Tax Preparation Guide

1. What's a Tax-Prep Service?

Tax-preparation services are like those auto tune-up centers at malls-except they're good with numbers. A tax-prep service takes your tax-related paperwork, fills out all those scary tax forms for you and then files the paperwork after you review and sign a release with the IRS and state tax departments.

• Efficiency -The tax laws are complex, so doing your own returns can be difficult, time-consuming and stressful-especially as the due date nears. You also don't want to make mistakes.

• Accuracy -Under the tax laws, you may qualify for a whole bunch of credits and rebates (tax breaks the government gives you if you qualify) and deductions (tax breaks you can take for certain expenses). You may be unaware of these and wind up overpaying what you owe.

• Cost -The charge for a tax-prep service is relatively low compared with the services of a certified public accountant and other tax experts.

The fee charged by a tax-prep service varies depending on the firm and complexity of your federal and state returns. Most base their fee on how many lines of a tax form must be filled out or the number of forms.

Generally, you can expect to pay a few hundred dollars for one-on-one service. But to compete with the popularity of tax-prep software, many services will now let you do your own taxes online at their sites for $15 to $60-or they will provide online handholding for $70 to $100.

2. Should You Use a Tax-Prep Service?

The level of tax-prep assistance you need will depend on the sophistication of your finances and investment returns. For example, if you have a home business, have investments and earn a sizable household income, a CPA may be more ideal for tax preparation, advice and planning.

But if your tax returns are relatively straightforward, a tax-preparation service may be a more convenient and affordable choice.

The only question is whether buying a tax-prep software program and doing your own tax returns is an even better option. Software programs may make more sense if your tax-related paperwork is organized, forms don't intimidate you, and you know where to turn online to determine the tax deductions, credits and rebates that are available to you. If you do your own returns, the IRS offers free live tax assistance (800-829-1040).

Or if you earn less than $54,000, you don't have to spend a dime to file your return. The IRS provides free electronic tax filing services. FiLife reviewed the Free File service here.

In addition, taxpayers age 60 and older can receive free tax aid from the American Association of Retired Persons (AARP) in a cooperative agreement with the IRS (888-227-7669).

Important: No matter who prepares your tax return, you are ultimately responsible for all of the information reported. Review your return before you sign it, and ask about anything you don't understand.

3. Choosing a Tax-Prep Service

The two largest tax-prep services are Jackson Hewitt and H&R Block, but there are plenty of others, and prices and services vary. You should know that many are franchises-which means that while standards and support come from company headquarters, each office may be under separate management.

Which tax-prep service you choose will depend on whether you want a person helping you one-on-one or easy-to-use software. It also depends on whether the company has an office near your home, since using a tax-prep service is first and foremost about convenience.

How to choose:

• Visit the company websites. After you make a list of five or six tax-prep services, go online and view their sites. Most will tell you where the nearest office is based on your ZIP code. Jot down several offices, since each office may be managed differently.

• Scope your e-options. While you're at the sites, see if the services offer online options. Take a tour of the e-service or call the company to see if the online option is sufficient for your tax needs and matches your form-completion abilities.

• Call for costs. Local branches should give you a ballpark fee. Avoid services that calculate fees based on your refund. They may be too aggressive when calculating your credits, rebates and deductions to maximize fees and land you in hot water with Uncle Sam.

• Frisk the franchise. Ask how your taxes are calculated. Many firms use computers to arrive at refunds or payments due. Also check if there have been complaints about the local service with your local Better Business Bureau. According to the BBB, most complaints against tax-prep services are over billing disputes-meaning high charges for relatively low-income returns.

• Seek experience. Tax preparers in franchise offices are required to attend a 75-hour tax seminar given by the company during which they learn about various tax situations. There are no national educational and professional requirements for tax preparers. So you need to interview the preparer, either over the telephone or at the office. You want someone who has years of experience with the firm and a long track record of problem-free returns.

• Check the safeguards. You want a firm that has a system for double-checking a preparer's work. You also want to know what happens if you face an audit, what happens if you're charged a penalty for a mistake the preparer makes, and who can represent you in an audit.

• Beware of traps. Steer clear of services that say they can get you larger refunds than other preparers or promise instant returns. These "fast" tax refunds are actually high-interest loans, since the preparer is lending you now what you're likely to get back from the government later. Also skip services that base their fee on a percentage of your refund, ask you to sign blank forms before data is completed, and have no policy for answering your questions months after filing should the IRS have problems with your return.

Important: Unlike a CPA, enrolled agent or tax attorney, a tax-prep service is not legally qualified to represent you with the IRS. However, some tax-prep services may provide referrals to such experts.

4. Grilling Guide: Questions to Ask Tax-Prep Services

How is your fee determined?
Most tax-prep services have a set schedule of charges. Ask for an estimate.

What's your turnaround time?
You want to be sure the firm can handle your return in time to meet the tax deadlines.

Who will be working on my return?
You want to know how many years the person has worked at the firm and whether they have had any problems with returns they completed.

How do you check the work?
Find out how the firm double-checks the math by the preparer.

What if you make a mistake?
Ask what happens if a mistake made by a preparer results in a penalty charge. Many larger firms guarantee their work and will pay the penalty if the error is theirs. But make sure you understand how a mistake is defined.

What's your privacy policy?
You want to be sure that your sensitive information is secure and how you can opt out of any future marketing programs.

What if there's IRS trouble?
If you face an audit, you'll need a CPA, enrolled agent or tax attorney. Ask the service for the names of their referrals and check their credentials and reputations with the Better Business Bureau.