Not everyone needs to use a paid preparer to do their tax returns, but as the Internal Revenue Code grows ever more complicated, a paid preparer can provide some peace of mind and a substantial time savings for a price. Whether you use a paid preparer comes down to a cost benefit analysis based on your individual situation. Here is some advice to consider when making your decision.
As a general rule, if all of your income is reported on a W-2 from your employer, it should not be necessary to use a paid preparer. A commercial software product or even some of the free software solutions listed on the IRS website will do the job.
If you have other sources of income, including interest, dividends, capital gain or loss from the sale of property, rental income (or loss) or income reported on a K-1 from a partnership or S-corporation, you cannot use the free software programs. A commercial software program could be a viable cost-effective solution.
However, certain types of income, including income from stock options, incentive stock grants and deferred compensation and income from foreign sources, give rise to very complex tax reporting issues. The amount of income you are reporting can also add complexity due to the phase out of certain deductions and the potential application of the alternative minimum tax.
In addition, if you have income and expenses from a sole proprietorship, you will be required to report that information on a Schedule C with your personal tax return. The Schedule C is a business tax return and not just a personal tax return. These more complicated reporting requirements suggest you should look to a paid preparer.
The IRS website is a helpful resource when evaluating whether you should use a paid return preparer. It has a number of publications written for the non-tax professional providing descriptions and tips for filing federal income tax returns and for addressing the reporting of certain kinds of income and expense.
The IRS will take the most conservative position on any reporting issue where it may not be clear as to how to treat an item. On the other hand, it will also provide an excellent overview of the types of forms that you would need to file. If the number of forms or the directions for filling them out seems overwhelming, consider using a paid preparer.
Commercial tax preparation software can walk you through the various questions you need to answer to complete your return and fill out the necessary forms. They often link to helpful information on the IRS website or to their own proprietary databases for tips or answers to questions you might have. In addition, once you use the commercial software, you can use the same software or most competitor programs in subsequent years to import the information from prior year returns saving the time of re-entering the same information.
However, commercial software is not “one size fits all.” You should evaluate all of the commercial offerings to make sure that there is a program that addresses the types of income and expense that you are reporting. Some will handle a more expansive set of investment income—such as vacation rentals—and some will not. Not all programs will address sole proprietorships.
Once you have identified a product, look for reviews from other users. Positive reviews from people with similar return requirements mean that the software package could work for you.
Obtain referrals to reputable paid preparers. A reputable preparer is a registered return preparer or enrolled agent, in each case certified by the IRS, or a certified public accountant or tax attorney. A reputable preparer should have a “preparer identification number” issued by the IRS and should state up front that he or she will sign your return as the paid preparer. In addition, it is important to use a preparer who has been in business for at least five years; you want to know the preparer will be around in case your return is audited.
Talk to the referred preparers. Ask them about the cost of preparing your return and the time line you will need to follow in order to file your return by April 15. (Filing an extension requires the payment of estimated taxes or it delays a refund.) If you have questions about how a certain item of income should be treated and you wish to take an aggressive position in reporting that item, discuss it before you engage a preparer.
A reputable preparer will want to understand all of the facts regarding that item and may not share your view about how to report it. If the paid preparer will not sign the return, you will have to file your own return or look for another preparer at the last minute.
Paid preparers will give you a questionnaire at the start of the return preparation season. You will be required to provide detailed information about your income and expenses and to provide relevant documentation (for example, W-2s, 1099s, K-1s, 1098s).
You will also be asked to identify various assets. If you are reporting any gain or loss from the sale of assets, you will need to provide information regarding the date of acquisition, the cost of the asset, whether there have been any additional expenses in connection with the asset and whether the asset has been depreciated.
You will need the same information to do your own return. Similar checklists are available online from the IRS and as part of most commercial software packages. Often, the record gathering is the most time consuming part of doing a return.
It is essential to evaluate your tax situation and your tax return preparation requirements before the end of the tax year. Should you decide to use a paid preparer, most of the better ones will be getting sufficiently busy by mid-January that they may not be in a position to talk to you about the complexity of your return or even take on the additional work and file the tax returns without putting your returns on extension.
If you are considering filing your own tax returns, you must identify the records you will need. If it is going to take you substantial time to gather and organize the records, and it is a priority for you to file your return without extending the due date, you may prefer to do the return yourself. A paid preparer will insist on putting your return on extension if you show up at the last minute with a paper bag full of receipts.
Many taxpayers use a paid preparer because they think the paid preparer will get them a refund. No preparer can guarantee a refund without assessing your tax situation to the point of actually preparing a return. Your concern should always be filing an accurate return that minimizes the amount of tax you are required to pay. A refund is a secondary consideration.
If you receive a refund from what you over-withheld, or you paid more estimated tax than required, the IRS will have had the use of your money without paying you any interest for the privilege. You should use a paid preparer because you think the preparer will file a more accurate return for you with less work on your part for an acceptable cost.
The Internal Revenue Code is growing more complex. It is a tangle of rules and regulations that do not always make sense from a policy or practical point of view. However, not every return is sufficiently complex to justify the time and cost of engaging a paid preparer. Understand your situation before you decide whether you need help, and understand the cost of that help before you commit to a paid preparer.
In addition, if you are a careful record keeper, you probably have at hand what you need to prepare a return. Preparing your own tax return can also give you a means to annually review your personal financial situation, and can help you understand your after-tax return on various kinds of income. A commercial software program is a useful tool if you choose to go it alone. Even if you are willing to fill out the forms on your own, the program can check your math and alert you to forms that you may not have known to file.
Deciding to use a paid return preparer is a personal decision based on the complexity of your reporting situation, the amount of money and time you have to spend on tax preparation and your own comfort level. Explore your situation before making a decision.
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