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As accountant ranks thin, who will prepare your tax returns this year?

If your accounting firm is taking an unusual amount of time to return your calls, or if you have found errors they should have caught, there might be a good reason.

Approximately one-sixth of accountants and auditors left the profession in the last two years, according to the Wall Street Journal. The American Institute of Certified Public Accountants reported 75% of Certified Public Accountants had reached retirement age by 2020, and many decided after the pandemic that they had had enough.

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Making matters worse, new college graduates are opting for less technical professions with higher pay, not as much stress and shorter hours. As a result, most firms are critically understaffed and overworked, and clients are suffering because of it.

So, what should you do if, instead of receiving that annual organizer package, you receive a notice that your accountant has sold their practice or retired?

Your first step is to dig out your last three years of personal and business returns with all the supporting paperwork. Your tax professional should have provided you with a pdf or hard copy of your completed returns at the time of service. They also should have returned all of your original documentation.

Should I prepare my own return?

After gathering your documents, the first question you should ask yourself is: Are my taxes simple enough to do myself?

If you are one of the 90% of Americans who no longer itemizes their deductions, and if you do not own a business, rental properties or investments (other than traditional retirement and brokerage accounts), you could consider using a tax program to prepare your own taxes.

Tax programs have become increasingly easy to use, and you can avoid the cost of hiring someone. Programs commonly offer an interview approach with the questions a preparer would ask if they were sitting across from you. Sometimes, a tax person can answer questions over the phone for an additional fee.

The disadvantages of preparing your own taxes depend on your return’s complexity. The more complicated your taxes, the more time you will spend researching regulations and completing forms. You might miss valuable deductions and credits. Also, there is a chance there will be errors your tax program will not catch. Even unintentional clerical errors can lead to potential audits and penalties.

Do I need a CPA?

If you decide preparing your own taxes is not worth it, who will you hire to prepare your returns?

If you have a simple return, using a tax preparer should be sufficient, with a caution that the quality of preparers varies widely. It is easy to become a licensed preparer, and most do not carry insurance for errors and omissions. So, If one year your return is more complicated or if you require accounting services, the tax preparer may be unable to help. Also, only EAs, CPAs and attorneys can represent you if you are audited.

What is an enrolled agent?

Enrolled agents are tax professionals licensed by the Internal Revenue Service to represent taxpayers in all matters related to the IRS, including audits, collections and appeals. An EA candidate must pass a comprehensive exam and a background check. They are a good choice for tax preparation for most taxpayers.

If a preparer claims to be an EA or CPA, those initials will be after their name on the signature page of your 1040 tax form. (Watch for similar tricky initials like CBA or ETA that are not the same.)

You can also go online to the IRS (for EAs) or State Board of Accountancy (for CPAs) to check if a license is in good standing.

When most people think of CPAs, they associate them with taxes. However, most CPAs do not specialize in individual return preparation. Surprisingly, taxes represent only a small portion of the CPA exam.

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Some CPAs specialize in tax planning, a service separate from tax preparation. Tax planning is developing a strategy to minimize or delay the taxes you pay. Examples of tax planning are the choice of an entity when you set up a business, maximizing tax deductions with benefits planning, and deferring taxes with the timing of transactions.

While both EAs and CPAs can prepare accurate tax returns and are held to professional standards, EAs are less likely than CPAs to utilize tax planning strategies, primarily because EAs are trained by the IRS.

Most higher net-worth families hire CPAs. The relationship with a CPA is much more comprehensive than a once-a-year meeting to fill out tax forms. CPAs generally talk with their clients several times a year and work with their attorneys, bankers, financial advisors, and other consultants to meet the client’s financial and tax savings goals.

Also, although many EAs call themselves accountants, the EA license does not require a college degree or any accounting education or experience. Therefore, a CPA would be preferable if you own a growing business since CPAs have years of comprehensive training and experience in accounting, finance, and business. They could be particularly helpful with obtaining financing, managing cash flow, and maximizing the value of your business for eventual sale.

What is an LLM?

If you see LLM behind an attorney’s name, it stands for a Master of  Laws (generally in taxation) that they earned after law school. They can represent clients in court and advise on tax-related matters. It is increasingly uncommon to find one who prepares returns. You will typically want to hire them if you have complex tax situations or legal issues, such as a tax dispute with the IRS.

Not all tax professionals, even licensed ones, are equally qualified. If necessary, file an extension this year and take your time to interview several professionals over the phone. (Just a reminder that an extension will extend the time to file your return, but your tax balance will still be due by the original due date of your return.)

When you call them, inquire about recent law changes they have learned about, how many returns they prepare a year, and if they have time for new clients. Also, ask about their audit representation experience and if they specialize in clients like you. They should be open to answering your questions,  and you should feel a rapport with them. Listen to your instincts.

If you choose your tax professional wisely, you can have a rewarding lifelong relationship, at least until they decide to retire.

Michelle C. Herting specializes in succession and tax planning, trust administrations, and business valuations.

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