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January 20, 2010

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I am a CPA with a Big 4 firm, and have 8 years tax experience there. When my wife and I moved overseas we ceded tax preparing and filing to our employer (part of the package to move, we both work for the same firm). There is no doubt I could have figured it all out, including the foreign filings, but the time investment would have been quite large, and after receiving my foreign tax return I know I got more back as a result of them doing it compared to me doing it. In my career I have prepared and signed numerous individual tax returns with income from partnerships, s-corporations, LLCs, trusts, etc. where the income is well in excess of $1M but even I know when it is not worth it. And remember this, tax partners in the big firms don't even do their own taxes. There are dedicated people assigned to these returns who understand the nuances of the partnership.

All of the above said, a few points I would like to make about people who choose to have someone else do their taxes:

1. Don't be afraid to do it yourself. At first it is intimidating, but if you are like 98% of the population you have a W-2, some interest, dividends, maybe some capital gains (losses this year most likely), some mortgage interest and maybe some student loan interest. If this is you the software programs out there walk you through pretty well.

2. DO NOT go to H&R Block or any of those seasonal prep places. Yes, there are some intelligent people working there occassionally, but the odds are against you getting one of those people (remember H&R Block is the largest seasonal employer in the US. Would you choose a "seasonal" brain surgeon vs. someone who does it 12 months a year). Find someone through your network of co-workers, friends, etc.

3. There is a major difference between a tax preparer and a CPA (see above). However, just because someone is a CPA does not mean they are necessarily better than a tax preparer. Interview the person, get references.

4. Unless you make a ton, have something extraordinarily complicated (beyond owning a small business or 3), or someone else is paying for it, forget the Big 4 or any national firm, you will pay through the nose. Trust me, I know. Try small, 1 office firms or sole practioners. You will get better service and pay less. The margins just aren't there for the big firms on an individual return for them to pay much attention to you.

5. No matter who prepares the return, YOU are responsible for what gets filed. Check your return, check it again, and then check it once more. If you give the preparer all the info and they forget to enter something or type $5,000 instead of $500, you are ultimately responsible for that. The preparer takes responsibility for the prep and has a duty to do it correctly and lawfully, but mistakes are made. I found over 3k of incorrect tax expense on my return last year just because I looked it over (and remember, someone from a Big 4 firm is preparing and reviewing it before I even see it). By signing the return you are saying you checked the return and agree with what is on it.

The example sounds very familiar to me. Did an early tax estimate via Turbo Tax and came up owing $8500. I'll likely do the the taxes 2 more times but if it stays high I'm debating weather or not to hire a CPA. The question is if it's worth it.

@CPA Abroad - thanks for the input. Those are definately some good tips worth sharing.

So what you're saying is, if you ask enough CPAs, eventually you'll come up with one who has numbers you like. That's like asking economists what the economic forecast is going to be.

Seriously though, I have always done my own taxes, even with tax software. I will call in a professional when the need arises. Hopefully that need will never arise.

"A few days later I was thrilled when I received a call stating that I now only owed somewhere in the neighborhood of $2,500."

Wow, Jeremy sounds a little on the gullible side. The CPA "knew she could help", as in "if I tell this guy he owes $4000 I don't make any money, so I'd better bend a few rules somewhere". People will believe anything.

My return is pretty plain. Two W2's, mortgage interest, student loan interest, and this year I added windows to my house so that qualified too. TurboTax let me put all those numbers in no problem.

When I finally get my own business started I'll definitely be working with a professional though.

@Mikegardner & Pop - I think the issue (if you are honest) is that maybe you missed something. Taxes are pretty complicated especially when you have a business, real estate and other forms. A CPA may recognize something you missed, for example, incorrectly applying the 179 rule for depreciating expenses on Schedule C.

My hope is that a CPA will recognize where I misinterpretted the rate of depreciation or catch an expense or deduction I wasn't applying. There is nothing wrong with claiming deductions which are perfectly legal.

In fact I hate this system. We should go to the Fair Tax (www.fairtax.org) which puts the burden of taxes fairly on everyone and also very simply.

So Flexo saved all his money by changing his incorporation from an LLC to a S-Corp. This allowed him to only count some of his money as wages and the rest as unearned business profit which gets you out of paying social security and medicare on that money.

This is something that someone who is versed about finances should know about and shows a lack of due diligence on his part about business entities. A basic search on the differences between business entities will show this one in 5 minutes.

As to this person who owed 4K and was shocked. This is more lack of due diligence. This person clearly had income, deduction, or life changes and didn't properly account for them in his with-holding. A little trial run with last years tax program would point out such a huge miscalculation in his with-holding.

And as to the idea that this person did this for a week and then the CPA magically found a way to "save" them another 1500 in taxes? That doesn't make much sense. Likely the CPA advised them to do something like make a SEP IRA contribution or some other retirement or business deduction type payment to lower the taxable income. While you may not know of all your options and how to do them, a financially savy person should be aware of the ability to do things like that.

If it was something else that truly is CPA magic, I would love to see the details, because when I do, it never seems to be very magical, even though these kinds of posts are always filled with a lack of details and a big gap where some magic happens and then great money is saved.

CPA's have their place and plenty of people need them, but unless your taxes get fairly complicated, the software on the market is actually quite excellent.

@texas,

I don't disagree with you. Once you get to a business with depreciation schedules, etc, its probably safer to have a CPA do it. But even a basic business using a schedule C that doesn't have much for depreciable assets doesn't really need one.

I also agree that our systems is all messed up and it would be way better if there was no income tax burden on the people. The "fair tax", sales tax, VAT tax, whatever you want to call it would be a much better system.

However no matter how much people prosletize it, it will never happen in this country that we eliminate the income tax. Even in countries that have sales or VAT taxes, they still have income taxes and the income tax portion becomes more progressive to offset the perceived regressive nature of the sales tax.

I wish people would stop promoting the national sales tax. If we get it, we will have both, we will never have no income tax in this country.

I am in the same boat. I actually paid about 4k to the IRS last year and this year decided to hire someone. Guess what...not only will I owe very little this year but he can also get me my 4k back!

I should've done that a long time. I live in a foreign country and make income both here and in the U.S. so obviously the tax situation is complicated.

I think the thing people forget is that even if you 'do your own taxes' with something like TurboTax you're still paying for the software and the filing. If you have anything like ESPP, 401k or the like you instantly have to upgrade to the premium package, which is a minimum of $50-75.

I've found that a good CPA in our area can cost less than $200. It saves me hours of my life, reduces my stress, and due to some non-standard investment trades, refinancing a home, etc. that they have found loopholes that I didn't know about and TurboTax never pointed out. So even though it's about $100-150 more (which is also deductible), all they have to do is find ~$300-500 in deductions you missed and they paid for themselves.

Sure you can do it yourself and maybe save some money, but for me I'd rather reduce the stress, save the time, and get back more money.

As I've posted before, we gladly pay $250-$300 to our CPA once a year to handle our taxes. For the last 3 years, we've been carrying over business losses. My husband is also a sports official for several school districts. After this year, our taxes will be simpler, but we'll probably still use our CPA for about $200-$250 a filing.

Her fee covers doing our taxes and any tax questions we have throughout the year since she's open year round. I've called and asked her lots of stuff when I'm curious (most recently I wanted to know if the adoption fee for my Pug from Pughearts was tax deductible). She's awesome and I love having a tax guru on call. Plus she keeps all our past filings on hand so we have record backup in case of a fire or if we misplace something from a past return. I'm a very satisfied customer.

"DO NOT go to H&R Block or any of those seasonal prep places."

Yes!!! My fiance went to H&R Block and ended up with lower taxes than me (I did my own taxes) by about $2k. So I looked at her taxes and immediately noticed that they had qualified her for a deduction for addending school in a "Midwestern disaster area." We have lived in Virginia for the entire time! When she reported the error to them, they denied that it was an error and made her argue with three different associates for about an hour. Finally a manager admitted the error, but said they couldn't do anything about it because they had already sent in the taxes. They said we would have to refile the taxes ourselves.

When we asked about the money back gurantees they claim all over the place, they told us those only apply if they overstate your taxes. If the error results in you paying fewer taxes, they do not give you any money back.

Needless to say, I will never allow anyone I know to give them a penny!

I paid $15 for H&R Block Tax Software (Tax Cut or whatever they are calling it this year)at Walmart. I have the "normal" stuff mentioned by CPA Abroad above including a refinanced mortgage, 401k, some capital gains, and even an FSA and HSA. I have to do my two state taxes myself - including nonresident for another state, but those are the same every year so it is pretty easy, I can do my own state online. I did not have to upgrade to any premium package and it is fairly easy to walkthrough my situation with the software. Given this basic set of circumstances, it is hard to come up with an additional $3-500 in deductions that a CPA would find. I also don't think I would save much time with a CPA because I would have to better organize my records and meet with them a couple times to go over the information. That eats up the 3-4 hours it takes to do the work yourself.

If someone is unsure of themselves and wants to rely on someone else to make sure they don't miss anything, I encourage you to go ahead and use a CPA this year, but also spend the $15 to buy the software and do it yourself. Compare your results and I bet you will find that you could've done it yourself all along. Next year you can use this year's results as a template and do your own.

I am 75 and I have ALWAYS prepared my own state and federal tax returns. I have never had a single problem and have saved myself tens of thousands of dollars that would have otherwise gone to tax preparers over the last 52 years since emigrating to the USA. A large percentage of the population seem to be completely intimidated by mathematical computations, hence the proliferation of tax preparers - fortunately I'm not one of them - I have loved mathematics ever since my 1st. grade teacher turned me on to it 70 years ago.

It does help to keep your life and your business dealings as simple as possible, and that is what I have always tried to do. Every penny of our investments is held by one institution, Fidelity Investments, and we have no debts. We also have no earned income since retiring 18 years ago. Now that we are very wealthy I am no longer in stocks and will be holding our income investments until maturity. Our taxable account is in tax and AMT exempt municipal bonds and our IRAs are in longterm CDs with yields that are unobtainable today - so my tax returns have become even simpler.

I went to a local CPA for almost ten years. Every year the cost went up (to almost $200 two years ago). Last year I used Turbo Tax. I compared the output to my previous filing from the accountant and they were functionally the same (same lines, same forms, different numbers). Same result and I saved myself more than $100.

As recommended elsewhere, my return is itemized, but fairly simple: one income, kids, mortgage, school loan, etc.

If your taxes are simple then I think doing them yourself is a good idea. But if they get any higher $ value complications then I do think that its a good idea to consult with a CPA.

I would add stock options and stock participation plans to the list of things that you should probably get a CPA's help with for your taxes. I work in high tech and stock incentives are pretty common for rank and file employees. But the taxes on them can be a bit complicated.

This was a great post. Have no fear after reading it, it didn't irk me much ;). That story of Jeremy really gives encouragement to check these CPAs out.

Ditto. If you're doing the 1040 with interest/dividends, cap gains/losses, itemized deductions, I don't see why you need to hire somebody. I use a great Excel spreadsheet at:

http://www.excel1040.com

along with double checking the results with the online version of TurboTax (free to use, just can't print the forms or e-file). It's free to e-file with the IRS using their Fillable Forms.

"I think the thing people forget is that even if you 'do your own taxes' with something like TurboTax you're still paying for the software and the filing. If you have anything like ESPP, 401k or the like you instantly have to upgrade to the premium package, which is a minimum of $50-75." - Otis

Hey Otis, there are free options out there even if you have ESPP, 401k, etc. TaxAct lets you do every form for free by yourself, even free filing. If you have to do state taxes as well then you have to pay $15 to do it through them, but federal can be completely free.

I use TaxAct online and have had good results. Three years ago my step-mother (who does seasonal, part-time office work for an accountant) advised me to have an accountant do our taxes. She said that chances were that I could benefit from a professional, just in case I might be missing something.

After hiring the accountant, he charged me $280 and said he rarely sees people who do as thorough a job on their taxes as I had done (I gave him the return for the prior year's taxes for reference and to see if I had missed anything).

The accountant wanted to hire me! I already had a job (art teacher)!

I felt that was a real waste of money for us; however, I do think there are many people out there who may be a bit uneducated in terms of tax preparation, and this could certainly mean they are missing out on ways to save significant $$$.

Toby does my taxes. He learned in week 8 of puppy school: http://www.flickr.com/photos/morrisk/4229357172/in/pool-lifetuner ;)

What makes me think I CAN do my own taxes? Well, it is just a bunch of simple math formulas any engineer should be able to complete.

Will I? Absolutely not! The peace of mind/reduction of stress and time savings are worth more to me than the fee I have to pay. My CPA also records everything on a re-writable CD year after year (which I could also do) and some other nice perks that make it worth it too.

As I posted on the earlier thread I work overseas and have used Ernst & Young as well as KPMG to file my US taxes, both at the expense of an employer. In both cases the return was filed in a way that I owed more money- the preparer just didn't have the time to run every scenario to find the most efficient way of filing- I had to do this and then give them feedback!

Now I do it myself using turbotax simply because my current employer doesn't cover that service and I have not been able to find a good firm to do it in the part of the world I live in. Once I figured out all the different ways to handle filing overseas income, the process became simpler as the next year is just a cut & paste of the previous year.

You may find the same to be true with your own personal situation. Better to learn how to do it right once than using a preparer year after year.

-Mike

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