Starting Your Own Tax Preparation Business

Let’s Do The 1040 Dance

When you start thinking about starting your own income tax return preparation business (“tax store”), it’s important to first give significant consideration to your reason for doing it, the risks, requirements, and of course, the potential rewards.

Keep in mind that when we talk about starting a new business for doing tax returns, we’re generally referring to completing personal income tax returns for individuals and families. Building a business that focuses primarily or exclusively on business tax returns is very similar, but with some special considerations, particularly on the marketing side. This guide is written from a 1040 perspective.

Why is it you’d like to torture yourself, exactly?

Make no mistake: Operating a tax return preparation business is hard work. It’s a real business, and needs to be treated as such. Regardless of whether you’re doing a small number of returns from your kitchen table for extra cash, or you’re buying a big name, national franchise, or anything in between, never lose sight of the fact that this is a business you’re starting. There is a tremendous amount of work involved in starting any business, and a tremendous amount of responsibility. Do not take this lightly.

Above all else, I think all business owners need to know for themselves why they are in business. Everybody has different reasons for starting a business. My entire reason for starting my own tax resolution firm, for example, was to facilitate a lifestyle of extensive travel for as much of the year as possible.

Your reason for wanting to start a business in general is typically very connected to the decision to choose a tax prep business in particular. Some of the more common reasons for choosing tax prep as your offering to the world:

Only Oregon, California, Maryland, and New York currently regulate tax preparers in their state, and a recent attempt by the IRS to require a minimum license for tax preparers was struck down by a federal judge. In late 2015, an effort within the Senate Finance Committee to introduce regulatory language for IRS oversight authority of return preparers was tabled in committee. This means that 1040 return preparation is a pretty easy business to get into.

In addition, getting tax return customers can be incredibly simple and inexpensive, particularly during tax time at the beginning of every year. In terms of marketing and sales, it’s a service that essentially sells itself during tax season, at least to people that already know, like, and trust you.

Lastly, starting a tax preparation business is one of the most inexpensive businesses you could ever start. Aside from any local business licenses or similar things you need (not covered here, check with your city/county/state), you can literally start a tax preparation business with only $64.25 out of pocket cost, and that is simply to register with the IRS as a paid tax preparer and get a PTIN.

Start a Tax Preparation Business: Quick Start Guide

To get started preparing tax returns for a fee:

1. Learn how to prepare tax returns. Knowing how to actually prepare a tax return is a far different thing than just knowing what answers to type into a piece of software, which is really all many, many tax preparers know how to do. In other words, many people that get paid to do taxes couldn’t do a paper return using IRS forms if they had to. And that’s no bueno. You need to know what you’re doing, not just be a software jockey. Fortunately, there are many ways to learn how to prepare tax returns, from classes at major tax franchises, to college courses, books, and online training.

2. Select your tax software. This can be an incredibly difficult decision. Everybody has different preference for software layout, navigation, features, etc. Options range from web-based software with zero up front cost, to complex software suites that cost tens of thousands of dollars. For low cost, ease of use, and excellent support, I’d personally suggest giving consideration to Drake Software.

3. Obtain a Preparer Tax Identification Number (PTIN). The IRS requires all paid tax preparers to obtain a PTIN. This requirement was NOT struck down by the recent court decision. The fines for failing to do this are quite significant, so it is better to just pay the $64.25 to the IRS and be done with it. The PTIN registration site is here.

4. Get the word out. Once you have the knowledge to prepare a return, software for actually doing them, and a PTIN to sign it with, you’re ready to start getting paid. The easiest way to do this, at least in the beginning, is by telling your friends and family, and asking them to tell their friends. Now of course, you’re reading this on a web site that’s all about marketing tax services to get new clients, so this is my favorite part of this whole process. I hope that you’ll stick around this blog and implement some of the ideas for growing your new business, and managing that growth through intentionally systematic processes.

Where To Learn 1040 Tax Preparation

There are a number of ways to learn tax preparation, and since this is the core service you’ll be offering in your new business, it’s worth taking the time to become competent and well skilled at doing this. I think it’s particularly important that any tax preparer actually be able to prepare paper returns, as opposed to just being adept at using their tax preparation software.

If you have no interest in obtaining state or federal licensure, such as becoming an IRS Enrolled Agent or state licensed CPA, then college level courses are not necessary for learning how to prepare tax returns. In fact, you can become a competent tax return preparer with nothing else than the IRS’ own publications, particularly the annual 1040 booklet and Publication 17, Your Personal Income Tax Return. It’s a little known fact that most annually updated tax publications you find at book stores are actually Publication 17 in it’s entirely, with additional commentary and explanation. Most tax schools you can find at local tax franchises or online also use Publication 17 as the starting point of their course materials.

Publication 17, the 1040 booklet, and other forms and schedules are all available online at irs.gov, or from your local federal building. Most post offices no longer stock these items, even at tax time.

The next way to consider learning how to prepare a tax return is to visit a tax franchise and enroll in their tax school. These classes are usually offered in the fall every year in preparation for the upcoming tax season. Cost of enrollment varies widely, but is usually between $100 and $500, which is pretty low in relation to what you learn and the income potential of obtaining this skill. Also note that most tax franchises hire their seasonal staff out of these classes. In addition to H&R Block, Jackson-Hewitt, and Liberty Tax, also check with local CPA firms and locally owned retail tax shops to see if they offer classes. Even in this electronic era, the classes offered by H&R Block and Jackson-Hewitt are, at my last evaluation, pretty darn good, even if you have no interest in working there.

If you are looking for a highly structured setting, you may want to check with your local community college or a university extension office to see if they offer a personal income tax preparation class. Such classes are common during fall and winter semesters or quarters in particular.

For self-directed learning, but with course materials that are more developed than the IRS publications, there are a wide variety of online options. A web search will give you more choices than you can shake a 1040 at.

Lastly, please note that I highly encourage all tax preparers to become an Enrolled Agent.

Selecting Tools of the Trade

Your choice of tax software is probably one of the most important decisions you’ll make in starting your new tax preparation business. Everybody has different things they like about various commercial tax packages, and all software has it’s pros and cons.

It should be noted up front that it is usually a violation of the software license to use a personal tax software product, such as TurboTax or TaxAct, to prepare returns for a fee. These software programs not only limit the number of returns you can prepare under one license, but they also don’t have anywhere for you to enter your PTIN and other paid preparer information, which is required by law to be included on the tax return when it is filed. Bottom line: Don’t try using consumer tax software to commercially prepare returns for a fee.

Also keep in mind that once you start using a particular tax software, it is pretty difficult to switch to something else. All software uses proprietary data formats, so you can’t open tax files in another company’s tax software. Using the same software year to year generally lets you import returning customer information the next year, saving you a lot of time and data entry. Due to this, it is important that you take the time (and it will take time!) to thoroughly evaluate the trial versions of every tax software product you can in order to find the one you like best.

Since there are dozens of different commercial tax software products, I can’t possibly review them all in this lens. However, I can provide a few ideas to start with to help you get on the right track.

ATX: This is one of the more affordable tax software products on the market for professional use. It is definitely not the easiest software to use, and is best for folks that are more comfortable with the actual tax forms, because it is a forms-based product (instead of interview-based). Many freelance tax preparers use ATX, largely because of it’s low cost. If you really know your way around the tax forms, and are looking for an affordable option, I’d suggest giving ATX a try.

Intuit Tax Online: From the makers of QuickBooks and TurboTax comes Intuit Tax Online. The interface for this software is very, very similar to TurboTax, so if you’ve used that for your own taxes, you’ll be comfortable with this option. This is a purely web-based product, which has pros and cons. It’s an interview-mode product, and is extremely affordable, as you only pay per-return that you prepare and file. There are no up-front software costs. I gave this system a test drive last tax season, and I actually liked it. I much prefer tax software installed directly on my own computer, however, which is why I chose not to use it beyond the trial.

TaxWise: The first commercial tax software I ever used, TaxWise has been an industry leader for quite some time. It is my understanding that Liberty Tax franchises use a branded version of TaxWise. This product has built-in client management functions, also. TaxWise is one of the cheaper “big name” tax products, but it’s definitely more costly than the first two options mentioned.

Lacerte, Proseries: These three are essentially the big daddy tax software options most commonly used by CPA firms. They all cost several thousand dollars per year for licenses, but that provides a wide variety of features and options that you just can’t find elsewhere. They are worth taking for a test drive just to see if you have a preference for one.

Drake: This is my software of choice, as of 2015. It’s easy to use, affordable, comes with all forms, and has great customer service. Try out a free demo, it’s worth your time.