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6. "You hired me, but your return is being done by some guy in India."
Some accounting firms have begun outsourcing return preparation, says Rich Brody, a University of New Mexico accounting professor. That means your data might be sent as far away as India -- or as close as a local H&R Block, since the chain contracts with CPA firms to do returns. Either way, your accountant isn't obliged to tell you.
"It's very scary," Brody says. "Your most sensitive information may have gone halfway around the world, and you have no idea."
Indeed, sending Social Security numbers, names, addresses, birth dates and account numbers overseas electronically makes some people uneasy. For while the origins of identity theft are often hard to pinpoint, says Beth Givens, director of the Privacy Rights Clearinghouse, returns contain so much "in one bright, shiny package -- that's a great gift to the identity thief."
The number of outsourced returns is still small, but they're becoming increasingly common. An overseas company can process a return overnight for as little as $50, much less than a CPA's hourly rate. CCH, a company which provides such services, estimates that 240,000 returns will be outsourced in 2008 -- up 20% from 2007.
7. "Taxes, shmaxes -- let me see what else I can sell you."
The real money in tax prep has nothing to do with 1040 forms and W-2s. For the big-chain preparers, as well as your local accountant, the register really lights up only when they persuade you to take a loan, open a retirement account or buy insurance.
Chances are you don't need what they're selling, but the sales pitch may blur the issue. GAO staffers reported that when they visited the big-chain tax preparers, loans were described as "options" or "bank products"; on one visit a customer was asked to sign a loan application without being told what it was.
Worse, these extras can do you more harm than good: More than 80% of those who opened an "Express IRA" at H&R Block, for example, paid more in fees than they earned in interest, according to a lawsuit filed by the New York attorney general. (H&R Block says most Express IRA accounts opened between 2001 and 2005 have yielded "positive net tax savings benefits and interest earnings," even as the company "has lost money operating this program.")
CPAs, too, are in the sales game, ever since the AICPA allowed members to sell insurance products. When commissions can be $20,000, says Terry DeMuth, an insurance wholesaler in California, "it's easy to get greedy."
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8. "If I screw up, I'll pay up."
Worried about an audit? H&R Block and Jackson Hewitt are happy to ease your mind -- for a price. Both offer the option of buying a souped-up guarantee that promises to cover any back taxes you owe, plus interest, fees and penalties.
Here's what they don't say: You don't need the extra protection. If it turns out you owe back taxes, the big chains' basic (read: free) guarantee already covers fines, penalties and interest. Many CPAs and enrolled agents will do the same; they often have insurance for that very purpose. Just be sure to ask about it before one does your return.
But what about the back taxes? True, they could amount to a bigger expense than the fines and penalties, which may be why some chains can sell that extra guarantee. But H&R Block and Jackson Hewitt will cover you only up to $5,000 and exclude the most complicated returns. If you're tempted, know there may be an unintended consequence: If someone pays your taxes, the IRS considers that taxable income.
In other words if you buy the guarantee, and H&R Block ends up paying your back taxes, expect to get a 1099 next January.
9. "Tax preparation is an art, not a science."
A recent law tightened penalties for tax preparers who play fast and loose with the tax code, taking far-fetched positions because they know 99% of returns never get audited. That said, for anyone with a complicated or unusual financial life, there's still lots of wiggle room, says Kerstetter, the CPA: "It's about 10% black, 10% white, and everything else is in the middle."
Chances are good you have room to maneuver if you have income in a category the tax code treats flexibly -- you're self-employed, for example, or own rental property. Ditto if you've earned big capital gains or incurred high or unusual medical expenses. In short, Kerstetter says, if you're attaching a schedule to your return, a good tax preparer will pay for himself.
Now, that may mean raising a red flag with the IRS, and a good preparer should explain if he's taking risky positions, says Fred Giertz, of the National Tax Association. If you can't stomach the specter of an audit, you'll want a pro to err on the side of caution.
And think twice before paying someone to look for loopholes if your income picture is relatively simple. "If you've got one W-2, you don't need someone fancy," says Kerstetter. "There's not a lot we can do for you."
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3 tips for getting a good tax preparerMSN Money's tax expert, Jeff Schnepper, tells how to find someone who will do your taxes right.
10. "You could find a much better deal if you'd only shop around."
There's no standard price for doing taxes. Some preparers charge by the hour, others by the form; either way the cost depends on where you live, the complexity of your situation and the qualifications of your tax pro. Consider: The average H&R Block customer pays about $150; a CPA may charge 15 times that.
Jay Adkisson, a California lawyer who specializes in helping people protect their assets, says, "People rely too much on word of mouth; they don't shop prices." If they did, they might be surprised. A licensed local pro may not cost much more than a national chain. Nadine Smith, an enrolled agent in Florida, charges by the form, and a simple return could cost just $200 -- not much more than what you might pay at a big chain.
Even among franchises, prices vary. The return that cost $90 to prepare at one big store cost more than three times that at another, according to the GAO study. To be fair, it may be hard to know what your return will cost before the preparer actually spends time on it. Ask for estimates using last year's return -- that'll give you a point of comparison to find the best price.
This article was reported and written by Janet Paskin for SmartMoney.
Published April 2, 2008
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