Would I Recommend the Tax Prep Industry to a Young Person? Probably Not

If a young person were to ask me whether I would recommend getting into the tax preparation business, my response would be … NO.

Or at least, don’t “just” do taxes. Diversify and offer other accounting services.

This is a hard business. You have to know what you’re getting into.

If you prepare simple 1040s, you’ll be dealing with a lot of clients who view you as just a commodity. They’ll jump ship if someone cheaper comes along, or if they decide to get brave and do it themselves in TurboTax.

I don’t think Congress will ever truly simplify the tax code, but constant innovations in technology will make it easier and easier for people to file their returns quickly and painlessly — by themselves.

Imagine a system where a person takes a picture of their W-2 with their phone and uploads it into an app that populates the person’s 1040. All that’s left to do is hit “submit” and the person would be done with taxes for the year.

The tax prep industry is already losing a lot of the folks with “easy” returns to the DIY software. I doubt that trend will change.

If you try to specialize in more complex 1040s, you’re going to have to spend money on better continuing education and research materials. You can charge higher fees but you’re also taking on more risk because there’s a higher likelihood of making a mistake. 

That being said, this can also be a rewarding field. Taxes are like a giant, never-ending riddle. I learn something new every single day. I really do.

I truly get a high off of things like rebuilding 7 years worth of information for a taxpayer who holds ethanol plant investments. The taxpayer received K-1s from these plants, and the person’s prior preparer royally botched the returns.

So I had to go back to the first year of investment in these plants and re-calculate basis, disallowed passive losses and the proper loss carryforwards, the correct DPAD deductions and DPAD carryforwards, and the allowed production credits and the corresponding credit carryforwards. There were also issues involving obscure Iowa tax credits that flowed through to this person.

Oh, and one of the plants was located in a different state and produced large losses for a few years, so I had to calculate the correct net operating loss in that state for a series of years so that we know how much NOL was left to use up in 2012 on that particular state’s return.

This involved basically re-doing their returns for the last 7 years. I did many of the years by hand. When I was finished, I was proud of my work.

But make no mistake — when you take on projects like that, you’re taking on risk, because the client is counting on you to get it right.

So what point am I getting at?

I guess what I’m saying is, this can be a rewarding field. But it’s not for everyone. What do other tax pros think? Is this a good field for a young person to get into?

“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”

5 Responses to “Would I Recommend the Tax Prep Industry to a Young Person? Probably Not”

  1. Robert D Flach August 29, 2013 at 6:37 am #

    JD

    Over the past few years I have occasionally thought about this issue from a slightly different perspective – if I were just starting out today would I still choose tax preparation as my profession? Especially in light such developments as the IRS attempt to regulate all tax preparers, the continuing complexity and changing of the Code, and the excessive due diligence requirements of the Earned Income Credit.

    My answer would probably be yes – and still partly because of the seasonal nature of the job. I still enjoy preparing 1040s – the thrill is not yet gone.

    In my THE TAX PROFESSIONAL post “Ramblings on Tax Practice” (http://thetaxprofessional.blogspot.com/2013/07/ramblings-on-tax-practice.html). I take a different position than you do in this post. I talk about limiting a practice to 1040 preparation, which I now do, instead of recommending “diversify and offer other accounting services”.

    I am not as concerned as you are about DIY tax preparation software and tax simplification taking away business. As I have said for years, I do not believe that the creation of a much simpler 1040 would affect my practice, and I do not know of any client who has ever left me to “self-prepare” his/her tax returns using a box.

    RDF

  2. Mike Loshe October 3, 2013 at 10:40 am #

    Thanks JD. I have recently been juggling around the thought in my head and was wonder if you had any tips on how to become a tax preparer. The current job I am working feels like a dead end and I feel like my skill set would be perfect in the tax industry. Any tips?

    • Jason Dinesen October 4, 2013 at 9:39 am #

      Mike – I know the feeling of being in a dead-end industry and wanting to get out. I started on the side and built from there. Take the EA exams. You’ll learn a lot about taxes and it will give you a solid foundation and added credibility (even though literally 90% of the public has never heard of an EA). Once your business starts growing, you have to find some niches to specialize in. I would never recommend getting into the tax business as someone who just slaps together simple 1040s by the thousands each tax season. Too much competing on price, hard to differentiate yourself from TurboTax or from the H&R Blocks of the world, and a client base that is likely to drop you if they find a better deal somewhere else.

      • Brian Huber November 6, 2013 at 3:48 pm #

        I somehow missed the comments in October. Jason is certainly correct about study for the EA exam.

        I will take this point further by emphasizing that the distinction of being an Enrolled Agent tax expert means you are not competing with TurboTax or H&R Block. Those avenues are designed to address different taxpayers than core EA clients. Mike can sample the special knowledge possessed by Enrolled Agents with a free looks at EA exam question at http://fastforwardacademy.com/enrolled-agent-exam-prep.htm. Enrolled Agents know a lot that isn’t understood by typical TurboTax users or H&R Block staffers.

        Granted that taxpayers may think they can substitute one of these choices for a skilled professional, but that illustrates the importance of targeted marketing and avoiding rivalry on the basis of price. I suppose that’s how Mr. Flach succeeds. However, a more ambitious young person will only have rising income by expanding into business tax returns and hiring competent staff.

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