4 Questions to Ask Before Hiring a Tax Accountant

By Markets Fool.com

There's a reason accountants are so busy come tax season. According to a 2013 Quinnipiac University poll, almost two-thirds of Americans find the tax system too complicated and therefore hire accountants to file their taxes for them. In 2014, an estimated 35 million Americans had their taxes filed by a professional despite the availability of lower-cost (or in some cases free) self-serve options.

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Of course, there are benefits to using an accountant, not the least of which is avoiding the stress and mental drain of doing the work yourself. Plus, in some cases, hiring an accountant can actually be cost-effective, especially if yours has the expertise to unearth enough legitimate deductions to earn you more than you're paying in fees.

But before you hire a professional to take the weight off your own shoulders, be sure to ask the following key questions.

1. Are you familiar with the requirements of the states I need to file in?
The good thing about the federal tax code is that the same set of rules applies to every state. However, individual states have different regulations, and those could come into play if, for example, you live in one state but work in another. Furthermore, if you move from one state to another during a given year or own a small business that operates in different states, then your taxes could get complicated. Therefore it's imperative that your accountant be familiar with the local filing requirements that apply to you.

Source: BIGSTOCK.

2. What information will I need to provide?
There are two reasons for asking this question. The first is to get a sense of what documentation you'll need to submit so that you can prepare accordingly. Some people mistakenly think that when they hire an accountant, that professional will magically find their pay stubs, bank statements, donation receipts, and any other documents they need to prepare a tax return. In reality, you're responsible for gathering and supplying that data -- which leads to the second reason for asking this question, which is to ensure that your accountant is being thorough. If your list of required paperwork seems remarkably short, then you may want to ask whether anything is being left out.

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3. How do you calculate your fees?
You wouldn't agree to buy a car without knowing how much it costs. Similarly, you need to understand how much you can expect to pay for the privilege of having someone else handle your taxes for you. Some accountants charge a flat fee for their services, while others charge an hourly rate. Then there are those who calculate their fees as a percentage of the refund they're able to get you -- and these are the ones you generally want to avoid.

While it might seem like a good idea to hire someone who stands to gain from maximizing your refund, this could come back to bite you in two ways. For one thing, your accountant might take certain creative liberties with your return in order to collect more money for you (and from you), but if the IRS gets wise and comes asking for its money back, you're the one who'll be on the hook to pay back that difference and whatever penalties come along with it. Additionally, depending on the size of your refund, you could wind up paying far more than you would pay a professional who charges an hourly or flat rate. Imagine your accountant charges $125 an hour and spends three hours doing your taxes. Your total bill, in that case, would be $375. Now let's say you go with an accountant who takes a 10% cut of your refund. If you find that you're owed $5,000 from the IRS, you'll fork over $500 instead of $375.

Accounting fees can vary significantly by geographic region, but to give you a sense of what you might pay, consider the following data. According to the National Society of Accountants, its members charged the following average fees to prepare 2014 tax returns:

  • $159 for Form 1040 with state return and no itemized deductions
  • $273 for Form 1040 with Schedule A (itemized deductions) and state return
  • $447 for Form 1040 with Schedule A, Schedule C (business income), and a state return

4. What type of audit support do you provide?
Statistically speaking, your chances of getting audited are pretty low, as less than 1% of filers get singled out in this regard. Still, even if you and your accountant play by the rules, you can't discount the possibility of somehow making that list, and if you do, it'll be helpful to have your accountant in your corner. That's why you need to ask what type of audit support your accountant provides. Some accountants, for example, offer free audit support for certain clients. Others will pay any penalties and taxes owed if you're found to have underpaid your taxes (though this certainly isn't a standard, or a given, so you shouldn't necessarily count on it). Find out what to expect from your accountant so that there are no surprises down the line.

Finally, while there's no substitute for your own due diligence, never underestimate the power of a good referral. If a friend, neighbor, or family member had a good experience with an accountant, consider it a strong starting point and work from there. Remember, your goal in finding an accountant shouldn't just be to get this year's taxes over with; it should be to find someone to advise and support you on all things tax-related for many years to come. A little extra legwork up front could wind up serving you very well for the long haul.

The article 4 Questions to Ask Before Hiring a Tax Accountant originally appeared on Fool.com.

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