If you are one of the 80.6 million Americans the IRS estimates use paid preparers to complete and file their electronic tax returns – or plan to become one – what can you expect to pay for tax preparation fees this filing season?
- When tax time rolls around, roughly 80 million Americans seek professional help in preparing and filing their electronic tax returns.
- Tax accountants and online preparation services are available at various price points, that will vary based on the complexity and amount of time needed on a return.
- The preparer's level of skill and expertise will also come into play, with CPAs and tax attorneys charging a higher base rate than seasonal workers or PTINs.
Variables That Affect Tax Preparation Fees
There’s no standard fee for tax-return preparation. Most preparers charge a flat fee per return, but some may charge an hourly rate. There are many variables that can determine what you’ll pay for this service.
- Type of return. The type of return you file affects the price you’ll pay for preparation. According to the National Society of Accountants, the average fee in 2020 for preparing Form 1040 with Schedule A to itemize personal deductions, along with a state income tax return, was a flat fee of $323; the average fee for Form 1040 with the standard deduction, plus a state income tax return, was $220. As you add schedules to your return, the fees increase. For example, the average additional fee for Schedule C for a sole proprietor/independent contractor was $192. The additional fee for Schedule D to report capital gains and losses was $118. The additional fee for Schedule E to report rental income and losses was $145. So individuals whose returns require Schedules A, C, D and E paid an average total fee of $778. Many preparers increased their fees in 2020.
- Your location. Fees vary considerably across the country. Those in the Southeastern U.S. pay the lowest fees, while those in New England and on the West Coast pay the highest.
- Expertise of the preparer. The credentials of the preparer (explained later), as well as their experience, also have an impact on the fees that are charged. For example, a certified public accountant (CPA) usually charges more than an enrolled agent.
Determine Your Needs
Before you select the person or firm that will help you, decide what you require.
- Complexity. The more complex your return, the more you’ll pay for preparation. This is because you’ll likely need a more experienced preparer. For example, a person with investments classified as passive activities may face higher preparation fees because the preparer must make determinations (e.g., whether there has been a complete disposition of the activity that enables carried-over losses to be claimed in full) and not merely fill in the numbers.
- Volume of work. An individual with one rental property likely will not pay the same fee as another person with 10 rental properties, each requiring numerous entries on Schedule E for rental income and expenses, including depreciation calculations.
- Special situations. An individual involved in certain types of transactions may require additional time and advice for tax preparation. For example, if the person has a “listed transaction,” which the IRS has designated as an abusive transaction (e.g., syndicated conservation easements for claiming high charitable deductions), this requires another form to disclose it on the return as required by tax law; the preparer may also offer advice about what to do with the investment going forward.
Select the Best Preparer for You
After taking into account your tax-preparation needs, you should look at the type of preparer that can meet those needs. Your choices for a paid preparer include:
- Attorney—a person licensed by state courts or state bars to practice law. Some may have an advanced legal degree in taxation. Working with an attorney offers attorney-client privilege for any matters discussed.
- Certified public accountant (CPA)—a person who has passed the Uniform CPA examination and is licensed as a CPA. A CPA may specialize in tax preparation and planning.
- Enrolled agent—a person who has passed the Special Enrollment Examination and has completed continuing education courses. Like attorneys and CPAs, an enrolled agent has unlimited representation rights before the IRS.
- Annual filing season program participant—a person who is not an attorney, CPA or enrolled agent but has completed the IRS’s Annual Filing Season Program. Such a person has limited representation rights before the IRS.
- PTIN holder – a person who is not one of the above but has obtained a Preparer Tax Identification Number (PTIN) to file tax returns this filing season; they have limited representation rights before the IRS.
The Bottom Line
Before you agree to work with a preparer, ask for a quote on the fees you’ll be charged. While fees alone should not be the basis for selecting a tax-return preparer, it is an important factor to consider.