Tips for Choosing a Tax Professional

The IRS recognizes attorneys, certified public accountants, enrolled agents or actuaries, or one who has a direct affiliation with the taxpayer through a business relationship, such as an officer of the taxpayer's organization or a full time employee of the taxpayer. All such individuals can act on behalf of a taxpayer. Additionally, a member of the taxpayer's immediate family may also represent him or her.

If you are seeking out a "tax professional" because of an IRS problem, a recent audit or due to a proposed assessment letter you've received, having an understanding of these designations is critical to the successful outcome of your case.

An Enrolled Agent is an authorized tax practitioner who is recognized by the IRS as technically proficient in the field of taxation and who is empowered by the Department of the Treasury to represent a taxpayer before all administrative levels of the IRS. An enrolled agent is schooled in a specific knowledge base regarding individual and business taxes, where as attorneys and CPAs may not be.

Only Enrolled Agents are required to demonstrate to the IRS their competence in matters of taxation before they may represent a taxpayer. Unlike attorneys and CPAs, who may or may not choose to specialize in taxes, all Enrolled Agents focus on matters of taxation. Enrolled Agents are the only taxpayer representatives who receive their right to practice from the U.S. government; CPAs and attorneys are licensed by the state or states they choose to practice in. When searching for an individual to represent you, keep this distinction in mind.

In order to authorize an individual to represent you before the IRS, a Form 2848 must be completed and signed. All of the above individuals can sanction themselves using this form and thereafter be recognized by the IRS. Additionally, Form 2848 also makes an allowance for Student Attorneys and Student CPAs. The only designation on the form that has limited representative powers is the Unenrolled Return Preparer.

An Unenrolled Return Preparer is an individual other than an attorney, CPA, enrolled agent, or enrolled actuary, who simply prepares and signs a taxpayer's return. These individuals are "unenrolled," or do not hold the documented certification that the enrolled agents possess. More to the point, anyone who works at an H&R Block, a Jackson-Hewitt, or another tax preparation agency may be unenrolled.

The Unenrolled Preparer is eligible to represent a taxpayer only with regard to a tax issue arising from a return that they themselves prepared, and ONLY if that issue or liability has not become delinquent to the point it has been turned over to IRS collections or appeals.

In a 2008 article titled "TIGTA: Unenrolled Preparers Often Wrong" that appeared in the December 2008 edition of the Journal of Accountancy, some startling results were brought to the fore. TIGTA is a branch of the IRS that has oversight over IRS activities and is committed to the prevention and detection of fraud, waste and abuse within the IRS and related entities.

The article said: "Unenrolled, unlicensed preparers had only a 35% accuracy rate in preparing income tax returns, in a test conducted by the Treasury Inspector General for Tax Administration. More than one-third of the erroneous returns contained misstatements or omissions that TIGTA considered willful or reckless. TIGTA auditors posed as taxpayers earlier this year at 12 offices of commercial tax preparation chains and 16 small, independently owned offices. Of the 28 tax returns prepared, only 11 were prepared correctly, TIGTA said. If the 17 erroneous returns had been filed with the IRS, they would have resulted in $12,828 in underpaid taxes."

Upsetting indeed. That being said, it would be wrong to categorize all preparers that are unenrolled into this group. Many of them have taken extensive training that is mandated by the company they are working for. Others however, may be fly by night temporary employees hired due to the influx of business come tax time. In fact, the amounts charged by tax prep places can be surprisingly high. Most of these filers simply plug your information into a program, like TurboTax, which of course anyone is free to do. In fact, the IRS always collaborates each year with reputable, free tax preparation companies, where you can e-file your taxes, free of charge, directly through IRS.gov.

Any other individual, other than those already discussed, who desires to authorize themselves before the IRS in order to represent a taxpayer must file Form 8821, Tax Information Authorization. This form is an acknowledgement that the taxpayer has authorized a third party to act on their behalf. The third party needs no credentials and does not have to hold any affiliation with the taxpayer.

According to the instructions that accompany this form, the 8821 "...does not authorize your appointee to advocate your position with respect to the federal tax laws; to execute waivers, consents or closing agreements; or to otherwise represent you before the IRS." Essentially, an 8821 designee can talk to the IRS about your situation, but has no ability to resolve matters absent the taxpayer's consent. For this reason, before you "hire" someone, see what, if any, designation they have.

A determining factor as to who one chooses to represent them obviously has much to do with the issue at hand. As discussed, a taxpayer with a serious delinquency or liability, or an individual who has been subject to enforcement actions such as levies, liens, or possible seizures and sales, may desire to seek out qualified and personable assistance. This assistance is likely best to come from an enrolled agent or an attorney / CPA that specializes in taxes or who has perhaps worked for the IRS at one time.

However, it should be noted that a third party, no matter what their credentials are, has no ability to offer any type of resolution that is not available directly to the taxpayer. While an authorized representative may have a heightened awareness of IRS policies and be able to navigate IRS regulations better than you are, the IRS does not present alternative resolutions to them because of whom they are.

This is a significant detail, especially considering the "pennies on the dollar" approach that is consistently promulgated in the media. There is NO formula that the IRS uses that equates to paying a reduced percentage of each whole dollar owed. The ONLY arrangement the IRS has whereby a taxpayer can offer to pay less is a program called Offer in Compromise.

If you notice, most of these companies advertise that if you owe the IRS $10,000 or $15,000 or more, they can help you. This dollar threshold is mentioned because it's unlikely the IRS will accept a compromise on the amount owed if a taxpayer has the ability to pay it in full over time. The Offer program is designed for taxpayers who have extremely high and unmanageable debt, and who demonstrate through providing detailed financial statements, that they cannot make full payment or borrow to full pay over the remaining amount of time left on the collection statute (generally ten years from the date the tax has been assessed).

Tax resolution companies know this, and thus attempt to draw in potential clients who have a large tax debt. However, the acceptance of a taxpayer's offer is not simply based on the total amount owed. Rather, the basis for compromise largely has to do with the taxpayer's ability to pay now, and what their future earning potential may be.

This program is available directly to taxpayers. It is not uncommon for a tax preparation or resolution firm to charge upwards of $1,000 to prepare an Offer in Compromise, in addition to the $150 application fee and the up-front payment the IRS requires as they consider your offer. Better to research it yourself. Check out the IRS Offer in Compromise page.

To conclude, first identify the issue at hand. For simple tax preparation, see if you can do it yourself for free. For matters that are more consequential, make sure you choose an individual with the proper credentials and experience. Don't be duped into thinking that the IRS will not work with you. They will! Moreover, you may be surprised at how straightforward and uncomplicated the process can be.