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.

Tax attorneys

Tax attorneys are lawyers who specialize in tax matters. In addition to being members of a state bar association, they often have a special tax law degree (LL.M.-Tax) or a certification as a tax law specialist from a state bar association. Many tax attorneys are also CPAs.

Some tax attorneys specialize in complex tax and estate planning, while others do complex tax return preparation. Many tax attorneys focus on IRS dispute resolution.  

Tax attorneys are usually the most expensive tax professionals. In many cases, it’s likely overkill for the average small business owner to hire an attorney to prepare a tax return. However, if your tax situation is especially complicated, an attorney may be the right choice.

How much do tax pros charge?

Many tax pros charge by the form. If you’re self-employed, in addition to filing your individual form 1040, you’ll have to submit an IRS Schedule C. This is the form self-employed people use to report their business income and expenses. The average fee for filing Schedule C is $250.  

Oher tax pros charge a set fee to prepare an entire return. However, they may charge more if the return proves more involved than anticipated.

Some tax professionals charge by the hour. Hourly fees run $100 to $400 for enrolled agents and CPAs.  

If you’re a sole proprietor and your return is fairly standard, it will likely cost $250 to $500 at a minimum. The cost could go up to $1,500-$2,500 or more if you have a more complicated return. It will cost even more if you have employees.

Before you hire any tax pro, make sure you understand how much the services are going to cost. Ask for an estimate of the tax pro’s fees before you hire them.  

How to find a tax pro

The best way to find a tax pro is referrals from friends or business associates. You can also find a tax pro by using these online databases created by various tax professional organizations:

• National Association of Enrolled Agents
• American Institute of CPAs, and
• National Association of Tax Professionals

You can find other directories at Accountant-Finder.com, and CPAdirectory.com.

You don’t have to go to a tax preparer’s office to do your return. You and your tax pro can deal with other exclusively online or by email. Thus, you can use a preparer in another city or even another state.  

However, it’s wise to stick with a preparer located in your home state because he or she will likely be more knowledgeable about your state’s taxes.

Protect yourself when hiring a tax pro

Whoever you hire to prepare your taxes, it’s ultimately up to you to make sure your return is correct. In other words, you’re responsible for your tax return.

There are some unscrupulous (shady) tax pros out there. They come out of the woodwork during tax time.

You can protect yourself when you hire a tax pro by taking these steps:

• Verify your preparer’s credentials. You can check on an enrolled agent at the IRS Office of Enrollment. You can check on a CPA with your state board of accountancy.
• Your preparer must provide a preparer tax identification number (PTIN) obtained from by the IRS.
• Make sure to get a printed copy of your return signed by your preparer. IRS rules require all paid preparers to identify themselves on the returns they prepare. If a preparer refuses to sign your return, he or she is likely up to something shady.
• Never sign a blank tax return.