Pitfalls of doing own taxes vs. paying a CPA?

[Amethyst]

We have always paid a CPA to do our taxes. In recent years, we've not been happy with their responsiveness; and this year they significantly raised their fees.

I bet a lot of people on the ER Forum do their own returns. Can anyone think of any reasons not to do your own return?

For example, is there any evidence that the IRS audits self-prepared returns more often than returns prepared by CPAs?

Thanks for all points of view.

Amethyst

 

[Bestwifeever]

I don't know the statistics on who gets audited more often--that may be a function of the tax return's results more than who prepares the return. Someone on here might know.

We have always done our own taxes, from pencil and paper through TurboTax and now the TurboTax clone, TaxCut. Others use TaxAct. I don't know how complicated a tax situation would have to be for some version of the above not to be able to handle it.

Get one of the above and try doing your own taxes. Worst case, you're not happy with how it turns out and you go to the CPA (and then you can see how your results and his/hers compare) and you're out $30-$60 or so for the software.

 

[FIREd]

I used to have a tax preparer do our taxes. Then I started finding mistakes in my returns and the tax preparer was so impressed with my ability to spot his mistakes that he urged me to take classes to become a tax preparer as well. That's all it took to convince me that I didn't need his services anymore and I now prepare my own tax returns. I use Turbo Tax and our tax return is very easy to prepare (nothing weird, just a couple W-2s, some interests, dividends, capital gains, ESPP, stock options, and then some basic deductions). I now pay 10 times less to file my return than I did before.

 

[Moemg]

I've had mine done and I've done them myself . Unless I had real complicated returns I 'd do them myself . I've used both Tax act & Turbo Tax and they are simple to use . My late husband worked for the IRS so when we got married he started doing our taxes and we would never get a refund so I would complain that when I was single I always got money back . He pulled out his check book and wrote me a check marked tax refund . Great guy !!

 

[Rustic23]

I have always done my own taxes. About 50 years now. When Turbo Tax first came out I used it, and continued to use it until two years ago, when I switched to TaxAct because it was free. I have never been audited. I have had moving expenses, been self employed, and home office expense. On the other side, I have never taken a deduction I thought was questionable. In fact I would rather be on the conservative side. So in my opinion, I don't think it makes any difference if you do your own. For me it would depend on how complex your return is. For me, if your return can be done on Turbo Tax, I would use it.

 

[Lakedog]

I have also always done my own federal and state taxes but have never used any of the tax programs. I do complete the forms electronically just for neatness and record keeping. I feel it is easier to stay attuned to current tax changes by not using the tax programs. My returns have not been extremely complicated but have involved real estate, business income from part-time consulting, etc. I have never been audited and doubt that it matters (who prepared the return) since audits are most likely triggered by content such as excessive/questionable itemized deductions, etc.

 

[Purron]

For most folks, doing it yourself is just fine. Even so, I would guess Timothy Geithner, the new head of the Treasury Department, wished he had hired a professional instead of doing it himself with Turbo Tax.

 

[OAG]

My DD and SIL had their taxes done (Federal, State AND City) for several years. For the last 3 years I have been teaching DD how to do them and she has with the help of TAX ACT and Excel. She is getting pretty good at doing them. Saved about $2K in fees too. IMO you have to WANT to do them yourself, otherwise it may not be worth the effort. I, personally, have been audited a couple of times in the past and each time it was a "no change" audit.

 

[simple girl]

I always did them myself until we became landlords and also lived in multiple states in one year. At that point I contacted an accountant.

If you have an uncomplicated tax situation, TurboTax is great, IMO.

 

[Maurice]

I did my own except for my expat years where my employer did them for me.

Until just 3 years ago. Then I decided to try to use the accountant that had done my wife's taxes before we married. He saved me a few thousand dollars, and charges less than that (~550 IIRC). So I continue to go to him.

 

[bbbamI]

Can anyone think of any reasons not to do your own return?

If you hate, don't understand or feel queasy about it.

For example, is there any evidence that the IRS audits self-prepared returns more often than returns prepared by CPAs?

I don't know the statistics on this. I had my taxes done by a CPA once, and he made a mistake. So, for the past several years, I've done my own with TurboTax.

I've never been audited, but if I do, I'll have all my paperwork to back up my return.

 

[aaronc879]

I've always(11 years) done my own taxes. Never used tax software. All i've ever had though is W-2's, interest and dividends.

 

[Amethyst]

I have also always done my own federal and state taxes but have never used any of the tax programs. I do complete the forms electronically just for neatness and record keeping. I feel it is easier to stay attuned to current tax changes by not using the tax programs.

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.

 

[CyclingInvestor]

I have always done my own taxes. I use Excel to track the capital gains, dividends (some complications since many were from REITs), etc. I never trusted tax software to track or compute these correctly. I trust certain well-known tax preparers even less - they made ridiculous errors on both my moms and ex-MILs returns, and used high-pressure scare tactics to trick my mom into buying one of their crappy high-fee low-return completely inappropriate IRAs.

 

[growing_older]

Always did my own, by hand and later with tax prep software. I did hire a CPA to go over the return one year when there was a lot of unusual stuff, moving, landlording, multiple job changes and some IRA money moving around. They found nothing to suggest changing and were quite complimentary about the quality of what was prepared, so I figured there was no advantage to be gained by hiring tax prep over what I could do myself. I resisted tax prep software for a few years, but I'm convinced the quality of the big three is now so good, and the process is now so easy, that unless you have a very unusual situation, doing it yourself with tax prep software is the easiest, fastest and best way to go. At least I think it is for me.

 

[harley]

This will be my last year with a tax preparer. We've had some seriously complex tax returns over the last 4 years, with deaths and estate taxes, moving 3 times, dissolving partnerships,etc. It's been worth it to have someone else sweat the numbers (I think). Next year will just be us and our 1099s. I'm looking forward to some nice, simple taxes.

 

[mickeyd]

I have always done my own taxes, except one time. I used to use the stubby pencil method then I discovered TorboTax and I'll never go back. FWIW, I notice that our new Secretary of Treasury Tim Geitner also uses TT. I'll bet he never makes a mistake...

 

[FANOFJESUS]

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. My CPA is maybe $30 more than software on the net.

 

[Gardnr]

I have always done my own taxes. About 50 years now. When Turbo Tax first came out I used it, and continued to use it until two years ago, when I switched to TaxAct because it was free. I have never been audited. I have had moving expenses, been self employed, and home office expense. On the other side, I have never taken a deduction I thought was questionable. In fact I would rather be on the conservative side. So in my opinion, I don't think it makes any difference if you do your own. For me it would depend on how complex your return is. For me, if your return can be done on Turbo Tax, I would use it.

Ditto, almost word for word except for the self employed and home office part, and only for about 28 years.

I'd have to have some very unusual and complicated circumstances to think about hiring a CPA for the job. If I had a small business I'd certainly consider it.

 

[samclem]

The biggest advantage of doing them yourself is that it makes you aware of how "the soup is made." By doing the questionnaire in TaxCut, (and even deliberately putting in a "wrong" answer occasionally to see what other questions get asked and what the bottom-line impact is), it's easy to see how you can reduce taxes in future years. If you just hand it all over to a CPA, you get your return all filled out, but you may not see how to reduce taxes in the future.

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.

 

[OAG]

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.