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 current tax situation is not too 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 H&R Block, 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.