Starting an Income Tax Preparation Business

Summary: The income tax preparation business involves preparing income tax returns for individuals and families.

Outlook: Demand for income tax preparation services should remain strong as the tax code continues to become more complex and difficult to understand. Many people prefer to let a professional income tax preparer file their income tax returns rather than preparing the returns themselves.

Earnings: Self-employed income tax preparers can earn $25 per hour and more. The relatively short tax season (late January through April 15) does limit the annual income possibilities. However, this can be supplemented by preparing quarterly returns for self-employed individuals and small businesses.

Start-Up Costs: $0-5,000

Equipment: Computer, Laser Printer, Internet Access, Tax Preparation Software (recommended but may not be required)

Detailed Overview

The income tax preparation business involves preparing and filing income tax returns for individuals and possibly small businesses. The income tax preparation business works well for people with a background in accounting, bookkeeping, or who are just good with details and numbers. This business is also quite seasonal so it may be attractive to people who prefer to work hard for a few months and then have some time off. Income tax preparation can also be used to earn extra money during the winter months. I have prepared income tax returns on a part-time basis for quite a few years and earned some decent extra money for my services.

Many people assume that tax preparers must be an accountant or have a business degree but this is not the case. The IRS has no formal training or certification requirements for income tax preparers. However, the lack of formal requirements does not mean that income tax preparers do not need to be qualified and competent. You should never take on returns that you are not confident you can prepare correctly and accurately. This would be unfair to customers and risk creating problems for yourself as well.

The income tax preparation business should remain strong for the foreseeable future. The complexity of the tax code, frequent changes to the tax code, and a general fear of the IRS by the average consumer all guarantee job security for income tax preparers. Despite occasional rumblings in congress about simplifying the tax code it remains as complex as ever.

Tax preparation can be a profitable business for a few months each year. The season starts in late January or early February and lasts until April 15. A few late customers will still file after the April 15 deadline. Most income tax preparers charge from $30-60 per hour though some are able to charge even more [1]. Clients are often billed per form rather than per hour. This billing system simplifies cost estimating but may take some practice to figure out exactly how to price each form.

Startup Costs/Equipment
You will need a computer, laser printer, Internet access and tax preparation software for your income tax preparation business. Tax preparation software is an invaluable tool as it reduces errors commonly associated with paper returns, facilitates electronic filing of returns, and is usually much faster than using paper forms. Further, IRS regulations require paid income tax preparers to keep copies of all income tax returns that they prepare. Filing returns electronically makes it much easier to keep records Many states now require tax preparers to e-file customer returns and the IRS strongly encourages income tax preparers to do so [2]. There are a number of professional income tax preparation software solutions [3], including:

• TaxAct from 2nd Story Software
• ProSystem fx Tax from CCH
• Tax Program from Drake Software
• LaCerte and ProSeries from Intuit
• InelliTax from Orrtax Software Solutions
• Taxsoftware.com from Taxsoftware.com
• Taxworks from Taxworks
• UltraTax CS from Thomson Tax & Accounting
• ATX MAX from Universal Tax Systems, Inc.
• TaxWise from Universal Tax Systems, Inc.

You will also want to obtain a Preparer Tax Identification Number (PTIN) from the IRS. IRS regulations require paid preparers to list their name an contact information, including a preparer identifying number, on all returns that they prepare (IRC section 6109(a)(4)). Preparers who do not have a PTIN assigned by the IRS must list their social security number on the returns. Needless to say many income tax preparers prefer to obtain a free PTIN rather than list their own social security number on dozens of paid returns each year!

Starting an income tax preparation business with no experience or training is probably not a good idea. There are, however, several ways to obtain training as a tax preparer if you are not comfortable with your level of experience.

One option is to work for a tax preparation firm that will provide training. You can also take an online or local tax preparation course prior to the start of tax season. H&R Block [4] and Jackson Hewitt [5] both offer low-cost tax preparation courses each year as a way to find qualified employees for their companies. Several other companies also offer income tax preparation training. Some programs also include certification upon completion of the course which can be used in your marketing to set yourself apart from other preparers who are not certified by any recognized organization.

The IRS, in partnership with community colleges and state universities, offers Tax Practitioner Institute Classes at various locations across the country. These classes are designed to provide continuing education credits for tax professionals at a reasonable cost. Course topics vary by location. More information is available on the IRS website [6].

Some people may also prefer to study income tax preparation on their own. There are many resources available to study but the best place to start is actually with the IRS. The IRS has many articles and downloadable publications detailing every aspect of the tax code. The reading is sometimes rather dry and dull but you will be able to learn the rules with accurate information. You can then expand your study to additional resources.

Marketing/Advertising
Successful marketing is critical to any business. However, seasonal businesses like income tax preparation have less margin for error in marketing campaigns. This makes it very important that marketing campaigns deliver the necessary customers the first time.

Networking with family, friends, and associates is obviously a great place to start when marketing your new income tax preparation business. Offering referral bonuses to those already in your social circle can also yield new customers. People tend to trust business and professionals recommended by someone they know and respect.

Every business needs a website and an income tax preparation business is no exception. Your website should contain basic information about your business, your experience and training, the services you offer, and contact information should customers wish to contact you. Including your website address on business cards, letterheads, signs, and any other printed material allows you to expand your direct marketing. Adding more information to your website is free; adding another page to a mailing costs money.

Offering group rates or discounts to employees of local businesses or organizations is also a good way to find new customers. Many customers who might not have heard of your business will hear about your business through their employer or organization. Further, everyone likes to get a good deal and to save money. Offering a discount to select groups entices people to try your business while bringing in new customers at lower cost than advertising in traditional media.

Marketing your income tax preparation business really requires creativity and imagination. Be willing to try new ideas and adapt ideas that have worked in the past to new markets and circumstances.

Taking Your Income Tax Preparation Business to the Next Level
Expanding the services you offer would allow you to turn a seasonal income tax preparation business into a year-round business. Two reliable ways to expand your seasonal income tax return business include preparing quarterly returns for freelancers and self-employed individuals and becoming an enrolled agent (EA).

Freelancers and self-employed people are required to file estimated earnings reports quarterly. Return preparation for self-employed people also tends to be profitable as the returns are more complicated and require more forms.

An enrolled agent (EA) is an IRS designation referring to a tax professional who is recognized to represent taxpayers in IRS hearings and audits. According to the IRS, "An enrolled agent is a person who has earned the privilege of practicing, that is, representing taxpayers, before the Internal Revenue Service. Enrolled agents, like attorneys and certified public accountants (CPAs), are unrestricted as to which taxpayers they can represent, what types of tax matters they can handle, and which IRS offices they can practice before" [7]. Becoming an enrolled agent requires passing a written exam (Special Enrollment Examination or SEE) and background check. While becoming an enrolled agent is not for the faint of heart it does provide the opportunity to bring in revenue for your business throughout the year.

Conclusion
Starting an income tax preparation business if not for everyone. Many people are intimidated by the IRS and the complexities of the Internal Revenue Code (IRC). Of course, this is exactly what makes income tax preparation a viable business!

Income tax preparation is not a good option for everyone - but for those with the ability to understand the details of the tax code, good attention to detail, and a willingness to stay on top of ever-changing regulations, an income tax preparation business can be a great business to start.

SOURCES

1. http://www.hometaxbusiness.com/tax-articles/is-a-tax-franchise-right--124.html - Accessed on 9 June 2009
2. http://www.irs.gov/efile/article/0,,id=120335,00.html - Accessed on 9 June 2009
3. http://www.hometaxbusiness.com/tax-articles/right-tax-software--215.html - Accessed on 9 June 2009
4. http://www.hrblock.com/taxes/planning/tax_courses/index.html - Accessed on 9 June 2009
5. http://www.jacksonhewitt.com/tax-preperation-school/ - Accessed on 9 June 2009
6. http://www.irs.gov/businesses/small/content/0,,id=142334,00.html - Accessed on 9 June 2009
7. http://www.irs.gov/taxpros/agents/article/0,,id=100710,00.html - Accessed on 9 June 2009