Should You Hire a CPA To Do Your Taxes?

I was more amused than annoyed with Harry Campbell's statement, “I don’t think it takes much to be a CPA” in his article why the average CPA isn't worth the money on PFMoney blog.  

I hold a CPA license and have to say passing the certified public accountant exam was one of the hardest things I’ve ever done. Back when I took it, it was a 16-hour exam covering business law, auditing, financial accounting and tax. In order to pass, I needed a strong knowledge in all four areas since you never knew what specific scenario or obscure topic they would test on.

Passing the exam was one of the best things I’ve done for my career. It opened doors that never would have been available to me without it, increased my annual salary $10,000 the first year I became certified and boosted the amount of respect I receive from colleagues and business associates. I still notice a distinct change in attitude when I hand a vendor, banker or auditor my business card and they read the CPA designation listed after my name.

Campbell goes on to say:

Like in any profession, I’m sure there are some really good ones out there but I think it’s a myth that only a CPA can do a great job. That doesn’t mean the average person is smarter than a CPA but if you can read and you have an interest in taxes you can do just as well as the average CPA.

The reason why I feel so strongly is that this year I actually met with two different CPA’s in person. Both were very highly rated by online reviews and I ended up explaining depreciation recapture tax to the first one and arguing with the second one about the passive loss exclusion. The only reason why I knew more than both these CPA’s was because I had just read NOLO'S Landlord's Guide. It wasn’t because I’m a genius, I just spent the time reading up on landlord deductions and clearly these guys weren’t specialists in real estate taxation.

I have never prepared taxes professionally nor do I ever intend too. My eyes glazed over when I read the words depreciation recapture tax and passive loss exclusion in Campbell’s example. I attend several tax-updates each year as part of my CPE requirements, but these classes are designed to keep me informed of tax law changes affecting my industry, company or personal life, not to become a tax expert - my company has an outside accounting firm for that. I can handle cocktail party tax questions, but anything more complicated I can't answer. (I was once asked how much of a capital gain someone would have if they were to sell their printing business.)

Many of the CPA’s I know do not work in tax or even for an accounting firm. Less than 15% of the members in my professional organization prepare taxes professionally. I am confident that those who do would be able to answer Campbell’s questions accurately and with enthusiasm. If they could not, I’m sure they would know where to find the answers.

He closes with:

I got the feeling from both of these CPA’s that they were going to just take my information and hand it to a secretary to enter into their tax software. I don’t need to pay $500 for that and neither do you. My advice is to do it yourself or hire a specialist and take an active role in your taxes.

Should Harry hire a CPA?
The tax-preparers I know who work for larger firms do have interns or assistants who enter client information into tax software, but an actual CPA always reviews and signs the return. Also, they specialize - some work with small businesses, others with not-for-profits or medical professionals. I would suggest Harry call some of the rental property owners in his area and ask for recommendations. One of my co-workers owns rental properties, his wife is a CPA working in industry and he tells me she spends days working on their taxes. Someone that specializes in rental property returns would be more knowledgeable about best-practices, but if Harry feels comfortable preparing his own tax return he can certainly do that too.

Here are some other considerations:

If your tax-prepared deductions seem too good to be true perhaps they are: 
Two salesmen at my company living in two different states are currently undergoing IRS audits for their 2010 returns. Both used an outside accountant to prepare their return. Both audits disallowed their business expense deductions. One received a bill in excess of $10,000. I’m not sure what he could have claimed for $10,000 because he receives a car-allowance, reimbursement for his gas, his entertainment expenses and mileage in excess of 35,000 from our company. 

Not all tax-preparers are CPA’s or have the same training:
H&R Block has an in-house training program. When one of the CPA tax preparers from my professional organization was looking for an assistant at her law firm, she indicated she wanted someone with prior tax experience and working at H&R Block did not qualify as prior experience.

Also, not all accountants who prepare tax returns are CPA’s. If having a CPA prepare your return is important to you make sure you ask if they are licensed.

If utilizing a CPA, be organized:
The CPAs I know charge clients more if they are not organized. One has a client who drops off shoe boxes filled with receipts each year. It takes her at least eight hours to organize all the papers and receipts in these boxes. She charges him for every minute of her time.

Be careful with the home-office deduction:
The home office deduction is the most frequently audited item on a tax return. The rules are very specific about how this space is used. It must be used exclusively and regularly as your principal place of business. My boss, who prepares tax-returns on the side, refuses to use this deduction on his client’s returns.

There is a new simplified option for the home office deduction:
Starting in 2013, you can deduct a simplified safe harbor amount of $5 per square foot up to a maximum of $1,500 (300 square feet). This means you can itemize your full mortgage interest and real estate interest on Schedule A of your personal tax return rather than apportioning between Schedule A and business schedules C or F. In some parts of the country this simplified option may be as much as if you claimed actual home office expenses. If you live in a high expense area this simplified method will probably amount to just a fraction of your actual expenses.

Your tax-preparation fee may be listed as a deduction, but it may not actually be reducing your taxes:
I had a co-worker who didn’t mind paying someone to prepare her taxes because his fee was deducted as an itemized expense on her return. When I reviewed her return for her, the tax preparation fee was indeed listed as a miscellaneous itemized deduction, but the total miscellaneous deductions in excess of 2% of adjusted gross income was zero - meaning her tax preparation fee was not actually reducing her taxes.

The same can be said for medical expenses:
I currently have a co-worker who hires H&R Block to complete her taxes because they itemize her medical and dental expenses for her; something she doesn’t like doing. I told her to make sure she is actually receiving a deduction. In the past, you needed out-of-pocket expenses in excess of 7.5% of adjusted gross income. In 2013, that percentage has been increased to 10%. If you or your spouse is 65 or older the 10% increase does not go into effect until 2017.

Should You Hire a CPA To Do Your Taxes?
If you have a fairly uncomplicated tax return, nothing new or out of the ordinary occurred during the tax year and you are familiar with the various tax reporting forms you probably do not need to hire a CPA. For the past three years, I’ve used TurboTax answering all of their questions to make sure I didn’t miss anything. I was finished in less than two hours. If you do the same, you probably don't need to hire an accountant to do your taxes. If you have your own business you may want to hire a CPA - at least for the first year.

Do you prepare your own taxes?

*Part of Financially Savvy Saturdays on Femme Frugality and Stapler Confessions*