I am sometimes asked:
"Should I prepare my own tax returns or should I use a Tax Professional such as an Accountant or Attorney to Prepare them?"
Having a professional preparer and advisor and developing a long term relationship have many advantages, many of which are subtle and not recognized until time passes.
It's true. Tax Software or Online Tax Preparation is easier and cheaper than ever before. However, that doesn't mean you should use it.
All of the technological sophistication in the world will not compensate for taxpayers who don't know what they're doing. The best programs can guide you through a relatively straightforward return, but there are many instances where a professional tax preparer is a much better choice.
If any one or more of the following reasons apply to you, you should strongly consider hiring a professional tax preparer:
1. You don't follow instructions well.
A friend recently asked my wife which schedule she should use to write off as business expenses her commuting costs (to and from work). When told she couldn't do that, that it was not a matter of whether to use Schedule C or Schedule A, she insisted she'd been writing off these expenses for years.
This friend had been steadfastly ignoring all the "help" boxes in her tax software that could have explained that she was making a mistake. A tax preparer could have made the issue clear in about two minutes. A good tax preparer would not have signed off on her tax return had she insisted on deducting nondeductible expenses.
2. You don't have time to figure out all the software and tax nuances.
Using tax software requires you to be inquisitive and willing to sort through all the advice provided, to find what applies to you. This makes preparing many tax returns time-consuming, and you can still not get all the information you need.
Some people just don't want to go to the effort. If you've got anything more complicated than a 1040EZ or 1040A, you can expect to spend several hours researching tax law and typing in data on your own. It's much easier to spend 30 minutes to an hour with a tax preparer and let him do the work.
After many years of checking out different tax software packages and uncountable hours of professional tax training, most people have never gotten through a complete return on any program without encountering numerous areas on some point of tax law not adequately described in the software's help package.
3. You don't bother to keep up with the latest in tax law.
Just because you understood what the rules were last year doesn't mean you can prepare and file a correct return this year.
Every year congress passes new laws, the IRS cames out with new rulings and judges make decisions that affect your tax situation.
Your daily newspaper will cover developments that concern a large number of people, but they don't report on every change. Professional Tax Preparers subscribe to newsletters and alert services and take continuing education courses to stay up to date. We live, eat, and breathe this stuff 24/7, whereas the rest of you have lives to lead.
4. You own a small business.
If you can explain what a mid-quarter convention is and when it does and does not apply, you might be able to look over your tax preparer's shoulder while he prepares the return. Most other small-business owners should simply hand over their records and do whatever the tax preparer says.
Depreciation schedules, payroll taxes, and Section 179 expense limits are just the start of what an entrepreneur must understand to tackle a small-business return. There are many gray areas of tax law related to business, and returns with Schedule Cs tend to get audited more frequently. A tax preparer who understands your business and has a good relationship with the IRS and the State Franchise Tax Board is an invaluable business asset.
Besides, the expense of preparing your business return is an above-the-line deduction.
(Above the line, by the way, refers to the line on your tax return that discloses your adjusted gross income; it means that these deductions reduce your taxable income dollar for dollar. By contrast, below-the-line deductions such as most itemized deductions reduce your tax bill by a percentage that roughly equals your tax bracket. Below-the-line deductions are inferior, in terms of tax savings, to above-the-line deductions.)
If you have a retirement program that includes your employees, a benefits savvy tax preparer is a must. Any errors could disqualify your plan and make contributions taxable to you and your staff.
5. Your taxes are otherwise complicated.
How complicated is too complicated to do it yourself depends on the software and the tax preparation skills of the taxpayer. Generally though, if you have extensive investments, household employees, rental property, foreign income, or if you lived in more than one state or country, you probably could benefit from a professional's advice.
Tax software varies in its ability to guide inexperienced taxpayers through common but difficult areas, such as determining who qualifies as a dependent or whether the earned-income credit applies.
By the way, just having to file a California return could qualify your tax situation as complicated. California tax law differs in significant ways from federal tax law.
6. Your Company is a Corporation, LLC or Partnership or you have a Trust
Entity tax returns can be very complex and filled with numerous traps for the unwary. These entities and their tax reporting requirements are subject to arcane and obscure rules that the average person or preparer does not understand. You may miss important tax elections or fail to accurately report income in these circumstances either cheating your company into paying more tax dollars or causing it to incur substantial penalties.
7. Privacy is important to you
A glitch in H&R Block's online programming allowed a handful of people to see a part of other filers' returns at its tax preparation Web site; that problem has since been fixed. Such lapses are rare, and most Web sites bend over backward to safeguard financial data. If you're really touchy about your financial data, you might want to stick to the software you can download into your computer or that you buy packaged in a store. (You'll also want to avoid H.D. Vest's tax site, which offers free preparation in exchange for access to your data.)
You're probably still safe electronically filing your return. The IRS and the State Franchise Tax Board have set high standards for their E-filing systems and no one has reported any breaches.
8. You need tax, financial, legal, business or other advice throughout the year.
Is a Roth IRA a better choice for you than a deductible IRA? Should you rent out your home while searching for another, or sell it first? Are your investments wisely positioned for maximum gain with minimum tax impact? Does paying off your mortgage early make sense? Is your state and federal income tax withholding right, or should you adjust it? Do you need a will? Should you purchase a home? What are the legal or financial issues?
Tax guides, legal guides, personal finance books, Internet Web sites and interactive calculators can give you answers to these questions; unfortunately, the answers are often contradictory and may not fit your particular situation. There's nothing like a professional who knows you and who can give you personalized advice. Plus, the professional who already knows you can anticipate and be looking for problems or solutions before you do, since they know you well.
Those who need heavy-duty investment and financial planning advice in addition to tax help should consider looking for a professional who is a personal finance specialist. Further, having a tax preparer who is also an Attorney helps in preempting legal and estate issues you may have, whether or not you know about such issues.
9.You don't want to face the IRS alone.
This can be a perfectly rational reason for paying someone to prepare your return, even if your situation meets none of the criteria above. You can always hire tax help after you receive an audit notice, of course, but having a conscientious and knowledgeable professional prepare your return in the first place reduces the chances that you'll be facing an expensive adjustment later on.
Once again, an audit-savvy preparer who knows you will be better able to answer sticky audit questions, provided you don't blow the whole thing by insisting on going along. Audits are the one time when everyone should leave it to the professionals.
One person prepares her tax returns each year, then sends the completed returns and all of her information to me, to re-do it. When I asked her a few years back, why she doesn't just file them herself, she replied: "I had to deal with them once, never again".
10. You Have Been Audited Recently.
If you have been audited recently, chances are, if you represented yourself, you will be audited again. Even if you had representation, your chances of audit are still increased. That's because the IRS knows that if you prepared your own return and had to cough up more taxes once, due to tax law or mathematical mistakes, or underreporting of income, the chances are you will do it again, thus owing more taxes. Having a tax professional prepare your next return does not necessarily eliminate the chances of an audit, but it reduces the odds of that happening.
11. The IRS will be auditing a much higher number of Tax Returns from now on.
The IRS has been given a substantial increase in funds and has announced that it has reallocated its efforts and substantial resources to auditing more tax returns in the future. That means the audit odds will be going up. You may have been lucky up to now, but the odds of being audited have increased. Doing your own tax returns means you could be leaving yourself open to the types of errors that generate audit red flags. Plus, you will have a harder time in audit and a more expensive one if you try to bring in a professional who has to get up to speed on what you did yourself.
What should be your response to this?
1. Get to know your Tax Preparer
If you're still with me, then maybe you're considering using a professional tax preparer. Your choices are a Preparer Mill or a Personal Preparer.
All of the online tax preparation sites, that I have checked, and most of the National or franchise offices are Preparer Mills. That means that the preparer you had last year may have moved on, H&R Block gives "long term" awards to any preparer that has stayed with them for three years or more. Getting to know your preparer and developing a long term relationship has its advantages.
Every year I need to contact a few people about an item or two of income or a deduction that they forgot to include in their present year's tax information. These include items that I would only know about because I have been doing their returns for the last few years and have gotten to know their tax situation.
2. Tax Preparation Fees Are Tax Deductible.
The professional's tax preparation fees are tax deductible. That takes some of the sting out of having to pay a preparer. Plus, you get to dump your preparation responsibility onto someone else. You don't have to take your valuable time going through your financial data and make sense of it. Isn't your time more valuable than that?
3. You go to Doctors don't you?
This comment is made in only a half-joking way. But, you wouldn't try to treat yourself with over-the-counter medications or chemicals for most physical problems. It's the same with tax preparation and planning.
The person who tries to help their self may be causing greater harm that will be much more expensive to resolve, if it is not too late, than if they had hired a professional to begin with.
Who Should You Use To Prepare Your Return?
If you are now convinced that using a professional is best, the next question is what kind of professional. Although Enrolled Agents, CPAs and others can prepare returns, the best option is the professional who knows law, tax and otherwise. That would be the Tax Lawyer who is also a CPA.
Steve Yahnian Esq., CPA, JD, LLM (Tax), CFP®, Certified Taxation Law Specialist (California State Bar Board of Legal Specialization) first began practice as an Accountant in 1980. He has been a California CPA since 1984 and has saved his clients millions of dollars in taxes over the years.
Conclusion
Perhaps you are one of the many millions of astute taxpayers who recognize the need to have a professional tax preparer.
If so, contact YAHNIAN ACCOUNTING at 559-733-8505 or email Steve Yahnian at steve@yahnian.com. Also, visit the YAHNIAN ACCOUNTING web site. We have helped many others, chances are we can help you, too.