Monday, March 31, 2014

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*

23 comments:

  1. for most of my life, my mom did my taxes. she's an accountant, not a cpa. she has always said that taxes are easy and anyone can do their own taxes. then when i got married, i started using my husband's CPA who got me the biggest return i'd ever seen. he charges a hefty fee, but totally worth it! word is he used to work for the IRS.

    ReplyDelete
  2. Was feeling very guilty about doing my own until i reached your last paragraph! Have used Turbo Tax for 10 years or more with good results. Our taxes are very simple, but just going thru all the paper formscan takea long time.

    It seems to methat if oe is mainly salaried with simple investments taxes are not awful with TT, buti do them early. Had my refunds by Valentine'sDay.

    ReplyDelete
  3. My hubby does our taxes with TurboTax, and it works great! Especially for me, since I don't do them at all! ;) Stopping by from the SITS Saturday Sharefest.-Ashley

    ReplyDelete
  4. I have used the same CPA for over 10 years. I'm an independent contractor and my head shuts off when I start thinking of numbers. I am so grateful to pay a small fee and know my taxes were prepared correctly!

    ReplyDelete
  5. My taxes were so painfully overwhelming this year. I spent the year out on tour with a show and had W-2s from 18 states. I didn't even know where to begin. They completely freaked out TurboTax when I tried. Then I thought contacting an entertainment CPA would probably be the way to go, but I couldn't find any that would do the project for less than $1000 and considering how much I made last year, that was so not worth it. I wound up using a hybrid of H&R Block and TurboTax to get it done that cost me about $300 and I still owed the government $60 more.

    I was so frustrated and upset. I really feel like there should be a simpler way to get taxes done that doesn't require outside help.

    ReplyDelete
  6. There is gold in here. I had not idea about the new home office rules! But then again I never use them for the reasons you talk about. I've always thought that it was wrong that clients could get serious audits when they've trusted and paid a CPA to prepare their taxes for them. I kind of feel like the CPA should share some of that financial burden in some way.

    ReplyDelete
  7. Taxes are definitely a specialty area. I'm a professional accountant, CMA now changing to CPA in Ontario, Canada, but I hate doing even my own taxes.

    Accounting can be quite broad, with different niche areas, Corporate Finance, Cost Accounting, General Accounting, Management Accounting, Tax even Treasury has some accounting elements within it. So just because someone is a CPA doesn't mean they know the tax rules.

    Now if they specialize in tax and your situation is complex, then hire a CPA, be organized, but be prepared to pay the commensurate rate reflective of their training.

    If you're prepared to do some legwork / research, have a tax software program and the motivation, then you could do them yourself.

    But let's be clear, you can make an analogy that it is no different than doing your own plumbing / electrical work if minor, homeschooling your kids, writing up your own will if not complicated, self diagnosing your illness if minor. There are risks involved and it is a personal cost/risk avoidance decision.

    Having said that, just because you do hire a professional, doesn't mean there are not a small % that are not competent. I believe the professional organizations do address these situations. It is very important to the governance, standards and reputation of the members.

    But we all know stories of poor workmanship, bad teachers, crook lawyers, quack doctors - why should accountants be any different? I think they call them shady. LOL

    Caveat emptor - let the buyer beware and do their homework!

    ReplyDelete
  8. Great discussion Savvy! As you know I am a CPA but like you, I am not a tax professional. Yes, I passed the grueling exam but with the ways tax laws change, I am glad to have Turbo Tax to guide me through prep of my family taxes. Ours aren't too complex yet, and I keep them that way on purpose. I would rather err on the side of being conservative rather than looking high risk and subject to an IRS audit. Unless we hit the lottery I am guessing I will be doing our taxes for years to come. One thing my CPA/accounting education did earn me was teaching me how to research tax issues so should the day come, I can always dig into the code more to find my answers. Thanks for sharing with #smallvictoriessunday last week and look forward as always to what you share with us this week. I enjoy the unique nonfiction books and financial perspective you bring to the linkup!

    ReplyDelete
  9. Catherine,
    I can't help but wonder if your hefty return after getting married is attributed to what you claimed for withholding after you got married. Plus, with the purchase of your condo you may have more deductions due to property tax and mortgage interest deductions. I am a skeptic when it comes to a CPA finding deductions you can't find on your own.

    ReplyDelete
  10. Webb,
    Good points. If you are salaried and your investments are fairly simple TurboTax should work fine for you. And why not save $150.

    ReplyDelete
  11. The Dose of Reality,
    Ah the best of both worlds - saving money using TurboTax and not having to do them either. You do review them of course and understand/ask questions before signing. I'm sure you do!

    ReplyDelete
  12. Esthetic Goddess,
    Yes, being an independent contractor it is wise to use an accountant, especially if you aren't good with numbers. A claim which I would dispute - you just didn't have a teacher who explained math properly, but that is a different post.

    You will ask your accountant questions on anything you don't understand when they go over your return, right? Also, ask if there is anything you can do to save on your taxes in the future.

    ReplyDelete
  13. Esthetic Goddess,
    One more thing - if you are paid via a credit card your clients no longer have to send you a 1099. You will receive a 1099k from your credit card company.

    ReplyDelete
  14. Mel,
    That is the worst tax scenario I've ever heard.

    I literally hid at the gym* from a woman who kept asking me how to get her money back from the state of Illinois, I can't imagine 18 states. And $1000 - I can understand though why all those state tax returns. You are right there has to be a better way this
    is ridiculous. I sure hope you didn't overpay. I'd ask around and find out who your fellow actors use to do their taxes for next year - you are an actress right?

    * I didn't really hide, but I wanted to. She eventually got her refund money, but it took 9 months. Funny how we never are paid interest when the taxing authority owes us money.

    ReplyDelete
  15. Femmefrugality,
    I know for a fact one of the CPAs I mentioned in my post pays the IRS penalties if she makes a mistake. She did so when she missed something on a friend's return. I'm glad you enjoyed the tax updates.

    ReplyDelete
  16. Tanya,
    Yes, having a CPA we do have an edge on preparing our own taxes. I did a little poll around my office and the majority of my co-workers have someone prepare their taxes. They do this Mostly because they are afraid they will make a mistake or miss out on a big deduction they aren't aware of.

    Thank you for mentioning my financial perspective. I am trying to find my writing voice by including my financial background into my posts without becoming a personal finance blogger. And you know I love nonfiction.

    ReplyDelete
  17. I did my own for years when all i had to do was a 1040. But the year I married my husband (independent contractor), I realized we would need a CPA. We've been with the same guy for 9 years now. This year wasn't our best year since I'm self employed now too, but he's done really great things for us these 9 years, found expenses I never would have thought of. worth every penny.

    ReplyDelete
  18. Ok you didn't make me sound too callous so thanks for that :)

    I do find it odd though that the CPA is such a broad designation. In fact, all but one of the CPA's I know on a personal level do other things than personal tax returns. I'm sure the CPA test was/is very difficult but I only care about the personal taxes part of that test. I could care less if my CPA knows how to do public accounting. So while it may be a 16 hour test, I only care about 2 hours of it right?

    I'm sure there are a lot of CPA's out there that specialize in real estate(which is what I need) but I guess I did a poor job of finding one. The one I did find that knew their stuff charged $1000. If I spent 20 hours researching/doing my taxes, that's $50 an hour after tax or the equivalent of somewhere around $80-$90/hr at my marginal tax bracket. So basically I got paid double my normal hourly salary to spend 20 hours doing my taxes - I wish more people would think about their money in these terms since there's a huge difference between pre and post tax $/hr.

    The other two CPA's I met with more general CPA's and charged $300-$500, that's not going to provide much value for me. I would almost equate these types of CPA's to general practice doctors(sorry my fiancee is in med school so I've been using a lot of medical analogies). General practice doctors don't do a whole lot. If a tough problem comes in, they refer you to a specialist. For more routine stuff, most hospitals are starting to give nurses/PA's more of this responsibility because they are a) cheaper and b) can do just as good of a job.

    Not sure if I made this point clearly or not but I'd either go with a CPA who is a specialist or no one at all and do it yourself.

    ReplyDelete
  19. The general rule is that if your income comes from a singular source and is pretty straightforward, you can do the taxes yourself. If there are multiple sources of income, it's a good bet to hire a CPA just to make sure you're paying the right amount. It's best to pay the right amount every time, not too little for the taxman to come knocking on your door, and not too much that your finances suffer.
    Patrice Mills @ MillsCPA.com

    ReplyDelete
  20. Vanita,
    When you are self-employed it gets to the point where your time is better spent elsewhere, you need professional expertise and who wants to spend time determining how much to send in for quarterly estimates.

    ReplyDelete
  21. Harry,
    I think you are over thinking this. If you are comfortable researching and preparing your own taxes by all means do them. I too think the average tax payer probably could prepare their own taxes, but choose not too. Yes, having your taxes prepared by a professional is costly. For comparisons sake my company (annual sales in excess of 40 million) paid $90,000 to our accounting firm last year. I give up trying to explain the CPA certification. Lets just leave it at there are many CPA's who don't prepare tax returns and never intended to do so. Also several lawyers I know also have their CPA license.

    ReplyDelete
  22. Patrice Mills,
    Thank you. You've provided a great rule of thumb!

    ReplyDelete