The cost of preparing any tax return can vary dramatically among tax preparers. IRS law prohibits tax preparers from basing their fees on the amount of tax refund realized by the client. Many tax preparers charge by the hour, others operate from a standard schedule of charges, and some simply charge “what the traffic will bear.” Higher levels of tax expertise typically command higher fees.
Determining Your Fees
If you operate a home-based tax business, you won’t have a lot of overhead. Therefore, you are able to charge a lower fee than if you operate in a storefront. Lower fees can help you gain market share. However, be careful not to price your services too low. If your services are a lot lower than the general market price in your area, clients may become concerned that you are not as competent as the other tax professionals. In addition, your profit margin will be lower and the value of your business will be less. Also, if you move into a storefront or a professional office in the future, your fees must be adequate to cover your new overhead expenses. It is easy to lower fees in the future, but much harder to increase fees. However, if your fees are too high, you may attract fewer clients and your revenue could be less.
Check Out the Competition
You need to know the value of your service and understand the local market. Obviously, when setting your fees, you must be competitive. Therefore, it’s important to find out the fees charged by your local key competitors. Calling the main competitors in your area for a price quote based on a scenario will give you an idea as to whether or not you are pricing your services competitively. If they will not provide a price quote or estimate by phone, you could recruit a friend or relative to “shop” your main competitor(s) in person, posing as a potential client. Obtaining national average pricing can also help.
Charging by the Forms
The fairest pricing method may be to base your fees on the complexity of the tax return, determined by the schedules and statements required. You simply charge a base price for the type of return you are preparing…1040EZ, 1040A, 1040, 1065, 1120, 1041, etc. and then charge for additional schedules and statements, etc. You can also charge for the following:
- Compiling tax information
- Additional line entries
- State tax returns; local and foreign
- Bank products
- Amended returns
- Taxpayer representation: audit, offer in compromise
- Copies of tax returns
Pricing by the Hour
If you are a sole practitioner, it might be appropriate to charge by the hour. You may not want to do this unless you will be preparing complicated returns. Many basic tax returns will take less than an hour to complete and you could run the risk of charging inappropriately. However, you could establish a minimum charge. Remember the client is paying for your knowledge, experience, and credentials, and not just for the time it takes to compile the tax return.
Quoting Fees in Advance
Charging by the schedules and statements required makes it more feasible for you to quote the fee in advance that will apply regardless of how long it may take for you or another tax preparer to complete the return. If a client’s tax return is complicated, you may have difficulty quoting an exact price before conducting a thorough interview. However, you should be able to conduct a short phone interview to provide a rough estimate of the probable fee. A telephone interview form should be used for this purpose. If a fee is quoted in advance, the prospective client should be advised that the fee was based on the schedules and statements required based on the information provided by the taxpayer. If something new comes up during the interview requiring additional forms to be completed, an additional fee would be charged. The completed interview form should remain on file until the potential client comes in for service in case there is a change in the information provided, which could affect the price quoted over the phone.
Most people who inquire about price simply want a “ball park figure” to determine whether the cost will be reasonable and affordable. You should welcome questions about pricing and disclose as much as possible about the basis for your fees in advance. If you deliver value-added services at no additional cost, such as assistance in the event of an audit, a tax-planning session, a state tax return, etc., you should mention them. The bottom line is that people are afraid of the unknown. If you can tell a prospective client what you would charge up front you have eliminated that concern.
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