Filling out a tax return can be a challenging task. What’s more, unless you’re a tax expert, you may be unaware of how you can use tax laws to reduce how much you pay to the Internal Revenue Service. That’s why, come tax season, many people enlist the help of a tax preparer.
What does a tax preparer do? Services run the gamut from ensuring documents are mistake-free to spotting and claiming potential tax benefits to filing income tax returns on behalf of their client.
Here’s a look at the different types of income tax preparers, the pros and cons of hiring one, and under what circumstances they can help their clients pay less to the IRS.
What Is an Income Tax Preparer?
A tax preparer completes and files income tax documents and forms for clients. People use tax preparers because they are experts in tax rules and know how to use those rules to claim deductions or credits on tax returns.
That’s why, according to a survey by The College Investor, 27% of Americans use either credentialed or non-credentialed tax preparers to complete and file their tax returns.
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Credentialed Tax Preparers
Credentialed tax preparers tend to work full time on tax- and accounting-related tasks. There are three types of credentialed tax preparers: Certified Public Accountants (CPAs), Enrolled Agents (EAs), and tax attorneys. CPAs receive certification from state boards, EAs receive certification from the Internal Revenue Service (IRS), and state bar associations license tax attorneys.
CPAs are certified by a state government as having the required expertise to maintain financial records, certify financial statements, and conduct tax and financial audits.
CPAs must pass the Uniform Certified Public Accountant Examination, a comprehensive test given by the American Institute of Certified Public Accountants. Most states require CPAs to pass an ethics exam and stay up to date on changing accounting and tax laws.
CPAS can also represent clients on tax and IRS issues, such as tax audits, payment and collection issues, and appeals.
Enrolled Agents (EA)
An EA obtains licensing from the IRS to represent clients before the IRS. To become an EA, an individual must pass the IRS’ Special Enrollment Examination or have qualifying work experience if they were an employee of the IRS. Once certified by the IRS, EAs are required to stay up to date on changes in the tax law by completing at least 16 hours of continuing education each year, or 72 hours of continuing education every three years.
Tax attorneys specialize in tax law, advise clients on the legal aspects of their taxes, and prepare their clients’ tax returns. They can represent their clients before the IRS on all tax matters. Tax attorneys have a law degree, have passed a state exam, acquired a state license, and keep up with updates to the tax code through ongoing education.
Non-Credentialed Tax Preparers
Non-credentialed tax professionals are not licensed or certified by a third-party organization and tend to be self-taught. These individuals may have worked for a tax store during tax season but may not be involved in tax-related work full time.
Non-credentialed tax preparers include Volunteer Income Tax Assistance (VITA) program volunteers, tax accountants not certified by the American Institute of CPAs (AICPA), and Annual Filing Season Program participants.
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What Does a Tax Preparer Do?
In addition to preparing, completing, and filing tax documents for their clients, income tax preparers also advise their clients on how they can reduce their tax liability in the coming year.
Preparing tax documents and returns requires calculating tax brackets, credits, deductibles, and liabilities. However, income tax preparers are also responsible for making sure tax reports comply with government tax rules and regulations. For example, there are strict due diligence requirements when certain tax benefits are claimed, such as earned income tax credit, or when an individual claims head-of-household status.
Following due diligence requires interviewing clients to verify the information they are providing, such as earnings, tax withholdings, and dependents, to gather supplemental documentation that back up the claims.
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How Much Does It Cost to File Taxes with a Tax Preparer?
How much you pay a tax preparer depends on who you use and what services they provide. For example, credentialed tax attorneys and CPAs will likely charge more than a seasonal worker or non-credentialed preparer. A credentialed preparer will also have more expertise and can take on more complex tasks, such as representing the client in tax resolution cases.
A tax preparer might charge a flat fee for a tax return or an hourly rate. Also, the more complex your taxes, the more a preparer may charge.
Here are some of the fees charged in 2020 (the latest data), according to a National Society of Accountants study:
• The average fee for Form 1040 with the standard deduction, plus a state income tax return, was $220.
• The average fee for preparing Form 1040 with Schedule A to itemize personal deductions, plus a state income tax return, was a flat fee of $323.
• The additional fee for Schedule C for a business or sole proprietor was $192.
• The additional fee for Schedule D to report capital gains and losses was $118.
• The additional fee for Schedule E to report rental and other income and losses was $145.
Where you live can affect the amount charged by a tax preparer. Fees tend to be higher on the West coast and in New England, and lower in the Southeast.
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Pros and Cons of Hiring an Income Tax Preparer?
There are several advantages to hiring an income tax preparer, though there are some potential disadvantages, too.
• Using a tax preparer could save you time.
• Using a tax preparer minimizes errors on your return, which can help protect you from an audit.
• You may save money if the tax preparer finds ways to reduce the amount of tax you pay.
• The cost of using a tax preparer is often deductible.
• The cost of working with a tax preparer may be high if your taxes are complex.
• It might be difficult to find an available licensed tax preparer during tax time.
• A non-credentialed tax preparer may not be able to take the time to fully understand your situation.
• Some tax preparers could be frauds, so always check their credentials.
What Are the Job Requirements to Become an Income Tax Preparer?
A credentialed income tax preparer typically has a degree in finance or accounting. They also must have a thorough knowledge of the tax system and be up to date on the latest rules and changes. Tax preparers must also be familiar with tax software, Excel, and other tools and information resources.
What Skills Do Tax Preparers Need?
Tax preparers need to be skilled with numbers and in dealing with clients. They are required to interview clients and ask them sometimes intrusive questions to verify that the information they are providing about income and lifestyle is true.
Tax preparers must also have in-depth knowledge of the tax code and the tax benefits that apply to various situations and be able to apply those rules using their analytical and mathematical skills.
When Is Hiring an Income Tax Preparer Worth It?
As you’re preparing for tax season, you may want to consider hiring an income tax preparer if your situation is complex or there are tax benefits that you could qualify for. This might be the case if you are a business owner or self-employed; have diverse investments or rental properties; bought property during the tax year; or had a major life event, such as marriage, a birth or adoption, divorce, retirement, or inheritance.
If you have had issues with the IRS in the past or are under audit, you should also use a tax preparer. This is because a professional knows how to navigate the IRS’s rules to your advantage and help you understand the options open to you.
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Not everyone can afford to hire a tax attorney or a CPA to help them with their tax returns. However, if you are a business owner, an independent contractor, or have experienced life events that make your tax situation complicated, hiring a credentialed tax preparer could help save you money in the long run.
Not all income tax preparers are the same, so if you choose to hire a tax preparer, make sure you choose a reputable one by checking with the Better Business Bureau for complaints and verifying their credentials. The IRS’ Directory of Federal Tax Return Preparers can be a good place to start.
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What are the responsibilities of a tax preparer?
Tax preparers are responsible for completing and filing tax forms for their clients. They are also responsible for ensuring the forms are accurate and the information provided by their clients is truthful. This often requires interviewing clients and collecting supporting documentation. Tax preparers also provide tax strategy advice to clients to help them to pay less tax in the future.
Can you make good money as a tax preparer?
Tax preparers’ salaries vary depending on whether they are credentialed and where they live. According to the Bureau of Labor Statistics, in 2021, tax preparers in general earned an average of $51,000 a year. However, licensed CPAs earned an average of $77,250 a year, and tax attorneys earned around $128,000 a year.
What is the difference between a CPA and a tax preparer?
A CPA is typically better qualified than a tax preparer. A CPA not only has accounting credentials, but they are also certified as a tax specialist by their state board. A tax preparer who is not a CPA, EA, or tax attorney is uncredentialed and may only have worked part time on taxes during the tax season.
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