Warning: Your Hairdresser Is More Regulated Than Your Tax Preparer

Female hairdresser adjusting curlers in a mid adult woman's hair
Getty Images

A recent Consumerist article points out the shocking fact that hairdressers (along with most other service professionals) are more heavily regulated than the people you may hire to prepare your taxes. In fact, only three states (California, Maryland, and Oregon) have any laws whatsoever mentioning necessary qualifications.

With tax season swiftly approaching, it's important to understand what you should look for in a tax professional, whom to avoid, and the signs that should send you running for the hills.

After all, you are legally responsible for the information on your tax return -- whether you pay someone else to prepare it or not. So even though getting an outsider's assistance may give you some peace of mind, it could ultimately be the cause of an even worse headache down the road.

How Regulation Bypassed Tax Preparers

In the state of New York, cosmetologists must complete a 1,000-hour course and then pass a state-administered written and practical exam. Virginia has a similar process -- and the regulations involved run to 18 pages of legalese.

Even Alaska, the least densely populated state, has a 23-page document establishing requirements for social workers, geologists, and big-game outfitters. But absolutely no mention is given to tax preparers.

%VIRTUAL-article-sponsoredlinks%Although the IRS might be a tempting target to blame these lapses on, they're not the IRS' fault. Service jobs are regulated at the state level. The IRS does require preparers to obtain a preparer tax identifier number, or PTIN. But there are no competency requirements involved.

In 2011, the IRS tried to change this, hoping to begin regulating non-attorney and non-CPA tax preparers. But lawyers quickly moved to quash the attempt, arguing that Congress never gave the IRS authority to regulate tax preparers.

Though that may be true (a decision has not yet been reached by the U.S. Court of Appeals that's currently reviewing the case), just consider the number of Americans who shell out for help in preparing their paperwork. In 2011, nearly 80 million Americans paid about $10 billion to have someone prepare their taxes. It's clearly a big deal that there are so few regulations on these preparers, nor are there major ramifications if they make a serious mistake. And those mistakes ultimately could cost you money.

This is even more troubling when you consider that an official government investigation into this issue in 2006 -- managed by the Government Accountability Office -- involved having returns prepared at 19 tax chain outlets. It discovered that "all 19 returns had mistakes ranging from refund overclaims of nearly $2,000 to underclaims of over $1,700."

Whom Can You Turn To?

The best tax preparers to seek assistance from are certified public accountants or tax attorneys -- heavily educated (and regulated) professionals who must meet strict requirements for initial certification. They are also required to receive ongoing education in order to maintain their certification.

Of course, expertise comes at a cost, which makes hiring CPAs and tax attorneys too expensive for a lot of people.

For those on who make $52,000 or less annually, the IRS offers completely free tax preparation through its Volunteer Income Tax Assistance, or VITA, program. These agents are trained and IRS-certified, so they are similarly trustworthy.

Then comes the vast middle ground into which most people fall.

Tax preparers at national chains like H&R Block (HRB) and Jackson Hewitt go through minimal training (the equivalent of 2.25 and 3.5 college credit hours, respectively). That's better than nothing, of course. But even so, a quick Web search will return reams of horror stories from folks left with stiff penalties due to careless mistakes made by tax prep agents. So proceed with caution -- and use them at your own risk.

Of course, outside of the big chains, there are many, many tax preparers. And when it comes to those, you're on your own. Some may indeed be knowledgeable and helpful, but others might not be looking out for your best interests.

How to Vet a Tax Preparer

Heed the IRS' advice and keep these things in mind when determining whether or not a prospective preparer is suitable to use:

1. Ask for their preparer tax identification number (PTIN). As mentioned earlier, the IRS requires tax preparers to apply for this number. So if yours can't provide you with his number, it's probably because he doesn't have one. Meaning you should stay far, far away.

2.Do your research. Don't rely solely on a family member's or friend's recommendation. Google the tax preparer's name. Check the Better Business Bureau to see if there's a history of complaints. Obviously, if the preparer's name is attached to a long list of disgruntled clients, keep looking.

3. Beware of big promises, and consider how the preparer is paid. A preparer who guarantees they'll send you home with the biggest refund in town (especially before they've even examined your documentation) is probably willing to fudge a little on your return to fulfill that promise. The same goes for a preparer who doesn't charge a flat rate -- but rather charges a percentage of the return he secures. These are two common, but easily avoidable, red flags. Don't be lured by big refunds -- and seek out flat-rate tax preparers.

4. Never sign anything until you've completely reviewed it. It may take some extra time, but review every number that your tax preparer has prepared. Ask questions if something doesn't make sense. A good tax preparer is willing to explain what they've calculated and why. Remember, even though your preparer is required to sign the return and list their PTIN, all responsibility for the accuracy of your return falls on you. So make sure all the t's have been crossed and the i's dotted -- and never sign until you've verified your return.

Motley Fool contributing writer Adam Wiederman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our newsletter services free for 30 days.