What Are Tax Preparers?
A tax preparer is someone who will prepare, calculate and file your taxes. In some cases, the preparer can represent you if you’re facing an audit or if other problems arise. Some have a strong accounting background, while others may be very familiar with the law.
In short, a person who prepares taxes can have different roles and be known by different titles, such as:
Certified Public Accountant (CPA)
These professionals have passed an exam in their state, which qualifies them in accounting, and they must meet certain ethical standards of practice. A CPA not only prepares and files your tax return, but he or she may also help you with maximizing tax refunds and deductions for future returns. They might also help with other accounting needs you might have, and help you plan your financial future.
Tax Attorney or Lawyer
After completing their education and passing a state exam, attorneys may choose to specialize in different areas, including tax preparation and filing. A tax attorney may be especially helpful when there are complicated cases or you suspect you may need to legally defend yourself against the IRS or state tax department.
These agents are licensed by the IRS directly, and have passed a comprehensive exam that qualifies them in tax planning and preparation. These agents also must complete continuing education every three years to hold onto their license.
The professionals listed above may represent you when talking to the IRS, and this could be helpful or — in complicated cases — necessary.
Other professionals, such as bookkeepers, consultants or advisors, may also be very knowledgeable or experienced in preparing and filing your return. However, they might have a few limits on being able to represent you.
Keep in mind that anyone who has applied and been granted a Preparer Tax Identification Number (PTIN) may file on your behalf. However, they cannot represent you when talking to the IRS.
Methods of Determining Tax Preparation Fees
The first factor in figuring out the cost of how much having your tax return prepared is investigating the various methods tax professionals use to determine the fees they charge.
Different tax accountants use different pricing methods for tax preparation. When you want to compare their rates, you could start by asking how they produce their fees. Alternatively, you can ask for an estimate of their tax services.
While some offer a free consultation, other accountants will only engage you when you’ve presented your tax situation to them. Since your summary may not be exact, the estimate may not reflect what you’ll end up paying.
Here are some of the methods tax professionals use in determining tax preparation fees:
1. Setting a Fee for Each Tax Schedule
With this method, there’s typically no room to negotiate the tax preparation fee. The fee is usually a flat rate that applies to each schedule or form. For a breakdown on the average cost of filing common forms, check out the following from the National Society of Accountants:
- Form 1040 with Schedule A and state return: $273
- Form 1040, non-itemized, with state return: $176
- Schedule C (business activity): $184
- Schedule D (gains and losses): $124
- Schedule E (rental activity): $135
- Schedule F (farm): $180
With the knowledge of these figures, you can properly estimate the cost of having your tax return prepared by a firm who bases their fees off of which forms you need filled out.
2. Fees Based on What They Charged the Previous Year
If you use the same service each year, you’re likely to get a matching rate. The cost of having your previous return prepared provides a good model for how much preparing your new return should cost. Your tax advisor will give you a similar price, as long as your taxes aren’t more complicated than in previous years.
3. Setting a Minimum Tax Preparation Fee
For returns that are fairly standard and aren’t too complicated, a tax professional may simply charge a minimum flat fee. They may then charge you an additional fee based on any hours worked over the usual hours other tax returns similar to yours require.
While the initial minimum fee may be low compared to some of the other methods in this list, be prepared for your final bill to potentially be a bit higher than the initial fee.
4. An Hourly Rate for Time Spent in Tax Preparation
If you approach a tax professional who charges by the hour, first find out how much time it’ll take to complete. Also, find out how much they charge by the hour. This will help determine whether you can afford their services or not. Some professionals have steep hourly tax preparation fees, sometimes charging hundreds per hour.
While such a high rate can easily make you think twice about working with such a firm, a high rate isn’t necessarily a bad thing when it comes to tax preparation.
A tax professional who charges a high hourly rate is likely to be an expert, and may only take a short amount of time to prepare your taxes. If the work takes a short amount of time to complete, you won’t be stuck with an immense bill.
Paid Software or Online-Subscription Services
While free tax programs might work for many people, you may prefer to purchase a tax-preparation-software product or use an online-subscription service. There are several reasons that a commercial product might be better for you:
Your taxes are too complex for many free options
You don’t want your private data collected
The up-selling pop-ups and ads in free products can be annoying
You don’t like the interface or bare-bones features of the free tax-prep versions
You are filing multiple returns for other taxpayers
Even if you start with a free option, it is smart to see what the providers charge for their paid products. You would want to know that in case your return needs a form not supported by the free version and you either must upgrade that product or start over.
In addition, you’ll want to consider the total cost of filing. For instance, OLT charges $7.95 for the federal return and between $7.95 and $9.95 for the state return. That total is less than other providers that charge nothing for the federal return and $19.95 or more for the state filing.
Tips for Cutting the Cost of Having Your Taxes Done
Many taxpayers stress about the size of their tax bills this time of year, but many more may be stressing about the size of the bill to calculate their tax bills. It now costs $188, on average, to have a tax preparer do a Form 1040, according to the National Society of Accountants. Itemize and add a state return, and the average rises to $294.
For many people, the struggle to find affordable, high-quality tax preparers is real, but experts say five things can help rein in the cost.
See if you can get free help
The IRS programs — Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) — provide free tax prep services generally to people who make $56,000 or less, have disabilities, are older than 60 or speak limited English. This can be a huge money-saver if you qualify.
Read the contract
“Typically, tax preparers that want a long-term relationship with you will have some type of an engagement letter. That will help you understand how the preparer’s fees work, and it may give you a heads-up on whether there will be charges for things such as extra copies of your return.
Preparers can’t base their fees on a percentage of your tax refund amount, and they can’t charge you a separate fee for having the IRS direct-deposit your refund.
Ask for a break if you need it
Negotiating tax-prep fees isn’t very common, but sometimes it’s OK to ask for a discount.
“If you’re having a bad year and you’ve been with somebody for a long time and something’s happened, somebody’s lost a job, you’ve lost a spouse, you’ve had something that’s out of the ordinary, I think there’s nothing wrong with calling your preparer and saying, ‘Look, this is the bind I’m in this year. Is there anything you can do for me?
The Qualifications of the Tax Professional
On average, a tax advisor who’s starting off will charge less than a high-quality, professional one. When it comes to your taxes, the stakes are extremely high. Any mistakes will likely lead to trouble from the IRS and require corrections, or could even incur penalties.
If you’re already the subject of an audit, then consider hiring experienced tax defense attorneys to help defend yourself from tax penalties and even criminal charges.
Chances are that you’d rather spend more on quality and have the task done correctly than save a few bucks on fees and then wind up spending your time and money later on fixing mistakes and paying penalties. Plus, you wouldn’t want to miss out on any deductions or credits that an inexperienced tax preparer may overlook.
Although paying less for quality services is ideal, paying a higher fee may be worthwhile in the end for your own peace of mind.