Tax Preparation Fees: Are You Overpaying?

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The time that Americans spend on complying with federal tax laws per year translates to about 8.9 billion hours. This explains why they would rather pay tax preparation fees and spend their time elsewhere in more productive activities.

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.

In this article, we’ll take at a handful of the variables that can determine how large your tax preparation fees will be: the pricing method used, the qualifications of the tax professional preparing the return, the complexity of your taxes, and your location.

Then, we’ll take a closer look at 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.

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 tax professionals use in determining tax preparation fees:

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1. 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:

  • Form 1040 with Schedule A and state return: $273
  • Form 1040, non-itemized, with state return: $176
  • Schedule C (business activity): $184
  • Schedule D (gains and losses): $124
  • Schedule E (rental activity): $135
  • Schedule F (farm): $180

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.

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2. 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.

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3. 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.

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4. 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.

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5. 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.

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6. 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. This is 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

As mentioned earlier, on average, it’ll cost you $176 for a standard 1040 Form and state return. While this is the average, don’t assume that it is set in stone. Several other factors will determine the actual final cost of fees.

Some factors to consider when deciding how much you should spend on having your tax return prepared  are:

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1. The Qualifications of the Tax Professional

On average, a tax advisor who’s starting off will charge less than a high-quality, professional one. When it comes to your taxes, the stakes are extremely high. Any mistakes will likely lead to trouble from the IRS and require corrections, or could even incur penalties

If you’re already the subject of an audit, then consider hiring experienced tax defense attorneys to help defend yourself from tax penalties and even criminal charges.

Chances are that you’d rather spend more on quality and have the task done correctly than save a few bucks on fees and then wind up spending your time and money later on fixing mistakes and paying penalties. Plus, you wouldn’t want to miss out on any deductions or credits that an inexperienced tax preparer may overlook. 

Although paying less for quality services is ideal, paying a higher fee may be worthwhile in the end for your own peace of mind.

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2. The Complexity of Your Taxes

How well do you file your financial documents? Are they kept in well-maintained files and folders, or are they thrown haphazardly into a cardboard box in a dark corner of your office?

If the tax professional will have to sort through unorganized piles, the price will rise. It is best to present them with well-organized records to increase your chance of getting fair rates. 

Another issue is about what your tax details entail. If all you need done is placing figures where they belong, you can get away with the bare minimum rate. The more complicated the figures and calculations required for your return, the more you’ll end up paying.

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3. Where You Live

Tax preparation fees differ from one state to another. For example, charges on the Pacific Coast are far more than in the South. 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:

  • $333 in New England (CT, ME, MA, NH, RI, VT)
  • $290 in Middle Atlantic (NJ, NY, PA)
  • $268 in South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)
  • $210 in East South Central (AL, KY, MS, TN)
  • $271 in West South Central (AR, LA, OK, TX)
  • $249 in East North Central (IL, IN, MI, OH, WI)
  • $214 in West North Central (IA, KS, MN, MO, NE, ND, SD)
  • $263 in Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)
  • $329 in the Pacific (AK, CA, HI, OR, WA)

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.

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Negotiating a Fair Price

For you to get fair tax preparation fees, call various firms and gauge their price ranges. The quotes you get will give you a rough idea of what you can expect to pay. 

Some firms will charge more during the busiest days of the week. 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.

Illegal Pricing Methods

The Treasury Department outlines some inappropriate and prohibited pricing models. The first prohibited model is charging a fee based on your tax return documents. For example, they should not charge a percentage of your tax refund.

The advisors should also not charge a contingent 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. 

Be cautious of fees that seem much higher than the normal average. They could be an indication of fraudulent activities by the advisor. You could ask them how they came to such a high figure.

How to Dispute Tax Preparation Fees

It’s not uncommon for clients and accountants to have price disputes. Fortunately, the Treasury Department has guidelines for such cases. 

You have a right to have any original documents that you turned over to the tax preparer to be returned to you. 

On the other hand, the accountant has the right to keep any forms, schedules, or related documents that have already been prepared. If no compensation is made they don’t have an obligation to return these documents

If you’re not well informed about the procedure of disputing the fees, a tax attorney can help. Although this could incur an extra cost on your part, your chances of having a refund are high. However, check that what you pay the attorney is not more than the refund you seek.

If you’re not well informed about the procedure of disputing the fees, a tax attorney can help. Although this could mean an extra cost on your part, your chances of having a refund are high. However, check that what you pay the attorney is not more than the refund you seek.

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How to Get a Trustworthy Tax Advisor

When shopping around for a tax advisor, think of it like getting a haircut. It’s possible to get a haircut for a meager price, but it may not be the best. If you want the best set of skills, you’ll probably have to part with a considerable amount of money.

Paying the average $176 for tax preparation will get you an average tax professional. They may not help you get all the deductions you deserve but will give you the essential services. To help you get more than the minimum refund, you’ll need to part with a good amount of money.

A high-quality tax advisor will also help you understand tax changes and your current tax situation.

Take Away

Filing your tax returns is a time-consuming process, especially if you run a large company. This is where the services of tax preparation firms come in to save the day. Parting with tax preparation fees is better than missing the deadline and facing tax penalties.

When shopping around for a tax advisor, think of it like getting a haircut. It’s possible to get a haircut for a meager price, but it may not be the best. If you want the best haircut possible, you’ll probably have to part with a considerable amount of money.

Paying the average $176 for Form 1040 tax preparation will get you an average tax professional. They may not help you get all the deductions you deserve but will give you the essential services. To help you get more than the minimum refund, you’ll need to part with a good amount of money.

In addition to the expertise of the tax professional, remember to factor in other variables such as geographical location, the complexity of your return, and the pricing method used. Remember that no matter how good a firm is, there are some pricing models they legally can’t use.

While we hope that the tax professional that you choose does an outstanding job with preparing your return, things can go wrong sometimes.

If you are facing an IRS audit, or believe you may be the subject of an IRS investigation, Silver Tax Group is here to help.

If you are in either of these situations or have any other tax issues, then do not hesitate to reach out to us for help.

Managing Partner of Silver Tax Group, author of the book “Stop the IRS”. Practicing a variety of tax issues, regulations, laws and rights. Specializing exclusively on tax matters involving IRS audits, negotiation, settlements & compromises.

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