How to Choose a Tax Firm for Complex Needs

Choosing a tax professional isn’t an easy task anyway, but mix in the coronavirus tax extension deadline and current economic recession, and this process just got a whole lot more complicated. Keep reading for all you need to know about how to choose a tax firm for your complex accounting, tax planning, and taxpayer representation needs.

Do I even need an accountant or tax firm?

According to the Internal Revenue Service (IRS), every taxpayer is entitled to representation. The taxpayer may either represent themselves, or with proper written authorization, have someone else represent them. However, this representative can’t be just anyone. They must be a licensed attorney, Certified Public Accountant (CPA) or Enrolled Agent. Each individual may verify a representative’s eligibility.

Why would I want a representative?

You may want a representative (such an accountant or tax firm) to represent you for a number of reasons. These include a specific tax problem, a notice from the IRS or a tax audit. For most taxpayers, the chances of being audited are less than 1 percent. Those most likely to get audited are among those in the highest income brackets and those in the lowest. If this happens to you, your representative can help to interact with the IRS on your behalf as well as provide information and explanations. They can also enter into agreements with the IRS once you reach them. However, it is important to select your representative carefully because, in the eyes of the IRS, the representative is the person they are interacting with.

Taxpayers have a right to representation, and a qualified, knowledgeable, and experienced representative can ensure that you get the best outcome. If you’re unsure of the process, they help to streamline it and eliminate many of the pressures that come with it. To authorize a representative, you’ll sign a Form 2848, Power of Attorney and Declaration of Representative. This allows the IRS to recognize the representative in your case instead of you personally. 

Understanding professional roles  

Choosing a tax professional can be a difficult process, especially if you’re not sure what the difference between them are. Seeking the best person to prepare your tax return will ultimately land you in a different place than looking for someone to skillfully represent you in front of the IRS. Here’s what you need to know.

CPA: A CPA is a certified public accountant that must be licensed by the state. They earn this designation only after they have passed the Uniform CPA Exam that is comprised of four parts and administered by the State Board of Accountancy. They’re a trusted financial advisor for individuals, businesses, and organizations who help them reach their goals in a variety of ways. They may do bookkeeping, financial planning or prepare financial documents like tax returns and profit-and-loss statements.  

Enrolled Agent (EA). An EA is a tax professional licensed directly by the US Treasury Department. In order to become an EA, an applicant must successfully past a 3-part exam covering individual taxaxtion, business tax law, and IRS policy and procedure. In addition, they must have a clean criminal record, and complete a minimum of 72 hours of continuing education every three years. Just like attorneys and CPAs, an EA has unlimited representation rights in front of the IRS. But also like CPAs and attorneys, not all EAs are experienced in every aspect of taxpayer representation — each tax professional has their own areas of expertise and specialization. You will need to take this into account when choosing a tax firm.

Tax preparer: According to the IRS, anyone can be a paid tax return preparer as long as they have an IRS Preparer Tax Identification Number (PTIN). Tax return preparers will have differing levels of education and expertise. Thus, it’s wise to check their qualifications prior to hiring them. You can use our directory of carefully selected tax firms to help you. Beware that tax return preparer fraud is a common tax scam. You can lodge a complaint if you have been financially impacted by a tax return preparer’s misconduct or improper practices.

Tax representative: Not everyone can be a tax representative, unlike a tax preparer. These individuals must be a tax attorney, certified public accountant (CPA) or enrolled agent. Tax representatives are helpful when you’re corresponding with the IRS.

I’m good for 2019. How do I start tax planning?

If you’re squared away for 2019, you may already be looking forward. After all, tax planning can really benefit you in the long-term. Tax planning is the analysis and arrangement of a person’s financial situation in order to maximize tax breaks and minimize liabilities in a legal and efficient manner.

Step #1: Understand your tax bracket

Plan for the future by looking at where you’re at today. The United States operates within a progressive tax system which means that people with higher taxable incomes have higher tax rates (and vice versa for lower incomes). There are seven income tax brackets. You can view the 2019 versus 2020 tax brackets here to determine which one you’re in for planning purposes.

Note that your taxable income isn’t necessarily equal to your salary. You’ll need to subtract out any deductions to determine your taxable income. Once you’ve found that, don’t just multiply by the tax rate, the government divides your taxable income into chunks and then multiplies it by the corresponding rate.

Step #2: Differentiate between tax deductions and tax credits

This is a crucial step in tax planning because you can create strategies to help you reduce your tax bill. This is also where a tax expert can come into play because they are likely to know more about the available deductions and credits than you will.

  • Tax credits – a dollar-for-dollar reduction in your tax bill
  • Tax deductions – specific expenses that you’ve incurred that you’re able to subtract from your taxable income

Step #3: Plan for standard deductions versus itemizations

Another big impact on your tax bill is deciding whether to take the standard deduction or to itemize. When you take the standard deduction, it’s a flat-dollar, no-questions-asked tax deduction that Congress sets every year. This makes you preparation go a lot faster and a lot of taxpayers prefer it because it’s easier. However, you can also choose to itemize your tax return which means you add up all the individual deductions that you qualify for. People normally take this route if it will be more advantageous financially. Evaluating which direction to go can take some time and math!

Step #4: Learn about popular tax deduction and credits

Learning the most popular tax deductions can help you to save some cash. Make it part of your tax planning to learn about them. Your tax firm can help you with this.

Step #5: Know what records to keep

Keeping tax returns and documents is essential for your own records and if you’re ever audited. When you decide this, know that the IRS has three years to decide whether they want to audit your return, so don’t throw it out before that.

Step #6: Select a firm to help

Knowing what you do about the three roles above, look for a firm that has individuals focused on what you need the most help with. For the majority of individuals and businesses, this is likely to be a tax firm that can help with proactive planning while also serving a critical support role in other areas of your business or personal finances.