Buyer Education VI

A couple more tips to protect you from the unscrupulous preparers out there.

Contingency Fees Are a No-No!

Actually, they aren't always but they are on an original return. Ok, let's look at the real world. You call a new preparer and of course you ask about fees. You probably won't get an exact quote but they should explain how they calculate fees. I charge by the forms required to prepare the return. (I'll add a time charge if I need to do bookkeeping first.) Some preparers just use time. Others based their fee on the level of complexity. But if you are told the fee is based on the refund, thank them and keep looking. This is a contingency based fee and the preparer now has a interest in the outcome of the return. The bigger the refund the bigger the fee.

Joe Taxpayer has his W-4 set to about break even. He usually gets a small refund (under $100). If he uses a  preparer charging a 10% contingency fee, he will pay $10 or less to get his return done. Not too many preparers will settle for that fee for even a W-2 only return. So if the preparer wants to make money, it is in his/her best interest to beef up the refund. Legally or not. Remember, if there is a problem with the return, you and not the preparer will have to pay the IRS. If you can find the preparer when the notice comes.

The restriction against contingency fees is on an original return. Jane Taxpayer's preparer has read about a new ruling that might benefit Jane if a back year is amended. That return, since it is not the original return, may be subject to a contingency fee. If the IRS approves the change and refunds Jane, she will pay her preparer. If the IRS doesn't approve the change, the preparer is not paid.

The idea behind contingency fees is why a taxpayer needs to be careful with all the car lot and pawn shop type businesses offering tax preparation. They have a vested interest in the size of refund and that can make it very tempting to create a few deductions.

Receive But Not Cash.

Some tax practitioners can receive your refund check. But, they have to be able to practice before the IRS. This means an Enrolled Agent, CPA or Attorney. They have to have a signed  Power of Attorney (Form 2848) filed with the proper box checked. But they can't cash the check even with your permission. And an un-enrolled preparer (anyone not specifically mentioned above) can't receive it at all. Do not have your refund sent to anyone but yourself. This is a good way to lose your refund. Besides your refund, this will be the address the IRS and state revenue office will send notices.

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