Money Coach: How To Find A Trustworthy Tax Preparer

With just ten days to go before the April fifteenth tax deadline, some taxpayers are still hunting for help with preparing their returns. And that helping hand might turn out to be less helpful than they might have thought. The treasury department's inspector general found up to a 61 percent error rate on tax returns prepared by authorized, but unlicensed, tax preparers. Host Michel Martin and personal finance contributor Louis Barajas Michel Martin offer last minute tips for finding trustworthy tax filing assistance.

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MICHEL MARTIN, host:

I'm Michel Martin, and this is TELL ME MORE from NPR News.

Coming up, we'll get the final word on men's college basketball. The championship game was last night. It was one of the lowest scoring and some critics are saying the least fun college basketball championship game ever.

But first, to the trash talk, the insults, the low verbal blows of April madness. Of course, we're talking about taxes. The country's largest tax preparation firm, H&R Block, is talking down its rivals.

(Soundbite of advertisement)

Unidentified Man: Worried about your taxes? At H&R Block, we found errors on four out of five returns prepared by others. This year, get the maximum refund guaranteed.

MARTIN: The insinuation in that commercial was enough for Jackson Hewitt, the second largest tax preparation firm in the U.S. to file a lawsuit against H&R Block. Now, however that goes, it does raise the question of just how you can figure out if your tax preparer knows what he or she is doing, particularly because if the preparer makes a mistake, the taxpayer is still on the hook.

So, to figure this out, we've called one of our money coaches, Louis Barajas, and he is still what is called an enrolled agent - licensed to practice before the IRS. So, Louis, thanks so much for joining us once again.

LOUIS BARAJAS: Thank you.

MARTIN: Now, the inspector general at the Treasury Department found up to a 61 percent error rate on tax returns prepared by authorized, but unlicensed tax preparers. So, as an enrolled agent, who's no doubt spent some time thinking about this, you know, is that surprising? Are people's taxes really - most people's taxes - really that complicated? That the error rate should be that high?

BARAJAS: No, you know, they're not really that complicated. And that doesn't surprise me. But at the same time they don't take into effect that most people wait until the very last minute. And when you go see a tax preparer, they're pretty much doing, you know, 75 percent of all the tax preparations are going to be done in the last couple of weeks of - before April 15th. And so there are a lot of mistakes that are being made just because tax returns are being done in a hurry.

MARTIN: So, now, if you - what kind of person should probably go out and try to find a paid tax preparer since there are so many other resources out there? There's, you know, software and so forth that people can use. Is there a certain kind of profile of taxpayer you think really needs to think about getting some help? Or is it just if you're scared to do it yourself?

BARAJAS: Well, first of all, you know, the thing is this - that a long time ago, most people who were, you know, what I call, you know, basically poor, who didn't have a lot of money, who only worked one job could actually go out and do it themselves and it was really pretty basic.

But now, there are a lot of credits that, you know, people who don't earn a lot of income can get and who don't get them. For example, the earned income credit. And so it requires a little bit more savvy when it comes to tax preparation as it did in the past because the tax laws are really complicated. So, my suggestion is that at one time, you'd like to go see somebody who's a professional, who can help you, who can identify certain tax credits that you may be able to get.

And if the return, after it's done, is not that complicated, you can do it in the following years. But the average person who has a small business, a person who owns a home, who has children, you know, it's - who runs a business, these are the people that need to hire somebody professionally, because they can find them a lot more deductions than the average consumer can do on their own.

MARTIN: So, let's talk about how you find that person. First of all, is there any entity that supervises tax preparers? Is there some sort of basic credential that you should be looking for?

BARAJAS: Well, you should look for somebody who is a specialist in tax law or tax preparation. And you just have to be careful because the three people that you're really - going to do your tax returns could be certified public accountants or CPAs, enrolled agents who are licensed by the IRS, and then you have, in certain states, they license tax preparers like here in California, they'll license the tax preparer.

Now, the problem is that you have to be really savvy about when you're hiring the CPA. Now, I've worked for a big CPA firm years ago, a firm called Ernst and Young. And so, what happened is that a lot of CPAs are really focused on audits and there are some that just focus on tax. So not all CPAs are really good tax preparers. So you have to be careful about that. Make sure that they're specialists in tax.

Enrolled agents are actually specialists who should be the best people out there preparing tax returns because they have a lot of continuing education requirements when it comes to tax law. They can also represent you in case you get audited anywhere in the country.

And then a tax preparer, doesn't mean that a tax preparer isn't, you know, as good as an enrolled agent or a CPA. The only thing is you want to make sure that they have years of experience and they have a reputation for doing things right. Not for getting the best or biggest refunds.

MARTIN: How would you know?

BARAJAS: Well, you know, it's easy because what happens is you have to careful about locations where you go where they're offering you really inexpensive tax preparation services. Be careful about the places where you go and they'll do it inside a furniture store or a check cashing store or an auto dealer and they use your refund to go purchase a car or purchase more furniture. That should be a red flag.

Avoid the tax preparation places where they'll do check cashing and they marry you and they divorce you and they remit money to other parts of different countries and they do taxes.

You have to look for someone who is a specialist and who does this as a full-time job year round. That should be the first clue. The second thing...

MARTIN: The first clue is don't - one of these places that's kind of set up in a tent in the parking lot, you know, selling fruit on the side. That's not what you want. You want somebody who's there if you have a problem later on.

BARAJAS: Absolutely.

MARTIN: Right.

BARAJAS: And also, you have to be very careful. Again, it's on what the fee that they're charging you. If they're promising you a very inexpensive return because you're going to do a rapid anticipation loan or you're going to, you know, upfront you the refund and charge you a really high interest rate on that money, you got to be very careful about those places.

So, find somebody who's been doing it for a long time who's got a, you know, who's been in one place for a long time. Because these fly-by-night tax preparation places also should alert you that if they haven't been around in the same location for at least a couple, you know, two, three, four years, I don't know if I'd go there.

MARTIN: Now, what about this whole question of a guaranteed refund? There are those who say that just - if somebody's guaranteeing you a refund, that that should be in itself a red flag. Why is that?

BARAJAS: Absolutely. Because refunds have nothing to do with your amount of tax liability every year. You just did the proper, you know, improper withholdings, meaning that if you're getting money at the end of the year, you might have just filled out your W-4 wrong when you filled it out, you know, when they withhold your taxes every year. And so that has nothing to do with how good the tax preparer is. So guaranteeing a refund is a huge red flag.

MARTIN: And maybe it goes without saying, but you are supposed to be honest with your tax preparer, right? It's not, like, you're not supposed to come in with, you know, with children you don't actually have and, you know, maybe we shouldn't need to say that, but, you know.

BARAJAS: Well, no, you know, we do need to say that. First of all, you need to be extremely honest with your tax preparer, but you also have to be careful about tax preparers who are kind of goading you on to take deductions that you may not be worthy of. So, for example, I have seen many tax returns where a tax preparer had made a husband and a wife, they have two kids file head of household returns, which they cannot do if they're married.

And so they can get a bigger tax deduction. And so you have to be very careful also on the other side when a tax preparer is telling you, hey, we can do this or we can do that. And I know something more than the other tax preparers -another big red flag.

MARTIN: And, finally, if you are worried that your tax preparer has made a mistake, maybe you had - you did what you just said, is you did your taxes in a rush at the end right toward the filing deadline. You're worried. What can you do? What's your recourse after the fact? Is there any?

BARAJAS: Not a problem whatsoever. I mean if you do actually find - and remember, when you complete a tax return, you sign the tax return saying that you know that all the information there is correct. And your tax preparer pretty much doesn't really have any liability when it comes to that. I mean, it's very little.

You can go back and amend your tax return. You can file what's called a 1040X and go back and amend the return and do it right and then pay back the taxes that you might owe. And it's not a big problem. I mean, once you get it done, it's easily taken care of.

MARTIN: And, finally, I do want to ask you, what is - if that dreaded word comes: audit, and you find that you are being audited, presumably you've represented taxpayers before audits, is it as terrifying as it seems? What should you do to be prepared?

BARAJAS: Yeah. You've actually tried to do the best job that you can on your tax return and you do get audited, the very first thing you have to do is not avoid the paperwork that's coming in the mail or that envelope and just think that the problem's going to go away. You need to address it very quickly. Most of the time it's just a misunderstanding. I would say 75 percent of the time it's just a misunderstanding and you can go in any IRS office and take care of it within - probably within an hour it's all resolved.

If you have bigger issues, you can hire, for example, a CPA or enrolled agent to go there and represent you. Now, if obviously you've been doing some bad things and really kind of not doing your taxes as you should, then you have something to worry back because they can back several years and audit you for the other years as well.

MARTIN: But none of our listeners would do that.

BARAJAS: Well, absolutely not.

MARTIN: Absolutely not.

Louis Barajas talks matters of personal finance with us on a regular basis. His book is called - his new book is called "My Street Money: A Street Level View of Managing Money from the Heart to the Bank." And as we mentioned, he is an enrolled agent with the IRS. And so he does, as we said, prepare taxes and represent taxpayers before the IRS and he was kind enough to join us on the line from his home office in Irvine, California. Louis, thanks so much.

BARAJAS: As always, thank you so much.

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