Jennifer Jones was rattled when she started getting audit letters from the Internal Revenue Service. The tax-preparation firm that did her return had misreported a rental property she owned as a business, according to Ms. Jones and her financial planner, Stephen W. DeFilippis.
After the 2009 audit, the 39-year-old Miami-based travel agent had to hire Mr. DeFilippis to resolve the issue and prevent her from incurring a $6,000 tax bill. Mr. DeFilippis, who is based in Wheaton, Ill., is an enrolled agent, a designation that requires passing special exams administered by the IRS.
"Once you get audited, you're burned forever," Ms. Jones says.
Other professionals can trip up investors, too. Last year, a New York couple lost a case in U.S. Tax Court and wound up owing $754,653 in additional taxes and a penalty of $150,930, after their insurance agent and financial adviser wrongly told them they didn't have to include business-related insurance policies in their reported income, according to court documents. The case is under appeal.
Comprehensive statistics on how many people get bad tax advice are hard to come by, but Tax Court cases show the kinds of issues that prompt an audit and how often people fight back against the IRS when they do occur.
New tax laws heighten the importance of having an adviser who is knowledgeable and current. A 3.8% federal surtax on investment income took effect in January, and investors need to know to which income it applies. Some New York financial advisers in are reaching out to tax professionals to help qualified spouses in same-sex marriages get a recently announced estate-tax refund.
The changes help put a premium on finding the right expert, and credentials alone are no guarantee. This year, a couple lost another fight in U.S. Tax Court over more than $5 million in deductions for a horse-breeding operation. A tax lawyer had assured them they could take the write-offs.
The American Institute of CPAs has a few tips for choosing an accountant. Besides getting a referral from someone you trust, the group suggests finding a tax pro with a proven record of dealing with related tax issues to help avoid disaster. Ask friends and associates to refer you to a tax adviser who has done a good job for them.
If you have a business, it is best to find someone who knows the ins and outs of tax returns or tax strategies for businesses.
"Bad tax advisers are going to be willing to say they know how to prepare taxes for businesses," says Jeffrey A. Porter, chairman of the tax executive committee at the American Institute of CPAs and the owner of Porter & Associates, an accounting firm in Huntington, W.Va.
Lauren Locker, chairwoman of the National Association of Personal Financial Advisors, recommends that anyone looking to hire a financial adviser should see how comfortable candidates feel talking about taxes. An adviser who doesn't hold tax credentials ought to be able to introduce clients to one or two good CPAs or tax lawyers.
"The credential is a baseline," Ms. Locker says. "We know you were able to learn this, but how you were able to apply it is a whole other thing."
You can get some limited help from financial planners and others who give general advice. These advisers might know enough about, say, selling shares of appreciated stock to reduce capital-gains taxes. Or they might suggest using a trust or partnership to reduce estate taxes. But good planners know when they are in over their heads.
It is easy to trip over the new 3.8% investment tax, for example, or make an error calculating the alternative minimum tax, given new income-tax thresholds and phased-out deductions.
Meredith Schneider, an adviser in Redwood Shores, Calif., whose firm manages $40 million, says she might offer clients questions to ask a tax expert but avoids getting into any details herself.
"I will never say anything definitively," she says.
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