Filing your taxes: D-I-Y Taxation Software or a Professional Preparer
Over the last few years, having lived in a couple of different countries I have ended up using a tax professional to do my taxes. This was an easy option for me, given I was not familiar with all the local tax laws and wanted some protection/assistance in the advent of an audit. I am not alone in getting my taxes done. Nearly two-thirds of Americans pay a professional to do their taxes (up from 46% in the mid-1980s, according to IRS data), and the National Society of Accountants estimates the average cost at $205.
However, through running this blog and reading others, my understanding of basic tax laws has become much stronger. By no means am I at a professional level, but I do feel I could do my own taxes much more cheaply than hiring a professional tax preparer. Especially as my tax situation is not that complicated (i.e. no fancy investments or complex real estate holdings).
I have used one of the large Cookie Cutter Tax companies for the last 2 years, paying around $600 each time for pretty standard returns. I was hoping that the preparer (who was an ex-IRS enrolled agent) would give me some advice on lowering my taxable income, but he did not offer any real insight into deductions or tips that I could not have read in any mainstream personal finance magazine. Very disappointing really.
Now, I am not saying using a tax preparer is a bad idea. I think finding the right one is key and if you really want to get some tax savings you need to build a relationship with a smaller or more specialized tax preparer (i.e. avoid the "big" guys who make their money on a volume basis). However you need to be very careful when choosing a preparer because of the 1.6 million preparers around the country there are hundreds of thousands of preparers, such as sole practitioners in storefront operations who have little or no training or credentials and face little or no regulation. Anyone regardless of training, experience, skill or knowledge, is allowed to prepare federal income tax returns for others for a fee.
So if you do want to use a tax preparer, make sure you stick to professionals - such as tax lawyers, certified public accountants and enrolled agents - who are professionally regulated. Also ensure that the preparer you use has no complaints against them by checking with your local Better Business Bureau. To start your search for a preparer, try and get trusted references or else go to the National Association of Enrolled Agents, and the American Institute of Certified Public Accountants websites, for tax preparers in your area.
If not a professional preparer, should I do my own taxes?
With all the tax software out there like TurboTax and TaxCut, most people could just as easily—and less expensively—do it as well themselves. You are pretty much guided through the whole process and after answering a few questions, hit "send" to file electronically, and wait for your refund. You play a slight premium for more features (e.g. business or investment tax aids), but the software still ends up costing you less than $100. In fact the "cookie-cutter" tax preparers use similar software themselves - so you are in affect paying for someone to do the data entry on your behalf.
The old argument (and the one I used) of using a tax preparer can save you in an audit has a few holes as well. If you have an poor preparer who made mistakes with filing the return the IRS will go after the taxpayer if there are errors and not the preparer. Sure the big guys offer "audit-protection", but again for a fee.
Another major benefit of doing your own taxes: You'll get real insight into your saving and spending habits, especially if you itemize. Consider it an annual fiscal physical. Then make the necessary lifestyle changes to stay healthy, financially speaking, for years to come. If you work, it can also be very helpful in figuring how much you should be withholding from your paycheck throughout the year.
My personal and general advice is that if you have a complex tax situation (e.g. multiple personal and business incomes, moved a lot or have complex investments) then go with a accredited professional tax preparer. If you have a relatively straight forward tax return go for the easy to use tax software and if you are in a low income tax situation use the IRS free e-filing option.
Related Articles:
~ Tax Tips, Rates and Brackets for 2009 Returns
~ Capital Gains and Losses : Tax Facts and Figures
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January 19, 2009 8:54 AM
For moderate income and older taxpayers, the IRS has the VITA and TCE programs where you can receive free help preparing your return.
January 19, 2009 9:14 AM
I worked with an accountant for the first 4 years of my business. I didn't have a great experience. I guess the fit wasn't right.
My stuff was ready by the end of Jan every year and he was late a couple of times filing by our deadline (April 30th)!
So I bit the bullet and started filing on my own. I do all of my bookeeping anyways so I wasn't afraid of numbers. I use Ufile and for under $20 each yr vs. hundreds, I've got a great return.
Like you said, you learn tonnes about marginal tax rates etc. and I've been able to alter the amount of work I do because of it. Great post!
January 19, 2009 11:42 AM
I am employed by the bigggest tax prep company and let me tell you one thing - we go through EXTENSIVE training and educational programs EVERY YEAR
We are REQUIRED to take new and refresher classes every fall and they run for 18 to 66 hours EACH--and then every December we go through a minimum of 30 hours of training and updates-then in mid-February we have another update class---this is for EVERYONE no matter their classification. Sure, we make errors, everyone does, but our error rate is very low compared other professionals--they are not well trained and are mainly 'data processing' your information--PLUS we guarantee our returns to get you the highest LEGAL refund or lowest balance due---
Next time you read an article like this think for yourself----they are usually biased against whoever they are writing about.
January 19, 2009 1:33 PM
Great personal insight Andy, However I disagree with you on one aspect even though, the risk are there. A good preparer isn’t solely the ones who have EA, CPA, or whatever title lawyers use.
At one time, I had CPA at the end of my name. At that time, I can assure you, I was so pressured by the accounting that my tax practice lost sight of itself.
I know people will be doing their own taxes, they do every year. I agree that with a bit of reading and understand of their situation, a taxpayer can indeed use software to prepare their returns. I even promote the use of software to certain potential clients in specific situations. However with each recommendation of self preparation using software, I clearly state “use caution, and if you have a question call me, the end result is ultimately on you so if you make an entry incorrectly the error is yours. Garbage in, garbage out”
I would agree that there are a lot of preparers out there that have no business doing returns, but there are those of us who devote our time to nothing but tax laws and preparation. I didn’t keep up with the CPE requirements, and no longer proclaim CPA. I have a Master degree in accounting, not hanging on my office walls because again, nothing to do with my ability to prepare a return.
A CPA, EA, Lawyer can represent you in an IRS audit, but so can I for a return I prepared. I would agree there are reasons someone might need one of the high dollar fancy preparers with some sort of designation behind their name, but I urge everyone not to make that your sole decider on a preparer.
You want to find a preparer? Find one who offers the services you need. Friends and family can be of assistance. Word of mouth is the best advertizing. Call around to a couple of tax offices and take the time to ask some questions:
>What kind of formal tax training do you have?
>Do you belong to any professional organizations?
>Do you take continuing professional education classes each year?
>How long have you been preparing tax returns?
>Have you ever done a tax return dealing with my situation?
>Are you open for business year-round? - this one is key
>Have you ever been disciplined by any government authority for malpractice?
>How much do you charge, and how do you calculate your fees?
>Ask what their price range is. Prices for tax preparation will vary depending on how complex your tax return is. Some professionals charge by the hour, or by how many tax forms you need to fill out, or even a flat fee for all work.
>Ask about any guarantees the tax preparer offers. The tax preparer should be willing to guarantee the accuracy of the returns, be willing to amend the tax return if there was a mistake in the preparation, and be willing and able to assist you in an IRS audit should there be one.
Also, be careful of tax preparers who claim to know “the secrets” of obtaining unusually large refunds.
Incase questions arise after your return has been filed, find out if, and where, your tax preparer can be contacted in future weeks or months.
Remember that you are ultimately responsible for your tax return, so be sure to choose your tax preparer carefully. If you want to find competent, licensed tax professional I suggest you visit The IRS web site Authorized IRS e-file Providers for Individuals then/or go to Search the NATP Member Directory, then call around and ask questions.
Finally Andy, I put it to you, I’d enjoy seeing your last year’s return (2007), If you had it done in a franchise “store”. If there are no mistakes, I offer you free preparation for 2008. (we’d need to talk first)
For over ten years I have been professionally prepared tax returns for taxpayers. I have seen many “fast food returns” in those years, and have never seen one done 100% correctly. (Missing deductions mostly.)
As for the Anonymous commenter, I’ve had 16 Audits of returns I prepared in the past 10 years and everyone one of them have been due to taxpayer error and/or omission. If you want to talk about percentages of errors per my company over yours please contact me. I already know the outcome.
January 20, 2009 12:09 AM
As an accountant (who no longer does taxes) I can tell you the only way to make decent money is to have an insane number of clients, thus making it really easy to make mistakes ...
Having said that, in Canada, I would advise people to get software if there tax return is simple, but once it gets even slightly complicated, get a professional.
And remember, you usually get what you pay for.
January 21, 2009 4:28 PM
I have been doing my own taxes for the past 10 years and this include fairly complicated business, investment, and a property. Tax software have been improving over the past few years and there's a benefit of being more aware about your finances by doing your own taxes.
That said, there are people that will need help from professionals.
February 13, 2009 9:00 AM
The National Society of Accountants web site www.nsacct.org has a great "Find a Professional" link to search for independent qualified tax preparers in your area. All dedicated and professional folks who must maintain continuing education standards and adhere to a code of ethics so you know you can trust them.