Hiring a tax professional for your small business

If you have your own business, you should consider hiring a tax professional to prepare your return. This is an especially good idea the first year you’re in business.  

Hiring a tax professional to prepare your return will save you time. It can also save you money—quite possibly a lot.

There’s yet another advantage to hiring a tax pro: The IRS is more likely to pick self-prepared returns for audit than those signed by a reputable tax professional.

It’s important to understand, however, that not all tax professionals are alike. They vary widely in educational background and experience. Thus, hiring the wrong tax pro could prove disastrous.

Types of tax professionals

There are four different types of tax professionals.  

Non-credentialed tax preparers

These are people who prepare tax returns but lack a professional credential. In other words, they are not enrolled agents, certified public accountants or attorneys. They usually charge the least of all tax professionals.

There are about 600,000 to 700,000 people who work as non-credentialed tax preparers. Many non-credentialed preparers work for national tax preparation services like H & R Block. And a large number of them work only part-time. ar

The IRS does little to regulate non-credentialed tax preparers. It does not require them to have licenses. But non-credentialed tax preparers can’t represent clients before the IRS.

In most states, anyone can work as a non-credentialed tax preparer without taking a competency exam, getting a license, or complying with any other government regulation.

Non-Credentialed tax preparers typically handle relatively simple individual tax returns. Consequently, they are generally not the best choice for business owners.  

Business returns are just too complicated for most non-credentialed preparers to handle well. Indeed, a study by the Government Accountability Office found that non-credentialed preparers gave horrible tax advice, particularly when it came to reporting business income.

Enrolled agents

Enrolled agents (EAs) are both tax advisers and tax preparers. Unlike uncredentialed preparers, they are licensed by the IRS. You must pass a difficult IRS test to get an enrolled agent license.  

Although they are often confused with CPAs (certified public accountants), enrolled agents are not the same as CPAs. Unlike CPAs, who may perform a variety of accounting and tax work, enrolled agents specialize in taxes.  

Enrolled agents can represent taxpayers before the IRS at all levels, including examinations, collections and appeals. Thus, if you undergo an audit, an enrolled agent may represent you during the audit process, file an appeal, or fight IRS collection actions. The only thing an enrolled agent can’t do tax-wise is represent clients in the U.S. Tax Court or other courts—only lawyers can do this.

Enrolled agents are the least expensive of the true tax pros and are reliable for tax return preparation and more routine tax matters. They’re a good choice for many small business owners.

Certified Public Accountants

The states license and regulate certified public accountants (CPAs). To become a CPA, an accountant must have a college degree, experience with a CPA firm, and pass a rigorous examination.  

CPAs represent the higher end of the tax pro spectrum. CPAs are among the most knowledgeable and expensive tax pros. In addition to preparing tax returns, they often perform sophisticated accounting and tax work.

CPAs work in both large national CPA firms or smaller local outfits. Do you need to hire a large national accounting firm to prepare your return? Probably not, unless you have a large business.  

If you’re looking for an extremely knowledgeable tax professional who specializes in business returns, hiring a CPA is usually your best bet.