For taxpayers with the simplest income tax returns, do-it-yourself software and websites often seem like the way to go. These individuals often have only one source of income (i.e. W2 from their employer), may have a home mortgage with interest, some student loan debt and maybe some childcare credits. But for those with more complex situations, such as revenue from businesses, income from interest and dividends, capital gains on a home sale or foreign assets, seeking the expertise of a professional can save time, money and potential legal complications.
For small business owners, and many other taxpayers, there are several reasons why seeking a tax professional might be better than going it alone. In this post, we’ll discuss some of the most common and influential drivers that typically signal it’s time to make the switch.
Types of Tax Advisors
The first thing to know is that anyone can claim to be a tax expert. Furthermore, there is no requirement that people who prepare tax returns have to be licensed by the IRS. With that being said, note that there are (generally) three designations when it comes to tax professionals:
- Enrolled agent (EA). An EA is licensed by the IRS and has either passed a difficult test or has at least five years of experience working for the IRS. EAs are “generally” the least expensive of the tax pros and often offer bookkeeping and accounting assistance.
- Certified public accountant (CPA) and other accountants. CPAs are licensed and regulated by each state. They perform sophisticated accounting and business-related tax work and prepare tax returns. Larger businesses or businesses with complex business tax returns often use CPAs. The larger CPA firms (e.g. The Big 4) are expensive. Smaller CPA firms and practitioners can be less expensive and may be better suited for the typical small business.
- Tax Attorneys. Tax Attorneys are lawyers with a special tax law degree (called an L.L.M. in taxation) or a tax specialization certification from a state bar association. Tax attorneys can be expensive, but you should consult one if you have a tax problem, are in criminal trouble with the IRS, need legal representation in court, or need business and estate planning.
Reasons to Hire A Tax Professional
So when is the right time to hire one of the individuals listed above? Typically, it’s once one of the following items below occurs:
- Your tax situation exceeds your expertise or your software. Even what may seem like a “straightforward” situation can quickly turn into more than one bargained for. For example, let’s say that you drive for one of those ride share companies. At tax time, you receive a Form 1099-K, a Form 1099-MISC and a Yearly Summary. Some of the documents include numbers from one of the other documents, and some documents appear to have totally different numbers. Some have fees that “may be deductible” but you aren’t sure which ones to include. Do you add them all? Do you only include some? What if you leave a number off that should have been reported? A tax professional can help ensure everything is reported correctly and that you don’t wind up getting an IRS Automated Adjustment Notice for under reporting your income.
- Your time is valuable and you’re spending too much of it preparing your return. While you may be able to prepare your taxes yourself for $100 or less online, many do-it-yourself filers spend an enormous amount of time when doing so. According to the 2018 Form 1040 Instructions per the IRS, the average taxpayer will spend 11 hours preparing their return.
Average Taxpayer Burden for Individuals Average Time (Hours) Type of Taxpayer Percentage
All taxpayers 100% 11 5 2 4 1 $200 Nonbusiness 70% 7 2 1 3 1 $110 Business 30% 19 10 3 5 1 $400 Estimated Average Taxpayer Burden for Individuals by Activity per 2018 Form 1040 Instructions
- You could be missing out on valuable deductions. In addition to saving you countless hours of painfully boring and costly tax guessing, experienced preparers know the deductions that you may qualify for, and which items are tax deductible if you own a business. They can also easily tell you if it’s more beneficial to itemize or take the standard deduction. Even if you just earn only a little income on the side, a professional may be able to find you deductions or credits that will more than pay for their services and keep more of your hard earned money out of the pockets of Uncle Sam. Lastly, the cost of having your taxes prepared by a professional can also be tax deductible as a professional fee if you have a business.
- The tax law is constantly changing. Adding to the complexity, new tax laws are enacted every year that affect virtually everyone, making it tough to keep up with changes and how they might affect you. For example, the new 20% Qualified Business Income Deduction will no doubt cause some frustration for those this tax year (especially if you in the “phase in” range for a partial deduction). For small businesses that have to manage income tax withholding and reporting for their employees, taxes are even more complex. While tax software can help, an experienced professional that “has seen it all before,” and also keeps up with tax law changes through educational courses, can make the process easy peasy lemon squeezy!
- A mistake was made in the past. If you do your taxes yourself, you are much more likely to make a mistake. Mistakes happen, but when they happen to you, it may feel like they are costing you big time. A simple math error can cause a return to be inaccurate, leaving you liable for unpaid taxes and interest. For errors the IRS believes are not accidental, such as failing to report income, taxpayers can also face large fines and even criminal prosecution. A skilled tax professional can not only help ensure that your returns are accurately prepared, but they often can help you rectify a past mistake.
- You want peace of mind. The only people that look forward to an IRS audit are IRS auditors! The best way to avoid their scrutiny is to make sure your tax return is in compliance with the tax laws. To do that, why not hire a professional who lives, works and breathes taxes every day (or at least a lot more frequently than you do)? There is still a chance than any taxpayer will get audited, but if you use the services of a professional CPA, Enrolled Agent or Tax Attorney, and your return is selected for further inspection by the IRS, those professionals can typically help represent you on your behalf before the IRS. Don’t go before a court without a lawyer, and don’t go before the IRS without a professional.
How much does it cost to hire a tax professional?
According to the 2018 survey by the National Society of Accountants, the average federal tax return in the U.S., including the tax return for the person’s state of residence, cost $294 for a professional preparer to handle if the taxpayer itemizes and $188 if they don’t. If you own a business that needs to file a Schedule C (for business income and expenses) that will tack on $187 more. But as outlined above, there are numerous reasons why this cost can be well worth it.
Do you need help with your business taxes this year?
If you don’t want to deal with the hassle and headache of navigating the new tax law, or simply don’t have the time, we’d be happy to assist you! Call the office now to schedule your appointment or request your complementary tax situation analysis (valued at $197 but free if you mention this blog post). We are a year round practice and can even help you file your state taxes no matter where you are located.