Despite the restrictions and headaches of Circular 230 and other rules designed to regulate the tax preparation profession, the benefits of a career in tax preparation haven't been lost on the tens of thousands who enter the profession every year. And while some of them fall by the wayside, others find tax preparation a rewarding and enjoyable occupation.
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Most newly minted CPAs, Enrolled Agents, Registered Tax Return Preparers or attorneys who intend to make tax preparation their business have questions about how to get started: what form the business should take, whether and how to expand, whether to buy into a franchise opportunity, how to market, how to charge, and what to pay employee-preparers, among other issues.
Part of the dilemma on whether to franchise or not to franchise depends on how much of initial investment you want to make, according to Chuck McCabe, founder of Peoples Income Tax and the Income Tax School. "When I first started, I looked at a franchise, but I decided against it because it was just too expensive and you had to pay the full price. The franchisor wasn't willing to give a multi-site reduced agreement, and since it was a new franchisor with relatively no name recognition at the time, I decided to do it on my own."
The pros of a franchise are that there is an existing, proven system, McCabe explained. "They have a system that's been proven to work, assuming the operator is competent and is able to implement the system. The other key advantage is that, with an existing established franchise, there should be name recognition, and there is probably advertising to an extent that would not be feasible for the sole operator."
The cons include the initial fee, which can be expensive, and the ongoing royalties, as well as geographic restrictions that may make it difficult to expand, he said.
McCabe advises new preparers, especially those going into business for themselves, to join one of the professional organizations such as the National Association of Tax Professionals, the National Society of Accountants, the National Association of Enrolled Agents or the National Society of Tax Professionals, as well, of course, as the American Society of CPAs if the preparer is a CPA.
One of the attractions of operating a tax business is that it can be started on a shoestring and, in fact, operate out of a home. However, being a woman and working from home is not for the faint-hearted, cautioned Beanna Whitlock, a Reno-based preparer and adjunct professor at Auburn University, and former director at the IRS Office of Public Liaison. "If you operate from home it has its pitfalls," she said. "If you're a woman and have people coming and going that you do not know, I suggest you don't do it alone. You don't want to expose yourself to unnecessary danger."
"Likewise, if you have a walk-in office on the street, people are very observant," she said. "If they see a female is in the office and has a purse, if there's no one in the front office they can slop in the front door and open a desk drawer and get a handbag. Or if it's late at night, it might be you they have their eye on. So it's very important to assess and control the safety of the location."
THE WORST WILL HAPPEN
Malpractice, professional liability, or errors and omissions insurance is vital, Whitlock said. "Just because I never had a claim against me in 45 years doesn't mean it was not a good investment," she said. "I've had auto insurance all my life and I've never run into a tree, but I don't regret it. It's a way to protect yourself from the worst that could happen, and with taxes, it's not a question of if it will happen, it's when."
For the expanding tax office, it would be worthwhile to closely examine non-compete agreements, advised McCabe, who covers recruiting, hiring and training preparers, as well as site selection and lease negotiations, in the Tax Office Operations Manual available from his Income Tax School.
"We only prohibit former employees from serving clients they served while employed by us," he said. "For preparers, the typical time period is two years and the distance is usually 25 miles from the former employer's offices. Equally important as having a non-compete clause is to include provisions in your tax preparer employment agreement that serve indefinitely to prohibit solicitation of clients and employees, and to require confidentiality of client and company information."
New preparers are required to attend 12 hours of pre-work training in class, in addition to previous training in tax preparation and tax software, McCabe noted. "After classroom training, new employees complete at least a week of on-the-job training with an experienced tax preparer serving as a mentor. And all associates, regardless of their experience level, have each return they prepare checked by a second associate. This policy applies to EAs and CPAs, as well as RTRPs."
The point of this is that anyone can make a mistake, explained Cathy Mueller, a director of Peoples Income Tax. "Cross-checking provides an opportunity for less-experienced preparers to learn from the returns completed by the more experienced staff, as well as reducing errors. This procedure also provides a second chance to ensure that all of the Earned Income Tax Credit due diligence procedures have been followed."
For someone getting started in the tax prep business, or even for the seasoned professional, it is critical that knowledge and ability limitations be recognized, cautioned Whitlock: "Tax professionals should not accept engagements where their knowledge or skill is limited. A great Form 1040 preparer should not accept an engagement to prepare a corporate or partnership return without the knowledge and skill to do so. We must realize that while it is our taxpayer's return of income, it is indeed our tax return because we put our names on them, giving legitimacy to the return."