Chapter 1

Ultimate Guide for New Tax Preparers

How to Start a Tax Business

Chapter 1

How to Start a Tax Business

The Fundamentals for Tax Preparers

Chapter 2

The Fundamentals for Tax Preparers

How to Setup Your Office

Chapter 3

How to Setup Your Office

Getting Your Office Tools

Chapter 4

Getting Your Office Tools

Outsourced Suppliers

Chapter 5

Outsourced Suppliers

Investing In Your Own Office Space

Chapter 6

Investing In Your Own Office Space

Acquiring Your Clients

Chapter 7

Acquiring Your Clients

Tips for New Tax Preparers

Chapter 8

Tips for New Tax Preparers

Chapter 1: How to Start a Tax Business

Since 2000, the business of tax preparation has been a lucrative one. The complexities of tax returns have driven individuals and businesses to seek out professional assistance. In 2019, 56% or 71,725,000 of e-filed tax returns were accomplished by tax pros.

Tax professionals can include Tax Preparers, Enrolled Agents, Certified Public Accountants (CPAs), and Tax Attorneys. They need to be registered with the IRS to file tax returns on behalf of clients.

Every year, people undergo training to become a tax preparer. They also register, and start their own business or get employed. Overall, the IRS issued 773,911 Preparer Tax Identification Number (PTIN) registrations and 360,000 Electronic Filing Identification Number (EFIN) registrations for the year 2019.

Chapter 1: How to Start a Tax Business
Employment of Tax Preparers

The top five states with the most tax professionals are California, Texas, Florida, New York, and Illinois.

Tax office work is annual in nature. The busy season runs from January to April of each year. In addition to the dedicated preparers, a fair number of accounting and law firms expand their services to include tax preparation.

Building a tax preparation business is easy. It has minimal start-up costs and a high return. It’s also a stable career. If you’ve just graduated from high school and want to start a career in finance, becoming a tax preparer can be your first step.

What are the responsibilities of a Tax Preparer?

Tax professionals are responsible for filing federal and state tax returns for clients. They need to have expertise in all types of tax forms appropriate for their clients’ needs. And they should be familiar with the key tax filing dates.

Tax return preparers provide services to individuals and businesses. Individuals hire them to work on their personal tax returns. Business owners hire them to manage business returns such as Corporations and Partnerships. Business tax returns are considerably more complicated. They require accounting or bookkeeping to ensure all records are correct before filing tax returns.

Starting your career as a preparer is not difficult. You do not need to get a professional license. However, you should register for a PTIN, and you’ll also want an EFIN if you plan on e-filing. You can also become an Enrolled Agent (EA). That would allow you to represent clients before the IRS.

What are the responsibilities of a Tax Preparer?

Before registering, start your career path with extensive training. Check if your local community colleges offer any courses. Or look into training programs endorsed by the Accredited Council for Accountancy and Taxation (ACAT) and the National Association of Tax Professionals.

ACAT provides accreditation through the completion of the course and passing the exam. There’s no need to be accredited, but having the certificate garnishes your credentials. That can improve your chances of getting hired or qualifying for a higher pay rate.

Once you’ve finished your training and registered with the IRS, you can start working as a preparer. Here’s a better look at the responsibilities involved:

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Identifying clients' tax needs

Preparers are responsible for filing tax forms according to their client’s needs. You should have a clear understanding of a client’s financial situation. Conduct interviews with your client to better assess their position. A tax software program with an interview mode can help you accomplish this task successfully.

You will be reviewing people’s financial activities in detail. So you have to gain their trust and be worthy of that trust. Your reputation depends on that. Success in the industry demands your utmost integrity and trustworthiness.

Preparers should also provide consultation services to their clients. Give them relevant information and offer advice on completing their tax returns. Apply the basics of tax planning, so as to ensure the clients’ withholdings are correct.

Expect that you will be called on to answer difficult tax questions. In some cases, you may be asked to help with a client’s future tax planning. Guide them through state and federal tax laws with the aim of making better financial decisions.

Interviewing the Client

The tax preparation business is not just processing your client’s data. It’s a business built on good professional relationships. The first chance in building a good relationship with the client is via the tax preparation interview.

Maximize building relationships with your clients with these tips:

  • Make a good first impression
    Clients want a preparer they can trust. You want them to feel assured in your presence. Appear professional and presentable. Smile and be accommodating. Offer a beverage and cultivate a welcoming space. Make your client feel comfortable.
  • Start asking about your client’s personal information first
    Before asking your clients about their financial records, start discussing personal information first. Every tax interview begins with basic information such as full name, birthdate, contact information, occupation, and Social Security numbers.
  • Ask about your client’s previous tax filings
    Make the most of your interview by understanding your client’s previous tax filings. This is essential when you take on new clients. Do your best to get all the data from previous tax years, you’ll need to know Adjusted Gross Income to file the tax returns electronically. If your client has been with you already, make sure to check your previous records, too. Looking at previous tax filings can refresh your mind to ask pertinent questions.
  • Learn about your client’s possible incomes
    Get to know all of your client’s possible sources of income. Some clients do not know that their side business needs to be filed. Knowing about odd jobs or overlooked sources of income would help you advise your client better.

Overlooked sources of income:

  • State refunds (when taxable)
  • Social security
  • Unemployment benefits

Your client may forget about other sources of income that are passive in nature. For example, passive income from investments. Here’s a list of all other sources of income you need to ask about:

  • Interest Income – investments from a savings account or certificate of deposit)
  • Dividend Income – income earned from stock or investments
  • Self-Employment Income – income from any job hired that requires 1065 form
  • Sales Commissions
  • Pension Retirement Income
  • IRA or 401(k) Distribution Income
  • Gambling or Lottery Winnings – filed under form W-2G
  • Alimony Income – financial support from a former spouse
  • Rental Income
  • Sale of Business Assets – any sale that happened within the year for tax return filing
  • Sale of Personal Residence – any sale that happened within the year for tax return filing
  • Stock and Bond Sales – any sale that happened within the year for tax return filing
  • Income From Partnerships, Corporations, Trusts, Estates

Some clients forget the income they receive in a year unless asked. You need to be thorough in asking for these details.

  • Identify any deductions or credits for your client
    You’ll want to learn about any possible deductions or credits for your client to help them get a refund. Go through the following list with them to review how they could qualify for a deduction.

Here are several possible tax deductions or credits:

  • Sales tax
  • Insurance premiums
  • Tax savings for Teachers
  • Charitable gifts
  • Lifetime learning credit
  • Unusual business expenses
  • Unemployment credit
  • Childcare expenses
  • Traditional IRA contributions

Get your clients to recall details throughout the interview, so you won’t miss out on any possible tax deductions. Be aware of all possible tax credits for individuals and businesses from the IRS website.

Collating financial documents

Tax preparers should collect a client’s financial records. Tax preparation entails making sense of the client’s finances based on available information.

Types of financial documents clients would submit:

  1. Personal Information
    1. Social Security Number
    2. Tax ID
    3. Birth Date
  2. Income and Investment Information
    1. Form W-2 Wage
    2. Tax Statement
    3. Bank Statements
    4. Last year’s refund amount
    5. Miscellaneous income records
    6. Form 1099s
  3. Self-Employment and Business Records (if applicable)
    1. Business Expenses Records
    2. Quarterly Estimated Tax Payment
    3. Mileage Records
    4. Home Office Expenses
  4. Deductibles
    1. Unreimbursed medical expenses receipts
    2. Health Insurance Coverage forms (Form 1095)
    3. Social Security benefits
    4. Charitable Donation receipts
    5. Property Tax receipts

Some clients will submit organized financial documents. Others have all their receipts in a shoebox. You must go through them and identify which ones go on the forms. The more questions you ask your clients, the more comprehensive a picture you will get. Understanding all the information will be essential in forming an accurate representation of your clients’ tax returns.

Encourage clients to complete these documents to file their tax returns. This will help you to maximize clients’ refunds.

Start tax planning

Once you’re done with the interview and recorded all relevant financial data, initiate a discussion on tax planning with your client.

Tax prep isn’t as simple as entering data into a computer program. Preparers have to understand what the data represents. If you can skillfully analyze the collected data, you will be in a position to provide a more comprehensive level of service. You can help people plan their tax management strategy for the future.

Compute and prepare tax returns

Now we come to the essence of this profession: performing tax return calculations using data from the collated financial documents. You’ll need to have excellent attention to detail and technical know-how.

Your computations have to be error-free because mistakes can incur penalties. Reliable, professional tax software will help you in performing correct calculations. UltimateTax provides you with a secure tax software product that can handle such work. And the parent company provides excellent tax preparer support, too.

You can contact UltimateTax via phone, email, chat, Facebook, and fax. If ever you experience difficulties in understanding the program, the support staff will happily advise you.

Completing client's tax forms

The final stage of any tax preparation job involves completing the client’s tax forms and filing them. You must check each data input and verify computations before filing.

File tax returns either electronically or manually via mail. A tax preparation business must become an IRS affiliate to file electronically. Apply for your Electronic Filing Identification Number (EFIN).

Filing returns electronically is an advantage for both tax preparers and clients. Tax preparers could file returns with faster processing times. You can also reduce inaccuracies on a client’s tax return. Clients can also receive their refunds faster.

Clients who would like to file their returns through the mail may do so, as well. The clients would sign a waiver to file taxes electronically.

Offer other products related to tax

Based on a client’s needs, tax preparers may offer bank products. Bank products are an additional way for you to add revenue. You can guide and advise their clients on which products to use based on your client’s refund amount. Keep in mind that the cheapest and quickest way for clients to get their refunds filed is to get a direct deposit from the IRS.

Tax preparers must be pre-approved before offering bank products to their clients. Get the necessary approvals first to offer these product options.

What Type of Services Should I Offer?

Tax Filing

Tax preparers can start a business focus on the filing of taxes. Tax season begins from January to April of the next calendar year. If you extend personal tax returns you have until October to get the returns filed. From December of the previous year, a tax preparer can start providing services to the following clients:

  • Accounting services
    Aside from tax filing, tax preparation businesses can also offer accounting services. In some states, you must be a certified public accountant (CPA). In other states, you can offer bookkeeping services which include reconciling and verifying bank statements and items.
  • Bookkeeping services
    Tax preparers have available time for other ventures after the tax season. During the off-season, you can offer bookkeeping services to your clients. Your client’s advantage in using your bookkeeping services is that once tax season comes in, it will be easy for you to prepare their taxes. Additionally, since bookkeeping can be a monthly service you can keep income coming in all year long.
  • Specialized services
    Standard tax prep services mainly involve income and investment portfolios. However, there are other dedicated taxes, such as insurance or sales taxes. If you have other qualifications (i.e., you are a lawyer or a CPA), you can also provide this service for your new business.
  • Employed clients
    Tax preparers can help with the filing of income tax returns for working clients. Mainly, they can charge for the preparation of clients’ W-2 forms.
  • Corporations
    Taxes of corporations and companies is also a good market for the tax filing service. Tax preparers can handle tax filing for small companies to big businesses. However, you may want to consider specializing if this is the type of market you want to get into.
    For example, you can specialize in tax filing of business in the food industry like restaurants or food suppliers. Handling too many clients from different sectors may be complicated for someone who is just starting. Once you’re ready to expand, you can consider branching out to other industries. You can also offer filing 1099s for small businesses. Each business is required to file 1099s to any supplier that they paid more than $600 in the tax year.
  • Non-profits
    You can also prepare taxes for non-profit organizations. When filing taxes for these types of clients, a particular specialization is also required. Different tax rules apply to non-profit clients. Available exemptions vary by the state where the non-profit organization operates.

What Clients Should I Get?

Tax preparation businesses can serve anyone, from individuals to business owners. Everyone needs to file taxes. You’ll have no shortage of possible clients. But you’ll need to market your services or possibly make cold calls.

Family and friends

It’s a good idea to lean on your personal and professional networks. When you’re a new tax preparer, consider taking on family and friends as your first clients. Ask for their support. They can help spread awareness of your practice through word-of-mouth and online reviews. Market yourself as the “Tax Guy or Gal.”

Connect with friends who are small business owners. Get in touch with former employers and offer them your services.

Preparers need to build trust with their clients. If you have previously established a relationship with someone, that’s a big step in winning their trust in you.

What Clients Should I Get?
What Clients Should I Get?

After providing your services to family and friends, you can ask them to provide referrals. Following that, the next step is to network and solicit referrals from within your circle of influence.

Get referrals from your suppliers and vendors, former co-workers, and past classmates. Ask members of your organizations and your church to provide references. Having a relationship in good standing with them serves as a testimonial to your character.

Request referrals from your previous clients as well. Always put your best foot forward when providing your tax preparation services. A kind word from your past clients is good marketing for your practice. Paying for referrals is also a good business practice. Paying a referral fee of $20 can easily be the best $20 you will spend on advertising.

Local Businesses

Local businesses like restaurants and contractors typically have one to ten employees. They are not likely to have a full-time bookkeeper on their staff. Such businesses would outsource tax preparation tasks.

But even businesses with accountants and bookkeepers may choose to outsource tax preparation tasks. Outsourcing tax preparation is an excellent cost-cutting technique. It saves time and money for the company.

Now, that you’ve learned what kind of services to offer and clients to pursue, start building your own tax preparation business. It is can be a lot of work, initially, but a tax business is stable and very profitable. Learn more about how to grow your business below.

What Clients Should I Get?

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