How to Hire a Tax Professional

Everyone outgrows the 1040EZ and tax preparation software sometime. When that moment arrives, you'll need to know what to look for in a tax professional.

An old tax joke explains the difference between the 1040 and the 1040EZ tax return: the government gets your money when you use the 1040EZ, and your tax advisor gets your money when you use the 1040. Since humor always has a grain of truth, make sure you choose wisely when hiring a tax expert.

Knowing your options

There are several types of professional tax preparers, ranging from unlicensed individuals to fully credentialed advisors. Which one you need depends on the complexity of your tax situation:

• Commercial preparers. If your taxes are relatively straightforward, you can get your returns prepared quickly at H&R Block or Jackson Hewitt.
• Enrolled Agents (EAs). EAs are trained and licensed in tax preparation for individuals, businesses, trusts, and other tax-paying entities. They also have the authority to represent you for audits, appeals, and collections.
• Certified public accountants (CPAs). These professionals can prepare your returns and assist you throughout the year in tax planning and accounting, for your personal and business finances.
• Accredited tax advisers (ATPs). ATPs undergo rigorous certification testing and training and are required to pursue continuing education after receiving the credential. They can handle any type of return; some also specialize in certain functions, such as estate planning.

Tax questions to ask

After you decide what level of tax service you need, ask friends and associates for referrals. Create a short list, and make arrangements to interview each of your options. Questions you'll want to ask include:

• What credentials do you have? Make a note of the professional's credential information; you'll want to follow up with the licensing agency to ensure that that she's in good standing. Avoid tax preparers who have no credentials.
• How do you stay on top of tax law changes? Tax law evolves every year, and your returns need to evolve with it.
• How and what do you charge? Tax professionals will either charge you an hourly rate or a flat fee. If it's hourly, ask for estimates on how long your return will take, and how many meetings will be required throughout the year. If there's a flat fee involved, get the details on what it does and doesn't include.
• Will you represent me if I'm audited? Any answer other than yes is a red flag.
• How can you reduce my tax bill? You can ask this question to get a read on the tax professional's ethics. If she responds with references to cutting corners, cheating the IRS, or misrepresenting information, walk away fast. Because there's another old joke you should remember: The only difference between tax avoidance and tax evasion are the jail walls.