5 Things to Know Before You Hire a Tax Preparer
There’s no overstating it, tax compliance is something you absolutely have to get right. And it’s not just for the sake of maximizing your deductions. Whether it‘s preventing you from making costly screw-ups that lead to penalties, or ensuring you have someone to accept liability, the right tax preparer is invaluable.
So what should you know before you hire one? Getting referrals from trusted members of your professional network is a good first step. But that’s only the beginning. The more thoughtful you are in choosing someone, the better. Here are five things to consider when you’re looking for a tax preparer.
1. Fees: Know what you’re paying for
Complying with taxes can easily put a dent in a cash-strapped startup’s finances. It’s understandably tempting to try to cut corners where you can. But keep in mind that choosing the cheapest preparer may not be the bargain it seems to be initially. S/he may lack expertise with businesses in your industry, and/or might not have the capacity to assist you with value-added services such as proactive tax planning advice.
Worse, a budget tax professional may not have the know-how to handle complex situations like multijurisdictional tax compliance and the ins and outs of certain types of business tax credits. They might also be too busy cranking out returns to have the bandwidth to respond to more than basic questions or to help you resolve collections issues or appeals.
How can you make sure you get the best value for your money? First, get a clear idea of exactly which services a tax preparer offers. Any tax professional you’re considering should be able to clearly explain their fee structure. Whether you’ll need to pay by the hour or be charged a flat fee before you sign a contract with a tax preparer be sure you understand exactly what services will be included and which would cost extra. Typically, covered services could include:
- Annual federal and/or state returns
- Quarterly tax filings; and
- Audit support
2. Expertise: Understand their qualifications
There are different types of tax professionals, with varying levels of credentials, expertise, and qualifications. The main three are Chartered Public Accountants (CPAs), Enrolled Agents (EA), and Tax Attorneys.
CPAs are licensed by state accounting boards. They have to pass the American Institute of CPAs (AICPA) rigorous exam that probes their knowledge of several different areas of accounting, and financial reporting as well as taxes. They also have to meet a minimum number of years of education and work experience, abide by ethical standards, and comply with continuing education requirements.
Enrolled Agents are licensed by the IRS, after passing a three-part exam. They are required to complete a certain amount of continuing education to keep their tax knowledge up to date and to abide by the IRS’ required ethical standards.
Tax Attorneys are licensed by their state bar or bars, and may or may not have additional educational or other specific expertise in tax planning. They are most helpful in helping you with more complicated tax and business structure concerns and represent you in tax court.
Additionally, some states, such as California, require tax preparers to be licensed.
Whichever type of preparer you choose, make sure you check their credentials. You also want to ask what experience they have working with startups, and more specifically, with businesses in your industry. And don’t forget to vet them by asking what kind of a track record they have with audits, getting references, and checking them out, and making sure they are in good standing with their professional association (or certifying body) before signing on with them.
3. Legal: Know what representation rights are and who has them
What if, even with your best efforts you face an audit or get hit with an unexpected tax penalty and need help resolving it? The different types of tax preparers have differing representation rights. Specifically, these rights can be limited or unlimited.
- Preparers with limited rights can’t represent you to the IRS unless they have personally completed your tax filing. They can only represent you in dealing with certain categories of IRS employees. And they can’t represent you on appeals or collections issues.
- CPAs, EA, and tax attorneys have unlimited representation rights. That means they can represent you on tax matters concerning audits, payments, collections and appeals.
4. Fit: Think short and long-term
It’s not just about working your way through a checklist. And if you think about the relationship strictly in transactional terms, you’ll miss the bigger picture. The right tax preparer can really play a key role in your business’s long-term success — by keeping you out of trouble, helping you with strategic tax planning, and becoming a trusted partner.
Because this is such an important part of your startup foundation, you need to feel comfortable that whoever you work with is the right fit for you and your business.
5. Prepare: Know what you need to bring to the table
To get the most value from a tax preparer and to manage your costs effectively, it pays to get your own house in order first, so to speak. Locate and organize your receipts and business records before you meet with a prospective preparer. Even if you don’t have everything, at least you’ll know where the gaps are. That means you’ll be better able to ask and answer questions about exactly what type of help you need, saving you time and money in the long run.
About Early Growth
For over 10 years, Early Growth has provided early-stage companies CFO Consulting Services, Accounting for Startups, Taxes, and 409a Valuation. We saw a need in the marketplace for a service that would allow founders to still focus on business while building a healthy financial story. Our Outsourced CFO, Outsourced Accounting, and R&D Credits services have helped many companies grow.