How to Know if You’re Overpaying on Tax Preparation Fees
Having a professional compile your tax return saves you precious time to spend on other important areas of your life, and ensures that your tax return is prepared accurately and submitted on time. These professionals have various approaches to determine tax preparation fees. In addition, there are several factors regarding your return that will influence the tax preparation fees that you will incur.
There are a handful of variables — including the pricing method used, the qualifications of the tax professional preparing the return, the complexity of your taxes, and your location — that can determine how large your tax preparation fees will be. This guide will walk you through how to make sure you receive a fair price for having your taxes prepared, ways to make sure you are receiving a fair and legal price, and how to dispute the cost of your tax preparation fees if necessary.
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Methods of Determining Tax Preparation Fees
The first factor in figuring out the cost of how much having your tax return prepared is investigating the various methods tax professionals use to determine the fees they charge. Different tax accountants use different pricing methods for tax preparation. When you want to compare their rates, you could start by asking how they produce their fees. Alternatively, you can ask for an estimate of their tax services.
While some offer a free consultation, other accountants will only engage you when you’ve presented your tax situation to them. Since your summary may not be exact, the estimate may not reflect what you’ll end up paying. Here are some of the methods professionals use in determining preparation fees:
Setting a Fee for Each Tax Schedule
With this method, there’s typically no room to negotiate the tax preparation fee. The fee is usually a flat rate that applies to each schedule or form. For a breakdown on the average cost of filing common forms, check out the following from the National Society of Accountants:
With the knowledge of these figures, you can properly estimate the cost of having your tax return prepared by a firm who bases their fees off of which forms you need filled out.
Fees Based on What They Charged the Previous Year
If you use the same service each year, you’re likely to get a matching rate. The cost of having your previous return prepared provides a good model for how much preparing your new return should cost. Your tax advisor will give you a similar price, as long as your taxes aren’t more complicated than in previous years.
Setting a Minimum Tax Preparation Fee
For returns that are fairly standard and aren’t too complicated, a tax professional may simply charge a minimum flat fee. They may then charge you an additional fee based on any hours worked over the usual hours other tax returns similar to yours require.
While the initial minimum fee may be low compared to some of the other methods in this list, be prepared for your final bill to potentially be a bit higher than the initial fee.
An Hourly Rate for Time Spent in Tax Preparation
If you approach a tax professional who charges by the hour, first find out how much time it’ll take to complete. Also, find out how much they charge by the hour. This will help determine whether you can afford their services or not. Some professionals have steep hourly tax preparation fees, sometimes charging hundreds per hour.
While such a high rate can easily make you think twice about working with such a firm, a high rate isn’t necessarily a bad thing when it comes to tax preparation.
A tax professional who charges a high hourly rate is likely to be an expert, and may only take a short amount of time to prepare your taxes. If the work takes a short amount of time to complete, you won’t be stuck with an immense bill.
Charging a Fee for Every Item of Data Entry
While the charged rate for each item of data entry may be low, this method of determining tax preparation fees could end up being quite expensive if you have a large number of entries to make. Before agreeing to work with a tax professional who calculates fees based on this method, take stock of how much data entry will be involved in your return. For instance, if you have a large number of capital assets that were sold in the past year, chances are that completing your Form 8949 will require a lengthy amount of data entry. This matter could get even worse if the rate for each item of data entry is high.
Charging a Value-Based Fee Subjective to the Service
Value-based tax preparation fees are based on the “value” that the tax professional provides from preparing your return. The supposed value from this is quite subjective, and no two tax professionals are likely to give you the same answer as to what the value of preparing your tax return is.
This could easily lead to disputes over the cost of having your taxes prepared, however, because the “value” is determined abstractly based on what the advisor feels. Tax advisors typically take this approach so that they can reap a big chunk from clients who won’t negotiate the cost of having their return prepared.
Unless you are willing to enter a lengthy dispute with your tax professional regarding the value of having your taxes prepared for you, it would be best to steer clear from having your tax preparation priced using this method.
Other Factors That Determine Your Tax Preparation Fees
How much does it cost to get your taxes done? It will cost you about $176 for a standard 1040 Form and state return, as mentioned earlier. This number is not set in stone and just reflects the average. Several other factors will determine the actual and final cost of tax services. Some additional considerations when deciding how much you should spend on having your tax return prepared are:
The Qualifications of the Tax Professional
A less experienced tax advisor won’t typically charge as much as a high-quality, more experienced professional, on average. Remember that the stakes are high when it comes to your taxes. Any mistakes will likely lead to trouble from the IRS and require corrections, and errors or omissions could even incur penalties.
Consider hiring experienced tax defense attorneys to help defend yourself from tax penalties and even criminal charges, especially if you’re already the subject of an audit. Chances are you’d rather spend more on quality, ensuring the task is done correctly instead of saving a few bucks on fees and winding up spending your time and money on fixing mistakes and paying penalties. You also wouldn’t want to miss out on any deductions or credits that an inexperienced tax preparer may overlook.
Paying less for quality services is ideal, but a higher fee may be worthwhile in the end for your peace of mind. Think about your priorities and consider what’s most important to you.
State of Your Tax Records
How well do you keep track of your financial documents? Are they stored in well-maintained files and folders, or are they thrown haphazardly into a cardboard box in a dark corner of your office? The price will likely rise if the tax professional will have to sort through unorganized files. It is best to present them with well-organized records to increase your chance of getting fair rates.
Another issue concerns what your tax details entail. You can get away with the bare minimum rate if all you need the tax preparer to do is place figures where they belong. The more complicated the calculations and tax knowledge required for your return, the more you’ll end up paying. All of this means that the better prepared you are before meeting with a tax advisor, the more affordable tax preparation services will be.
Where You Live
Tax return preparation fees differ from one state to another. Charges on the Pacific Coast are far higher than in the South, for example. Here are the varying rates for the preparation of an itemized 1040 Form with a Schedule A and state return, according to the National Society of Accountants:
Take note that these figures are higher than the $176 average mentioned. Tax advisors are usually presented with more than the standard 1040 can cover, hence the extra charges. Plan for slight fluctuations in the prices based on the quality of the advisor.
Type of Return
Another major factor that will influence your tax preparation cost is the type of tax return you’re filing. Itemizing your deductions, for example, requires that you use Schedule A with your Form 1040, and completing these tasks will be a bit more work for your tax professional. Itemizing instead of taking the standard deduction will require a closer look at all your business expenses, ensuring that you have all necessary records and that amounts are correctly recorded.
Many business owners and self-employed individuals itemize deductions, so you may have to pay a bit more if you are going this route. One estimate indicates that preparing a Form 1040 with Schedule A costs an average of $294.
Forms of Income
Having several different income streams may create more work for a tax preparer, though this doesn’t always mean you’ll pay more. Some taxpayers who have several avenues of rental property income, for example, will require more work than usual. Each property owned will require a different entry using Schedule E, which delineates income and expenses for that property.
Taxpayers with several types of income such as these may see heftier costs for tax preparation. It may help you to view your tax needs by writing down all forms you need to complete, all forms of income, and all categories of expenses you will have to report. This will also help you prepare for your meeting with a tax professional.
Other Special Situations
Sometimes taxpayers have unique situations that require more time and care from a tax professional. Perhaps you need to amend your tax return down the road or submit additional forms with your return. Anything that requires extra attention outside of the fairly standard Form 1040 and subsequent schedules may increase the price you pay for services.
You may need help in the first place because you are dealing with a more complex situation, so be prepared to pay a little extra in these cases. You may have to pay additional tax preparation fees per form.
Remember that all these factors play a role in determining your tax preparation costs. Fees vary widely by location and accounting firm. Come up with a realistic budget before you reach out to CPAs or other tax professionals, and don’t be afraid to ask a lot of questions when you are vetting firms.
How to Get a Fair Price
Tax preparation fees are hardly standardized, as the above indicates. That means there are concrete steps you can take to ensure you get the fairest price for the service you’re getting. Here are a few tips:
Call various firms and gauge their price ranges to get fair tax preparation fees. This will also help educate you about what people charge. The quotes you get will give you a rough idea of what you can expect to pay.
Avoid Busy Times
Some firms will charge more during the busiest days of the week or the busiest times of the year. It is thus best to secure your appointment before March and April hit. Days just after the W2 forms have been mailed out attract high rates. You can also expect to pay a little more a few days before the April tax filing deadline when millions are scrambling to file their taxes at the last minute.
Try to Negotiate
Some firms will have flat fees and are unwilling to negotiate. Shopping around, however, may help you ask for a better price from someone you want to work with based on those quotes you received. Negotiating rarely hurts anything, and the worst answer you can get is a no.
Organize Your Files
Tax professionals won’t have as much work to do if you’ve stayed organized throughout the year and are ready to roll when you meet. Staying organized and being prompt with correspondence and meetings can only help your chances for a lower price.
Remember that it is best practice to plan well in advance for your tax preparation needs. Contact professionals for quotes near the beginning of the year, or even before then, so you can get the best service possible.
Illegal Pricing Methods
The Treasury Department outlines some inappropriate and prohibited pricing models. Here are the basics of these methods:
Charging a Percentage
It is prohibited to base the fee on what’s in your tax return documents. The tax preparer should not charge a fee based on a percentage of your tax refund, for example.
The advisors should also not charge a contingency fee, except in some exceptional cases. Such circumstances are minimal. There have been cases of fraud in which advisors have elected to take inappropriate tax credits and deductions on their clients’ returns to meet a certain threshold so they could earn contingent fees. This approach incentivizes bending the rules, or worse, and is thus prohibited.
Be cautious of fees that seem much higher than the average, because they could indicate fraudulent activities by the advisor. You should always ask them how they came to such a high figure if something seems off to you. Talk to a tax attorney if you don’t get a straight answer.
How to Dispute Tax Preparation Fees
It is not uncommon for clients and accountants to have price disputes. The Treasury Department has guidelines for such cases, fortunately. You have a right to insist that the tax preparer return any original documents you turned over in the event of a disagreement or issue.
The accountant also has the right to keep any forms, schedules, or related documents that they already prepared. They have no obligation to return these documents if you withhold compensation. Your best course of action if you are disputing with a tax preparer is as follows:
A tax attorney can help if you’re not well informed about the procedure of disputing the fees or if you’re not sure what you should do next. This could incur an extra cost on your part, but your chances of having a refund are high. Just check that what you pay the attorney is not more than the refund you seek.
Working With an Expert Tax Advisor
Filing your tax return is a time-consuming process, especially if you run a large company or have several income streams. This is where the services of tax preparation firms come in to save the day. Parting with tax return preparation fees is better than missing the deadline and facing tax penalties, and you could end up with a heftier return when all is said and done.
Remember to factor in variables such as location, complexity of your return, and pricing method used, in addition to the tax professional’s expertise. Be on the lookout for dishonest practices. Some pricing models cannot legally be used, no matter how good a firm seems to be.
Silver Tax Group is ready to step in and help you with any tax issues you may have. We can help if you need basic tax preparation services, are facing an IRS audit, or believe you may be the subject of an IRS investigation. Our expert tax attorneys have seen it all, and we can provide guidance from the most experienced team. Reach out today to speak to a tax expert about your tax preparation or audit defense needs.