Tax Preparation & Planning

Tax Preparation

As we mentioned above, many taxpayers think of a tax preparer as someone responsible for minimizing their annual tax bill. Though a good tax preparer can sometimes find ways to help you save (they should know more about tax credits and tax deductions applicable to your business than the average person), the primary purpose of tax preparation services is simply to complete and file the necessary forms for you during tax season to comply with state and federal laws correctly and in a timely manner.

Tax preparation occurs once a year, after the close of the financial year, and generally during tax season (between January – April, or September – October if extension is filed). For most businesses and individuals, tax preparation involves only one or two exchanges with their tax return preparers over the course of a few months leading up to the tax deadline.

Tax Planning

Whereas the main goal of tax preparation is to ensure you’re operating in compliance with federal and state tax laws, the purpose of tax planning is actually to maximize tax savings (including minimizing penalties) for the tax planner’s clients.

In contrast to tax preparation, tax planning is a year-round process that takes into account the client’s past tax filings, current financial situation and regulations, and future financial goals, and their year-round activity. Successful tax planning strategies therefore require ongoing communication between a business or individual and their tax planner. This often involves an initial onboarding meeting, as well as regular communication between the tax planner and client, as both the applicable tax laws and the business’s situation evolve.  Tax planning is a more long term process and sets plans for immediate as well as long term benefits for the clients.

Tax Preparation Requirements

The absolute minimum requirement necessary to prepare taxes is a preparer tax identification number (PTIN), which allows a professional tax preparer to prepare federal tax returns for compensation. A PTIN, however, requires no other professional credentials and no accounting or tax preparation experience. Additionally, seven states—California, Connecticut, Illinois, Maryland, Nevada, New York, and Oregon—require a separate credential to prepare taxes within their borders, but these are generally similar to the PTIN and are not indicative of experience and knowledge.

While anyone with a PTIN and the necessary state-level credential can file your annual tax returns, a preparer must be an enrolled agent, a Certified Public Accountant (CPA), or an attorney to represent clients before the IRS on any matters, including audits, payment/collection issues, and appeals.

Tax Planning Requirements

While strategic tax planning requires significantly greater expertise and specific knowledge than tax preparation alone, there are no federally or state-mandated requirements for tax planners.

Because the effectiveness of a tax planner depends greatly on their knowledge of your industry, applicable tax laws, and your business’s specific situations right tax planning professional has to discuss with  decision-makers within your company.