Who's Preparing Your Tax Return...and, how much are you (really) paying to get it done?April 26, 2017With another tax season in the rear-view mirror, I wanted to take some time to address an issue that should be of interest to just about everyone. When it comes to your tax bill, are you paying (only) your fair share? A significant aspect of this question is, who is preparing your taxes, and do they know what they are doing?Someone once told me a key to effective writing is to make the bottom line the top line, so here’s the bottom line:The cost of preparing your tax return is often not limited to what you pay to have the forms completed. With the advent, indeed, the proliferation of tax preparation software, the degree of professionalism and competence among those who hold themselves out as practitioners has been severely degraded. The situation is made worse by online services which suggest that they will do your taxes for free. Even the IRS has jumped on this bandwagon. Did you know that if your situation meets certain parameters, you can file a tax return for free using IRS-provided software? A key question … Is anything ever really free in this world? This situation has led to an expectation by many that I should be willing to work for, well, almost nothing. Every phone call from a prospective customer tends to begin with “How much do you charge to do taxes?” as if there were a single price for every return, regardless of the complexity. If we don’t quote a rock-bottom price, we don’t hear from them again because there’s always someone out there who will charge less than I do. But, the best tax software program will not turn a novice into an expert, it will not turn a crook into a high-integrity, principled professional, and it will not impart one iota of intelligence to an idiot. It seems we had more problems in our practice this tax season than we have had in a long time. Part of the problem is due to increasing due diligence requirements aimed at fraud and identity theft issues that the IRS has transferred to me. (The existence of these threats, by the way, is a good reason for you to know your practitioner!) If you’ve tried to contact the IRS lately, you know it’s made worse by the fact that IRS service and support has severely degraded. Charlatan preparers thrive in this environment, and self-preparers get away with mistakes in their returns, not always to their own benefit. The situation increases the likelihood that errors will be made by professionals and neophytes alike. When you make an error on your tax return, it’s not necessarily a good thing if you get away with it. As often as not, the error results in you owing (and paying) more than you should. When we take on new accounts, we always ask for at least one, and usually two prior years’ returns, and you would be amazed at how often we find that even well-qualified practitioners make silly mistakes that cost their clients money. I make my share, I’m not pointing fingers here, but the point is, if even the professionals overlook and omit information, how often do you think it happens for the person with no training trying to make a few seasonal bucks doing returns for $100 a pop? And for the do-it-yourselfer, … well, probably you are asking the question yourself at this point: “am I really saving money by doing it myself?” Here’s how a very cynical system is perhaps designed but certainly allowed to exploit this situation. I expect you have heard the political demagogues and populists talking about a tax reform measure which will allow you to file your tax return on a post card. Let me tell you, 95% of you don’t want to be able to file your taxes on a post card! It’s a lead-pipe cinch that the easier your tax return is to prepare, the more you will pay (as a percentage of income) in taxes. Making it easier for you to file is not the reason the politicians want to simplify the process. The thing the politicians want to simplify – Republican, Democrat and Socialist alike – is the process of separating you from your money. Tax reform is advertised as lowering taxes but any reasonable analysis of the ultimate requirement is that federal revenues must increase, and that can’t happen if everyone’s taxes are reduced. Everyone rants about loopholes, but the only people who do not benefit from loopholes are those who are not paying any taxes. Yes, I understand and to some degree agree with “supply-side” economic theory as it applies to tax policy and the argument that economic stimulus resulting from tax reductions will result in increased revenues. But the reality of the situation is that, at least initially, with our deficit and debt situation being what it is, somebody is going to have to pay more. “Soak the rich”? You might be surprised to find out how many congressmen consider you to be “rich”. And when it comes to easy marks for higher taxes, the first-order targets are the people who are looking for simplification. I suspect this is the very reason the IRS wants you to use their free on-line service; because they know an awful lot about you, they can tell if you include all your income, but if you miss a deduction or credit or savings or two that’s on you. If you understate your income, you will hear from them. If you pay more than you owe, they’re ok with that. On another note, I sometimes get the impression that some customers are annoyed by our efforts to ask all the right questions and gather all the right material. Preparing a tax return properly is usually not easy and it’s almost never intuitive. No checklist will ever capture all the potential permutations, and if someone proposes to prepare your tax return while you wait in their office based solely on the information you provide this may not be the person you want doing the job. If we are asking for more information, we are usually trying to save you money, but we are always trying to make sure it’s done correctly. One last important point. There are no “automatic” itemized deductions, credits, write-off’s, etc. If your tax preparer is telling you that you can automatically deduct $500 in charitable contributions, for example, or if he guarantees you a better refund, then fire him. That’s tax fraud. It’s also worth noting that, unlike the seasonal part time preparer, and even many of the national store-fronts, we are available for you to call or stop by and chat anytime during the year, not just during tax season. If you get a letter from the IRS in August, you are not going to want to talk to a call center or handle it on your own. We will be here for you when you need us. So let’s wrap this up. If you are confident about the competence and diligence of the person who is doing your return then stick with them, and pay them fairly. (And it is about the person, not the firm. The competence of the preparers in the store-front national firms really varies from person to person.) But if you have been using the lowest cost alternative, or if you have been trying to do it yourself, you need to ask yourself if you are being penny-wise and pound-foolish. If you have been using us and you’re happy with our performance, tell your friends. If you’re not, tell me. We have tried very hard to keep our costs reasonable over the years. It is clearly not my intent to be the lowest-cost provider; my service, experience and efforts do have value. But we are far from the most expensive service around, and we do make a conscious effort to be competitive with the qualified competition. Operating costs are increasing for everyone, continuing education is expensive and time consuming but essential, and as stated earlier, the IRS is increasing requirements and reducing support. And contrary to popular belief, preparing a tax return properly is not just about completing and printing out a couple of forms. I don’t think it would be too much of a stretch to suggest that the less you are paying to get it done, the more suspicious you should be. Remember, this bears repeating: the IRS knows an awful lot about you. They usually know if you include all your income, but if you miss a deduction or credit or savings or two that’s on you. If you understate your income, you will hear from them. If you pay more than you owe, they’re ok with that. Are you?Jim DentonJames C. Denton, CFP® Managing Principal The observations and opinions expressed in this commentary are those of the author and do not necessarily reflect the views of LPL Financial. This commentary is for general information only and is not intended to provide specific advice or recommendations for any individual. Income Tax services provided by DFS Advisors, LLC are conducted as an outside business activity separate and distinct from our relationship with LPL. LPL Financial does not provide tax advice or services.