We’re right at the start of tax season. Here’s a few questions that come up every year around this time:
- Do I really need a CPA to do my taxes? Could I just do the same thing myself?
- Am I missing out on a bigger refund by doing my taxes myself? Would a professional be able to get more for me?
- Am I risking an audit by doing my own taxes?
- Is it worth my time just to pay someone else to do my taxes?
- Do I even have to pay my taxes?
Just kidding about that last one.
The answer to all of these questions (except the last) is the same: “it depends”. Each person’s situation is different and dependent on a few factors.
Let’s look at those factors and hopefully you can be a little more assured of the answers to your questions.
I’ll be comparing the following 3 types of tax preparation methods (feel free to use the comment section below to share your opinion):
- Software – This is anything from free online tax services like TaxAct to the take it home software-in-a-box Premium Level TurboTax.
- Preparation Company/Individual – By this I mean an in-person filing service like H&R Block who’s doors open up for 4-5 months of the year. This can also be a friend or family member who enjoys making a little extra income this time of year.
- Certified Public Accountant (CPA) – A CPA is an individual or firm that is licensed by the state to perform accounting services. They may do only tax services, or they may perform a wide-variety of services (bookkeeping, financial reporting, investment services, etc.)
And I’ll be considering the 3 services for individuals with simple to intermediate level tax situations. I’m not talking about corporate returns here.
Let’s first look at the cost of the different tax preparation methods:
- Software (TurboTax, TaxAct, etc.) – $0 to $100
- Tax Prep Co. (H&R Block, Speedy Tax Service, etc.) – $150-$500
- CPA – $100-$1,000
It’s hard to beat free tax preparation. And you can get that with tax software. I’ve personally used free tax software a lot over the years. I’ve never used a tax prep. company, but I know their services start above $100 and can move into the $200s pretty quickly.
CPA’s can be the most expensive. But I’ve worked as a CPA preparing taxes and have seen clients billed as little as $100 per return. Fees will vary by the number of hours spent on the return the the level of the employee in the firm who spent time on it (whether working or reviewing).
Tip: If you enjoy preparing your own taxes, but need some extra assurance, don’t let price be a deterrent. Take your completed return to a CPA and have them run an error check on it. It will cost you less than a full return and you’ll be more confident you got things correct.
What Software is Involved?
- Software – Free to premium levels of TurboTax, H&R Block at Home, as well as online versions.
- Tax Prep. Company – Can use anything from an in-house product to the premium level software.
- CPA – Typically a professional version of TurboTax called Intuit ProSeries or an in-house custom-built product.
The bottom line on software is that everyone is using it, and the products are generally the same. The professional level stuff isn’t going to be smarter than your take-home software. It will just have a few more bells and whistles.
Let’s look at the people who’ll be doing the work in each of the different methods:
- Software – You. You do all the work. Although tax software has become very sophisticated and will hold your hand through it all.
- Tax Prep Co. – Typically regular people with a skill for tax preparation. Mostly unlicensed individuals. Some preparation companies will have a standard they try to adhere to and a course that must be completed. But generally speaking, you don’t know the level of professionalism you’ll be dealing with here. (FFB: I’ve heard some companies have a CPA check the final return).
- CPA – A CPA is licensed by the State. They have had 150 hours of education (includes approximately 1 year of graduate school) with a core focus on accounting classes. They’ve passed the CPA exam (brutally tough), and they’ve completed at least a year’s worth of experience under another CPA. They also are required to complete annual continuing education courses (approx 40 hours a year). A CPA is still a person though. They make mistakes and some are better than others. However, a CPA is bound by his or her license to the state and the requirements and standards that come with it. If they screw up, their license is at stake. Additionally, a CPA is there year round and could help you with tax planning or an IRS audit.
Chance of an Audit
I’ve seen nothing from the IRS that says who you use to help file your taxes has an impact on the chances that you’ll get audited. Therefore, I don’t see any reason to believe you should stay away from one of these three methods because of this risk.
- If you’re completely lost when it comes to tax preparation and have no confidence that free tax software can close the information gap, then please go see a professional. Get help. You wouldn’t want to leave something off your return and trigger an audit.
- The IRS will focus in on tax preparers who they’ve caught filing improper returns in the past. If your taxes were also prepared there, you are more likely to be audited. Stay away from shady tax preparers.
What Method Do You Use?
Hopefully you’ve gained a little more confidence when it comes to choosing a method of tax preparation. In my personal opinion, the tax software is great for beginners. However, once your tax situation gets more complicated (investments, home purchase, small business, etc.) you should at least let someone else have a look.
Good luck with your taxes. Which method will you be using this year?
This post was contributed by PT. You can catch PT blogging about saving, debt reduction, and making extra money every day at PT Money: Real Personal Finance for a Life Without Limits.