When to Hire a Tax Professional

Here's a piece I originally wrote for a national magazine.

Believe it or not, there once was a time when preparing and filing your own tax return wasn’t that difficult. But over time, the tax law has grown and become more complicated, leading many Americans to seek help on tax matters. Here are some instances when you might benefit from hiring a tax professional:

• You’re not familiar with tax law. According to the U.S. Treasury Inspector General for Tax Administration, in 2007 Americans forfeited some $4 billion in phone tax refunds, in part because they didn’t know the refund existed. Tax professionals are up to date on current laws, and often find deductions that can offset the cost of paying to have your taxes prepared.

• Your taxes are complicated. Have you moved out of state recently? Do you own your own business? Buy and sell investments? The more complex your taxes, the more paperwork that’s required, and the more likely it is that a tax professional would be a worthwhile investment.

• You have better things to do. The IRS estimates it takes an average taxpayer 13 hours to complete a tax return. If your time is worth $10 an hour, that $130 could help pay for someone else to do your taxes.

• You want help in an audit. If you’re audited, most tax preparers will represent you if they prepared your return.

• You want a quick return. Tax professionals usually file returns electronically rather than by mail; that means if you’re due a refund, it will arrive sooner and can be deposited directly into your bank account.

If your taxes are relatively simple, or if you enjoy preparing your own return and feel capable of completing it, then go for it. But the more of these categories that apply to you, the more you’ll want to consider hiring a professional.

For more thoughts on taxes, see these posts:

• How to Hire a Good Tax Professional

• How to Get More Out of Your Accountant

Comments

[Ann]

We almost always do our own taxes. We pay $20 for Tax-Cut and answer the questions. I may be wrong, but I really doubt that an accountant would find any more deductions than Tax-Cut or Turbo-tax would. We buy and sell stock, own Mutual funds in taxable accounts, own a rental house, contribute to non-deductible IRAs, and have withdrawals from an inherited IRA. so our tax return is probably of medium complexity. As far as the time spent doing our taxes, it would take just about as much time preparing the information to take to an accountant, as it does putting in the information into a computer program, so I consider the time spent equivalent in the two cases.

[justin]

This year I used one of the free online services recommended by the IRS. I used Free Tax USA and had no trouble at all. It took me maybe one and a half hours to get everything together. My taxes are pretty straightforward, but the software took me right through with no problem. The catch is that you have to have an AGI of less than $64k, which wasn't a problem for me. I think I did pluck down $10 to get PDF copies of my returns, but e-filing was free.

[Sam]

One more thing, if you've gotten married, divorced, started your own business received an inheritance or started investing, you might consider enlisting the help of a pro to make sure you know how to file under your new circumstances. This isn't to say you need to resign yourself to a lifetime of paying for help, though. Consider hiring an accountant, ask him or her tons of questions throughout the process to make sure you understand everything. Then use current year's return as a guide in filing next year's return. You will, of course, have to factor in small changes to your personal situation and tax law, but it could serve as a good blueprint for future years.

Sam

[Param]

All this assumes that the "professionals" are truly "professional" - which may not be the case all the time. Few years back, I went to HR Block & they told me that I cannot get credit for Taxes paid abroad (even though the country was covered by DTAA) & that I better file as Non-Resident, though I qualify as Resident - all this mis-guidance for a simple W2 based return with 1116 for foreign tax credit. I did the math on my own & found their "advice" dangerous to my pocket. Spent 1/2 day on a weekend & went for DIY...

[FMF]

Param --

yes, you'll certainly want to find a good professional. Best way to do so: ask friends/family who are successful money managers who they use.

[Kevin]

Ann - does that $20 version track your depreciation on the rental home? I thought only the "business" versions of turbo tax and TaxCut did that.

Param - you get what you pay for with H&R, which isn't much. H&R is ok if you have a W-2 and interest/dividends, but get into some of the more complex issues and they know just enough to be dangerous usually.

[sahm]

We had always done our own in the past, but the last two years necessitated a hired professional. We began a business, bought some investment properties, sold a couple investment properties, so it got pretty crazy. We found one we liked based upon a recommendation of a very trusted friend (who is also a business owner). I have to admit that it is painful cutting the check, but I certainly have felt better having a professional do the return. We have asked lots of questions and have copies of our last couple of returns, so we might be able to do our own this year.

I have a friend who used H&R and got audited for state taxes. H&R didn't follow through on their promises to take care of them. They are still fighting with the state gov't and H&R and no longer live in that state. Go figure...

[Ann]

We almost always do our own taxes. We pay $20 for Tax-Cut and answer the questions. I may be wrong, but I really doubt that an accountant would find any more deductions than Tax-Cut or Turbo-tax would. We buy and sell stock, own Mutual funds in taxable accounts, own a rental house, contribute to non-deductible IRAs, and have withdrawals from an inherited IRA. so our tax return is probably of medium complexity. As far as the time spent doing our taxes, it would take just about as much time preparing the information to take to an accountant, as it does putting in the information into a computer program, so I consider the time spent equivalent in the two cases.

[Ann]

The non-business versions of tax-cut definitely track depreciation on the rental, although I think we do buy the next level up from the basic. We've used Tax-cut for the last several years so its even easier because it grabs the cost-basis for the rental from the previous year's return and I believe it lists any investment accounts from the previous year too, so you don't have to completely fill out everything. We don't have state income tax, so we don't have to pay the extra $10 or so for the state version -- that does save a little on the price.

[Mike]

As a tax preparer at a CPA firm (not a CPA yet) I'll throw in my two cents:

Regarding being audited: the CPA firm who files your taxes will almost always be willing to represent you before the IRS for the audit, but it won't be gratis unless the CPA firm screwed up and that triggered the audit. I read some industry data that the average person being audited will spend 70+ hours preparing for it, and a firm will spend 30+ hours preparing for it. Those hours will translate to anywhere between $3000 - $12000 worth of fees. Note that many CPA firms will represent you for an audit even if you prepared the return yourself, just expect the fees to nearly double, not due to malice that they didn't prepare your return, but the time it takes to figure out what you did on the return, your support for it, the IRS's position on the accounts their auditing, and putting it all together.

Whether you need a CPA or not depends competely on your circumstances. One example is that I personally believe that if you have rental properties you should let a CPA do your taxes. There too much that can go wrong on rentals. Did you divide up the basis of the property between land and building? You're not depreciating the land portion right? Did you factor in closing costs and other costs when computing your cost basis on the rental? Same thing for the sales price, when you sell it are other costs in the 'sales price' as well. Are you decucting the correct amount on line 23 of Page 1 of Sch E, did you take into account any other passive income? Are you recapturing depreciation when you sell? Do you know what depreciation recapture is? Are you keeping track of your suspended losses? I hate to say it, but if you can do all that stuff yourself then you should probably be preparing taxes for living seeing that you're more fluent in the tax code than 99% of Americans.

Getting your return prepared can be expense but ther are ways to get the cheapest rates. The trick is to give your preparer what they ask for and nothing else. Every tax preparer I know, their biggest pet peeves is going through your entire 'shoebox o finances' to see if there is anything remotely related to taxes in it. Just fill out the organizer and attach ALL your 1099s, 1098s, and W-2s to it. Thats it. If you gave us last year's return and filled out the organizer we'll be able to tell if anything is missing without the shoebox. We don't want anything else, no receipts, not March's electricity bill, no check copies (unless you're having the firm do your accounting also). The more you fill out the organizer, the cheaper it will be, even on the most complex returns

Lastly, I know organizers can be over 60 pages long, and a pain to fill out. However, organizers will also have the most up to date tax questions for provisions that may only be in effect for a year or two. An example is that many of our clients got a tax credit for buying energy efficient windows or a water heaters. This provision was in effect for two years but is now expired. However this was a nice size credit and probably paid for most of the return's prep cost. The last tip I can give on filling out an organizer is that if you don't understand something in the organizer, it probably doesn't apply to you. If you think it might apply to you circle it and make a note in the organizer, then move on. Most organizer are over 90% empty with only a few bits that apply to each client, you likely not missing out on any deductions.

[Andy]

When hiring a tax professional, you need to make sure do you look around and find one that can also give you some advice on lowering taxes rather than just doing the data entry for you.