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Female hairdresser adjusting curlers in a mid adult woman's hair
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A recent Consumerist article points out the shocking fact that hairdressers (along with most other service professionals) are more heavily regulated than the people you may hire to prepare your taxes. In fact, only three states (California, Maryland, and Oregon) have any laws whatsoever mentioning necessary qualifications.

With tax season swiftly approaching, it's important to understand what you should look for in a tax professional, whom to avoid, and the signs that should send you running for the hills.

After all, you are legally responsible for the information on your tax return -- whether you pay someone else to prepare it or not. So even though getting an outsider's assistance may give you some peace of mind, it could ultimately be the cause of an even worse headache down the road.

How Regulation Bypassed Tax Preparers

In the state of New York, cosmetologists must complete a 1,000-hour course and then pass a state-administered written and practical exam. Virginia has a similar process -- and the regulations involved run to 18 pages of legalese.

Even Alaska, the least densely populated state, has a 23-page document establishing requirements for social workers, geologists, and big-game outfitters. But absolutely no mention is given to tax preparers.

Although the IRS might be a tempting target to blame these lapses on, they're not the IRS' fault. Service jobs are regulated at the state level. The IRS does require preparers to obtain a preparer tax identifier number, or PTIN. But there are no competency requirements involved.

In 2011, the IRS tried to change this, hoping to begin regulating non-attorney and non-CPA tax preparers. But lawyers quickly moved to quash the attempt, arguing that Congress never gave the IRS authority to regulate tax preparers.

Though that may be true (a decision has not yet been reached by the U.S. Court of Appeals that's currently reviewing the case), just consider the number of Americans who shell out for help in preparing their paperwork. In 2011, nearly 80 million Americans paid about $10 billion to have someone prepare their taxes. It's clearly a big deal that there are so few regulations on these preparers, nor are there major ramifications if they make a serious mistake. And those mistakes ultimately could cost you money.

This is even more troubling when you consider that an official government investigation into this issue in 2006 -- managed by the Government Accountability Office -- involved having returns prepared at 19 tax chain outlets. It discovered that "all 19 returns had mistakes ranging from refund overclaims of nearly $2,000 to underclaims of over $1,700."

Whom Can You Turn To?

The best tax preparers to seek assistance from are certified public accountants or tax attorneys -- heavily educated (and regulated) professionals who must meet strict requirements for initial certification. They are also required to receive ongoing education in order to maintain their certification.

Of course, expertise comes at a cost, which makes hiring CPAs and tax attorneys too expensive for a lot of people.

For those on who make $52,000 or less annually, the IRS offers completely free tax preparation through its Volunteer Income Tax Assistance, or VITA, program. These agents are trained and IRS-certified, so they are similarly trustworthy.

Then comes the vast middle ground into which most people fall.

Tax preparers at national chains like H&R Block (HRB) and Jackson Hewitt go through minimal training (the equivalent of 2.25 and 3.5 college credit hours, respectively). That's better than nothing, of course. But even so, a quick Web search will return reams of horror stories from folks left with stiff penalties due to careless mistakes made by tax prep agents. So proceed with caution -- and use them at your own risk.

Of course, outside of the big chains, there are many, many tax preparers. And when it comes to those, you're on your own. Some may indeed be knowledgeable and helpful, but others might not be looking out for your best interests.

How to Vet a Tax Preparer

Heed the IRS' advice and keep these things in mind when determining whether or not a prospective preparer is suitable to use:

1. Ask for their preparer tax identification number (PTIN). As mentioned earlier, the IRS requires tax preparers to apply for this number. So if yours can't provide you with his number, it's probably because he doesn't have one. Meaning you should stay far, far away.

2. Do your research. Don't rely solely on a family member's or friend's recommendation. Google the tax preparer's name. Check the Better Business Bureau to see if there's a history of complaints. Obviously, if the preparer's name is attached to a long list of disgruntled clients, keep looking.

3. Beware of big promises, and consider how the preparer is paid. A preparer who guarantees they'll send you home with the biggest refund in town (especially before they've even examined your documentation) is probably willing to fudge a little on your return to fulfill that promise. The same goes for a preparer who doesn't charge a flat rate -- but rather charges a percentage of the return he secures. These are two common, but easily avoidable, red flags. Don't be lured by big refunds -- and seek out flat-rate tax preparers.

4. Never sign anything until you've completely reviewed it. It may take some extra time, but review every number that your tax preparer has prepared. Ask questions if something doesn't make sense. A good tax preparer is willing to explain what they've calculated and why. Remember, even though your preparer is required to sign the return and list their PTIN, all responsibility for the accuracy of your return falls on you. So make sure all the t's have been crossed and the i's dotted -- and never sign until you've verified your return.



Motley Fool contributing writer Adam Wiederman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our newsletter services free for 30 days.

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scottee

why is tax preparation and compliance a major job sector?


what if congress scrapped the 73,000 pages of tax code
and everyone just paid a small national sales tax with no deductions for anyone for anything?
they would probably collect more, everyone would pay some, the rich would pay more, we could close down the IRS, congress would have a lot less power, and April 15 would just be another spring day.

January 18 2014 at 10:23 AM Report abuse +1 rate up rate down Reply
dyana35226

Worked for H & R Block. Did taxes for years before starting there. They say they charge so much for their returns because of their tax preparers experience. BAH-HUMBUG!!!! You pay the same for a first year preparer as for one who has been with them for years. The main reason I left is because I couldn't lie to my clients anymore and I couldn't "sell" them products I didn't think they needed. Like insurance on their return. The last year I was there Block paid for all of their people's PIN numbers at $65.00 a person. They added a $2.00 charge to every return, and if the client questioned it we were told to tell them the $2.00 was an IRS charge! Well, myself I did over 120 returns that year, so they got $240.00 back for the $65.00 they had spent. There were people in my office that did over 300 returns a year. So, even with the large costs of the return they raked in a lot just with the $2.00 extra charge, after they subtracted the $65.00. Basically anyone who can operate a computer can do their own returns now a days, especially if it's just a 1040 even with earned income credit. And if you make less than $58,000 a year you can do it for free. Just check out IRSfree file and find out for yourself. Good Luck, now I'm off to do my taxes and help others learn how to do theirs for free.....

January 18 2014 at 4:04 AM Report abuse +1 rate up rate down Reply
basscat58

Turbo Tax you are full of ****! CPA's who do taxes are regulated tested and certified as prepares by the AICPA & IRS! For the 1040's with little more than standard deductions your software maybe okey! Get a hair cut!

January 18 2014 at 12:56 AM Report abuse rate up rate down Reply
Steve

Here is a warning about where you get your financial news and advice from:

Watch out for half-baked and poorly researched and written articles, like this one. And if it is associated with 'daily finance' or huffpost, take it with a giant grain of salt and feel free to ignore most of what it says, or simply run the other way.

January 17 2014 at 11:50 PM Report abuse +1 rate up rate down Reply
1 reply to Steve's comment
Mr. Bill

Steve, sorry to point this out but, under the circumstances, a tiny grain of salt might be a more appropriate measure. Let's not mislead the public by overstating.

January 18 2014 at 12:48 AM Report abuse rate up rate down Reply
1 reply to Mr. Bill's comment
Steve

Ooooh! NOOOOOOOO! Mr. Bill!!!!!

January 18 2014 at 1:08 AM Report abuse rate up rate down
hothe5

Turbo Turbo Turbo TAx That is the way to go! Every year it has never failed me. I am confident it will do the same for me now!

January 17 2014 at 9:20 PM Report abuse -1 rate up rate down Reply
sticklingtaxes

Enrolled Agents (EA) should have been mentioned with CPA\'s and
Tax Attorneys. We have to have education credits every single year to keep our license active. We have more education than CPA\'s. We have a Code of Ethics that must be followed. We have to pass a test to become EA\'s and are licensed with the IRS. This license must be renewed every three years.

January 17 2014 at 8:28 PM Report abuse rate up rate down Reply
Hi Gram, Ty&Dill

I can't believe more people don't do thier own taxes on sites like Turbo Tax or Hr Block.. It's not that hard as long as you have all your information at hand. You always see a line of people at the booths set up in walmart for tax prep, most of them doing an EZ form. Are people too lazy to think?
They will pay $50-75 for an EZ form , its crazy.

January 17 2014 at 5:59 PM Report abuse rate up rate down Reply
Cherrie Groves-Mouss

Enrolled Agents are federally licensed tax professionals. They are tax experts.

January 17 2014 at 10:40 AM Report abuse +1 rate up rate down Reply
cbizbob

Robert Flasch below is absolutely right. I am an Enrolled Agent. We are required to have annual continuing ed in taxation and are subject to stringent regulation by the IRS. (Look up Circular 230 if you want an idea of the rules.) An EA is a tax professional by choice and is also licensed to represent you at all levels of Appeals before the IRS as are CPAs and attorneys who may or may not specialize in taxation.
If you find someone offering to do your initial tax prep for a portion of the refund, call the IRS. That is not permitted due to the temptation to improperly increase the refund size.

January 17 2014 at 10:33 AM Report abuse rate up rate down Reply
Robert Flach

You are wrong when you say "The best tax preparers to seek assistance from are certified public accountants or tax attorneys".

CPAs are not necessarily trained, educated, or current in 1040 preparation. And you don't need an expensive attorney to prepare a 1040.

The best tax preparers to seek assistance from are "Enrolled Agents", or EAs. They are independent tax preparers who had to pass an comprehensive test in federal income taxation and must maintain annual CPE in federal taxation.

And there are many "unenrolled" preparers who are knowledgeable, experienced, and current in 1040 preparation.

The Wandering Tax Pro

January 17 2014 at 7:13 AM Report abuse -1 rate up rate down Reply
1 reply to Robert Flach's comment
basscat58

Hey buddy want to file a trust with 6 million in assets! You best believe you need a CPA or an attorney who is a CPA to file that return! Businesses etc EA,s are not trained to handle complex returns!

January 18 2014 at 1:18 AM Report abuse rate up rate down Reply
1 reply to basscat58's comment
cbizbob

The size of the trust is pretty much irrelevant to the complexity. It depends on how it is invested, whether it passes income or principle through to the beneficiaries, who the beneficiaries are, etc., etc. A ten million dollar trust invested in idle land is pretty simple. A half million dollar trust invested in inner city residential rehab projects ain't gonna be so pretty.

Again I state CPAs and attorneys are not automatically tax gods - if they don't specialize in taxes they can be somewhat to very incompetent in that area (tax). And the same is true for EAs. While they may specialize in the area you need, you can bet they are a tax pro with up to date continuing education in taxes - not just accounting or law with (some) tax maybe thrown in.

Again, credentials are a good start but you need to ask the questions of your preparer as to specialty and experience if you have more than a W-2 and itemized deductions. Be an informed shopper because *you* are ultimately responsible for what is in that return and you cannot always say you relied on your preparer's expertise to get yourself out of penalties. A recent Tax Court case absolved a taxpayer of all tax liability on funds that were effectively stolen from him but they left the penalties because he didn't pay attention to the return with the errors in it. Having it professionally done wasn't enough.

TurboTax works well for less complicated returns for most folks. *IF* you know how to use it, it will accurately prepare a complex return for you, too.

January 21 2014 at 12:46 PM Report abuse rate up rate down