The first – and for some, only – financial professional that many people hire is a tax professional. A tax professional is a licensed individual or firm that can prepare income tax returns and provide advice about reducing your tax bill. A good one will help you save time and reduce taxes (from deductions and credits you didn't even know about).

If you decide to hire a tax professional, take the time to find one that you trust — they'll have access to some of your most sensitive personal and financial information.

What is a tax professional?

Starting in 2011, only individuals with some type of tax-related license are able to prepare taxes for a fee. This is a change from the past, where in most states many tax preparers weren't licensed at all. It's important to understand what types of professionals are allowed to prepare tax returns. Which you choose to work with depends on the complexity of your tax returns and how much you need help with tax planning.

There are four types of licensed tax professionals:

Certified Public Accountant (CPA)

A Certified Public Accountant is an accountant who has gone through a special licensing program that includes work experience and testing. While that program isn't focused on tax, many CPAs do make tax a priority and most CPA firms prepare tax returns. In particular, CPAs who work with small businesses and individuals are likely to have in-depth knowledge of tax matters. Others strictly work with large corporations, so not all CPA firms offer tax-prep services to people like you.

CPAs are often the tax advisor of choice for those who are self-employed, own small businesses, or own rental properties. But they can be of a big help to anyone else with more-complicated tax returns. A good CPA will also provide advice about your business and investments, and tips for tax planning throughout the year.

Some CPAs also hold the Personal Financial Specialist (PFS) credential. This credential from the American Institute of Certified Public Accountants (AICPA) requires a competency test and continuing education in personal-finance matters. A PFS is likely to offer more general financial planning services, not just tax advice. 

Enrolled Agent (EA)

Most people are unfamiliar with enrolled agents until they have a problem with the IRS and need someone to represent them. EAs are individuals who pass a very in-depth test about the federal income tax code, and keep up with changes through continuing education. An EA can both prepare taxes and represent you in front of the IRS, to help argue your case in the event of a tax dispute. Of all the tax-related licenses, the EA is most focused on knowledge of federal income tax; that's all an EA license is for.

Tax attorney

A tax attorney is a lawyer who specializes in tax law. In some states, the attorney may have gone through a special certification of the specialty, but that isn't required – any attorney can advise about tax if they choose to.

Most people do not need a tax attorney unless they have very complicated tax planning needs, or need to be represented in a dispute with the IRS or state taxing authority (especially, one with a lot of money riding on the outcome). But some tax attorneys also provide general tax advice, and prepare tax returns as well.

Registered tax return preparer

A register tax return preparer does not hold one of the above licenses. A registered tax return preparer must register with the IRS, pass a skills test and keep up with changes in federal tax laws through continuing education. This was a new regulation introduced in 2011. Registered tax return preparers are able to prepare tax returns and represent taxpayers in front of the IRS, but only regarding returns that they actually have prepared. In contrast to federal regulations, most states do not license tax professionals, but if you live in one that does — such as NY, CA or MD — be sure to check for the appropriate state licenses as well.

This is the type of professional you are most likely to come across at larger tax-preparation companies. It's also typically the lowest-cost alternative, though that isn't always the case.

Why do you need a tax professional?

Anyone is allowed to prepare his or her own income taxes. But there are many cases where you might want to work with a tax professional. Some examples include:

• You lack the time or interest to do your own tax returns

• You have deductions that you are unsure about

• You have "grey areas" on your income tax return that will shift your taxes up or down by a significant amount

• You own a rental property

• You inherited a large sum of money or you are responsible for preparing estate and final income tax returns for someone who passed away

• You are self-employed

• You own or recently started a small business

• You moved between states during the year, or have income that comes from more than one state

• You have income from overseas, or work overseas

• You have a lot of investment or partnership income

When to see a tax professional?

Don’t wait until April to pick the tax professional you want to work with — most will not accept new clients anytime close to tax deadlines because they're too busy. Preparing taxes can take a few weeks. Plan ahead and try to schedule an appointment for early in the year — ideally, as soon as possible after getting all your W-2 and 1099 forms in January. After your first year, your tax pro should send you a tax questionnaire early each year to get the ball rolling.

If you get started late, have a special financial case or need to track down documents, you or your tax professional can file a tax extension that delays your filing deadline until Oct. 15. But April 15th is still the deadline for paying your tax bill, making estimated tax payments, and funding an IRA, so you'll need at least have a rough idea of your tax return by then. The message is, don't wait until the last minute, because it can cost you money.

How to pick a tax professional?

One way to find a tax professional is ask someone you trust if they work with and can recommend someone. Don’t rely on recommendations alone — your specific situation financial situation may mean the tax professional recommended to you isn’t the right fit for your needs. Just use personal recommendations for a place to start your search.

Which professional to choose depends on the complexity of your tax returns and your need for advice. Before hiring one, write up a list of your questions and a quick list of your income and any deductions you think you have. How big a list do you have? A basic return with little more than a W-2 for job income is very easy to prepare. If you have a small business with inventory tracking and employees, you are almost certain to need a CPA or other more experienced tax professional (and again, get started before tax season).

Once you have an idea of which type of tax professional you need, make sure you hire the right one by asking a few questions:

What are your credentials?

Understand which of the licenses above the individual holds, as well as any special certifications. Don't even consider hiring an unlicensed preparer.

What types of clients and returns do you specialize in?

Some will have a narrow focus, others can do just about anything. The more unique your business or personal circumstances, the more likely you'll want a specialist in that area.

What will your fees be? 

There's a range of billing methods, so understand what the fees will be. Some base the fee on the number of forms and schedules you file, others offer a flat rate, still others work on an hourly basis. We do not recommend working with a preparer who bases the fee on the size of your refund, which can encourage unethical behavior.

Will you file on time?

Understand how busy a potential preparer is, and make sure you can fit into their schedule so you can file on time — if that's your goal.

Do you offer tax advice?

Many tax preparers only prepare your returns based on the information you provide. If you want advice about things like IRAs or tax planning for your business, be sure that's offered.

If you are working with a CPA or tax attorney, also check your state’s board of accountancy (for CPAs) or state bar (for attorneys) to verify his or her name and credentials.

No matter where you get a tax professional's name, ask the questions above to make sure the person has the right fee structure and credentials for your needs. Asking the right questions and getting the right answers is a key indicator of their knowledge and skill level.

What to watch out for when working with a tax professional

Different tax professionals will have different approaches and may offer you a few things we recommend against:

Fees based on your tax return

As we mentioned above, we recommend that you never work with a tax preparer who bases his or her fee on the size of your refund, which can encourage unethical behavior.

Refund Anticipation Loans (RALs)

We don't recommend using RALs. A RAL is a cash advance that your tax preparer gives you, so you don't have to wait for your tax refund to come in the mail or via direct deposit. The problem with RALs is that you end up paying high costs for that small convenience — so high that they've been investigated by several consumer-protection agencies. Instead we suggest waiting it out this time and planning for a smaller refund next year.

Words to know

Unsure about something you read? Many of the financial terms you came across in this article are defined in our financial glossary. A-Z Glossary

Links we like

Here are some online features you might find useful:

• IRS requirements for tax preparers: www.irs.gov/taxpros/article/0,,id=218611,00.html

• American Institute of Certified Public Accountants (AICPA): www.aicpa.org

• National Association of Enrolled Agents (NAEA): www.naea.org

• American Bar Association Taxation: www.americanbar.org/groups/taxation.html