The recent well-publicized fiasco with representatives of ACORN giving tax "advice" to business owners (actually undercover journalists) who said they were starting an illegal business points out the difficulty of getting good business tax advice. The story as reported by the Associated Press is that two individuals posed as business owners who wanted tax advice on starting a brothel and hiring underage illegal aliens.
For a detailed analysis of the tax advice, see a recent blog post from The Tax Girl (Kelly Phillips-Erb). Kelly points out that some of the advice was appropriate (filing business income on Schedule C for a sole proprietorship), some was mistaken (saying the prostitute should claim $9,600 as annual income instead of $96,000), and some downright illegal (bringing in illegal underage girls and calling them "dependents"), which, as Kelly says, "does violate local law on a whole bunch of levels."
How to Check Out a Tax Preparer
Here are some ways you can check to see if your tax preparer is legitimate:
- Use the Department of Justice's Tax Division website to see if this preparer has been barred from practicing.
- Contact the Better Business Bureau to see if there have been complaints against the preparer.
- If the tax preparer is a Certified Public Accountant (CPA), you can check with the American Institute of Certified Public Accountants (AICPA) for disciplinary actions or your state's accountancy board to see if the CPA has any charges against him/her.
- If the tax preparer is an attorney, check out the preparer on your state's bar association.
- You can also check with the IRS Office of Professional Responsibility (OPR) for enrolled agents or the oversight agency in states that license or register tax preparers.
How to Spot Bad Tax Advice
Here are some "red flags" to look for when you are talking to a tax preparer:
- Telling you to hide or not report income. All of your business income must be reported to the IRS, even barter, in most cases.
- Suggesting you take deductions for personal expenses and calling them business expenses. Sometimes it is difficult to know what personal expenses can be deducted (like home business deductions), but if it doesn't sound right to you, it probably isn't. For example, if you have only one phone that you use for both business and personal calls, you may be able to claim part of the expense and specific long distance calls as business expenses, but not the entire monthly cost of the phone.
- Suggesting you take deductions that are not allowed. Again, this is difficult to spot, but you can always go to the IRS website and search for the deduction, to see the limitations and allowable amounts.
- Guaranteeing results or basing fees on a percentage of the amount of the refund. A practitioner may not charge a contingent fee (percentage of your refund) for preparing an original tax return.
- Claiming larger refunds. Avoid preparers who claim they can obtain larger refunds than other preparers. If your returns are prepared correctly, every preparer should derive substantially similar numbers.
If it seems too good to be true, it probably is.
For More Information: How to Work with Business Advisers and How to Get Good Business Tax Advice