Assess Your Needs <i> Before</i> You Hire a Tax Preparer

QUESTION: I have always done my taxes by myself. But when I read a story the other day that said even tax attorneys don’t know how to interpret some of the new laws, I decided that it was time to hire somebody. This is a scary thing for me. I have no idea what is a reasonable price to pay a tax preparer, and I don’t want to pay someone to just put numbers in blanks--the same as I could do for free. But neither do I want someone who will really go out on a limb and get me in trouble. Do you have any advice?--M. W.

ANSWER: Welcome to the plight shared by tens of millions of Americans. Last year, about half of the 100 million Americans who filed individual tax returns turned to professional tax preparers. This year, the figure is expected to be much higher.

All juggle the same concerns you pose.

Before you start making any calls, ask yourself some questions. How complicated is your tax situation? How much are you willing to pay? Do you need tax and financial planning advice or just help with filing?

Your answers are critical because fees range from about $20 per tax form or tax schedule to $250 an hour. And if you go to the tax preparer who charges a flat $20 and expect expert financial planning advice, you’ll be sorely disappointed. But neither do you need a tax attorney if yours is a simple, straightforward tax return.

What can you expect for $20? Tax preparation by someone trained mostly to enter numbers correctly on tax returns. Such preparers generally work alone--putting out their shingle only during the tax-preparation season--or for one of the big chains. They know the basics and probably will be introduced to some of this year’s biggest trouble areas, such as interest deductibility. But if your situation is anything other than run of the mill, you shouldn’t expect such preparers to know how to deal with it.

If you require more expertise, you have four choices: an enrolled agent, a certified public accountant, an attorney or a CPA who also is an attorney.

The enrolled agent is someone who has permission to represent taxpayers before the IRS. To get that permission, one must pass a difficult test sponsored by the IRS or have had at least five years’ experience as an IRS auditor.

Hence, if your primary consideration in enlisting a preparer is knowledge of the tax laws, you can’t go wrong with one of the nation’s 15,000 enrolled agents. And if you want someone skilled at dealing with the IRS, you might consider an enrolled agent who worked five or more years as an IRS auditor. But keep in mind that knowing the laws and knowing how to deal with the IRS don’t necessarily mean that the preparer will aggressively interpet the laws to help you save money. Expect to pay somewhere in the neighborhood of $25 to $150 an hour for an enrolled agent’s services.

With a CPA, you are assured of hiring someone who has passed a bevy of accounting and business courses. But there is no assurance that he or she also is a tax expert. Only about 10% of the nation’s 200,000 CPAs devote their practice mostly to taxes. So you will have to ask each individual you contact about his or her tax expertise. The cost? Roughly $50 to $200 an hour.

Unless you have some legal complications that make your tax case unusual, hiring an attorney to prepare your taxes is overkill. Even lawyers who are skilled in tax law often send their clients’ tax returns to a CPA for the actual preparation. This means you wind up paying for two minds instead of one--anywhere from $75 to $250 an hour.

If a lawyer’s services are required, however, be sure to find one who acquired a master’s degree in taxation after getting his or her law degree. Or if you prefer going to the top of the heap, find an attorney who also is a CPA.

Q: Do you know what is meant by a Rabbi trust?--P. E.

A: It is a device for deferring compensation and was so named because its first recipient was a rabbi.

Such trusts often are used to protect certain employees against changes in management or against any change of heart by the management that agreed to the plan.

Typically, a Rabbi trust will be employed if an employer doesn’t want to lose the services of a prized employee--or doesn’t want him to take his talents elsewhere--and the employee wants to lock in for a certain number of years the promises this boss is making.

The employer generally puts cash or other assets into a trust and sets up a payment schedule. The employee is guaranteed ownership of all the assets but bases his annual tax bill only on the assets he actually receives.

Hence, the company’s management can’t spend the trust assets on other things or arbitrarily decide to scrap it. That also protects the employee against a new management that might not share the former managers’ concerns for this employee.