1. "A big name doesn't always mean better service."
Roughly 135 million Americans file tax returns, and of those, two-thirds pay for help. Though solo acts like CPAs and so-called enrolled agents have plenty of clients, almost 20% of taxpayers go through a big franchise like H&R Block, Jackson Hewitt or Liberty Tax Service to get their refunds -- last year an average $2,255 per return.
The problem is, tax preparation and advice depend on the preparer, and in a system of franchises, that means thousands of seasonal employees and limited quality control.
The results can be dangerous. When staffers from the Government Accountability Office went undercover to get returns done by the big chains, they found "nearly all of the returns prepared for us were incorrect to some degree," according to the report.
Worse yet, lawsuits allege that the owners of 125 Jackson Hewitt franchises cost the government $70 million in tax fraud and created an environment "in which fraudulent tax-return preparation is encouraged and flourishes," according to the Department of Justice. Jackson Hewitt says it stands behind its compliance procedures as well as its nationally standardized educational curriculum.
2. "You wouldn't believe what I get away with."
Complaints about tax preparers, including allegations of inaccuracies and returns that weren't filed on time, are up 80% in the past five years, says the Council of Better Business Bureaus.
But when it comes to the Internal Revenue Service policing problem preparers, "the lifeguard is asleep," complains Sen. Chuck Grassley, R-Iowa, who took the agency to task for inaction last April. (The IRS had no comment.)
Less than 1.5% of returns get audited, and while that may pacify nervous taxpayers, audits are the primary way to catch bad tax pros. The GAO found that a year after it reported poor preparers by name to the IRS, the agency had failed to audit a single one.
Professional organizations, such as the American Institute of Certified Public Accountants and the National Association of Enrolled Agents, pack even less of a wallop because they often wait for the IRS to act. Then the institute will strip membership and report bad accountants to the relevant state-licensing group, says Tom Ochsenschlager, the association's vice president of taxation. How to find out if your CPA's been disciplined? Visit the agency's Web site.
3. "You'd be better off without me."
Maybe you're hiring a tax preparer because you've got better things to do with your weekend or numbers make you dizzy -- more power to you. But if you're hiring a pro because you think he's smarter than you, think again. On average, tax preparers make more mistakes, and costlier ones, than Josie Taxpayer does.
According to a study of IRS data, 56% of professionally prepared returns showed significant errors, compared with 47% of those done by the taxpayer. And audited taxpayers who used preparers owed an average of $363, while those who filed themselves owed $185.
Of course, tax preparers often see more-difficult returns, which could lead to more errors. But the bottom line?
"For one W-2, mortgage interest and a couple of kids, TurboTax is just fine," says Kerry Kerstetter, an Arkansas CPA. If, on the other hand, you're attaching a schedule for self-employment income or capital losses, consider getting help. And even then, if a return is made complicated by a one-time event -- say, the birth of a child or the acquisition of a rental property -- you might need only one year's worth of advice. "If nothing changes, you should be able to copy it from year to year," says Ochsenschlager.
4. "What are my qualifications? Well, I'm real good at Sudoku."
Every April, Grassley calls IRS officials before the Finance Committee to grill them on taxpayer protection. He's increasingly concerned about unethical, unlicensed tax preparers and what he calls "sharks in the water."
"Anyone can call himself a tax preparer," Grassley laments. Many do. There's no mandatory national licensing, and Oregon and California are the only states that require tax pros to take a test. That means as many as 600,000 tax preparers are unregulated, according to the National Taxpayer Advocate, the taxpayer assistance wing of the IRS. Some may set up shop in a local real-estate office, but many work for the big chains.
Translation: There's no universal standard for qualification. Licensed preparers, who are usually CPAs or enrolled agents, are tested and must meet ongoing education requirements. Unlicensed preparers do neither. In general that's fine -- no harm, no foul. But in the worst-case scenario -- say, a tricky audit -- only a pro with a license (or a lawyer) can represent you before the IRS. At stores such as H&R Block, you'll pay extra for representation.
5. "If it's February, you're too late."
A savvy tax pro may be able to cut your tax bill or juice your refund. But don't expect to find one come Feb. 1.
From that point through April, tax pros are generally too busy to talk to new clients. So if you don't already have a preparer lined up, by the time you actually have your W-2s in hand, "you're not going to get good service," says Frank Degan, an enrolled agent in Setauket, N.Y. "In the fall, though, tax preparers will give you their full attention."
That means you should be talking to tax preparers in October and November. They'll have time to answer questions, look over your old returns and suggest changes.
Not only that, but talking to a tax pro in the fall means you still have time to plan. If you wait until you have all your W-2s, you've locked in all your income for the year. But in the fall a good preparer can help you figure out ways to manipulate your income by increasing your 401(k) contributions, deferring a bonus until the new year or taking taxable losses.
Wait until spring and a professional can help you make small decisions, like whether to itemize or think about different deductions, says Bob Scharin, an analyst with Thomson Tax and Accounting, but you've lost most of your flexibility.