[Editor's Note: This is a guest post by Johanna Fox Turner, CPA, CFP who many of you know from the forum where she serves as a moderator. Her companies, Fox & Company Wealth Management and Fox and Company CPAs are also paid advertisers on the site. In this post, she discusses an important topic that I am frequently asked about- how to hire a good tax preparer. Enjoy!]
If you want to buy a new car, you can look under the hood, take it to a mechanic or check the Kelly Blue Book, and have a pretty good idea about the value. Although it might help to know how an engine works, it’s not essential knowledge you’ll need when you’re car shopping. On the other hand, you’ll need a different set of skills to find a great CPA. It can be even more difficult than finding the best doctor to treat you. Word gets around when a doctor takes out your spleen instead of your gall bladder or misdiagnoses a fatal disease. When a CPA botches a tax return or overlooks deductions, you’ll probably never find out.
CPAs vs EAs
For purposes of this article, “CPA”, when used in reference to tax preparation, designates either Certified Public Accountants or Enrolled Agents (“EA”s), even though only four states (CA, MD, NY, and OR) require tax preparers to be licensed and the federal government has no consumer protections. That’s right – the guy who does your taxes may have been a bartender a few weeks ago. Should it matter that you use a CPA as opposed to Debbie-Does-Taxes? I believe so. For starters, unlicensed preparers are not allowed to represent you before the IRS. And even though there are many good unlicensed preparers, if your tax calculations are complicated enough to pay for the service, you should hire someone who has demonstrated a baseline level of knowledge. That means passing a difficult test, practicing long enough to qualify for licensure, and completing required annual CE. In fact, some long-time EAs have more tax code knowledge than CPAs because they specialize only in taxes.
Who Needs a CPA?
You should hire a CPA when your concerns extend beyond tax deductions. Tax law is flexible and complicated, and a CPA can advise on tax planning, estate/trust/gift planning, business planning, and can represent you in the event of an audit. You should use a CPA if you are a(n):
- Self-employed contractor (get paid by 1099): An expert will take the time to get to know you to uncover planning opportunities that arise when you own a business.
- Investor/owner of S-corporation or Partnership: Basis issues make these filings especially complicated.
- High income earner: You are four times more likely to be audited if you earn over $200k. If your return is marked “self-prepared”, your chances are even higher. AMT (Alternative Minimum Tax) and NIIT (Net Investment Income Tax) are other opportunities for tax planning.
- Real estate investor: passive rental income, sales and like-kind exchanges, and rules of depreciation and capitalization are complicated. Improper reporting can affect your tax liability for years into the future.
- HNW (High Net Worth) taxpayer: If you have investable assets of $1M+, tax compliance issues are likely to be more complicated.
On the other hand, if you are paid by W2 wages, don’t itemize, and/or don’t have outside business interests, you can probably handle your taxes just fine with TurboTax as long as you’re comfortable doing so. In this situation, the best way to learn about your taxes is to do them by hand and then compare your calculations to your software results. Before tax software became readily available, we all understood taxes and the consequences of various choices far better than we do today.
Four Steps to Find a Good CPA
Once you’ve decided you need a professional, the hard part starts. In my experience only about 1 out of 10 CPA are really competent and thorough at tax work; in other words, they are good tax preparers. If you want a pro who is also resourceful and proactive, you’re going to have more difficulty, maybe 1 in 50 to 100, so you should be prepared to pay for that expertise. But that’s ok. Over the years, the difference in having a long-term relationship with a great CPA versus working with a poor or even average CPA can be measured in hundreds of thousands of dollars for a HNW taxpayer, especially one who has multiple business interests and/or lives in a city and/or state with income tax regulations. Here are four steps to increase your chances of finding that needle in a haystack.
# 1 Get Referrals
Getting referrals should be your starting point, not the last (or the only) step, as it so often is. Find out why the referrer likes her CPA. Brains? Good golfer? Returns phone calls immediately? Always makes sure to get your friend a refund (not a good sign, btw)? Or is it because your buddy likes to be the one who always looks smart and has the “best” of everything?
# 2 Study the Firm’s Website
You may find enough information to decide whether the firm stays on your short list. You’ll also get an idea of your prospect’s culture, learn about any specialty areas, and be better prepared to ask specific questions.
# 3 Interview
The reason taxpayers hire half-competent CPAs is because they are in a hurry to find someone and settle for nice, not qualified. You can interview just as well by video conference as you can sitting across a desk. It’s more difficult to do by phone as you cannot gauge emotions. Well-known, busy CPAs (typically in larger cities) may charge you for an initial consult. If so, ask for a brief interview on the phone so as not to waste everyone’s time. The responses to any of these questions can help you make a better decision:
- When you think you may not need a pro but aren’t sure: Can you explain why I need a CPA to prepare this return and why I shouldn’t be able to do it?
- Will I meet only with you? Always (or never) with you? Work with a team? You might as well find out now if you really like the person you’re interviewing.
- Will I hear from you after tax season? Why (or why not)? Meaning tax planning, not a birthday card. Will your preparer expect you to be in touch, reach out to you around November, or have a skeleton staff for part of the year?
- How long should I expect to wait for a phone call or email to be returned? Maybe the CPA doesn’t like to take calls (I prefer email myself) but that doesn’t mean he should be MIA when you want to ask a question.
- How many clients do you have like me? If you are the CPA’s only doctor client, she may not be aware of common pressures such as malpractice suits, partner buy-ins, embezzlement, SOLO-401k’s, divorce and remarriage, etc.
- Can you describe your review process (i.e. how do you ensure tax returns are done correctly and that opportunities are not missed)? Preparers, often 1st or 2nd year staff accountants, learn on the job. They will overlook documents, transpose numbers, use the wrong forms, fail to clear error messages, forget to check a box, and so on. The review and the corrections process determine the quality of the return and some firms allot little time to these steps.
- Can you give me a list of the continuing education classes you took in the last year or two? CPAs are required to take 40 hours of CE annually, reported bi-annually. Does your prospect focus on current, information-rich topics or marketing and compliance with an annual tax update?
- What is your average turnaround time in tax season? The rest of the year (extensions)? You don’t want to be that person who is always on time with information and fuming on April 14th.
- What licenses do you have and why did you get them? Jot them down, along with the CPA’s answers and do a little independent research. There are a lot of designations available for sale and only a few are really worthwhile. Also: Is Your Advisor Pumping Up His Credentials?
- What do you do if you find you’ve made a mistake on a return you prepared for me? If the CPA says, “Nothing, if it’s in your favor (wink, wink)”, it’s not a good sign.
- How would you support me in an IRS audit? Would I pay extra? How do you handle audits for out-of-state clients? Some firms include audit protection in the fee you pay, most don’t. Most audits are handled by mail and easily dispensed with. In the event of an office or field audit, the CPA can stand in for you except for the initial and exit interviews.
- Will you give me a reliable estimate of the cost in advance? Do you use Fixed Price Agreements (FPAs)? Would I expect my bill to rise each year? You are trying to find when the time clock begins and what to expect after the first year. An FPA means that you have an all-inclusive cost, usually for a year’s services detailed on the document, quoted in advance. If the firm does not use FPAs, they should still be able to give you a range of cost in advance.
- What does your firm do besides taxes? The general public typically views a CPA firm in the context of tax preparation, but, for a full-services firm, tax preparation is simply the end result of a year of planning and strategizing. Is that what you want or need? Or just a tax return and a bill?
- Do you have any outside relationships, i.e. insurance, investments, legal services? You need to know if the firm has a client-sharing affiliation with another firm. There is no problem with this as long as it is disclosed so you understand why a referral is made.
- How much of your practice is local? If you’re not local, your relationship will almost certainly be smoother and more productive if your CPA has been giving virtual advice for a few years.
- Can you describe your ideal client?
- Why did you lose your last 3 clients?
# 4 Get an Unbiased Second Opinion At Least Once
Even if you’ve never received a notice from the IRS, you don’t know what you don’t know. I believe you should hire an expert to look for mistakes or overlooked planning opportunities after a couple of years. You may have to pay for an hour or two of time but the peace of mind will be well worth it. If the second opinion is positive and the reviewer has no meaningful suggestions that cannot be explained by your current CPA, you probably don’t need one every two years. An exception is if your firm or preparer changes or you have a logical suspicion that something is wrong. Don’t let inertia be your guide. It’s amazing how long people will stick with a CPA who treats them poorly and makes multiple mistakes.
How long have you been with your CPA? Any other questions you would recommend for an interview? How did you find your current CPA? Comment below!