How to Choose Your Tax Adviser or Accountant
Do I need a tax adviser or an accountant?
More often than not people will actually require both an accountant and a tax adviser, however, it is important to establish why you need them – do you need someone to manage your accounts and help you with your tax return? Or someone to give you sound advice that will legally save you money?
What does an accountant do?
Your accountant can manage your accounts, provide compliance work and some may even do tax planning.
What does a tax adviser do?
Tax advisers tend to focus solely on tax planning. They spend significant amounts of time keeping up-to-date with the latest tax legislation and tax cases to help make sure they provide their clients with great strategies that will help to reduce or eliminate tax – some of which your accountant may not even be aware of!
Example of the difference between an accountant and tax adviser
If we compare the accountancy profession with medicine, an accountant is the equivalent of a GP, and most of the time a GP is all you need for routine health care, but if you get seriously ill (compare with a dispute with HM Revenue and Customs) or you need surgery (tax planning), then you need a specialist consultant (a Tax Adviser)
What qualifications should my Tax Adviser / Accountant have?
As a client you want to be assured that your tax adviser / accountant is acting in both your best interest and within the law, which is why it is important to know what qualifications your tax adviser or accountant has, and when they were achieved and if they are relevant to you. Check that the qualifications they have cover the area of taxation or accounting that you require assistance with.
How to Find a Good Tax Adviser
Many unlicensed tax preparers with questionable credentials set up shop during income-tax season. Some disappear after the April 15 filing date, leaving you to deal with the IRS if there’s a problem with your return. The IRS recently cracked down on such rogue tax preparers by, among other things, contacting those whose returns have frequently shown to have errors. Plus, it is instituting stricter rules for anyone who charges a fee to prepare a tax return. See the IRS’s fact sheets about the new requirements for tax-return preparers. Most of the new rules do not take effect until the 2011 tax season, so taxpayers still need to be vigilant when hiring a tax preparer or adviser this year.
One good approach is to look for an enrolled agent. Enrolled agents are tax experts who must pass a rigorous test, meet annual continuing-education requirements, and who are licensed to represent clients in front of the IRS. Enrolled agents can prepare your income-tax return, and some provide tax-planning advice. You can also contact an enrolled agent if you need help after receiving a penalty letter from the IRS.
Enrolled agents work in a variety of settings: Some have their own firms, some work for tax-preparation chains, and some are also certified public accountants or certified financial planners. You can find an enrolled agent through the National Association of Enrolled Agents. They usually charge by the tax form to prepare a return (so the more complicated your return, the more you’ll pay) and by the hour for tax planning.
Tax Planning: The Good, the Bad, and the Ugly
When your clients come to you and wonder what they can do to save money when it comes to paying taxes, you can recommend tax planning services. Many taxpayers aren’t aware of how impactful tax planning can be.
Wise taxpayers plan out their upcoming tax year instead of hoping you can do something amazing for them once the year is over. Those that plan ahead have more control over their tax situation and increase their chances of reducing their tax obligations. It’s the first step toward a better financial future.
The Good: In-Person Tax Planning with a Professional
The best way for taxpayers to implement a workable tax plan is to meet with a professional. Like a doctor, tax preparers who offer tax planning services take time to look at their client’s financial health, then diagnose any areas where mistakes and poor planning actually cost them. It’s also a good way to look for any missed opportunities that the taxpayer may use in the future.
True tax planning is a formal assessment of a client’s tax situation, but not many people really understand that creating a plan, implementing it, and then maintaining and evaluating it over the years will really influence their tax burden. When you and your client have the opportunity at the beginning of the tax year to create a thoughtful and effective financial plan, they’ll be very happy when it’s time to file those tax returns.
The Bad: Generic Tax Planning Software
If a client is not convinced that hiring you for formal tax planning is something they want to do, they might at least consider some do-it-yourself tax planning using specialized tax software. From data management software like Microsoft Excel to programs and apps designed to help individuals and small businesses with tax planning, using available tools is better than no tax planning at all.
Tips for Choosing a Tax Preparer
It’s the time of the year when many taxpayers choose a tax preparer to help file a tax return. These taxpayers should choose their tax return preparer wisely. This is because taxpayers are responsible for all the information on their income tax return. That’s true no matter who prepares the return
Here are ten tips for taxpayers to remember when selecting a preparer:
Check the Preparer’s Qualifications. Use the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. This tool helps taxpayers find a tax return preparer with specific qualifications. The directory is a searchable and sortable listing of preparers.
Check the Preparer’s History. Ask the Better Business Bureau about the preparer. Check for disciplinary actions and the license status for credentialed preparers. For CPAs, check with the State Board of Accountancy. For attorneys, check with the State Bar Association. For Enrolled Agents, go to the verify enrolled agent status page on IRS.gov or check the directory.
Ask about Service Fees. Avoid preparers who base fees on a percentage of the refund or who boast bigger refunds than their competition. When asking about a preparer’s services and fees, don’t give them tax documents, Social Security numbers or other information.
Ask to E-File. Taxpayers should make sure their preparer offers IRS e-file. The quickest way for taxpayers to get their refund is to electronically file their federal tax return and use direct deposit.
Make Sure the Preparer is Available. Taxpayers may want to contact their preparer after this year’s April 17 due date. Avoid fly-by-night preparers.
Provide Records and Receipts. Good preparers will ask to see a taxpayer’s records and receipts. They’ll ask questions to figure things like the total income, tax deductions and credits.
Never Sign a Blank Return. Don’t use a tax preparer who asks a taxpayer to sign a blank tax form.
Review Before Signing. Before signing a tax return, review it. Ask questions if something is not clear. Taxpayers should feel comfortable with the accuracy of their return before they sign it. They should also make sure that their refund goes directly to them – not to the preparer’s bank account. Review the routing and bank account number on the completed return. The preparer should give you a copy of the completed tax return.
Ensure the Preparer Signs and Includes Their PTIN. All paid tax preparers must have a Preparer Tax Identification Number. By law, paid preparers must sign returns and include their PTIN.
Report Abusive Tax Preparers to the IRS. Most tax return preparers are honest and provide great service to their clients. However, some preparers are dishonest. Report abusive tax preparers and suspected tax fraud to the IRS. Use Form 14157, Complaint: Tax Return Preparer. If a taxpayer suspects a tax preparer filed or changed their return without the taxpayer’s consent, they should file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit.
mistakes to avoid when choosing a financial or tax adviser
If you have the knowledge to do your own financial planning, tax preparation and/or investing, you can choose whether or not to do it yourself. Part of that decision is determining the highest and best use of your time. Doing the job of a financial or tax adviser, at least doing it well, requires a significant commitment of time and energy, both of which are limited and precious. Most people would rather spend that time on family, travel, hobbies, or volunteer work. If you’re in that camp, and need to find a financial or tax adviser, here are some common mistakes people make—and how to avoid them.
Not making a decision
Indecision—i.e., choosing not to make a decision—is like selecting “none of the above” on a test question, and can often be an impediment to financial success. This is as true when choosing an adviser as it is to sound investing. Many people let too much money sit in cash, or fail to rebalance their investment portfolios periodically, because they are waiting for the “right” time to make a change. Indeed, an inability to act (due to procrastination or indecision) is one reason many people choose to hire a professional financial adviser, who can eliminate the emotional element and use a disciplined approach to make decisions and take action as needed.
Not asking for referrals
If you are serious about hiring a financial professional, ask for recommendations from people you respect, such as work colleagues, friends, and professionals in related industries (e.g., an estate-planning attorney or insurance agent). If the idea of asking for a referral makes you uncomfortable, here are some questions to help you get the information you need
Assuming what a title or credential means
While no one can call themselves a “CPA” without considerable education and testing, literally anyone licensed to sell financial products (insurance, mutual funds, etc.) can call themselves a “financial adviser” or “wealth manager.” Similarly, certain credentials can be obtained by simply spending a few hours or a weekend taking a course, whereas others, including “CPA” (Certified Public Accountant) and “CFP” (Certified Financial Planner practitioner), require many months or even years of study, rigorous testing, and ongoing continuing education.
Not focusing on relevant experience
A common mistake is to only consider advisers who are older, rather than seeking an adviser with experience that is relevant to your situation and needs. It’s easy to assume that gray hair (or a lack of hair) equates to experience. However, it might just reflect age, with many of those years spent doing things other than providing the service you need.
Ignoring conflicts of interest
The investment industry is full of conflicts of interest, and they usually center around compensation. A registered representative (RR) or insurance agent can make 10 times as much commission if they get you to buy one thing versus another. Advisors with a Registered Investment Advisor (RIA), on the other hand, get paid the same amount regardless of which investments they recommend, so they have no incentive to push one over the other.