Updated: Jul 24
Ever wonder why going to a tax professional costs more than preparing a return yourself or going to one of those big-box shops? Did you know that you don't have to be a qualified professional to work at one of those big box shops?
Part of why it costs more to get your tax return prepared by a qualified professional (CPA or EA) is because we are well versed in tax law and we know the kinds of things that act as a red flag/come audit me sign to the IRS.
Take a look at the following cases and you will know why when it comes to taxes, you get what you pay for:
IRS Audit Bait
Here is an example of two statements from a tax return prepared by a well-known big-box tax prep company. These are attachments to a Sch C that was filed. What stands out to you?
Statement #2 is listing commissions and fees paid. Generally speaking, this line is for money you paid to other businesses or individuals for services. An example might be commissions you paid to salespeople. Notice on the above that the majority of the payments listed are amounts this taxpayer paid to themselves. These payments would not be deductible for tax purposes and listing them like this on the return is basically waving a bright red flag to the IRS.
Statement #3 is for insurance paid other than health insurance. Generally speaking, this line would be for liability insurance, workers comp insurance, etc. Notice on the above the insurance paid is to "Select Health" so this is not the appropriate place. As a business owner, you can get a deduction for health insurance paid, and if this taxpayer were eligible this would not be the correct place to put the deduction. It actually does not go on the Sch C at all.
Case of the missing return
In some cases, the individual tax return is prepared correctly but what happens if the Sch C is a single-member LLC? For federal purposes, the business income and deductions are included on a Sch C, but what happens to the state return? Well if you are in one of the states that require a separate LLC return you want to be sure that the person preparing your return knows that. The biggest issue I see when a new California client comes over from one of those big box stores or self prepares using a well-known software is the lack of an LLC return. Either it was prepared and not filed by the prior preparer or it was not prepared at all.
Other issues examples
Sometimes an issue can be as obvious as the ones above but other times they may not be caught until you get audited or once you decide to move to a qualified professional, some examples of what I have seen include the following:
-Deducting personal rent as a business expense on your Sch C instead of doing a home office deduction.
-Failing to attach an S election to a timely filed 1120S causing an issue with being classified as the correct entity down the line.
-Registering as the wrong type of entity. Now, this is not a tax issue however some times individuals will try to save money by creating an entity on their own instead of using an attorney. California has special rules about what type of businesses can register as an LLC and if you are not well versed in these you can end up causing a lot of issues for yourself,
Trust but verify
So you know you do not want to go to a big box shop or prepare yourself so you find what you think is a qualified preparer. This is where trust but verify comes in. Even though it is illegal to call yourself an accountant or CPA if you are not licensed, people do still do that so it is important to verify the preparer's qualifications. California has a nifty tool where you can look up CA licensed CPAs and other states have them as well so you want to be sure to look in the state that your CPA is licensed to ensure they are actually licensed and have a clean record. An EA or enrolled agent is an IRS designation so you can look them up as well by going here.