Guide to Starting a Virtual Tax Preparation Business

“The only two certainties in life are death and taxes.” – Benjamin Franklin

Individuals and businesses need to file their taxes every year and often seek professional help. Since the tax code is so complicated, it requires a deep understanding of all the deductions and credits people can attain and how to classify income appropriately. As a result, there is a tremendous business opportunity for those trained and have expertise in tax preparation. Yet many may still question how to start a virtual tax preparation business.

Questions abound about the requirements for licensing and registration and if there are other regulations in different states. One must also consider the market they intend to serve or their niche: businesses, individuals, ex-pats, investors, realtors, etc. What tools will you need to conduct your business? Finally, how do you get paid? What kind of merchant account do you need? We look into all these questions in our guide to starting a virtual tax preparation business.

License and Registration

Various types of licenses give a tax preparer absolute right to represent clients before the Internal Revenue Service (IRS). Individuals holding these licensures can represent their clients for any tax matter, i.e., audits, appeals, etc. The licenses include:

  1. A Certified Public Accountant (CPA)
  2. A licensed attorney
  3. An IRS Enrolled Agent (EA) – this license is granted directly by the IRS after an exam administered by the IRS and tests proficiency in federal tax planning and preparation for individuals and businesses.

Those tax preparers with limited rights in representing clients in front of the IRS don’t hold credentials such as the CPA, EA, or attorney at law. Such tax preparers are classified in the following:

  1. Preparer Tax Identification Number (PTIN) holders are active tax preparers that file a certain volume of returns with the IRS and don’t hold any licensure to represent clients fully.
  2. Annual Filing Season Program Participants – these are tax professionals who also don’t hold any traditional licenses but have gone through a voluntary program offered by the IRS to promote a greater degree of professionalism among tax return preparers. These individuals have the right to represent clients before the IRS but only for those returns that they have prepared and signed.
  3. Authorized e-file provider – Tax return preparers who prepared 11 or more returns in a particular tax year must create an e-service account with the IRS and become an authorized e-file provider. The application is granted after the IRS has assessed the preparers’ suitability for the program.

Some states have their own specific guidelines for non-licensed tax preparers. For example, in California, tax preparers must complete a 60-hour course by a California Tax Education Council (CTEC) approved vendor within 18 months of starting their tax services. They are also required to register as a tax professional in the state for a fee of $33 while also purchasing a $5,000 bond via a surety agent.

Specialization and Expertise

There are many different types of taxes that a person can specialize in. the area of expertise or specific niche of tax preparation you want to cater to can determine which audience to target and how to craft your message. You may cater your tax services towards very simple tax filings, those of 1040EZ or 1040A filers. Alternatives include targeting investors based on your technical understanding of capital gains taxes or the vagaries of a 1031 exchange.

Maybe you may find that targeting smaller businesses is more lucrative, and you want to cater to the needs of that specific market. It is not just the annual returns small companies need to file, but payroll taxes need to be managed at quarterly, monthly, and even bi-weekly intervals for both federal and state. Then there are a host of retail sales taxes that may be applicable that you can advise on an ad hoc basis. Your expertise will determine which services you want to offer to whom.

Software and Supplies

Any new tax preparation business will need to consider software purchases. Which tax preparation software best suits their needs? Some software guides through each step of the filing and requests data based on a conversational format. Other software takes you directly to the data entry and then conducts error checks and confirmation rules. How many different states do you want the ability to file for? Keep in mind that you may be required to file annual returns at the city level in certain jurisdictions, such as in New York City. Functionality, niche area of expertise, and the price will all play their part in determining the tax preparation software you decide on.

Considering spending on supplies can be befuddling. Shouldn’t we all be paperless? Some customers aren’t entirely convinced about not having paper documentation, even though tax preparers filing 11 returns or more in a given year are required to become an Authorized e-file provider.

Even if none of your customers want a paper form return for their records, you may still need to invest in software to store and share tax documents with your clients securely.

A merchant account 

For tax preparers to accept card payments, they will need a merchant account specifically for tax preparation. Such industries are often hard to classify for traditional payment service providers like PayPal and Stripe. Their auto-approval process can create problems after initial setup, where fund holds without notice may be placed on tax preparers’ accounts.

It is essential to understand that tax preparation is classified as a high-risk business subject to all the regulations and scrutiny of such a business when setting up a merchant account. One reason for such a classification is the high prevalence of tax and financial fraud often associated with such businesses that are too rampant in the news. Another reason is the likelihood of chargebacks for these services by customers who are not happy with their tax preparers.

Tax preparation is a necessity for all earning individuals and businesses. It’s also an excellent opportunity for those who understand the granularities of the tax code and can guide individuals and businesses on all relevant minutiae. But even those gifted with the knowledge of our tax code may still have many questions about starting a virtual tax preparation business. Questions on areas such as regulatory requirements, defining one’s niche, how to conduct outreach, and how to get a merchant account. All these are subject matters that can be quickly addressed once you work with a trusted partner and start your business.

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