Strategies cut risk of overpaying tax preparer

ByABC News
March 19, 2012, 6:55 PM

— -- Unless you have 11 toes, you'll pay the same for a pedicure as the customer in the next chair. Need to wash the car? There's usually a sign on the wall explaining how many quarters you'll need to get those mud flaps clean. Even your dentist can give you a reasonable estimate of the cost of a new crown.

When it comes to taxes, though, the cost of preparing a return is often shrouded in secrecy. A 2010 "mystery shopper" investigation by the National Consumer Law Center and several other groups found numerous instances in which tax preparers dodged questions about costs or refused to provide an estimate.

The lack of transparency on the cost of a tax return creates opportunities for everything from add-on fees to outright fraud, says Chi Chi Wu, an attorney at the National Consumer Law Center.

Tax preparers say the complexity of the tax code makes it difficult to give taxpayers an estimate until they've taken a hard look at their individual circumstances. Otherwise, it's like asking a house painter to estimate the cost of a paint job before he's seen your house, says Sandra Martin, an enrolled agent based in Pittsford, N.Y.

Many tax preparers base their fees on the number of forms — known as schedules — they'll need to file to report itemized deductions, self-employment income, rental property and other taxable events. But the amount of time needed to prepare these forms can vary widely, Martin says. For example, a rental property could have just a couple of deductible expenses, or it could have hundreds, she says.

Paying taxes is painful; overpaying your tax preparer only intensifies the discomfort. How to avoid regrets:

•Request a consultation. A legitimate tax preparer won't charge for a consultation, Martin says. Bring last year's tax return and be prepared to discuss what has changed since then, she says. By the end of the session, the preparer should be able to give you a reasonable estimate of the cost of preparing your return, she says.

In 2011, the average fee to prepare a federal itemized tax return and a state tax return was $233, according to the National Society of Accountants. The average cost to prepare a federal and state tax return without itemized deductions was $128. Your own costs may be lower or higher, depending on where you live, but you should be skeptical of advertised fees that are significantly lower than average, the NCLC says. Those fees may be limited to Form 1040EZ, which you can't use if have dependents or itemize.

•Stay away from refund-anticipation loans and refund-anticipation checks. These products, often marketed to low-income taxpayers, are expensive in their own right, and they're often accompanied by add-on fees, Wu says.

Refund-anticipation loans, often marketed as "rapid refunds," are short-term loans backed by the taxpayer's expected tax refund. The sale of these products has declined significantly since 2009 because most banks that supported the loans left the business or were forced out by regulators.

In their place, though, some tax preparers are promoting refund-anticipation checks. With an RAC, the preparer sets up a temporary bank account to accept direct deposit of your refund from the IRS. Once the refund lands, the bank issues your refund on a check or prepaid card, minus the cost of tax preparation and a service fee.