When Should You Opt For A Professional Tax Preparer?

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Well, we all know it is that time of year. If you haven’t had your taxes done by now, maybe you are still trying to decide how you will go about getting them done.

I did a recent article on Free File. If you meet all the income and age requirements, and expect to have a simple tax return, this may be the easiest way to prepare your taxes. However, if you made a little more money or didn’t meet all of the strict criteria, but merely have a W-2 and some interest income, maybe even a mortgage deduction, your best bet is still some of these tax software companies. In general you can pay to use Tax Cut or Turbo Tax for federal filing and get free state filing, or receive an equivalent rebate when you pay for both federal and state tax preparation. With the software, it asks you a bunch of questions, you input your info, and you are done. It doesn’t get much easier when it comes to taxes, and you get a little more help then if you just try to figure it our all on your own. You can buy tax return preparation software from a retailer, download it online, or even just prepare your taxes on the Internet with no download.

So when should you consider going to a professional tax preparer? In my tax practice we often get people coming in who sold a house, inherited money, moved, or started a business. Most of the time these people have no need to pay hundreds of dollars to get a tax return done. I tell potential clients all the time, “Go to H&R Block.” In general I recommend a franchise tax service, like H&R, if you have a rather simple tax return, but a generally more complex issue than you want to deal with yourself. In these cases, places like H&R Block are great, as they offer simplicity and convenience, and you know you are getting a little extra attention or care. If you can think of nothing worse than doing your own taxes, well, it might be worth it to shell out a little more money for your peace of mind and sanity. The only warning I have regarding the franchise tax preparers is to say no to Refund Anticipation Loans (RALs). Paying upwards of 100% APR to get your refund a couple of weeks early is just plain crazy.

A step up from H&R block is seeing an Enrolled Agent (EA). An Enrolled Agent is a tax professional licensed by the IRS. Enrolled agents can represent you before the IRS in all matters including audits, collection and appeals. If you inherit a small or medium sum of money, and just don’t know what to do, then an enrolled agent may have a little more expertise, but be more affordable than a CPA. I would also suggest an EA if you moved between states during the year or if you have rental property; or if you sold your house and think you have a bigger gain than the $250k/$500k exemption. If you are under the exemption, a house sale is a piece of cake (tax-wise), but if you are not sure, see a tax professional who won’t charge you too much. Oh yes, and if you move between states, the tax software and the franchises will offer to do these complex tax returns for you, but they will most likely not be done right. Take extra care in this situation, or go see an EA.

A step up from an EA is a CPA. So what is a Certified Public Accountant (CPA)? A CPA is a professional accountant licensed by the state. CPAs meet strict education, ethics and continuing education requirements. CPAs tend to focus on business accounting and taxes, though this is not always the case and many simply focus on individual taxes. CPAs usually will have a broader range of knowledge in more complex areas, and meet stricter licensing requirements. But CPAs will also charge more. Like EAs, CPAs can also represent you in front of the IRS in all matters. Just keep in mind that some CPAs have no tax experience, so a CPA license alone does not mean you are getting the best tax experience and knowledge. There are probably many cases where an EA is better than a CPA with no tax experience.

So when is it time to shell out a little more money for a tax-experienced CPA? There are two instances when this is important.

First, if you receive a large sum of money.

Large, for this purpose, is defined as upwards of $1 million. In this case you really need to see an experienced CPA to see how best you can minimize your tax liability. When you inherit money you are not taxed on it. But if you receive a large sum, say in your 80s (I have seen this happen), or even in your 30s or 40s, you need a solid estate plan to pass along money to your heirs. There are just so many issues a large sum of money brings up that I can not even begin to cover. That is why it is time to meet with a CPA when you win or inherit a large sum, or receive a large gift.

Secondly, you need to meet with a CPA if you start a small business. I would even go as far to say if you want to meet with a CPA your first year in order to make sure you are doing things right, and you never go back again, it will be money well spent. Although overall I would recommend seeing a CPA periodically to make sure that you stay on track, even if you feel comfortable preparing your own tax return. This is because when you start a business things suddenly get much more complex.

A huge issue I see is people coming in to our practice after having been in business for a couple of years, and seeing that their past tax returns have many obvious errors. This is just a big red flag that makes them susceptible to audit. Avoid having big mistakes on your tax return, and go see a CPA. A CPA can steer you in the right direction, not only making sure your tax returns are prepared correctly, but also making sure that you are keeping adequate records, in case of audit. Beyond that, a CPA can give you advice on how to structure your business, how to keep accounting records (help with accounting software which can ease your operations) and also should be able to save you money (more than any fees you pay) with tax savings strategies. Most small businesses, if nothing else, are under-utilizing the retirement vehicles available to them, simply because they don’t understand all of their options. Even if you are a MaryKay consultant making a little on the side, this holds true. In fact, I have never seen a bigger red flag for audit than some of these independent consultant companies. One visit to a CPA in this situation can save headaches down the road.

With all of these options, tread extremely carefully when going to a tax preparation service. If a tax return preparer is not licensed, or is not working for a reputable franchise, you could become a victim of tax fraud. Some things to keep an eye out are for tax return preparers who do not sign your tax return (because all paid preparers must sign your return), and tax preparers who charge a fee based on a percentage of your refund. These are two signs that your tax return preparer is a fraud. No matter who prepares your tax return, ultimately it is your responsibility, whether it is prepared correctly or not. Going to a reputable, long-time tax preparer should give you some extra peace of mind.

3 thoughts on “When Should You Opt For A Professional Tax Preparer?

  1. I tried the commerical tax software but didn’t find the instructions any clearer than the IRS instructions. What the software did help with was managing the data input and paper forms. The next year I found a method that was just as good for free. I modeled each form using a spreadsheet but only included the lines that applied to me. By linking the spread sheets I had the computer included the calculations from the different schedules onto the main forms so all the right lines were recalcuated if I made a changes in different places. When I was done, I downloaded the forms from the governement (state and IRS) web sites and filled them out in pencil so I could erase any mistakes. Then I photocopied the forms and signed the copies. I didn’t see any problem signing the photocopies since the quality was pretty much the same as printing out the downloaded forms. The the govt accepts downloaded forms printed on a home computer so they ought to accept the copies. I didn’t have any problems and got my refunds okay.

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