Ultimate Guide to Outsourcing Your Tax Preparation
Read Time: 25 minutes
Table of Contents
Tax preparation is the absolute first thing you should outsource for your business.
It is likely that most of your adult life, you’ve handled your own tax preparation. It was easy. You could put the data into software within 15-minutes and voila! you were done!
Now as a business owner, you have moved into more complex situations with tax codes and regulations that you never had to think about before.
You may also be thinking that you’re not at the stage to outsource tax preparation, you’ll handle that when you hit a certain revenue target. It is never too soon to start getting professional help.
The IRS doesn’t care if you are in your first year or fiftieth year of business. You have the same tax code to follow in both situations and they are going to expect your return to be done properly.
Having a tax professional from the start will give you so much guidance and help reduce your stress, panic, and overwhelm. They are there to utilize, analyze, and apply the tax code to your personal situation while also doing their best to find favorable tax positions to help maximize your after-tax income.
Pro Tip: Set aside money each month to pay for your taxes AND a tax professional.
Top 5 Reasons to Outsource your Tax Prep to a Tax Professional
#1: Tax Law is Complicated
Straight up. There are exceptions to exceptions to exceptions. And it’s hard to keep up with all of that, especially while trying to run a business.
What’s worse is that the general resources that are available to the general public are fairly limited and are often unreliable. They could be outdated, interpreted or explained wonky, or straight out wrong. Many times, what you find is a blog post written by someone who doesn’t have any experience in the tax industry. They likely Google searched their answer or regurgitated what they remember their tax professional saying to them.
Contrary to popular belief, taxes are not “one size fits all” where one business owner will have the same tax position as the next. In most cases, the answer to your tax question depends greatly on your individual situation.
General rules and regulations exist that can be extremely beneficial for you to learn and get a general idea of, but the exceptions to exceptions and the application of those rules vary depending your situation.
There are so many variables involved and various criteria that would need to be discussed before providing any guidance and for someone to give you a definitive answer without knowing your variables and criteria would be negligent.
Tax professionals should also have access to paid research resources that are not available to the public and will take continuous education every year as well.
Note: Tax software is not smart enough to handle “complicated” tax returns.
#2: It’s Time-Consuming
Running a business takes a lot of time, energy, and effort. As a business owner, even with Google at your fingertips, you don’t want to spend your time trying to keep up with all the tax changes, nuances, and exceptions.
The tax law actually has the ability to change yearly, so tax professionals must stay up-to-date on the regulations to ensure they still exist. Not only that, it takes a lot of your time to research each uncertain transaction to determine what the appropriate tax treatment is.
According to the IRS, the average amount of time needed for tax activities can vary from 20 hours to 280 hours, on average. This time refers to form completion & submission, recordkeeping, tax planning, and more; with the majority of the time spent on form completion & submission. Most small businesses who are sole proprietors or single-member LLCs will spend around 20 hours on their return.
+ Tax activities refers to: form completion and submission, RECORD KEEPING, tax planning, and more; with the majority of time spent on form completion/submission in most cases.
* Small refers to any business with less than $10 million in assets at the end of the year.
Data supplied from 2019 tax form instructions found at irs.gov.
#3: If An Audit Strikes
I know a ton of individuals are terrified of the idea of getting audit audited. The concern and worry people have over audits is almost palpable.
While, there are things to look out for when it comes to filing your tax return that are common “red flags” to the IRS, avoiding an audit should not be the focus when preparing your tax return or making any decisions on what is allowed and what isn’t.
When working with a tax professional, they have a professional code that they must follow. That code even states that when making a decision, you cannot look at how likely an audit would happen. You must focus on what is the chance you have at winning an audit, if an audit were to happen. I believe the professional code has that percentage as somewhere between 75 & 85%, but each professional may have their own range.
Now, if an audit does strike, it will be really handy to have a tax professional who can represent you before the IRS (CPA, EA, and Tax Attorneys) and many of them may have audit assistance available through them or a third-party.
Audits can be messy, stressful, and a lot of work. Having a tax professional helps increase your chances of winning the audit and can even take some of the work off your hands so you can focus on other things.
#4: It’s A Lot To Go Through Alone
You know all things tend to be better when you have someone in your corner and a second set of eyes on whatever you’re working on. Think about how many times you’ve had someone review your work. It always felt better having someone else look it over before moving forward.
The same is true for your numbers. Having someone help review and point out anything that doesn’t make sense or is cause for concern is extremely beneficial.
For your actual tax return, tax professionals have procedures, checklists and various steps they go through until they feel confident with your return. They have a TON of resources to help make sure they do the absolute best they can for you.
#5: Protect Your Mental Health
Let’s be real. Tax season, preparing taxes, basically all things tax related, will cause you a lot of stress, overwhelm, worry, anxiety, and so much more. It can really suck and oftentimes, it causes you to avoid it until you’re rushing around last minute scrambling to get it done.
Tax professionals tend to be very weird creatures who thrive during tax season. They find it exciting, fun, and diving into the tax code brings them joy. Letting them handle the tax code burden will help alleviate your feelings and make you feel much lighter.
While, you have to remain involved in the situation, it’s in a way more relaxed way.
Top 10 Warning Signs of a Potential Tax Professional
I know one of the hardest parts of outsourcing tax professionals is trying to find the right one. There are tons out there all with a varying degree of experience, certifications, skills, and knowledge.
While I will share some questions to ask tax professionals later on in this blog, this section will focus on the top 10 red flags that I see happening in the industry, why it is important, and how to do due diligence around this area.
#1: They don’t have a PTIN number
The PTIN (Preparer Tax Identification Number) is required by the IRS in order to get paid to prepare a tax return. If they do not have this number, they are not legally able to prepare a tax return for you.
Due Diligence?: Ask! Ask them if they have a current PTIN number. You can even be clever and ask when it expires to test them. They all expire December 31 each year.
Note: Tax professionals guard their PTIN the same way you guard your SSN.
#2: They don’t have an ETIN number
This number is required if you prepare 10 or more tax returns and stands for Electronic Filing Identification Number. The IRS required tax preparers who prepare 10 or more returns to eFile the returns (unless there is a good reason not to.)
Due Diligence?: You can ask, or you can look them up! Ask them what their zip code is where they are registered and put it into the IRS’s eFile Lookup. You are going to want them to be an Electronic Return Originator (ERO) at least! This means that they are able to eFile the return themselves and don’t have to use a third-party to eFile your return.
#3: They refuse to sign the tax return
If you pay someone to prepare your tax return, they are required to sign the tax return. This signature means they have responsibilities and professional guidelines that they must abide by.
Due Diligence?: Inquire how the process works and who signs the return. Don’t ask them if they sign the return, ask them who signs the return. The correct answer is the tax preparer AND the tax payer(s).
#4: They ask you sign a blank return or a blank form of any kind
This may seem like common sense, but it happens – a lot. You want to trust the professional(s) you hire and want to believe they are doing things the legit way.
As you wouldn’t ever sign anything you didn’t read, don’t sign anything that you can’t review.
I don’t care if their reasons make sense and I don’t care what they say. All items you sign should have something for you to review (numbers and/or text)
Due Diligence?: This one is a bit harder to do your due diligence for, but asking about the process can definitely help. If it ever gets to this point, I’d refuse to sign it and request a document where it shows the actual data you are agreeing to.
#5: They don’t provide you with a draft of your return
Contrary to popular belief, even if you hire someone to do your tax preparation for you, you are still responsible for the tax return. You MUST review your tax return and ensure you agree to it and sign off on it before your tax professional files it. This is VITAL.
Due Diligence?: Again, asking for their process on working together will help a lot. If they plan on providing you with a draft of your return, they will list that as a step. They won’t forget this because (if they do it properly) they cannot eFile your return without you signing an eFile Authorization form (Form 8879 for federal, some states have their own) giving them permission to do so, which they should provide after you approve the draft of your return.
Pro Tip: Form 8879 includes a summary of your tax return info, verify it matches the return you approved!
#6: They don’t require certain documents from you
The IRS requires tax professionals to use specific source documents when preparing the tax return. Anything that has been filed with the IRS (it’ll have your SSN/EIN on it) will be one of those items; such as, 1099s, W2s, interest statements, brokerage statements, K-1s, etc.
If you have a business, best practices is to request the income statement, balance sheet, and general ledger. However, most smaller businesses likely don’t have a balance sheet. Thus, they should request an itemized list of all the transactions that made up each account (general ledger). My revenue/expense tracker located in my Battle Plan Bundle includes all of these financial statements!
Due Diligence?: Ask them what documents they will need from you. If they say they’ll accept something like the last paycheck stub you received, this isn’t going to work. There is a high chance that the last paycheck stub will be missing information or counting for another year’s income.
#7: They promise a higher refund than their competitor or
they promise you a certain tax refund
This is one of the BIGGEST things I see happening that infuriates me the most. There is no way that they can promise you a refund of any size without knowing your tax situation. NO WAY.
Even if they say something like “if you have a child, we can get you a refund of $2,000!” – this is still a red flag. Why? because various tax credits that seem obvious are often phased out so without knowing your situation, there is no way they can promise you a certain refund.
Also, this encourages them to take risky tax positions on various items (likely without consulting you first) to get you the refund they said they could.
Due Diligence?: While you could ask them what refund you can expect, I’d look at their marketing material here. This is often found on websites, social media, and any ads/posts you stumble upon as it is typically part of their marketing to get new clients.
#8: Their fees are based on a percentage of your refund
Tax professionals are required to follow certain regulations found in IRS’s Circular 230 relating to the tax services they provide. Included in these regulations are rules against contingency fees. While, there are some exceptions (expect nothing less from the IRS), they won’t generally be in place for the actual filing of your tax return.
Due Diligence?: Ask how they calculate their fees. Oftentimes, it will be done hourly, based on complexity (number of forms, number of states, etc), or something else.
#9: They request you pay them for any taxes, penalties, or interest owed
They let you know that they’ll pay the taxing authorities on your behalf, you simply have to pay them the money and they’ll pass it on.
Does this give you a long lost uncle AKA: Nigerian-Prince vibe, or is it just me?
Either way, it is a similar situation. They could be telling you that you owe more than you do and keeping the difference or they aren’t remitting the amount to the IRS and you end up with an overdue tax bill. It’s very simply to pay your taxes as they want you to pay your taxes!
Due Diligence?: I will admit that this is a hard thing to prepare for, you might not know until you get to that point. You could ask: “If I owe taxes, how do I make that payment?”, but that might be a weird ask!
Note: Some tax professionals have software that will pay your taxes owed through an auto-draft!
Disclosure: I’m not referring to the tax professionals who ask if you’d like to set up in their software to have your taxes paid through an automatic draft. This set-up doesn’t allow the tax professional to ever access your money as the money goes directly from your bank account to the appropriate taxing authorities.
#10: They request you use a direct deposit account that you do not have access to.
The tax preparer will say something like “this is a quicker way to get your tax refund” or “this way I can take my fee out without you having to worry about it”. Which could work, but I find it to be shady and could potentially cause some issues down the road.
I do see tax preparers provide an “advance” of your tax refund before they file your return and then the direct deposit will get deposited in their account to “pay them back”. This is a fine situation if you feel comfortable with it and you feel you have no other choice, just know that the advance they give you will likely be less than the refund you receive and you will be charged extra service fees or interest for going this route.
I had a friend who hired someone who did this and was told it would cost $100 for their tax return (which is crazy low!) and the tax preparer took out $700 instead.
Due Diligence?: I will admit that this is also a hard thing to prepare for, you might not know until you get to that point. You could ask: “If I receive a refund, how do I get access to the payment?”, but that might be a weird ask! You can also ask how they accept payment and what the payment process looks like. If they mention taking it out of your refund as the ONLY option, you may want to consider someone else.
Top 10 Questions to Ask a Potential Tax Professional
I wanted to give you all a list of questions to ask any potential tax professional you are looking to hire as I know a lot of potential clients I met with had no idea what to ask me.
The perk of asking these questions is not only to gain insight on how well of a professional fit they are for you, but to determine the personality fit with the professional. Do you like them? Do you feel comfortable talking to them? Do they talk down to you? Do they explain things in a way that makes sense?
Please note: these questions are in addition to the “Due Diligence” questions from the above section. You also do not have to ask all of these questions, it is up to you to ask what makes the most sense for you. Make sure to ask enough for you get a generally solid idea on if you feel they are a good fit for you!
Note: While I do talk about inquiring on payment processes, the price shouldn’t be the first thing asked.
#1: What are your credentials?
An unfortunate fact about the tax preparation industry is that it is barely regulated. Yes, they have to have a PTIN and EFIN to get paid to prepare tax returns, but basically anyone can get these. There is zero education, training, experience, testing requirement that is tied to being able to be a paid tax preparer.
When someone is a CPA, EA, or Tax Attorney, you can feel a bit more comfortable knowing they have education, experience, training, and testing to support receiving that credential. They are also the only individuals who have unlimited representation rights before the IRS.
The IRS has a website that allows you to search for tax return preparers to determine the credentials/qualifications they have. This can be a great way to ensure they have the credentials they say they do.
#2: How do you keep up-to-date on tax law changes?
A little known fact is that the tax law actually changes each year. While there are large, publicly-discussed tax law changes (as we’ve seen with TCJA and COVID-relief programs), there are annual changes that could occur.
A lot of the tax code laws expire at the beginning of the current year or the end of the prior year, and the Congress releases information to let tax professionals/the public know which were renewed for the appropriate tax year and which weren’t.
#3: Do you have insurance?
You want to be protected in case anything goes wrong! Generally, tax professionals will have errors and omissions insurance and perhaps cyber insurance (especially if they have anything stored virtually).
You can ask for proof of insurance if that makes you feel more comfortable or you can ask and see what kind of insurance they have.
#4: What is your philosophy on deductions?
Maybe this seems like a weird question to ask, but hear me out. You want to know how risky they are willing to be and if that aligns with how risky you are. If they are more risky that you are, you will not be comfortable working with them. If they are less risky than you are, you might be disappointed with their services.
There is a professional standard for CPAs where the tax position we choose to have must have a “realistic possibility” of winning if an audit was to occur. Basically, we are not allowed to take a tax position based on the likelihood of an audit, but rather the chance the IRS will agree with us in an audit. They should also discuss any positions that are not clear-cut with the tax payer and potential penalties for that position.
Note: IRS historically used 40% chance of success – each professional uses their own percentage.
#5: Do you have experience with my type of business?
You will want to adjust this question to relate to your business specifically. You want to ask if they have experience working with businesses within your industry, your business entity type (LLC vs C Corp), your state, and anything else relating to your situation.
You can also use this question if you do not have a business, but ask about something similar to your situation: your state, your activity, etc.
They don’t HAVE to have experience for you to work with them, but it is an important factor. If they don’t have experience, they should share why they feel like they can successfully handle your tax return. You can also ask this if they don’t initially share.
#6: Will I have a team working on my tax return?
Follow up questions, as applicable:
- Will they be the same next year, if we keep working together?
- What security/protocol do you have in place to protect my information?
- Will you be the individual signing the return?
- What does that look like behind the scenes?
You can decide if you feel comfortable with a team or if you want only one person to work on your return (the person you are talking to). It is not unusual for an accounting firm to have a team of people working on the return with the person you are talking to being the one that signs off on the work.
With the team, the firm should be doing their due diligence to ensure that they are hiring competent individuals who are not a security risk with background checks and/or security requirements.
#8: How will we communicate and how often?
It is so important to make sure that the way they communicate lines up with how you feel comfortable communicating. If they want to have phone calls with you, but you have terrible phone anxiety, that might not be the best route to go.
You also will want to know how often they plan on communicating and when you might expect to hear from them. Will they be contacting you only when they need something? Do they have an email newsletter you can be part of?
#9: What is the timeline for getting my tax return done?
This depends a LOT on you and how quickly you get back to your tax professional, but it is good to know what their general guidelines are. Just be aware that the general guidelines are “best case” scenarios and things can come up to make it not possible to meet their initial plan.
Most tax firms that I’ve chatted with or have been apart of try to have a 14-day turnaround time. This is not standard, but don’t be surprised if you hear 14-days and you want 3.
#10: Will I have access to you throughout the year?
Sometimes something comes up after you have completed your tax return. Are they comfortable with you emailiing them in August with a question? It is important to know what that boundary is before you get into that situation and to make sure it aligns with you.
A few other questions that relate to this:
- What if something comes up after tax season?
- What happens if my tax return needs to be amended?
- What kind of questions are you comfortable with me emailing you?
- Do you have any resources I can have access to? (email list, blog, etc)
Along with this, I’d suggest making sure you are very clear on what is included in the tax preparation services if you were to work with them.
Your responsibilities as the taxpayer
I want to repeat myself here: even though you hire someone to handle your tax return preparation does not mean that you have zero responsibilities from that point on. You always have responsibilities regarding your tax preparation, but as soon as you decide to outsource, your responsibilities will go as follows.
Finding a tax professional
The first step in outsourcing your tax preparation is to find a tax professional who can help you. There are a ton of ways to go about finding a tax professional: Google search, ask colleagues/friends for referrals, browse social media, and more. Make sure you still do your due diligence, regardless of how you found them, to ensure they are the right fit for you and you understand what you are receiving if you work with them.
Something to note is that there are a lot of big box stores out there that offer tax preparation services. These are NOT tax professionals. The individuals handling your tax return at these big box stores had about two-weeks of training and know how to input your data into their software. You are simply a tax return to them and they charge fairly high (from what I hear!) given their “qualifications”.
A tax professional will have years of training, have experience in multiple areas, know how to handle research, know what to look for and what things you could have forgotten, and so much more. They are there to help you succeed, they care about you, they are your advocate and are completely on your side.
Provide all documents and documentation requested
Most tax professionals will not start working on your return until they receive all the documentation they are aware of that you need to provide. If you told them that you had a job, they will expect a W2 and will not start working on your return until they receive it.
It’s VERY challenging to bounce in and out of the same tax return multiple times, so most tax professionals will avoid it at all cost. The reason for this is because we are working on TONS of tax returns and each time we get back into a return after an extended period of time, we have to review everything all over again to pick up where we left off. Even with notes and other details, this still happens.
The tax professional may also discover that some information is missing that they weren’t initially aware of, when they send the request for this information, provide it to them within a reasonable amount of time. Reasonable can vary, but 1-3 days (including weekends!) is what I’d say is reasonable.
We can’t get through our tax season without your help and I know that if you’ve read this far, the last thing you want to be is a Pain In The Ass (PITA) client.
Note: Tax professionals work 60-70+ hours a week during tax season!
Answer the questions asked as timely as possible.
Obviously? Perhaps. But this is huge. A lot of times the tax professional is waiting for you to get back to them so they can wrap up your return, similarly to providing documentation.
What sets this apart and the reason I listed it separately is because sometimes, those questions are very uncomfortable.
When a tax professional is working on your return, they are seeing a lot of your personal data, various transactions, how you spend a good chunk of your money, and more. There are times when we see something that is cause for concern; such as low income but high expenditures.
We may ask you “I see you have $20,000 in out-of-pocket medical expenses, but you only made $8,000 last year, how did you pay for this as well as your daily expenditures?”
We aren’t asking this because we’re weird, nosey, and/or jerks. We’re asking this because it’s a “red flag” on our part and we are required to do OUR due diligence to ensure that we aren’t participating in fraud to the best of our knowledge.
Review the draft of your tax return EXTENSIVELY.
You are 100% responsible for your tax return whether you pay someone to prepare it or not. You still sign the return and in doing so, you are saying that you agree with everything on the return.
Take the time to review your return and look for anything that doesn’t make sense to you. Verify numbers, spelling, addresses, and check boxes. If something feels off or is confusing, make a note of it to discuss with your tax professional.
Ask any and all questions you have, until you understand completely
If there is anything that you see on the draft of your return (or if the tax professional brings something up to you) that you do not understand: ask as many questions as you need to.
I want you to keep asking questions until you completely understand what they are saying.
I want you to keep asking questions until you feel completely secure and comfortable with the tax return they provided you.
I want you to ask so many dang questions. SO MANY.
I’ve had some really lovely clients who tell me that their tax professional did something, but they didn’t understand it when they explained it.
I don’t expect you to understand it when they explain it to you. All I can say is keep asking questions, ask them to explain it again, ask them to explain it in a different way, ask how it will affect you this year and in future years, ask why they think it is the right way of handling it, ask for the potential risks/penalties, ask all the clarifying questions you have to!
Pay all of the taxes, interest, and penalties owed to all taxing authorities
When you sign off on your tax return, you’ll receive an eFile Authorization (or paper copy, if you chose to file paper) to sign so that the tax professional can file your return. Now, it doesn’t matter if you file your return in February, April, or July – your taxes will still be due on the tax deadline: April 15, for most taxpayers.
By the time April 15 rolls around, you need to have paid any taxes, interest, or penalties that have been accessed to all taxing authorities as applicable (IRS and state).
The IRS lets you pay completely online using their online portal. Most, if not all, states also have an online portal that you can find by searching “(state) online tax payment”
Use the box below to leave any questions, comments, or feedback you have!