Often as a taxpayer’s tax situation gets more complicated it starts to make more sense to hire a tax professional. Most people I”ve known who do their own tax prep don’t reference IRS publications and instructions very often and certainly not the tax code directly. But that is what due diligence requires to ensure the tax return is prepared properly. Here is my advice on DIY tax preparation.
If you feel good about tackling it yourself and have the time – go for it! If you get into it and it doesn’t work out you can always go to a tax professional. When you have more questions than answers, when you aren’t certain about entries, when the results don’t make sense – all of these are flags that you may need a tax professional.
A note about making use of tax assistance from DIY tax software companies. I’ve provided that tax assistance in the past. Sometimes I was transferred calls that another tax professional couldn’t adequately address. For some of those calls, what the client told me the other tax pro told them was rather disturbing and wrong. Maybe the client misunderstood, which is still a problem. It is like a box of chocolates, you don’t know what you are going to get. The tax pro may not have much experience in the area of concern. The tax pro may follow a script that really doesn’t fit. The tax pro may be under pressure to complete calls within a certain time. The compensation package may factor in whether or not you file a return while or after talking with the tax pro. All these things may affect the accuracy of the advice and the accuracy of your tax return. If the assistance is for a tax question and not just a software question it is still a good idea to verify the information with source documents.
Here are 5 tips for choosing a tax preparer when you have rental property (although this pretty much works in all tax situations):
- Don’t just walk into a tax office (or call in) and take whomever they assign to you. Even if the tax pro is qualified (some companies self certify their tax pros for different types of returns) to do a tax return with rental property, it doesn’t mean the tax pro is proficient or diligent.
- Do consider a tax professional that you have knowledge of their experience in rental property tax returns. For example, if someone with rental property like you recommends their tax professional, that can be a good indicator of someone you may want to choose. If a tax professional refers to another tax professional as having expertise with rental properties, that can be a good indicator. If you’ve seen or heard discussions from a tax professional that demonstrates expertise in this area, that can be a good indicator (one reason I write). Don’t rely on a referral from someone who doesn’t have a similar tax situation as you. Getting a recommendation from an 18 year old with only one W-2 job as a source of income when you have a lot more than that going on is not particularly useful.
- Consider interviewing at least 3 tax pros, especially if you haven’t identified someone as noted in tip #2. If you talk to them and aren’t sure of their experience with rental properties, then have a few targeted questions to try to gauge their knowledge. Ideally you would already know the answer or some of the answer. For example, maybe you ask “I’ve only lived in my house for one year, I got PCS orders and sold the house, do I have to pay capital gains taxes on the sale?” The correct answer for this question as stated is “it depends” or some variation of that. If they say yes, then find another tax pro. If they say no without any qualifiers you’ll want to consider whether or not they will be diligent in ensuring that the tax return is prepared correctly. If a tax pro states that he or she needs to do some research and maybe ask you additional questions, that could mean the tax pro is being careful and diligent or it could mean the tax pro is not very experienced in this area. In some cases you’ll have to trust your “gut”.
- Determine what kind of tax professional you want and/or need.
- For some reason it is common for many people to refer to tax professionals as CPAs. Most are not CPAs. Most people do not need a CPA to do their tax return and many CPAs don’t have anything to do with tax returns. But CPA (Certified Public Accountant) is a state level credential that takes a good bit of knowledge and effort to obtain, so it is a positive indicator of expertise. It is not a guarantee of expertise in a particular area or of diligence and accuracy.
- Most tax professionals are not credentialed. They can prepare tax returns but cannot represent you before the IRS. Some of these tax professionals are very knowledgeable and can prepare very complicated tax returns very well. Some are not and do not. The most important factors in whether a tax professional is “good” or not are: due diligence, knowledge, and experience. NOT credentials, but credentials are an indicator of expertise and knowledge. That said, as the complexity of tax situations increases, the percentage of non credentialed professionals that will work those situations decreases until eventually you are left with entirely or almost entirely CPAs and tax attorneys. Maybe a handful of EAs depending on the tax situation.
- If the uncredentialed tax preparers provide the service you need, then that is all you need. And there are plenty of uncredentialed tax preparers who are quite proficient with rental property taxes, S-corps, and partnerships. But if they don’t provide the service you need or you feel more confident with something more, some uncredentialed tax professionals participate in the IRS’s Annual Filing Season Program (AFSP). These tax professionals have to complete training as part of the program. Those that complete the AFSP every year have limited representation rights. They can only represent taxpayers for tax returns that they prepared and only for certain situations.
- Credentials are required for unlimited representation rights before the IRS on the behalf of other taxpayers. CPAs, Enrolled Agents (EAs), and tax attorneys are 3 types of credentialed tax professionals with unlimited representation rights before the IRS. Please note that an attorney would represent you in court, NOT a CPA or EA.
- The more complicated your tax situation, the more it makes sense to have a CPA, Enrolled Agent (EA), or tax attorney preparing your taxes or at least to be available when representation is needed or for dealing with IRS “issues” if they arise.
- Note that an EA is credentialed by the IRS directly. There is no requirement to have a degree. There is a 3 part exam required to become an EA. You can find more info here.
- If you need help locating a tax professional, the IRS does have a directory of credentialed tax professionals and of tax professionals who have completed the AFSP.
Well, those are the 5 tips. Choose wisely.