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We gave our daughter money towards a down payment on a home and learned we had to file a gift-tax return. Our accountant charged us $486 for this. Why can’t we just add a form to our regular tax return? What is so complicated that it would cost so much?
I’ll begin my answer with questions.
A mechanic informs you that your car needs a new air filter, brake pads or some other important-sounding repair. The cost will be north of $500. What do you do?
A plumber arrives to fix a slow-working drain at your house and discovers a leaky pipe connection that’s slowly seeping water into your walls. The job quote is around $750. What do you do?
A doctor advises a medical procedure and your deductible kicks in after the first $1,000. Again, what do you do?
Like a taxpayer who pays an accountant’s fee, the person who pays for all these services needs the job done right and is trusting an expert with specialized knowledge to perform quality work.
Furthermore, determining the price of quality work is tricky in the absence of widely known, easily accessible going rates.
And it gets even trickier in the midst of four-decade high inflation rates that are pushing up the cost of goods and services. Tax preparation fees are no exception.
So it’s difficult for me to say with 100% certainty that you are or are not getting reasonably charged for this gift-tax return. Likewise, it would be tricky to give a crisp “yes” or “no” if you asked about the price of car repairs, plumbing or medical procedures.
That’s not a punt. It’s a preface for what’s next.
‘You bought the knowledge’
The IRS says, generally, any gift could be taxable. But there are “many exceptions to this rule” and one of those examples is the annual gift-tax exclusion. For 2022, the exclusion applies to gifts (cash or otherwise) valued up to $16,000 per each recipient. For gifts beyond that value, the donor has to file a gift tax return, known as Form 709.
“The [certified public accountant] is going to have to go through the due diligence process. It’s not so simple as it appears,” said Edward Karl, vice president of tax policy and advocacy with the American Institute of CPAs.
Karl said the posed questions could include whether there are other gifts that have to be reported? If the gift is property, what’s the valuation? By statute, the gift tax return has to be filed separately from the regular income-tax return, Karl noted.
But is $486 an overcharge?
“I can only give you my gut reaction and the answer is no,” Karl said. The fee “seemed pretty low to me.” It’s tough to estimate what an average cost would’ve been for the work, he said.
“‘It’s the complexity of the law, not the ease in which it takes put on a form.’”
Wait, I got a second opinion.
“That sounds a little bit above, by $100 to $150,” said Tom O’Saben, director of tax content and government relations at the National Association of Tax Professionals.
But O’Saben noted prices range from region to region, and even from one tax practitioner to the next in the same region. Like Karl, O’Saben said that tax preparation goes far beyond merely putting numbers in boxes.
“It’s the complexity of the law, not the ease in which it takes put on a form,” he said. “You bought the knowledge.”
Inflation’s toll on tax prep
The preparation of individual and non-business tax returns for the 2021 tax year cost an average $160, according to IRS estimates gleaned from income-tax return instructions. For business returns, the average was an estimated $470. The IRS acknowledges the chance for “significant variation” within those estimates.
While the Labor Department’s monthly inflation data tracks the price increases on eggs, sewing machines, airfares, and much more, “tax return preparation and other accounting fees” are at the bottom of its list. The problem is there’s sparse Labor Department numbers for this expense, and the list indicates that the data come from smaller sample sizes.
Inflation is also creeping into fees. O’Saben said the firm he works for hasn’t raised costs in years. But his company is currently determining whether to assess a 5% to 8% fee increase in line with inflation, he added.
Industry wide, rising labor costs, software costs and overhead costs for office utilities, supplies and rent are all putting pressure on tax preparers. Of course, some tax firms have commercial leases, while others are solo practitioners doing the work from a home office.
‘Shop it’
It’s long been common for taxpayers to complain to their preparer that the fee is too high, O’Saben noted.
You may wish to pay the costs to move on with your life, and ask around for a better rate in the future. I’ll bet many people will have similar financial conundrums this tax season approaches.
But remember, you’re paying for the trust you put in your own tax preparer, and you are also paying for their savvy to spot the issues and know what data to track down and what form to complete. Ultimately, that could end up saving you money.
You’re also paying for a relationship. What if the IRS sends you a letter months or a year from now about this gift-tax return? Your tax preparer should be on hand to help you out.
If you choose to shop for the future, call around and ask for quotes, O’Saben said. But be warned: Some tax preparers may even be too busy to take on new clients. Ask trusted friends, relatives or colleagues if they use a particular person or firm, Karl added.
Ask how a professional structures their fees: Is it a flat fee? An hourly fee? A fee that escalates based on the return’s complexity? (Avoid contingency fees that take a percentage of the refund size, Karl added.)
“If they feel like the price is excessive, they should shop it,” O’Saben said. “But is it worth the relationship? It’s really, really difficult to value services when it’s so based on relationships and trust.”
Bottom line: I’m not passing judgment on the fee’s fairness and I’m not saying you should or shouldn’t stick with your person in the long run. I’m saying there’s a lot cooked into the cost.
Got a tax question? Write me at: akeshner@marketwatch.com
Thanks for reading. I want to help you think more broadly about the issues that affect your taxes. I’m not offering tax advice, just an attempt to look at what the swirl of tax rules and economic conditions could mean for your wallet.
I’m here for the reader who faces their taxes with an air of resignation. You’re just not that into taxes, I get it. I was once that guy. Underneath the jargon, think of your taxes like a maze — with money at the end. Or a trap that you need to avoid.
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