Is that tax preparer really qualified?

If you're among the 60 percent of Americans who use a tax preparer to fill out your annual return, tens of thousands of them are vying for your business. But the industry is largely unregulated; only three states—California, Oregon, and Maryland—require licenses. Everywhere else, a person with little experience or education can call himself a tax preparer and set up a business. And even among credentialed professionals, skill levels and experience can vary.

That's what the National Consumer Law Center, an advocacy group in Boston, found out last year when it worked with organizations in Philadelphia and Durham, N.C., to conduct "mystery shopper" tests of storefront tax preparers. They were investigating practices related to "refund anticipation loans," those high-interest, short-term loans secured by a taxpayer's refund (see Just say no to refund loans, available to subscribers), to see whether fees and interest rates were clearly disclosed. But they stumbled onto an equally troubling problem: Some tax preparers seemed woefully unqualified to fill out a simple return.

Mistakes and bad advice

When a tester in Philadelphia, for example, handed a tax preparer Form 1098, a statement of mortgage interest, the preparer had to ask co-workers what to do with it. The same preparer made numerous errors on the mystery shopper's tax return, including failing to recognize $3,500 in unemployment compensation as taxable income and neglecting to include another $25 in interest income.

In Durham, a tax preparer told a mystery shopper not to report a dividend as income. "Essentially, they were advising the tester to commit tax fraud," says Chi Chi Wu, an attorney with the law center.

Still, Wu is hesitant to give all retail tax centers a black mark. "At least the chains have some training," she says.

The two largest chains, H&R Block and Jackson Hewitt, require that their employees complete training programs. And the franchises in the law center's study were less likely than independent storefronts to charge customers what Wu calls junk fees, such as application and document-preparation fees.

Other sources of help

Of course, you're not limited to a storefront tax-prep service. If you have the time and the know-how, you can prepare your own return, using tax software or a pencil and a calculator. Or you can hire a certified public accountant or an "enrolled agent," who is licensed by the Department of the Treasury to prepare tax returns. Both of those types of tax pros have more extensive training.

CPAs must complete 150 credit hours of undergraduate course work, pass a 14-hour licensing exam, and take continuing-education courses to maintain their state licenses. Enrolled agents must pass three 4-hour exams on tax codes and calculations or have worked for the Internal Revenue Service for at least five years in a position that required interpreting and applying the tax code. They must complete at least 72 hours of continuing education every three years. CPAs and enrolled agents generally can represent you before the IRS if you are audited. A storefront preparer might not be able to.

You'll pay more, though, for that training. Fees at a storefront tax preparer generally cost $90 to $100 for a simple 1040A form; additional forms, such as a Schedule C for business income and expenses, cost extra. Last year, the average fee per client at H&R Block was about $172. Expect to pay a CPA $170 to $240 for a 1040 form with a Schedule A for itemized deductions and a state tax return. An enrolled agent might charge slightly less.

To find an accountant, ask your friends and neighbors or go to the Web site of the American Institute of Certified Public Accountants (www.aicpa.org). Under "Consumer Information" click on "Find a CPA," then enter a ZIP code. To locate an enrolled agent, go to the Web site of the National Association of Enrolled Agents (www.naea.org) and click on "Find an Enrolled Agent."

The best tax preparer for you will be someone who has experience in dealing with the peculiarities of your financial situation and who can minimize your tax liability. "Hiring the wrong person," says Jill Gianola, a fee-only financial planner in Columbus, Ohio, "can mean leaving money on the table."