3 KEYS TO HIRING THE BEST TAX PRO

Even for those with uncomplicated returns, the occasional professionally prepared return is like a checkup with the doctor: You never know what you might find. Should you do your own taxes or hire the job out?

It’s not the eternal question, but it is worth pondering because it involves two subjects near and dear to my heart: taxes and money. You don’t want to miss deductions, and you don’t want to spend too much money.

Let’s see if I can’t help you come to a conclusion. First, a disclosure: I earn my living as a tax preparer. I have a vested interest.

You may decide you’re comfortable doing your taxes because you’ve done them for years. That’s fine. Many people view tax preparation as a puzzle to be completed and actually enjoy the process. (My brother did his taxes for years. He gave up when he had to fill out a California tax return.) But if you’re not sure, ask yourself three questions.

(1) Are you prepared to give your taxes your time? According to the IRS (and we know how accurate they are), if you itemized your deductions and had some investment income and capital gains it took you more than 27 hours to do last year’s tax return. That’s longer than the year before — and that’s after “tax simplification.” An online program, or a tax program bought at the store or online, can save you a lot of time in filling out the forms, but you still must organize all the materials. And that assumes you have a fairly simple return with a limited number of deductions.

(2) Are you prepared to put up the cash to hire a preparer? Getting someone else to do your taxes can cost you $85 to $105 at the low end — again, that assumes a simple return with no deductions — to several thousand dollars at the high end with a complicated return. The average federal income tax return prepared by a professional preparer cost $210 in (for income tax preparation).

(3) Are you prepared to deal with the complexity of the federal tax code?

Including 2004, our Congress has changed the nation’s tax laws in 36 of the last 38 years. Just since 1986, there have been no fewer than 81 major changes to the tax code — including the Tax Relief Act of 2000, the big tax cut of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003. There are even more changes coming our way for — beware!

In fiscal 2004, about 137 million individual returns were filed, and the IRS processed more than 2 billion pieces of paper — which, if placed side by side, would stretch over 200 miles! Before any 1998, 1999, 2000, 2001, 2002, 2003 and 2004 tax changes, the Internal Revenue code was 9,471 pages long and contained 1.3 million words. By contrast, Tolstoy’s epic novel “War and Peace” has just 1,444 pages and 660,000 words. (I admit your return — unless you have a whole lot of money — won’t come close to touching all of the tax code.) In , a record 69% of all individual tax returns were signed by paid preparers — at a cost of $19.25 billion. That’s an average of $210 apiece!

Where Tax Preparers Really Earn Their Money

Here’s what you really want from a tax preparer. If you go to a tax preparer who just takes your numbers and inputs them onto your return, you’ve wasted your money and time. What you should actually pay for is advice and direction, and here are three things you should expect:

The good preparer should focus not only on your transactions but on what to do to reduce your taxes as well. The interaction should be proactive, rather than just reactive.

For example, if you tell your tax preparer that you have three kids, he should go beyond simply taking them as dependents and claiming three additional personal exemptions and possibly the child tax credit. He should ask if you’re self-employed (Could you hire the children as employees?) and how you’re saving for their college educations. (Is a Coverdell IRA appropriate, or would a Section 529 plan be more effective? Are you at least having some investment income taxed to them at their lower marginal rates?)

The key is to make sure the individual you need focuses on taxation and keeps up with tax trends. Quite frankly, a lawyer who passed the bar exam 10 years ago and who hasn’t updated, or a CPA who spends the rest of the year doing corporate audit work unrelated to taxes is useless for tax preparation. All either person will do is put numbers in boxes, and he’ll ask you for the numbers.

Clearly, a tax attorney is going to be more expensive than an enrolled agent, CPA or a storefront tax preparer. But, if your income justifies it, the more sophisticated advice and direction should more than offset the additional cost, which averages $225 per hour.

If You Do Nothing Else, Get a Checkup

Again, I’m biased, and if you expect to do your own taxes, fair enough. But let me make a suggestion: consult with a good tax professional at least every three-to-five years just to find out what you’re missing. A simple wage earner who itemized saved enough to cover my fee when I told him he could deduct the old clothes he was trashing by donating them to Goodwill or the Salvation Army. After the first year, those tax savings were pure profit for him.

Don’t minimize the psychological impact of professional tax preparation, either. There’s usually a sense of security in having a professional do your tax return.

But that doesn’t always work. My sister is a school teacher who usually did her own simple return, and sis usually broke even. One year, she let me do her return, and I found enough new deductions to get her a $2,400 refund!