Tax Preparation: What You Should Know
Keys
Common Reasons For Considering Tax Preparation Services
You Hate Doing Your Taxes
Unless you’re a tax nerd, filing your taxes is usually a dull process at best, and a migraine-in-the-making at worst. The #1 reason people hire tax preparation firms is simply that they’ve experienced one too many late nights, lost W-2s, or audits for one lifetime.
You Have A Complex Financial Situation
Taxes vary widely in terms of complexity. For example, a single person with one full-time income stream and student loans? Simple. A married couple working three jobs in total, who also have multiple IRAs, a 401k, and two investment properties? That’s more complex. As the complexity of your financial situation grows, so will the complexity of your taxes. As a result, more complex tax returns often require an expert’s eye not only to ensure you’re getting the most savings—but to ensure you’re not making any glaring mistakes.
You’re Too Busy
In general, we’re of the mind that most people tend to overestimate how much time it takes to do their taxes. But time is relative. While to some, a four-hour baseball game may feel like it flies by, the same four hours spent filing taxes might feel like a lifetime. The world tends to move at a lightning pace, and our lives are busy—especially during tax season. Work, school, family, and life don’t always leave room for taxes. So, tax preparation can be the perfect solution.
You Own A Business
If you were comparing the simplest individual tax return against the simplest business tax return, you know which one would be more complicated? That’s right, the business return. Between costs, labor, revenue, real estate, and everything in between, owning a business is, well, serious business. Therefore, errors on your business taxes can have potentially massive consequences on the future of your business, which is why it’s rarely recommended to do them yourself. So, that’s why many businesses that don’t have internal accounting teams often outsource their taxes (and bookkeeping, for that matter).
How Tax Preparation Services Work
- Firstly, you’ll discuss your finances with them. This will give them a sense of the overall shape of your tax return (whether you’re filing jointly, have dependents, have student loans, etc). After that, your tax preparer may provide you with a list of documents they’ll need to get the ball rolling.
- Secondly, you’ll send digital or paper copies of your tax forms as necessary.
- Of course, your tax preparer will reach out to ask questions or get clarification as needed. So, they’ll schedule a second call to go over outstanding questions or additional documents they may need.
- Eventually, once your tax prep firm has all the documents and accurate information they need, they will complete your taxes and typically send to you for a review—or for confirmation.
- Finally, the tax preparer files your taxes on your behalf. If you haven’t paid up front, you’ll likely pay now.
Types Of Tax Preparers
While the general shape of the tax prep process is similar regardless of whom you hire, there are multiple types of tax preparers out there. And they aren’t all created equally. No tier is right for everyone, and it’s important to understand which kind of tax prep solution may work best for you.
- National Tax Preparation Services: Simple returns, 1-2 income streams, low and middle-income earners.
- CPA’s And Low-Income Firms: Simple returns, 1-2 income streams, low-income earners.
- Boutique And Mid-Tier: Complex returns, multiple income streams, business tax returns, additional tax issues, middle and high-income earners.
- CPA’s And High-Income Firms: Complex returns, business tax returns, additional tax issues, high-income earners.
Pros And Cons Of Using A Tax Preparation Service
Pros:
Greater Tax Expertise
Most taxpayers aren’t tax experts. They may file their taxes every year, but they rarely know how to get every tax credit they qualify for and maximize their tax refund. The U.S. tax code is immense, and unless you’re a CPA or tax attorney, there’s a good chance you probably know about 1-2% of what’s in there. When you hire a tax professional or a tax team to prepare your taxes, you’re gaining access to their expertise and their intimate knowledge of national and state tax codes. A good tax preparation service will be able to apply their expertise to your tax situation and squeeze every last cent out of it right into your refund.
More Time & Less Stress
Most people don’t have their refund on the brain when they decide to hire a tax prep firm—they have the memory of the headaches that came with filing their tax return the year prior. And when you hire a tax preparation firm, that kind of relief is something that comes baked in. When you outsource the tax preparation process to a pro you trust, you’re getting two types of your time back. Initially, you give yourself back the time that it takes to physically do your taxes, which varies from person to person, but usually takes at least a few hours for most people. Additionally, you give yourself back the time you would have spent worrying about your taxes, which seems to wind up throughout tax season. All this time can be put where it belongs: at work, with your family, and asleep.
Cons:
Cost
The tax refund is a magical thing, and for some, it’s the best part of tax season. It’s a nice reward for a job done well. So, most people think about taxes in a binary: You owe money to the IRS, or the IRS owes you. It’s this binary that can make the cost of tax preparation a negative to the whole experience. We can’t blame anyone for that mindset! Obviously, it’s exactly that mindset that drives us to get our clients the best possible tax refund they qualify for. But for many, paying the IRS then paying more to somebody who isn’t the IRS – or getting money from the IRS then paying a portion of that money to somebody else – just doesn’t calculate. Subsequently, it can lead folks to opt for DIY preparation or for cheaper national chains that are usually less equipped for complex tax returns and specific local tax laws.
Paperwork
One of the greatest annoyances for most taxpayers, when it comes time to file, is dealing with the paperwork. Depending on your financial situation, you may have multiple tax forms for bank accounts, investment accounts, mortgage payments, student loans, donations, receipts, and other deductions – on top of your W-2s or 1099s. Unfortunately, acquiring and organizing this paperwork isn’t off your plate when you hire a tax prep company. In order to do our jobs, we still need a clear picture of your financial documents, and there’s no other way we can get them for you to provide. For example, tax preparers may need to speak with you over the phone or email to get additional clarity as they file your taxes. While you do get much of your time back, there is some work you’ll have to do to help your tax preparer do their job. Certainly, that realization is kind of a deal-breaker for some people.
Questions You Must Ask A Tax Preparation Service
What Is Your PTIN?
Every tax preparer has a PTIN, or Preparer Tax Identification Number. So anyone who prepares or assists in preparing federal tax returns (for money) must have one of these numbers, which is registered and listed with the IRS. So, you should be able to ask which other professional qualifications they have, like being a CPA or a tax attorney. However, the IRS provides you a directory to find out if they’re as qualified as they claim to be, and it lets them know you do your research.
You can visit the Tax Return Preparer Directory on the IRS’s website.
How Is Your Payment Structured?
There are a few ways you may be asked to pay a tax preparation company. But, there are also a couple of payment structures that you should note as red flags:
- First off, if someone promises you a bigger tax refund without knowing your tax situation, it could indicate that they might inflate your tax deductions and credits, take your payment, and then leave you with an audit.
- Additionally, if someone asks you to sign a blank or unfinished tax return and is unclear about payment, they can write or do anything they want with it. Therefore, they may attempt to steal your identity or take your tax refund and run.
- Further, if someone plans to deposit your tax return into their bank account, they may plan to take your tax refund and run.
- Last, if they refuse to sign their name, it could suggest they want to stay anonymous so the IRS can’t trace them if they commit fraud.
Where can I find more information?
We are here for you to answer your questions about tax return preparation. Please check out our tax return preparation service page and contact us today.
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