Do your own taxes, or pay a professional?

Those of you that know me in real life, know that I work for a CPA. Although I'm not a "certified tax preparer", I prepare 200 or more of the 450 or so individual tax returns our firm prepares each year.

I often get asked advice on how to handle tax situations. Sometimes I have an answer, sometimes I have to find one, and sometimes... the only answer I can give is that you need to hire a professional.

One of the main questions I find in some of the frugal lifestyle forums I frequent is whether you should prepare your own return, or hire a professional. I thought I'd share my opinion here.

First and foremost, I think that *most* people are perfectly capable of preparing their own return. I personally think it comes down to comfort level, and what value each person places on their own time and sanity. There are very few situations that I would absolutely tell someone in no uncertain terms that they NEED a professional. Those would include 1 time only changes like inheritance, lottery winnings, death of a spouse, adoption, divorce... major life changing events. Also included would be starting your own business (and perhaps maintaining that business), bankruptcy, and other largely financial based life changes.

Here are MY recommendations for deciding between doing your own taxes using a software (there's no way I think anyone should be preparing their own taxes by hand, especially with the broad availability of e-file), using a tax prep service (like H&R Block or Jackson Hewitt), or engaging the services of a CPA.

• If you have a straightforward return (W2, investment or bank interest/dividends, home ownership or renter), do your taxes yourself. Use whatever software you are comfortable with.
• If you work from your home, sell any real property or investments, work as a consultant paid via 1099 (like BlogHer income, if you have a high-traffic), etc… find yourself a CPA. That person will know what you can and can’t deduct (work out of your home? did you know that you *might* be able to deduct part of your utility bills, mortgage, and home owners or renters insurance?)
• If you usually have a straightforward return, but run into something more complex (high medical bills from IF treatments, bankruptcy or foreclosure, dependent in college, inheritance, adoption, etc), use a CPA.

I would strongly recommend NOT using places like H&R block or Jackson Hewitt.

• Their employees are simply trained on the software, NOT on tax law.
• Last year one of the major tax prep firms faced charges of fraud, creating a potential nightmare for taxpayers that used their services.
• If they mishandle your return, causing an audit or notice to be generated, you’re on your own. Good luck finding your H&R Block preparer in July.

I think the best way to find a CPA is to ask people you trust. Family and friends are our greatest source of referrals, and if they are referring a professional, it’s because they have been satisfied with the service they have received. Some important things to ask:

• Do they offer a free consultation? A professional should be willing to meet with you, look over your most recent tax return, and give you a general idea of what the current year’s tax return prep will cost.
• Will they charge you for phone calls? The idea at our firm is that we’d MUCH rather a client contact us with a question in June, getting GOOD advice on how to handle something that will impact their tax return, rather than have to “clean up a mess” come year end.
• Are they willing to review prior returns for accuracy? If so, what will they charge you to amend them if they find mistakes?

Finally, here are some things to remember:

• Most firms can’t give you an exact prep fee until the return is completed. When I quote, I give the potential new client a range, with the understanding that the quote is based on the information they provide me with at that time. If things are looking to fall beyond that range, a quick phone call to get the client’s approval only takes a few moments. If they fall under the range… I just get to surprise them with a smaller bill!
• If you go to a large firm, prepare to pay a large fee. The firm I work for has 1 CPA and 1 tax preparer (me!). Our bills are at least a third less than many of our competitors. Why? Less overhead.
• The more organized your information, the more reasonable your fee should be. If a client brings me a shoebox full of all of their receipts for the year (and yes, we have a few of those clients), they are going to pay significantly more for our services than the client that gives me a summarized spreadsheet of all the information. Even the client that hands me that same shoebox, full of those same receipts, but has them organized and sub-totalled by category will pay less. Remember, my time (at least during tax season), is ALWAYS billable. Either I'm spending that time organizing your receipts, or I'm spending it on another client's tax return.
• You are trusting this person with your finances, be sure you trust them. Have a few consultations until you find someone that you are comfortable with.
• Do NOT wait until April to find a professional. Even if you don’t yet have all the information you’ll need to prepare your 07 return, you can still make phone calls and set up consultations. Have your 06 return ready, and start the search!

My bottom line is this... My firm charges around $200 for an "average" return. (This includes Federal & Michigan Forms 1040, Schedule A for itemized deductions, Schedule B (with fewer than 5 transactions) for interest & dividend income, and Michigan Form 1040-CR for a homestead property tax credit. I would say that approximately 35% of the returns we do fall into this "average", and many more have only minor additions to it (selling a stock or 2, or maybe a dependent or taxpayer in college). These are returns that I believe those clients would be capable of doing themselves. But, they think the $200 is worth the time, energy, and stress they would put into preparing the return.

I'm debating about making "tax time" a more regular feature on my blog. Please, let me know if you'd like to see this, or if you have some specific questions or issues you would like me to address.