Pitfalls of doing own taxes vs. paying a CPA?

[OAG]

Quote:

Originally Posted by samclem I don't know if self-prepared returns get audited more frequently, but I do know I'm able to explain 100% of the things in that tax return--something I couldn't say if I turned it over to a CPA.

Yes, but if you used a CPA I am sure he/she would be glad to accompany you to the IRS office to explain what he/she did (for maybe $100 an hour with a 4 hour minimum).

[Amethyst]

My CPA caught a mistake that would have cost me $3000. The way I looked at it that was thier fee for the next 25 years paid already, since I have a cheap CPA.

Nothing is cheap, where I live. Here is a sample from their fee schedule:
Form 1040 Long Form: $225
Schedule A Itemized Deductions 75
Schedule B Interest and Dividend Income, per item 10 (we run up a big tab here since we have so many small pots)
Schedule C Profit or Loss from Business 180
Rental and Royalty Income, Per Property 100
Foreign Tax Credit 60
Depreciation & Amortization 50
MD Personal Property Tax Return 180
Itemized Deductions 75
AMT 95

And here's something new for 2009: "If you provide us with substantially all of your tax information (signed engagement letter, completed tax questionnaire and tax organizer, and source documents) after 21 March 2009, you will be charged an additional 20% of your basic fees."

Whaddaya think of that. How does that compare with what others pay?

Amethyst

[2B]

My FIL paid about $600 per year to have his taxes done for years. He had only pension income, interest and some dividends. When I did his taxes the year DW took over his finances with her POA, we made the mistake of having him sign the return. He was all upset he owed money to the IRS when his CPA always got him a refund. I tried to point out the reason was he was pulling money out of a VA with a substantial withdrawl penalty. There's a comfort to some people in a "professional" doing something. My FIL used to fill out a form with all the inputs for the CPA to enter into his program for tax filing. The output looked a lot like TaxCut.

I can see going to a CPA if you have complications in your life's finances. Just like going to a FA with a complex financial life, you should know what you're involved in and get someone that you pay by the hour (fee only). For 90+% I can't see where a CPA or a FA will do people any good if they're willing to do the most basic research themselves.

[kumquat]

Disclaimer: I'm Canadian, therefore YMMV

Up here in the frozen north, an accountant may help you but you must have ALL the data they need. If you have ALL the data and a 'not too complex' return the software should handle it. An old IT expression but still valid is GIGO (garbage in, garbage out).

Here in Canuckistan, the forms sent to you by employers, MF companies or banks (for savings account interest) are also sent to the tax man. The 'man' calculates your taxes and if you missed a form, he includes it, then he bills/refunds you. I just got a bill for $2.5K. It was accurate on two parts. I missed a small form from a MF and DW missed a larger one. DW's error didn't change her bill (still under taxable level of income) but it changed lowered my spousal deduction and therefore I owded more money.

The (Canadian) tax man also assumes you may be imperfect but are not trying to hide anything regarding these forms. His attitude will vary if you have a source of cash income like a small business. He can be quite aggressive if he thinks you are trying to decieve him.

DB is a CRA auditor and his advise (for those whose only income is reported on various forms) is "do a decent job, CRA will do the rest, perfection isn't expected".

So I guess it all depends on where your income comes from and if you tell your accountant enough (at tax time he probably doesn't have time to ask the right questions).

The probablility of an audit (up here) is directly proportional to the amount of potentially hidden tax dollars. I doubt that an account's filing it would help.

[prubin]

10+ year ago, after bad experiences with 2 different enrolled agents, I started using TT. We sold our home last year and we have a taxable LT gain. I am considering getting help. I want to ensure that we account for every dollar of basis to which we are entitled.

[Lakedog]

Quote:

Originally Posted by Amethyst Lakedog, if you don't mind saying, why would that be? I'd think the tax-software folks would have more time and resources to keep up with tax laws, than the average person would. Actually I think you've hit on an important point, since the main reason we keep paying the CPAs is that we "don't know what we don't know" about the tax code--and they, supposedly, do. We believe strongly in paying for specialized knowledge...not for poking data into spreadsheets, which I can do as well as anybody. We do have a rental property, with various carry-over losses, depreciation, and so on. Other than that, our situation is pretty straightforward.

Once you are accustomed to doing your own taxes, it is relatively simple to keep up with changes from year to year. The key is getting up to speed initially (if you have not been preparing your own). Plus, as someone (CyclingInvestor?) mentioned, I do not trust someone else or tax software to catch everything.

I cannot remember which publication did the comparison, but when the same numbers were put into three different tax programs, the result was three different answers. My thinking is that if I don't keep up with the tax code, how would I know whether a CPA or tax software did an acceptable job? In addition, I could just never bring myself to pay someone to do my taxes when I would have to furnish all of the information required anyway -- gathering the info is the time consuming part.

[samclem]

Quote:

Originally Posted by kumquat Here in Canuckistan, the forms sent to you by employers, MF companies or banks (for savings account interest) are also sent to the tax man. The 'man' calculates your taxes and if you missed a form, he includes it, then he bills/refunds you.

That's an interesting approach. I can see where the govt would know about the "regular" sources of income, but as you point out, you'd still have to account for any self-employment earnings. What about deductions--does Canada's tax code have thousands of possible deductions which reduce taxable income (donations to charity, some tuition expenses, household moves related to a job, etc). In addition, in the US there are numerous tax credits available for various behaviors the government wants to encourage/subsidize. This adds up to a very complex brew, and I don't think it would be practical for the US government to send people a bill for what they owe: each person's situation so unique that the bill would be wrong 99% of the time.

[jazz4cash]

It mostly depends on your situation and how complex your return is.
I prefer to do my own. When DW was a realtor, we used an Enrolled Agent and it was relatively inexpensive and offered good peace of mind. When we moved I hired a CPA because of moving expenses and relocation benefit covered the fee. The CPA was expensive and made mistakes which I caught and corrected. Next year same guy...same mistakes and that was it for me and CPA's.....what I realized is that most CPA's are busy doing other stuff 10 months of the year, and while they may be great at Accounting, taxes may not be thier strength (in terms of properly preparing the forms and minimizing the payer's obligation). So if you hire a CPA, it should be someone with a strong year-round tax practice, which is frequently an EA. Now we're using turbotax, but our return is fairly simple.

[kumquat]

Quote:

Originally Posted by samclem That's an interesting approach. I can see where the govt would know about the "regular" sources of income, but as you point out, you'd still have to account for any self-employment earnings. What about deductions--does Canada's tax code have thousands of possible deductions which reduce taxable income (donations to charity, some tuition expenses, household moves related to a job, etc). In addition, in the US there are numerous tax credits available for various behaviors the government wants to encourage/subsidize. This adds up to a very complex brew, and I don't think it would be practical for the US government to send people a bill for what they owe: each person's situation so unique that the bill would be wrong 99% of the time.

The answer to that is YES. However, the tax man doesn't care about getting deductions/credits correct, that's your job (and you need receipts etc). The man doesn't 'do' your taxes, he corrects for missing income. If you miss a deduction/credit (that requires a receipt), you're on your own, as you would be be if you used an accountant and didn't give him/her the information.

[frayne]

All depends on the complexity of your tax situation and your ability to understand the tax code. Have done my own taxes since 1975. Two years ago I took a tax course and realized I had missed some deductions here and there over the years. I have reviewed tax returns for others from CPA firms, tax prep firms, and individual completed returns and have found mistakes as well. My suggestion is to find a tax professional at a firm that specializes in taxes who you can trust and have them educate you about how to complete your return correctly. Also keep in mind the tax code changes constantly, so it can be like trying to hit a moving target at times to make sure you are getting all of the deductions you are entitled to. Just my two cents.

[Walt34]

I've done my own by hand and later with tax software, but the returns have always been simple by most standards. I did hire a tax preparer to do the estate return when my mother died; for a "one-time" return and about $150 I figured it was easier than spending days going through the paperwork for it.

[tryan]

Not sure about audit stats ... but after a few rounds of "IRS inquiry" a few years back, I am glad to have my CPA in my corner. Well worth the $300 especially considering I have to file in 3 states.

[youbet]

Isn't it a shame our tax code is so complicated that an average citizen would even consider needing highly trained, professional help to fill out the forms?

[audreyh1]

I started doing my own when I realized real quick that the forms I filled out for my new CPA were the equivalent amount of work and just using the software myself. The previous CPA had always interviewed me and collected my papers to do my taxes - that was nice. But she sold her business to this new "lazy" CPA who liked to have his customers do most of the work.

Audrey

[REWahoo]

In the mid 80's my niece worked as a programmer for an IT company specializing in tax software sold to CPA firms. She showed me what she was doing and the program looked a lot (as in almost identical) to what is now available to the general public as TurboTax, etc. I had always done my taxes myself by hand, and since she needed "real" returns to test the software, I gave her my information to run and compared what she came up with to my paper returns. My taxes weren't what I would consider simple but also not overly complicated - two W2 incomes, mortgage, buy/sell a house, and moving expenses. The end number for both was the same.

I continued to do my own returns and began buying TT and TaxCut when they became available.

A couple of years ago I volunteered for the IRS/AARP Tax-Aide Program and attended IRS sponsored training as a volunteer tax preparer for the poor & elderly (some of the elderly clients definitely weren't poor!). Once again I did a test and ran my tax return info through the IRS tax program and through TaxCut. Again I came out with the same end number.

Bottom line, I do my own. I might consider professional help if I had an unusually complicated return but I'm a stubborn DIY curmudgeon, so maybe not...

[73ss454]

REW, helping the poor and elderly is a good thing. I'll send you a PM with my info., thanks for the help. Glad to get rid of my CPA.

[REWahoo]

Quote:

Originally Posted by 73ss454 REW, helping the poor and elderly is a good thing. I'll send you a PM with my info., thanks for the help. Glad to get rid of my CPA.

I failed to mention some of the elderly who weren't poor before I did their returns changed status once I was done. I look forward to helping you out...

[Dennis]

Well, IAD..
1. How Complicated it is with Deductions, Doing Investments, Rental Properties, etc..
2. Or As I was, self employed..
3. If doing your own? You better be Right or Audit is Comming.. And if you've never been thru one? It's A P:ain In the Neck, even if your Right ( I was ), since it took 2 differnt trips and ave 3 hrs each time total traveling and an hour or so in meetings with the agent..
4. And when your dealing with +$100k yr incomes you're looked at just little closer and once you get on that watch list or get audited, your Looked at again and again..

5. And the Hours it takes just isn't worth it to me.. thus I use a CPA firm, pay them ave of $500/yr and if they have a good reputation with IRS, no problembo..and it's tax decutable so it only cost me about $350 in the end..for 8 hrs ave for me to do it? = $45 hr and I make it up in other areas..

6. Mine always over pays them and let's them catch it and gives me a refund of a Few Hundred $ every yr..( just one of the tricks)...

So, IAD..