Hiring a Tax Professional

Tax Software or Online Tax Preparation is easier and cheaper than ever before. However, that doesn’t mean you should use it.

All of the technological sophistication in the world will not compensate for taxpayers who don’t know what they’re doing. The best programs can guide you through a relatively straightforward return, but there are many instances where a professional tax preparer is a much better choice.

If any of the following apply to your situation, strongly consider hiring a tax preparer :

You don’t follow instructions well.

“Getting to know your preparer and developing a long term relationship has its advantages.”

A friend recently asked my wife which schedule she should use to write off as business expenses her commuting costs (to and from work). When told she couldn’t do that, that it was not a matter of whether to use Schedule C or Schedule A, she insisted she’d been writing off these expenses for years.

This friend had been steadfastly ignoring all the “help” boxes in her tax software that could have explained that she was making a mistake. A tax preparer could have made the issue clear in about two minutes. A good tax preparer would not have signed off on her tax return had she insisted on deducting nondeductible expenses.

You need to be told what to do.

Using tax software requires you to be inquisitive and willing to sort through all the advice provided, to find what applies to you. This makes preparing many tax returns time-consuming, and you can still not get all the information you need.

Some people just don’t want to go to the effort. If you’ve got anything more complicated than a 1040EZ or 1040A, you can expect to spend several hours researching tax law and typing in data on your own. It’s much easier to spend 30 minutes to an hour with a tax preparer and let him or her do the work.

After many years of checking out differant tax software packages and uncountable hours of professional tax training, I have never gotten through a complete return on any program without encountering numerous areas on some point of tax law not adequately described in the software’s help package.

Personally, I use a glorified tax calculator and form printing software. All information must be entered on the proper forms and in the correct places. This software does not try to do my thinking for me and would not be appropriate for most people.

You don’t bother to keep up with the latest in tax law.

Just because you understood what the rules were last year doesn’t mean you can file a correct return this year. Every year congress passes new laws, the IRS cames out with new rulings and judges make decisions that affect your tax situation. Your daily newspaper will cover developments that concern a large number of people, but they don’t report on every change. Professional Tax Preparers and Enrolled Agents subscribe to newsletters and alert services and take continuing education courses to stay up to date. We live, eat, and breathe this stuff 24/7, whereas the rest of you have lives to lead.

You own a small business.

If you can explain what a mid-quarter convention is and when it does and does not apply, you might be able to look over your tax preparer’s shoulder while he or she prepares the return. Most other small-business owners should simply hand over their records and do whatever the tax preparer says.

Depreciation schedules, payroll taxes, and Section 179 expense limits are just the start of what an entrepreneur must understand to tackle a small-business return. There are many gray areas of tax law related to business, and returns with Schedule Cs tend to get audited more frequently. A tax preparer who understands your business and has a good relationship with the IRS and the State Franchise Tax Board is an invaluable business asset.

Besides, the expense of preparing your business return is an above-the-line deduction.

(Above the line, by the way, refers to the line on your tax return that discloses your adjusted gross income; it means that these deductions reduce your taxable income dollar for dollar. By contrast, below-the-line deductions such as most itemized deductions reduce your tax bill by a percentage that roughly equals your tax bracket. Below-the-line deductions are inferior, in terms of tax savings, to above-the-line deductions.)

If you have a retirement program that includes your employees, a benefits savvy tax preparer is a must. Any errors could disqualify your plan and make contributions taxable to you and your staff.

Your taxes are otherwise complicated.

How complicated is too complicated, to do it yourself depends on the software and the tax preparation skills of the taxpayer. Generally though, if you have extensive investments, household employees, rental property, foreign income, or if you lived in more than one state or country, you probably could benefit from a professional’s advice.

Tax software varies in its ability to guide inexperienced taxpayers through common but difficult areas, such as determining who qualifies as a dependent or whether the earned-income credit applies. TurboTax is probably the best of the batch, but still requires some work on the taxpayer’s part.

By the way, just having to file a California return could qualify your tax situation as complicated.

California tax law differs in significant ways from federal tax law, and most professional tax preparers would chew glass or eat dirt before they would try to do a state return by hand. If you do use tax preparation software, make sure that it includes both state and federal programs. Some, like Microsoft’s new TaxSaver product, are federal only and thus next to useless to Californians.

You’re really, really paranoid.

A glitch in H&R Block’s online programming allowed a handful of people to see a part of other filers’ returns at its tax preparation Web site; that problem has since been fixed. Such lapses are rare, and most Web sites bend over backward to safeguard financial data. If you’re really touchy about your financial data, you might want to stick to the software you can download into your computer or that you buy packaged in a store. (You’ll also want to avoid H.D. Vest’s tax site, which offers free preparation in exchange for access to your data.) You’re probably still safe electronically filing your return, the IRS and the State Franchise Tax Board have set high standards for their E-filing systems and no one has reported any breaches.

You need tax advice throughout the year.

Is a Roth IRA a better choice for you than a deductible IRA? Should you rent out your home while searching for another, or sell it first? Are your investments wisely positioned for maximum gain with minimum tax impact? Does paying off your mortgage early make sense? Is your state and federal income tax withholding right, or should you adjust it?

Tax guides, personal finance books, Internet Web sites and interactive calculators can give you answers to these questions; unfortunately, the answers are often contradictory and may not fit your particular situation. There’s nothing like a professional who knows you and who can give you personalized advice.

Those who need heavy-duty investment and financial planning advice in addition to tax help should consider looking for a professional who is a personal finance specialist.

You don’t want to face the IRS alone.

This can be a perfectly rational reason for paying someone to prepare your return, even if your situation meets none of the criteria above. You can always hire tax help after you receive an audit notice, of course, but having a conscientious professional prepare your return in the first place reduces the chances that you’ll be facing an expensive adjustment later on. Once again, an audit-savvy preparer who knows you will be better able to answer sticky audit questions, provided you don’t blow the whole thing by insisting on going along. Audits are the one time when everyone should leave it to the professionals.

I have a lady in Mich. that prepares her tax returns each year, then sends the completed returns and all of her information to me, to re-do it. When I asked her a few years back, why she doesn’t just file them herself, she replyed: “I had to deal with them once, never again”

Get to know your Tax Preparer

If your still with me, then maybe your considering useing a professional tax preparer. Your choices are a Preparer Mill or a Personal Preparer. All of the online tax preparation sites, that I have checked, and most of the National or frachise offices are Preparer Mills. That means that the preparer you had last year may have moved on, H&R Block gives “long term” awards to any preparer that has stayed with them for three years or more. Getting to know your preparer and developing a long term relationship has its advantages. Every year I need to contact a few people about an item or two of income or a deduction that they forgot to include in their present years tax information. Items that I would only know about because I have been doing their returns for the last few years and have gotten to know their tax situation.

by M.E. Hansen, All rights reserved. Do not duplicate without permission