Get to know your tax professionals and figure out who to work with: bookkeeper, CPA, and enrolled agent.
Do you need an accountant? The short answer is yes. All business owners should use a tax professional to do their tax returns. There are so many different rules for what you can and can’t write off in connection with your business and they are always changing. You have enough to do running your business without having to worry about the thousands of pages of tax law and how they apply to you. This is the job of a good tax professional.
So how do you find a good tax professional? Our basic recommendation: go with a Certified Public Accountant (CPA). This is a licensed professional who can help you in multiple assets of your business. Our suggestion is to always go with a licensed professional who has had to study, pass an exam to demonstrate their knowledge, practice under another professional and has requirements from their oversight board to continue their education. Let’s look at what is available to you and your business.
First, let’s break down the options. There are different “accountants” that you can use: Certified Public Accountant (CPA), Enrolled Agent (EA), Tax Attorney, and, unfortunately, anyone who thinks they can do a tax return. That’s right, anyone can hang up a shingle and hold themselves out as a professional tax preparer.
Certified Public Accountants, also known as CPAs, are probably the most well-known option for small business owners and are licensed professionals who can help you with all areas of your finances including setting up your bookkeeping system, choosing what entity is best for your business, choosing a retirement plan, selecting and setting up an accounting software, preparing financial statements, budgeting, filing your personal, payroll and business taxes and helping you if you run into problems with the IRS or are audited. CPAs are governed by the state in which they are licensed. Currently all states require a CPA candidate to have 150 college credit hours with minimums in accounting and tax credits. This is equivalent to a Master’s Degree. They are also required to pass a rigorous, two-day examination and work under another licensed CPA for a minimum number of years, one to three, before they can be licensed as a CPA themselves. They also have continuing education requirements, around 40 hours a year, to keep their license.
Enrolled Agents, also known as EAs. They are certified by the Internal Revenue Service and specialize only in the area of taxation and don’t assist in as many services as a CPA. Unlike Tax Attorneys or CPAs there is no specific educational requirement for Enrolled Agents. The applicant has to have five years of experience working for the IRS or pass a rigorous exam before they can become an enrolled agent. They also must have 72 hours of continuing education every three years to maintain their status. They are able to take care of all of your tax needs and help you if you run into problems with the IRS even if it is a simple notice. As a rule, enrolled agents are going to cost as much as a CPA or perhaps a little less. It really depends on their experience.
Tax attorneys are licensed by their state bar association and specialize tax law. People use tax attorneys to help them with complex tax situations, like real estate exchanges, or to help them if they have received notices from the IRS about problems with tax returns or tax returns that should have been filed but haven’t been. Tax attorneys would be the most expensive route to go with many charging in the hundreds to thousands of dollars per hour. Most people would not have a tax attorney preparing their tax returns.
If your tax preparer makes a mistake resulting in you having to pay additional taxes, penalties or interest, you have to pay these fees — not your tax preparer. Since it is your tax returns, it’s your responsibility. When you suspect the tax preparer of misconduct that results in an IRS audit and penalties, you can report them to the IRS for misconduct, and after investigation, the accountant could lose their license.
Finally, people without licenses who say they can do taxes. You often see this with bookkeepers who often do some simple taxes. We recommend you avoid these like the plague. They have no education or licensing requirements, they may not have even taken a single tax course, and there is no oversight of their activities by a governing body. They have no continuing education requirements and can be completely out of touch with changes in the tax laws as they happen. They are not allowed to communicate with the IRS on your behalf so they would not be able to help you with that tax notice you got in the mail or if you are being audited.
So how do you go about finding the right person for your situation? The first thing to do is ask your peers, people in your same line of work or in networking groups to which you belong. Many professionals have more experience in one line of business than others so it’s always good to find one that already has clients in your profession. They are more likely to be up on the tax laws and saving opportunities that pertain to you. You can check with your local Chamber of Commerce for their suggestions. You can search online and read through any websites that come up to become familiar with their credentials. You can search for your state’s Board of Accountancy or Society of CPAs to find a CPA in your area. Call up the ones that seem like they may be a good fit and ask for a consultation so you can get to know each other. As much as you are interviewing them, they will also be interviewing you to see if you are a good fit for their practice.
Questions you may want to ask are:
- What are the areas they specialize in?
- How long have they been in business?
- How many, and who, are on their staff? Do they have a bookkeeper too? Or a receptionist?
- How many business (LLCs and S Corps) returns do they do a year?
- What do they provide to you to communicate your year’s results? Do they have forms you fill out, do you give them a spreadsheet or a print out from your accounting software?
- How do they expect to get paid and when? Is there a retainer? A deposit?
Most of all, you want to find someone you can work with, that you think you can communicate with easily and effectively. This is a person that will be with you for the long haul over the life of your business. They will know most everything about the financial part of your life and sometimes more. You want to have someone you get along with and that will be an asset to your company. They don’t have to be your new best friend, but you definitely want to have a relationship with someone who gets you and helps you move forward in your business.
What you need to prepare for an effective relationship with your tax professional:
Taking a little bit of time in the beginning to become familiar with common business deductions for your type of business can end up saving you thousands of dollars in taxes just by knowing all the expenses you are entitled to deduct. Your tax pro can only be as good as the information that you give them. If you don’t know what information to give them, they can’t save you the very most taxes possible. If your personal return is also involved, now they have to look at all of the other items included on your return such as your spouse and their job or business, children, do you own a house, do own other real estate or have a large stock portfolio, do you have income from different states so more than one state return has to be filed. A good way to get a better handle on the cost of your tax returns is to take a copy of your last year’s return with you to your meeting. That would give the professional a good starting point to a more accurate estimate for tax preparation fees.