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.
Don’t forget free help.
Depending on your situation, there are volunteers in your community to help you configure your taxes. They can answer questions and they have taken IRS training courses.
Generally you need to be retired, in the military or making under $49,000 a year. But there will be 12,000 sites nationwide to help. So check it out!
Also, if you decide to do your own taxes, the IRS is actually very helpful at answering questions. I have always been treated pleasantly. As we near April, you may have to wait a day or so for a return call. It depends on call levels. Still, it’s free help from people at the IRS. If you’re worried, take down the person’s name and ID number (given at the start of each call) for your records, so you have proof that you were following IRS directions.
.-= Abigail´s last blog ..Defending 79.9% APR? =-.
That’s great to know! And many of the software companies provide answers as well.
Despite a modest income and not too complicated return, i used a CPA to do my taxes for many years becus i considered it a headache and was afraid of making mistakes.
My CPA steadily increased his fees and i realized that while my numbered varied each year, the various schedules, deductions or credits i had remained pretty much constant: a sale of a mutual fund or two, my freelance income, mortgage interest, etc. Nothing too exotic.
So these days i simply used my previous year’s return as a guide and am probably one of the few people who still do their return the old-fashioned way: in pencil first, and using the IRS instruction book. My brokerage firm gives me turbo tax for free, but i prefer the IRS guide as i’m getting it straight from the horse’s mouth and don’t want software “interpreting” things for me. It just gives me greater peace of mind.
I doubt a CPA could get me a bigger refund. like to read personal finance magazines and feel pretty much on top of what credits or deductions I’m entitled to. CPAs are a waste of money, IMO.
Every person needs to figure out which system works out best for them. If you are most comfortable doing it yourself then by all means you should do so. It sounds like you feel reasonably comfortable doing it yourself and you’ve had time with a CPA to see what is usually done.
Personally, I would work up your return in TurboTax just to double check it and see if there’s anything they might catch (you don’t have to file with them if you don’t want to).
I’ve always filed my own taxes in the past using turbotax or a similar online product like taxslayer.com. This year I’ll be seeking out the services of a CPA to help me figure out my more complicated tax situation. Fun!
Are you sure i have to pay my taxes? (JK)
.-= Peter´s last blog ..Top 10 Tax Credits To Take Advantage Of =-.
Hey, you don’t have to pay your taxes but don’t be surprised if jail time is in your future! Haha.
I think when your taxes get to a certain level its good to see a CPA, at least to see what they say and suggest. And if you itemize you get to deduct the tax expense on next year’s return.
If you have a complex tax return I’d suggest going to a CPA. Tax Prep companies can be hit or miss, most of these people are only do the tax prep part-time and are not experts. They can handle basic returns, but I have seen so many people get in trouble with errors made by going to a storefront type tax-prep places. The best thing though is to just be consistent year after year.
.-= Manuel Davis´s last blog ..What Can Happen vs. What Will Likely Happen if Taxes are Not Filed =-.
I don’t think there is a magic bullet that handles all situations, it still gets down to the individual. I recently went to a “professional firm” for tax advise and came away with a very bad experience.
.-= Steven b´s last blog ..Looking for Woodworking Projects? Having An Excellent Set of Building Blueprints or Plans Is Essential to Your Project. =-.
No, there is no one option that is best but it is still good to know what is out there. Sorry to hear about your bad experience.
My mother-in-law currently does out taxes (she works for a CPA and is able to use their software etc to get er done). Next year, we will find a local CPA to do our taxes. For two reasons: I am treated as a contractor by my company, therefore I am self employed. It is a bit more complicated. My wife runs a photography business and has to deal with all the ramifications of that (sales tax, etc etc). So having a pro do our finances, taxes, and watch our backs is worth the few extra bucks. If we were ‘just’ pulling in a few w-2’s I would rock turbo tax.
.-= Ted´s last blog ..The shame of debt =-.
I think when your taxes get more complex its a good idea to check out a CPA at least once to see what they have to say.
I’ve got all the hours to be a CPA, but am just an EA(Enrolled Agent). EA’s are like CPA’s, but licensed federally instead of through the state. I work at an Accounting firm with 2 others in a college town. We offer income tax prep, payroll, and bookkeeping services. Our prices actually start out at $50 for e-z returns and then $150/hour for most other returns. The majority of clients don’t get charged the $150 because it really doesn’t take as long as most may think to do the returns that most take to places like H&R Block.
Basically, I’m trying to say that it never hurts to shop around. So many people just end up going to the place that they think is cheap and it ends up costing them more now and in the future.
We shop for so many other small things but when it comes to taxes, many poeple don’t shop around. But you get what you pay for here many times.
Great point about the time it takes to do a return. The experts know what to look for.
I do our tax returns on paper and then do them on one of the free tax software to confirm my results and to e-file. It works for me.