Tax Preparation Double Talk

Tomorrow is not just Valentine’s Day. It’s also the first day the IRS will accept tax returns containing certain forms. Last Sunday the RTD ran an article about tax preparation that was both evidence of the intellectual insolvency of journalism and that the print news business model is hemorrhaging.

The article titled Do-it-yourself or pay a pro? Taxing decisions turned out to be a free advertisement for Virginia Certified Public Accountants (CPA). Now, some of my best friends are CPAs (that’s probably less accurate than the article), but one should never recommend anyone go to a CPA for tax preparation just because those three letters are in the title. CPA does not mean tax expert. Nor does it equal financial advisor any more than a lawyer or doctor is necessarily a businessperson because they file business taxes (a whole other fallacy our politicians would have us believe; after all, so many are lawyers). But at the end of the article, a Richmond area CPA, who may also be a Certified Financial Advisor but doesn’t indicate such qualification on his website, is quoted as saying “CPAs are trusted advisors who can guide you on what you should be doing to minimize taxes and grow wealth today and in the future.”

There you have it: The tax tail wagging the financial dog. It’s a meme familiar in political discourse these days. It’s also a very bad first fundamental in planning and managing wealth. Here’s the best advice anyone can give to people who want to minimize taxes: don’t be successful; make no money; just throw in the towel. The Tea Party Dream: a flat, zero income tax rate with all of us operating on the barter system. But I digress.

The substance of the article concerning tax preparation software is actually fairly well presented. But at no point is there a suggestion that there are many ways to ready yourself to prepare your own taxes through a little study,  at no cost at all. Nor is there any question about why filing taxes requires software or a CPA ever. True, the scope and purpose of the article seems to be leading us to the conclusion that the real solution is finding a Virginia CPA, but it would have been much more convincing if the fact had been driven home that the returns for lower income individuals can be much more confusing and complicated than those for the middle class. Poorer people really need to spend more money. Of course that would lead us into a whole other discussion about the cost of tax preparation.

Here’s a problem with relying on the CPA shingle: If the primary focus of the CPA’s business is not taxes, if the CPA is not also an Enrolled Agent or does not possess some other evidence of tax preparation competence, the “CPA” is very likely not qualification enough. Much like the BA from a for-profit college, it isn’t the letters tagged to the end of a name, it is the individual’s specific skills. You would be better served relying on off-the-shelf or online software to prepare your taxes, because the odds are that that is what the CPA is doing. And using it yourself it will cost a lot less.

Experience with CPA billing practices shows that for more complicated returns, the charges are about double those of other tax professionals. That’s right! You do not have to be a CPA to be a tax professional. RTD missed that little factoid. Beginning this year, tax preparers must register with the IRS and pay a fee if they are going to charge for their services. The IRS looks ready to monitor the performance of preparers, and that will help consumers down the road. But it won’t help consumers understand preparation billing practices. What the RTD did not suggest is to shop and compare. This is one area where conspicuous consumption has no reward, thank-you very much Thorstein Veblen. If the preparer won’t offer to tell you what the price is (this will require all your tax information) and let you walk if you don’t like it, just walk.

But give Virginia CPAs this: they know how to finagle free advertising from the RTD. You can’t buy that kind of implied endorsement.