When It Pays to Hire a Tax Pro
Taxes | DIY | Accountant | CPA | IRS | Software | April 3, 2024
This Week's Quote:
“When you have a dream, you've got to grab it and never let go.”
- Carol Burnett
Crystal Dyck never had trouble doing her own taxes. But for tax year 2022, the American expat said she realized she needed the services of an old-school tax preparer.
In that one tax year, Ms. Dyck had to make sense of the impact of selling her South Carolina home and working remotely in Canada for a U.S.-based corporate recruiter. She also got a notice from the Internal Revenue Service saying she made a mistake with her child tax credit payment on her 2021 return.
“Life got more complicated. Taxes got more complicated,” Ms. Dyck said. In January she reached out to an enrolled agent, an IRS-credentialed tax preparer, referred to her by a friend.
Despite how easy commercial tax software has made it to file by yourself, the growing complexity of tax filing is convincing more Americans to pay someone for help. The majority of e-filed tax returns last year were done by paid tax preparers, according to the IRS. And this filing season, as of Feb. 24, the number of paid preparer returns is up 6.1% compared with the same time last year.
Even Intuit’s TurboTax, the original do-it-yourself tax software, is pushing Americans toward paid preparers. Its 2023 Super Bowl dancing-man ad beckoned: “Come to TurboTax and don’t do your taxes. Meet with one of our experts who’ll do your taxes for you.”
TurboTax users may get prompted to upgrade their plan to include help from a human preparer for an additional fee.
For those currently weighing a decision, there are some key ways to determine whether you should hire a preparer or not, detailed below.
The IRS estimates that the average time all Americans spend on taxes is 13 hours, at a cost of $250, including both those who file through a preparer and on their own. For individual filers with business income, like self-employment income reported on Schedule C, the average burden is 25 hours, at a cost of $530.
When does it make sense to get help with your taxes?
For taxpayers with straightforward returns, it may be overkill to pay for an expensive tax preparer, said Clay Ernst, a certified financial planner with Edelman Financial Engines in Colorado Springs, Colo.
Accountants say some examples of straightforward returns are a retiree with a Social Security check, a pension check and an annual distribution from an individual retirement account. Or it could be a married couple where both spouses have W2 wage and tax statements, and they have limited investments outside their workplace retirement plans.
But the DIY approach might be fraught for taxpayers with complex issues such as working in multiple states, having restricted stock units that vest, or selling a rental property, Mr. Ernst said. Even taxpayers with self-employment income may want paid advice because it can involve higher audit red flags such as excessive business deductions or the home-office deduction, he said.
One option is to buy add-ons to DIY software. TurboTax launched its add-on product where you can chat with a tax pro in 2017 and its full-service handoff product last tax season. Revenue for these add-on assist products rose by 30% last year, according to TurboTax.
H&R Block, which started as an in-person tax prep shop, has offered its chat with a tax pro add-on for its DIY product for three years. A tax pro doesn’t sign the completed return unless taxpayers pay an additional fee.
The choice comes down to your confidence and desire to do it yourself, said Heather Watts, who oversees the DIY and add-on products at H&R Block.
A paid preparer is responsible for the substantive accuracy of your return, but you’re ultimately responsible for the accuracy of every item reported, according to the IRS.
How to check a tax preparer’s credentials
If a preparer doesn’t have an IRS-issued preparer tax identification number, or PTIN, and doesn’t sign the return, that is a red flag to walk away, said Melanie Lauridsen, director for tax and ethics with the American Institute of CPAs.
Still, having a PTIN alone doesn’t guarantee any level of expertise: Over 75% of all return preparer penalties that the IRS issued in calendar year 2021 were assessed against non-credentialed preparers, according to the Taxpayer Advocate Erin Collins, an IRS watchdog.
Of the 700,000-plus individuals with a PTIN, less than half have credentials such as being a lawyer, certified public accountant or enrolled agent. These preparers who hold attorney, certified public accountant, or enrolled agent credentials must pass competency examinations, satisfy continuing education requirements, and are subject to standards of conduct. Plus, they can represent taxpayers before the IRS in the event of an audit or collections proceeding.
The IRS has a directory where you can verify a preparer’s credentials.
Beyond credentials
Ask potential preparers about their core practice, whether they have small business or expat clients, for example, to make sure they are a good fit, said Mr. Ernst.
A new preparer should ask for a taxpayer’s last year’s return since items carry forward that taxpayers probably won’t know to mention, said Annette Clearwaters, a certified financial planner in Mount Kisco, N.Y. That could include Form 8606 for backdoor Roth contributions, loss carry forwards, and refunds applied to estimated taxes.
Another thing to look for is whether a tax pro only does tax returns or also does proactive tax planning. “A lot of them are just filing returns and moving on,” said Ms. Clearwaters.
Credit goes to Ashlea Ebeling, published March 6, 2023 in the Wall Street Journal.
Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.
This Week’s Author, Belinda Stickle