Do You Need an Accountant?
By Ric Edelman
You turn to qualified medical, legal and (of course!) financial planning professionals. Make sure you seek the services of a tax professional as well.
The Internal Revenue Code is more than 73,000 pages. It takes hours to complete the forms — once you determine which forms need completing — and mistakes are costly. Overpaying wastes money and underpaying means paying penalties and interest. You could even be audited.
This fear of being audited causes many prepare-it-yourself taxpayers to deliberately refrain from claiming deductions, exemptions and credits they are entitled to. The result: They pay far more in taxes than they actually owe. And tax-preparation software is of debatable help. If you skip or misunderstand a question, the software will produce the wrong forms or complete them incorrectly.
It's much better to have a certified public accountant (CPA), enrolled agent (EA), or tax attorney prepare your return for you. With narrow exceptions, these are the only people who can represent you in matters pertaining to the IRS. (Everyone is familiar with CPAs and attorneys; EAs are tax professionals who have completed coursework and passed an examination certifying their competency to prepare tax returns.)
Not only will these folks help you deal with the IRS, typically they'll stand behind their work. If your CPA, EA, or attorney makes a mistake that causes you to owe additional tax, you'll pay only the tax, while he/she will pay any interest or penalties owed. (It's unreasonable to ask preparers to pay the tax itself; that's always the taxpayer's responsibility.)
Why are these folks willing to stand behind their work? Because they are ethical professionals. Besides, they know that they are unlikely to make a mistake. (You can't say the same about your MBA brother-in-law. According to recent statistics from the Treasury Department, the majority of all the returns prepared by volunteer tax preparers contained mistakes.)
One of the most common tax mistakes we've seen at Edelman Financial involves clients who own mutual funds, sell their investments, and then replace them with new securities. Consider one such client who prepared his own tax return, but because of his lack of understanding of Form 8949 and the reporting requirements pertaining to investment sales, he did so incorrectly. A couple of years later, he received a letter from the IRS demanding $8,000 for unpaid taxes, as well as interest and penalties. He was about to send the IRS a check when he mentioned it to us. We immediately sent him to a CPA who was able to show the IRS' calculations were wrong. Result: The client owed no additional tax and no penalties or interest, either.
The CPA billed the client for a few hundred dollars. The fee was well worth it.
Taxpayers who dislike the idea of paying a professional preparer's fee should consider a different perspective. According to recent IRS statistics, the typical married couple with an adjusted gross income between $75,000 and $100,000 per year paid $7,300 in federal income taxes. That's an effective tax rate of approximately 8.5%.
If the CPA, EA, or tax attorney's fee is $600, that's just 0.7% of the typical couple's income. In other words, retaining the services of a tax professional means the family's total tax bill, including the cost of tax preparation, is 9.2% rather than 8.5%.
Stated another way, is it worth $1.64 a day to enjoy the peace of mind that comes from knowing your tax return was professionally and properly prepared? I'd say it is. And considering that your professional preparer will save you substantial amounts of time and aggravation — not to mention all the interest and penalties you'd have to pay as a result of errors you might make — this small increase in your effective tax rate is well worth it.
By the way, the fee you pay your tax preparer may be tax-deductible. (Even Congress acknowledges you need a professional tax preparer!) That's why I strongly encourage you to work with a CPA, EA, or tax attorney.
Originally published in The Truth About Money 2010.
This material was prepared for informational and/or educational purposes only. Neither Edelman Financial Services LLC nor its affiliates offer tax or legal advice. Be sure to consult with a qualified tax or legal professional regarding the best options for your particular circumstances.