Proven Strategies Consulting - The facts about tax preparers

Finding A Good Tax Advisor

Here are some suggestions to help you find and evaluate a tax accountant/tax preparer:

• Ask around. Ask others in your profession. Anyone can pay for advertising, but a satisfied client is always the best referral. Just make sure that you ask someone you respect and has at least a little business and tax savvy.

• Find somebody who is familiar with your business or industry. Don't expect someone who specializes in service businesses to also be an expert in manufacturing. Avoid people who try to convey that they know everything about everything. Everyone has areas of expertise. Try to find the person who knows your business.

• Ask for an interview. In most cases, s/he will be glad to give you an hour (at no charge) to discuss your situation and assess your specific needs, wants, and desires. At that time, you will want to ask at some of the following questions:

• How big is the firm? Am I just going to be a little frog in a big pond? Just how important is my business to you?

• Who exactly will be doing my work, you or somebody else? If I have problems or questions, do I speak with you or am I shuffled off to another person?

• Why do you want me for a client? (This one always throws 'em for a loop.) If they stutter and stammer, you can bet that it's just for the money. If they tell you that your business would be a good mix for the firm, or that they specialize in your business and are anxious to expand, or another reasonable explanation, you at least have a fighting chance.

• What is your experience and educational background? People always like to talk about themselves. Give him/her a chance to spout off. See if s/he gives you the information in a "matter-of-fact" fashion, or if s/he is trying to put on a dog and pony show.

• What are your continuing professional education (CPE) requirements, and how many CPE hours do you normally take on an annual basis? If you're not comfortable with the answer, ask to see his/her written CPE report that is required to be filed with his/her professional organizations. You don't have to be rude about it. You can just say, "I'm just curious about your areas of CPE interest. Would you mind showing me your written CPE report?"

• What research material do you use? CCH? Research Institute? BNA? What research do you subscribe to? If you find that the only research material is a current copy of the Federal Tax Handbook, run, don't walk, to the nearest exit. Taxes evolve from regulations and court cases. Sometimes complicated problems arise that require deep research. You don't want your tax geek to "give it his/her best shot." Being correct is always best when dealing with the IRS.

• If your return is audited, will the accountant represent you, on your behalf, before the IRS? Not with you, but instead of you. If the accountant sources out the audit work, think twice. If the answer is that you will also be expected to be present in an audit, think a third time. Potentially the worst situation in the world is both the accountant and client being present at audit time. What will be the fee for any subsequent audit work?

• Speaking of fees, find out what and how the accountant sets fees. See if s/he will give you an estimate of your fees before you leave. Find out about billing policies.

• Once you are done with your questions, see if s/he has any questions for you. If the accountant is established, s/he doesn't have to take any Tom, Dick, or Harry that walks in the door. They might have some very pointed questions for you. In fact, the more questions they ask, the better. At least it shows some form of interest.

• Finally, select someone you are comfortable with.

How to choose a tax preparer

By Stephen D. Froikin
Special to the Chicago Tribune

OK. So you've decided to skip the sharp pencil routine this year and let someone else prepare your taxes. Who should it be? Aunt Millie? A CPA? Or do you need a lawyer to do it?

Any of these answers could be right. It depends on the complexity of your situation and on the qualifications of the individual who will be doing the work.

Here are descriptions of the qualifications of the folks who have put out shingles for tax preparation, some practical advice on how to find them, and some questions to ask before you commit yourself.

Who is qualified?
The first thing you should know is that the IRS does not certify tax preparers. Anyone can do them as far as the U.S. government is concerned, although some states impose a licensing requirement. The only federal regulation of tax preparers is a set of penalties that puts preparers on the hook if they prepare returns that they know are wrong or that they should know are wrong.

The result of this is that all sorts of people offer tax return preparation services:

Storefront preparers. This includes the big chains, like Jackson Hewitt or H&R Block, and solo operations. These people have all sorts of credentialed and noncredentialed folks, ranging from lawyers and CPAs to totally uncertified. The larger firms have training programs; the smaller ones don't. The person who prepares your return may not be authorized to represent you before the IRS if your return is audited, but someone else at the firm may be.
Enrolled agents. These are the only people who have passed an exam strictly on taxes. It's given by the IRS, and the people who pass are entitled to represent you before the IRS if your return is audited. They can even represent you in tax court, if things go that far.
Certified financial planners. In recent years, a number of organizations have offered certification as "certified financial planner." Their expertise lies in financial planning, estate planning and investments, and may include taxation. But the title does not guarantee it.
Certified Public Accountants. A CPA is an individual who is certified by the state to act as a public accountant based on a test and experience as a noncertified accountant. Many CPAs specialize in taxation, but many do not. CPAs may represent you before the IRS.
Lawyers. Representing you is the specialty of a lawyer. Return preparation usually is not. Your lawyer may prepare your return as a courtesy, but most don't seek this type of work.
Clinics. Various organizations offer tax assistance for elderly or low-income taxpayers. In terms of qualifications, these folks are probably most like storefront preparers, but this could vary a whole lot. The big plus of a clinic, of course, is that the fee is usually zero or quite low.

Finding the preparer for you
So where should you look? Your best bet is to ask your friends. Find someone who is happy with a preparer's work and get the preparer's name. Friends in similar financial situations are the best source.

If that doesn't pan out, check with your state's CPA, legal or enrolled agent organizations. Or you could drive around the neighborhood until you find a storefront. Finally, check the classified ads. You should be able to find a preparer you like. There are plenty of them. If not, you can do it yourself.

Ask questions first
When shopping for a tax preparer, experience counts. You want someone who knows taxes and is up-to-date. So ask a few questions before you go ahead. Here are some good ones:

What is your experience with my type of return? Most preparers can do a simple 1040, but your family's trust could throw some preparers for a loop. Check out any special requirements in advance. While you're at it, make sure that the preparer's experience is current. The tax laws are changing all the time.
Do you know the requirements of all the states where I am required to file? If you have moved from state to state, or you live in one state and work in another, or you have financial interests in other states, you need a preparer with interstate experience. Many preparers are challenged by this, particularly if the other state is more than 100 miles away.
Are you aggressive or conservative? Do you like to take chances or do you like to play it safe? Many tax returns are cut and dried, but some situations could be played in aggressive or conservative ways. Make sure that you hire a preparer who agrees with your level of risk taking.
Will you represent me if I am audited? This question opens the door to finding out the preparer's audit record. A garden variety preparer should have his clients audited very rarely. Preparers representing certain small businesses or other high-risk taxpayers might have a higher rate, but it still should be pretty low. A high rate could indicate trouble.
How much do you charge? Is it hourly? By the form? Extra for getting your records organized? Find out in advance. And if possible, get this in writing.

Shopping for the best results
Every year at this time you read about someone who took his tax return to 20 or a dozen preparers and got different returns every time with wildly different fees.

I'm sure this is true, but you could also assemble a group of 20 preparers who will give you the same results in a given situation. It depends on the complexity of the return.

The thing you should learn from these surveys is that you should beware. You don't want to select a preparer who figures out the lowest tax only to find out the return is full of errors. On the other hand, you might want a preparer who will take an aggressive stance. You are responsible for the return. You don't want to pay for someone else's mistake.

And some types of aggressiveness are called fraud. If you want to be aggressive, you still need a preparer who will find a legal basis for your return. In the end, many items of income and many deductions leave you little choice. And all good preparers should treat them the same. There is a right answer. And if you shop around and ask questions, you will stand a good chance of hiring a preparer who will find the right answer for you.

Setting the ground rules
Once you've selected a preparer, you should set some ground rules.

First, tell your preparer you want to be called if there are any questions about your records or your situation. You don't want him to jump to conclusions without checking with you first.
Second, have your preparer let you know in writing what judgment calls were made and gray areas that were shaded one way or the other. These may be unavoidable, particularly if your return is complex, but you should know about them.
Finally, make sure your preparer signed the return. This does mean something to the IRS: usually that professional work was done. That's a message that you want to get across.

Run, don't walk, if your preparer:

Guarantees you a refund upfront.
Charges a fee based on the size of your refund.
Arranges to have your refund sent to an address that's not yours.
Doesn't ask for your background information, such as W-2 wage statements.
Offers to create documents to support false or exaggerated deductions.
Asks you to sign a blank form.
Refuses to give you a photocopy of your return.
Refuses to list his or her Social Security number and sign the return, as required by law.

Businesses' tax strategies vary, but many rely on advisers to jump through final deadline hoop. Linda Romine

A good tax adviser can benefit any small-business owner, but having a cooperative relationship can be invaluable to both parties, especially when tax season rolls around. After trying to manage his own taxes, Travis Pennington, owner of Netview USA LLC, a home-based computer and Web design consulting firm in Louisville, realized he was losing valuable time. "It really came down to a matter of resources," Pennington said. "It's not my job to know all the tax codes and legal things that have a bearing on a business," he explained. "I can spend six or seven hours of my time per week trying to educate myself about all this, or I can just outsource it." Stephen M. Lukinovich, CPA and partner at Chilton & Medley PLC accounting firm in Louisville, is Pennington's tax adviser. The two men work as a team. "One of the best things Steve did when I met with him is (that) he communicated what he would expect from me at the end of the year, in terms of what kind of numbers he would be looking for," Pennington said. Other CPAs and business owners agreed that ongoing communication can prevent panic and chaos at tax season. "The most wonderful way for a business to work with their CPA is on a knowledge transfer basis," said Gwen Tilton, CPA and partner with Cotton & Allen PSC accounting firm in Louisville. She helps clients sharpen bookkeeping procedures so that their time together can be spent on tax issues, not remedial record keeping. "You want to allow them to interact with the CPA for tax advice," Tilton said.

Avoiding the dreaded shoebox scenario

"The worst-case scenario is a client who has procrastinated, and they come in near the filing date with a big box of unsorted source documents," said Tilton. "We call it the 'shoebox.' " In these circumstances, she said, "the client has no idea what they have, or if they have a profit or a loss. It will end up costing them more in fees because the first thing they're going to have to do is pay the CPA way too much to get it ready." Joseph Brown said he tells business owners to get organized beforehand. "If they can go through and summarize their expenses, put them into categories, it makes it a lot easier," said Brown, who is president of Melhiser Endres Tucker CPAs PC accounting firm in New Albany. Pennington agreed. "You don't want to just dump a ton of paperwork on their desk that might be meaningless for them," he said. "Reducing your tax adviser's time working on your actual account will save you money." In addition, accuracy is essential. "We don't want estimates. We want actual numbers so that we can make sure if the business does get audited by the IRS, it's going to stand up," Brown said. "A lot of times that means having the client come in around Sept. 30 so we can see how they're running year to date. "We give them ideas as to where they're at, or if they need to have some expenses so they'll have less tax impact," he said. For example, Brown said, "if you think you're going to have a loss, and all of a sudden you've got $50,000 profit, you're going to have to come up with a lot of money at tax time." "The biggest thing is to stay on top of all the changes in the tax laws," said Doug Heisler, president and CEO of Meta Associates Inc., an engineering firm at 401 S. Fourth St. With 75 employees at several offices (locally and in Nashville, Tenn.), he said he relies on the advice of his accounting firm, Deming, Malone, Livesay and Ostroff. He and his chief financial officer meet a few times a year, first around April, then again in September. The accounting firm does a full audit each January, he said. "They look at any tax law changes that were made during the previous year," Heisler said. "Then we plot out our tax strategy for the entire year." Heisler offers this advice to other small businesses with 50 or more employees: "Stay on top of those changes every year. You want to make sure you're not paying more taxes than necessary but that you're paying what you need to." By contrast, "some clients might be surprised they're going to get a refund," said Lukinovich. "We show them ways they can employ that capital today and not wait until April," he said. "That kind of information is extremely valuable to them."

Software as another support tool

Tilton said she also educates her clients about software that will help them track tax transactions. "It will save you in CPA fees, and you'll also probably pay less in income tax because when you're rushing at the last minute, trying to remember things that happened months, or even a year ago, you may not have the best advantage," Tilton said. "I'm a strong believer in QuickBooks," said Kathy French, president of Budget Print and Copy Center Inc., located on Plantside Drive in the Bluegrass Research and Industrial Park. "Time is synonymous with money. If I am efficient and have my ducks in a row before I go to see my CPA, it costs me less to have my taxes done." Donna Walker Mancini, chief financial officer of Colonel Walker Flags in Louisville, said she likes using Quicken and Microsoft Excel spreadsheets. "We keep a ledger in the computer. Everything I pay goes on the ledger, and it's all organized. I pay all the taxes, escrow to the bank, sales tax -- everything," she said of the 43-year-old business owned by her mother, Lorretta Walker. The company has six employees.

J. Robert Buschermohle, CPA and managing partner of Buschermohle & Co. PSC, 8900 Greenway Commons Place, Suite 100, is the company's longtime accountant. He gives her a workbook that she can fill out throughout the year. He calls it a "road map. ... Having everything in one booklet minimizes errors," he said. "And it simplifies things." "We do all of our own stuff, and he puts the final blessing on it," Walker Mancini said.

Counselor and coach for small businesses

French said she realized the importance of developing an open relationship with her tax adviser and recommends other business owners do the same. "You pretty much tell him everything, right down to how many times you change your socks," French said. "Besides, if you don't sit down and tell him your goals and what you want, it's very hard for (a tax adviser) to give you direction." Pennington said before he began working with Lukinovich, he went to another tax adviser for an initial consultation. "I went into this CPA firm and told them a little bit about myself, where I was headed, and what I wanted to do. I almost felt like it was overlooked," he said. "They tried to get me to subscribe to all these services in their business that didn't reflect what I was trying to do." Like other business owners, French said her goal is to not pay any more taxes than necessary -- "and to never be audited," she quickly added. "And if I am audited, I don't want to be sweating bullets when the IRS comes. I'm just an honest businesswoman who wants to be able to sleep at night." She said she feels comfortable with her longtime CPA, Glen Reed, a sole proprietor in Louisville, who gives her an annual workbook in which to record all tax-related data. "It can be time-consuming, but it gets into your head and really does tell you where you're at," French said. Reed said French is a "nuts and bolts person." Her outlook is: "Let's get the job done, and what is the right way to do it?" Reed said. "I have a number of clients like that." Reed said he acts as a controller of sorts for his small-business clients. "I like to get them onto a mechanized computer system that I have a copy of, like QuickBooks or Peachtree, or any of the computerized, user-friendly accounting systems. "Then, periodically throughout the year, I can go into their location and look at their profit-and-loss statement and balance sheet and see what they're doing."

Discuss costs with your tax adviser

Fees are another aspect business owners should hammer out before establishing a relationship with a tax adviser, sources said. "We have to have the hard conversation upfront about what it's going to cost them," Tilton said. "As part of that discussion, you also need to establish a timetable of when the client and accountant expects everything to be completed," Lukinovich added. "Some people don't mind extending their returns. We love those," he said with a laugh. "For clients who expect their returns to be filed by the due date, that's fine too; we simply need to know." A majority of CPAs charge between $75 and $250 per hour, Lukinovich said. A sole proprietor with a simple tax situation might expect to pay anywhere from $450 to $650 for advice and filing the return, Lukinovich estimated, while larger businesses with more complex tax matters might pay in the range of $1,100 to $2,500 annually. French, whose Budget Print and Copy Center has eight employees and annual sales of $750,000, pays about $500 a year to her accountant, she said.

When to call the CPA

How often small-business owners consult their tax advisers varies. Tilton said she meets with some clients quarterly, while others require a weekly review, and then others schedule time on an as-needed basis. "The perfect situation is for a CPA to know the client's strengths and weaknesses. So if there's something we know a small-business owner is really good at ... we need to be there more proactively for certain areas." Brown said he welcomes client calls throughout the year, not just around tax time. "I'd rather have the question when you know about it rather than later," Brown said. "If something happens in June, don't wait until January to ask me about it. If you have a question, call."

Linda Romine is a free-lance writer for Business First. Send comments on this article to rray@bizjournals.com.