Despite the struggling economy, 64 percent of California taxpayers will pay someone else to prepare their tax return. Below is a list of the most typical myths on how to find the “best” tax preparers that often get taxpayers into trouble.
Myth 1: All tax preparers are licensed
Until recently, thousands of unlicensed tax preparers in most states could hang up a shingle and do business without any training or accountability.
For years only two states—California and Oregon—had set standards for paid tax preparers. In California, tax preparers must be either licensed or registered.
State law requires anyone who prepares or assists with preparing tax returns for a fee, and is not a licensed attorney, certified public accountant (CPA) or enrolled agent (EA), to register with the California Tax Education Council (CTEC). Each CTEC-registered tax preparer (CRTP) must obtain a $5,000 surety bond, plus complete courses on federal and state tax laws each year.
It wasn't until 2010 that the Internal Revenue Service announced a plan to start registering unlicensed tax preparers (similar to California) by requiring them to complete tax education courses each year and pass a competency exam by 2013. Most of the new IRS rules for unlicensed tax preparers are just now coming into play this year.
Myth 2: Best tax preparers = Guaranteed refunds
Beware of tax preparers who advertise “guaranteed” refunds. Tax law is tax law. There is no magic formula to get the biggest refund nor can a tax preparer "guarantee" a refund before looking at clients' tax information.
The “best” tax preparers can only help make sure the correct amount is either paid or refunded based on their knowledge of the latest tax laws. It is why California, and now the IRS, focus so much on enforcing tax education requirements for tax preparers.
Myth 3: I’m not accountable for a tax preparer’s mistake
From an ethical and professional standpoint, a tax preparer should help clients if a mistake is made. From a legal standpoint, tax preparers are required to sign tax returns to show proof of work, but it is actually the taxpayer who is ultimately responsible for all information on the tax return—no matter if it is right, wrong or even fraudulent.
CRTPs are the only tax preparers required by law to obtain a $5,000 surety bond to protect clients against fraud. Some tax preparers may have errors and omissions (E&O) insurance to protect themselves against potential mistakes, but it is not requirement.
CTEC is a nonprofit organization that was established in 1997 by the California State Legislature to protect taxpayers against fraud and incompetent tax preparers. Visit www.ctec.org or call (877) 850-2832 for more information.