having her do your taxes. For this article, I will examine the concept of “who is doing your taxes” by going over some best practices for choosing tax preparers who will make sure that your complicated tax return is getting the attention that it needs, for a fair price.
Unregulated/Non-Licensed Tax Preparers
It’s hard to provide the exact number of tax preparers in the United States, but estimates show that there could be anywhere from 1.3 million to 1.5 million tax preparers. However, only about 15% of them are regulated/licensed to prepare tax returns as a CPA, Enrolled Agent, or Tax Attorney.
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To become an unregulated/non-licensed tax preparer (most of which also have no formal business, finance, accounting, nor legal education) just takes the person waking up one morning and “deciding” they are going to go into business. They usually start with their closest family members and friends (most of whom are likely to be lower income or working class) and use various sales tactics to entice said family and friends to utilize their tax preparation services versus that of a more well-known preparation firm that’s regulated/licensed. Many family members and friends will fall for the pitch because after all, this is your friend, or cousin, “Tisha” and certainly “Tisha” has to know what she’s doing, right? Certainly “Tisha” has to be looking out for your best interest, right?
Using Unregulated/Non-Licensed Preparers Comes With Significant Risks
There are a host of risks that come with using an unregulated/non-licensed individual to prepare your taxes, especially when on top of said non-licensure, they also have no real formal higher education in financial accounting, cost accounting, nor tax accounting.
- Your identity could be stolen by them or someone around them, as they leave your sensitive documents in open spaces while completing your tax return.
- They could unintentionally make errors on the return (due to their lack of education) which will require you to take the same tax return to a regulated/licensed preparer to do it all over again, costing you more in time, energy, and money.
- They could intentionally make false deduction claims, false business/personal expenses, or do various schemes to increase your tax refund such as filing for credits and exemptions that you don’t actually have. All of these procedures are considered intentional tax fraud and could land you with fines, fees, and even jail time depending on the circumstances.
How To Identify A Bad Tax Preparer
Other than the major red flag of being unregulated/non-licensed, if a tax preparer does any of the following, you should stay away from them:
- If they say anything about getting you larger “tax refunds.” This usually means they are going to claim a ton more exemptions on your tax return than you actually have. It also means they are going to file for credits that you don’t actually have or do so in an inflated nature.
- If they say anything about utilizing offshore accounts, offshore entities, or any type of domestic or offshore trust in order to not “pay taxes.”
- If they say or do anything in relation to making up fake business expenses, fake business invoices, fake business entities, etc.
- If they are operating out of their basement.
- If they aren’t a dedicated tax professional with actual tax education, professional tax experience, and with some sort of professional presentation. For example, if “Tisha” is asking to do your tax returns and she operates out of her basement (a basement in which she can also do your hair, your nails, your eyelashes, etc.) then you most likely should stay away from her.
- If they are not a part of any professional accounting/tax organization that promotes ethics, on-going education, etc.
- If you ask questions and they can’t answer them in a professional, clear, and verifiable manner.
- If they ask for compensation based on a “percentage” of your refund amount.
- Finally, if they ask you to sign a blank tax return.
Best Practices For Choosing A Tax Preparer
While this article does shine a negative light on unregulated/non-licensed tax preparers, the fact is that not all of them are “bad/unethical” and not all of the regulated/licensed tax preparers are “good/ethical.” An unregulated/non-licensed tax preparer might be able to represent you in cases of tax audits, but only regulated/licensed tax preparers such as CPAs, Enrolled Agents, and Tax Attorneys can represent you before the IRS in collections, appeals, audits, and all tax matters. So a regulated/licensed tax preparer is held to a higher standard of quality and there’s actually a centralized regulatory board that helps to “police” the actions of these individuals. Whereas, an unregulated/non-licensed tax preparer can literally do, say, whatever they want just to try to drum up business.
With that being said, I personally do not recommend that you utilize any tax preparer that’s unregulated and non-licensed, without some form of higher education and actual professional tax experience. My rule of thumb is to:
- Always select individuals with at least 10 years of verifiable, quality tax experience. This could be from working with the Big 4 Accounting Firms such as KPMG, Ernst & Young, Pricewaterhouse, or Deloitte. It could be from working in private industry for a large, medium, or small corporation. It could also be from operating their own accounting firm with verifable clients, office(s), websites, telephone numbers, and more.
- Always select individuals with some sort accounting related licensure and education, such as the CPA license or even an Enrolled Agent certification, along with at least a Master’s Degree in Taxation or Accounting from a quality university or college.
- Always select individuals who are a part of some sort of quality professional business organization that promotes ethics, ensures on-going education, and more.
While the costs for said professionals will likely be higher than going to “Tisha,” at least 95% of the time you can rest assured that you are getting better quality and efficiency in tax preparation, as trying to “save money” by going to “Tisha’s Tax Return Service,” could end up costing you more in the end when you have to get the same return done twice due to Tisha’s potential mistakes and bad judgment.
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