In 1963, Time magazine published an excerpt from a letter written by Leo Mattersdorf, a friend and accountant of Einstein, who had prepared the professor’s income tax returns and advised him on his taxes for many years:
Einstein: “The hardest thing in the world to understand is income taxes.”
Mattersdorf: “There is one thing more difficult, and that is your theory of relativity.”
Einstein: “Oh, no, that is easy.”
Mrs. Einstein: “Yes, for you.”
Many Americans pay for tax preparation partly out of intimidation, like Einstein, imagining taxes to be too complicated, and partly because they prefer to have a lawyer, accountant, or company between them and the IRS, should an audit or mistake occur. For those earning more than $200,000 a year (much more likely to be audited) or those with “complicated” taxes – itemized deductions, schedule C’s, corporations and real estate investments – it just makes sense.
Who Prepares America’s Tax Returns?
IRS data indicates that nearly 20% file their own paper returns or file directly online through the IRS’s Fillable Forms. Just over 80% of Americans use a tax preparer or tax software to file their return.
The king of the hill in “assisted” tax returns is H&R Block, by far the largest provider of tax preparation in the United States. They have 12,000 offices across the country, of which about one third are run by franchisees. In 2012, the company processed a record 25.6 million tax returns, a 4% increase from 2011, representing about 1/6 of all returns filed. (To put Block’s dominance in perspective, second place Jackson-Hewitt processed about 2.5 million – about 1/10th of HRB.)
Block’s bread-and-butter has been face-to-face, office-prepared returns, yet in this rapidly changing market, more taxpayers are going the “do it yourself” route. In 2012, 70% of taxpayers filed their tax returns online themselves, an 11% increase from 2011, according to ComScore. According to the Motley Fool, 83% of H&R Block’s new customers base in 2012 came from increased sales of their tax software, not assisted tax return preparation.
In the 2012 tax season, the three largest DIY online tax preparation providers accounted for more than 92 percent of DIY tax returns filed online. 60% of those used Intuit (TurboTax) software. InfoSpace’s TaxACT was used by nearly 18% of do-it-yourself tax preparers, and H & R Block’s software captured nearly 15% of the market, capturing a bit of TaxACT’s previous market share. (In 2011, H & R attempted to acquire all of TaxACT’s market share by purchasing the company, but the U.S. Justice Department blocked the sale, ruling that it violated anti-trust law.)
The Battle Over Taxes in Texas
In recent weeks, the battle between Intuit and H&R Block got legal and very public. Intuit rolled out commercials in Texas in which customers using an unnamed tax service are horrified to find their tax preparer working retail in a clothing store in one of the ads. In another ad, a customer discovers his tax guy is fixing a clogged pipe under their kitchen sink. “I thought you were a tax expert,” the homeowner says to Bob the plumber as his wife raises her eyebrows.
H&R Block filed an unsuccessful lawsuit to try to block the commercials, claiming they were misleading. A federal district court judge rejected the request. Dan Maurer, general manager and senior vice president of Intuit’s consumer tax group, stated, “These two TurboTax advertisements factually and accurately portray the tax expertise of TurboTax experts.” (However, those experts disappear if you get audited.)
Company CEO Bill Cobb accused Intuit of “taking cheap shots at hardworking plumbers and retail sales clerks, not to mention millions of Americans holding down two jobs.” Then he took the battle to Twitter. The company launched a campaign, #iamhrblock, featuring snapshots of its tax preparers holding up signs — many of which say what they do for a living outside of tax season. It’s an eclectic list: air-traffic controller, owner of a power-washing company, a salon stylist. There are also many whose main professions correspond more closely to the idea of “tax pro”: CPAs, people with MBAs, business and accounting degrees.
As Time magazine reported, a public opinion frenzy ensured. Consumers weighed in on Facebook and Twitter, some expressing support of whichever service they had used. Some criticized the ads, charging Intuit with being classist or misleading in its portrayal of H&R Block’s workforce. Then came the backlash to the backlash, with questions about just how competent or professional someone can be at tax preparation if they spend most of the year driving a truck or teaching Zumba.
Who SHOULD Be Doing Your Taxes?
Besides H&R Block, TurboTax, and do-it-yourself IRS forms, what are your options? Other tax professionals are (as defined in the LifeHealthPro trade publication by Brandon Stuerke, president of a Colombia, Mo. independent advisory firm):
CPAs: A Certified Public Accountant’s designation covers a wide range of financial topics, including tax returns, alternate business entities, personal financial planning, business valuations, bookkeeping and accounting methods. Approximately 25 percent of CPA exam “pertains specifically to taxes and tax law,” and in theory, a CPA’s broad financial training helps integrate taxation into a client’s larger financial picture.
Attorneys: Attorneys who specialize in taxation can provide valuable tax preparation services. In addition, some clients favor working with an attorney because they value the confidentiality aspects of attorney-client privilege. In theory, this relationship provides a higher degree of legal protection in the event of an audit, or other legal proceeding resulting from a tax issue.
Enrolled Agents (EAs): These tax professionals receive their credentials from the IRS after completing an extensive education and examination process that focuses exclusively on taxes and tax laws. This means an EA’s practice is typically solely related to taxes. Because they can represent their clients before the IRS in audits, an EA may develop niche areas of practice, such as offers in compromise or collection settlement.
Registered Tax Return Preparers (RTRP’s): Largely designed to regulate seasonal workers, bookkeepers, and others who do taxes, RTRP’s have taken classes and passed a competency exam. However, in January, 2013, The District Court in DC disagreed with the IRS’s jurisdiction in these matters, and for the moment, the program may be dead.
A few things a tax preparer may not tell you…
- The software your preparer is using is really no different from the tax software that do-it-yourselfers use, such as TurboTax. If your taxes are not overly complicated, you’re essentially paying them to ask you the same questions the software would ask. Ask yourself if you’re paying for advice you need, or typing you could do yourself.
- Do-it-yourselfers can use the IRS’s Free Fillable Forms, which will compute the figures for them. And for taxpayers with incomes of $57,000, they can choose free online tax software provided by major software companies. Find out more at FreeFile.IRS.gov.
- They may be poorly-compensated to prepare your tax return. Some Liberty Tax franchises pay its tax preparers only about a dollar more per hour than its Statue of Liberty “mascots” who wave people into an office with a costume and a sign.
Your tax preparer (or software) may be completely adequate to fill out a form or calculate your taxes accurately, but will they give you financial advice on reducing your taxes in the future? In many cases, they won’t, as they are not licensed, trained, or able to give you financial advice above and beyond the tax return.
And here lies the value of a quality financial professional: a good accountant or advisor will help you find ways to decrease your taxes and increase your income and savings. They might recommend utilizing an FSA and/or HSA to lower healthcare costs as well as taxes. They may suggest that instead of “Earn – pay taxes – then save/spend the rest,” they may encourage you to use a business (even a part-time or network marketing business on the side) to “Earn – save and spend – then pay taxes on the rest,” saving hundreds or thousands by writing off common expenses. And they will keep a long-term view, not simply look for ways to trade off savings today for more taxes tomorrow.
Who is doing YOUR taxes? Are you still looking for a tax preparer? We work with accountants and CPA’s we trust and recommend. If you need a referral for tax help, just contact us and we’ll be happy to help you.
Whoever you choose, make sure to get quality referrals or use reputable companies to avoid being the victim if fraud or other tax-related scams. http://consumer-law.lawyers.com/consumer-fraud/Tax-Prep-Scams.html And whether you’re a do-it-yourselfer or not, you can find some excellent tax advice that your past tax preparers have likely NOT told you in Tom Wheelright’s book, Tax Free Wealth.