Do I Need an Accountant or CPA? Knowing When to Outsource Your Taxes

Finding an Accountant Can Lead to Big Tax Savings

If you’re like most Americans you probably have a good handle on completing your taxes on your own. Over the years it has become incredibly easy for anyone with a computer thanks to TurboTax and H&R Block At Home to sit down and go through their tax documents, enter information as the software asks questions, and then even file your return instantly online. For those of you with relatively simple tax circumstances, this is the ideal way to go. The software is inexpensive, most of the questions asked can be easily answered in an hour or two, and there’s very little opportunity for error. It sure beats the days of sitting down with paper forms and spending a few days doing your taxes by hand!

But what about those with slightly more complex financial situations? Sure, there are more robust versions of tax software available such as TurboTax’s Home & Business, Property Manager, and so on. These solutions go into greater depth to help you account for less traditional sources of income and expenses. With more complex finances comes more time and money required to get through the tax filing process, not to mention more room for error. So, at what point does it become cost-effective to make the move from doing your own taxes with the help of software to hiring an accountant?

meeting with accountant

My Personal Tax Story

As soon as I was on my own I began using tax software to do my own taxes. I have used both TurboTax and H&R Block’s software many times and both get the job done great. For a few years during college my finances were so simple and my income and deductions were so trivial that I could spend under $50 and just about an hour and get my taxes done. Those were the good ol’ days. As time went on my finances started to get a little more complicated. For a few years I was a member of an LLC in addition to working part-time. This created a few unique scenarios that made doing my taxes a little more complicated, yet I was still comfortable in handling it on my own. As the years went on I moved on to where my wife and I just had regular salary jobs, no house, no kids, no odd circumstances, so doing my taxes again became as easy as sitting down at the computer for an hour and plugging in a few numbers.

Then, things started to change as I started to dabble in freelance work and other self-employment ventures. The first few years were easy because it was more of a hobby and the income and expenses generated from the freelance work were trivial. As time went on, more sources of income started coming in, and additional expenses started adding up, my tax returns become more of a nightmare. Sure, the software could still handle it, but I was spending more time tracking down documents, receipts, and trying to find deductions because the tax bill at the end of the year was growing significantly. On year after putting in all of my data the tax software said I owed the IRS nearly $4,000. That’s impossible, I thought. We had as much taken out of our paychecks as possible through work, I was paying estimated quarterly taxes, and was itemizing deductions so that we could deduct as much as possible. There had to be a glitch in the software or I was missing so I plugged the numbers in over and over for about a week straight only to come to the same result.

With that, I knew it was time to seek professional help. We asked around with some friends and co-workers about CPAs that specialize in small businesses and self-employed taxpayers, and I made a few calls around and interviewed a few of them. We eventually found one not too far down the road and their name came up a few different times from the people we asked. So, I set up an appointment. After sitting down with the accountant for about an hour discussing our situation, looking over some numbers, and doing some calculations she knew she could help me. A few days later I was thrilled when I received a call stating that I now only owed somewhere in the neighborhood of $2,500. Wow, that phone call and meeting just saved me about $1,500. Sure, the cost of having my taxes done increased compared to doing it myself, but at around $300 it was some of the best money I ever spent.

When Should You Consider Hiring an Accountant For Your Taxes?

I shared my story just to give you one scenario where making the move to hire a professional can be a good decision. I’m a pretty savvy guy when it comes to finances, but I admit that I don’t do a great deal with taxes on a daily basis. I thought I had enough knowledge with the assistance of tax preparation software to get the job done right, but clearly someone who does this stuff for a living can still do it better than I can. While it was the right decision for me, it may or may not be the right decision for you.

To start off, I want to make one thing clear. There is a difference between an accountant and just a tax preparer. As tax season kicks into gear you’ll begin to see advertisements pop up with tax preparers in your area who will do your taxes for you at a cost. Keep in mind that when dealing with one of these places you probably aren’t going to get a full-blown accountant or CPA. Instead, you’ll likely have someone who is qualified to handle returns, but they will likely do little more than ask you the same questions that software you buy on your own does and then plug in the numbers. While it’s nice to get some one-on-one time with someone, you also want to keep in mind that this person is more or less just trying to get your taxes done, not assess your financial situation and help you put together tax strategies going forward.So remember, there are accountants that do taxes, and there are people who do taxes that aren’t accountants.

Here are a few scenarios when it might make sense to start looking for professional tax help:

1. You own a business.

Self-employed individuals stand to see the greatest return when hiring an accountant. Running a business presents a lot of unique situations that can have a significant impact on your taxes. Being self-employed also opens the door for a new world of deductions, credits, and retirement account planning that you may not be used to. While you can certainly find this information online, having someone who does this for a living will save you time and maybe even some money. In addition to just helping you find all the available deductions and paying the IRS as little as possible an accountant can be tremendously helpful in working with you to structure your business as best as possible, putting together a plan for the future to help you take advantage of tax breaks in the coming year, and being there for you if you encounter problems down the road.

2. Going through a major life change.

If you’ve been plugging alone for the past few years with basically the same financial situation there’s obviously little need to pay someone to do what you’re already comfortable doing. But when you encounter a major life-changing event in the middle of a tax year it could lead to an unpleasant surprise come tax time. Getting married, divorced, changing jobs, having children, receiving an inheritance, preparing to retire, etc. These are the things that can change your financial situation in a heartbeat and if you aren’t prepared it could end up costing you dearly.

3. Real estate or taxable investment dealings.

Do you own a rental property? If so, an accountant will be your best friend. Owning a rental opens up a lot of special tax situations that you’ll surely want to take advantage of and make sure you aren’t making any mistakes. The same thing can go for just buying and selling a home or other real estate. While the laws are pretty straightforward, it’s usually a large transaction in terms of dollars so you want to make sure you’re doing everything properly. Finally, let’s not forget tracking gains and losses on taxable investments. If you buy and sell stocks, bonds, mutual funds, or anything else throughout the year in a taxable account you’re going to have a lot of things to consider. Long-term vs. short-term gains and losses, dividends taxed at a different rate, cost basis, the wash rule, and so on. Sure, you can do this on your own, but how much time will it take and are you sure you’ll catch everything? The time saved by hiring a professional alone may pay for itself.

Don’t Be Afraid to Get Help

For people who like to and are proud of doing things themselves it can be difficult to make the decision to seek outside help. Don’t let that get in the way of doing what’s best for your finances. Sure, the majority of people will be just fine doing their own taxes. If that’s you, grab the latest edition of TurboTax or H&R Block At Home. It’s still the easiest and cheapest way to do your taxes. But for those of you who may have finances that are a little more complex, are self-employed, or would otherwise just like to outsource your tax preparation don’t be afraid to get a professional to help. At most it will probably only cost a couple hundred dollars compared to buying software and e-filing yourself, and chances are you save that much or more on deductions and tax strategies you overlooked by doing it on your own. Whatever you do, make sure you get an early start so you don’t miss the tax filing deadline!

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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.

13 comments
solar savings
solar savings

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Kopa hemsida
Kopa hemsida

I really like and appreciate your blog.Much thanks again. Will read on…

RecardoMandy
RecardoMandy

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Will Chen
Will Chen

I strongly support the trend of seeing more Asian folks in stock photos. :p

Dan
Dan

I have been doing a lot of research in this area for our tax & accounting firm. Tax software really is great for those individuals with simple returns.

In theory, software and professionals should end up with the same results; however, the accuracy of the software is left to the knowledge and understanding of the individual inputting the figures. For that reason, we too recommend that individuals with major life changes, businesses or complicated tax issues use an accountant.

Here are the results of an experiment I conducted between free software and a tax professional: http://www.msftaxes.com/tax-software-vs-tax-professional

Beyond Paycheck to Paycheck
Beyond Paycheck to Paycheck

@Evan: When I first started my career as a financial planner, I learned that many of the best financial planners had financial planners of their own. So I'm with you - we can always benefit from an outside, less emotional, opinion (provided it's unbiased and competent.)

Jeremy, I enjoyed this piece. Here's yet another take on the tax prep landscape.

Credit Girl
Credit Girl

One of the most important things that you mentioned was interviewing to make sure you find a good CPA/accountant and getting references from family members or friends because once you have that one trustworthy person, you can always return to them for years to come.

Peter
Peter

I think this year may be the first that I'll be going to an accountant because of online and blog income, and because I want to make sure I get all the deductions/etc that I should be. Plus, staring at all those tax forms makes my head hurt.

FinanceDad
FinanceDad

I'm an Accountant and I agree with most everything you said. I just wanted to add that most people who make under $35-40k per year can do their taxes for free with various online applications or software. Check out the IRS for their approved vendor list.

Jeremy
Jeremy

Even, I think we share the same sentiments. It has always drove me nuts how so many people make it sound like you have to manage your finances yourself or else you're just throwing money away. I've never understood that, but it's a common talking point as you mentioned.

I think we can all agree that people should avoid handing their money over to a salesman who's going to simply make money by selling them high-commission investment products, but even a fairly savvy investor can reap many rewards from a competent fee-only planner. Even someone who knows the importance of saving, investing, and diversification can often stand to learn something from a good advisor/planner.

I think the same rules apply. If you're just earning a simple wage, don't have much debt, and are contributing to the minimum to your 401(k) or IRA, then maybe getting professional help isn't the best use of your funds. But as you begin earning more, start experiencing more complicated financial issues, and want to go beyond just dumping money into a retirement account there can be many benefits in hiring a professional.

So, I completely agree with you and wouldn't put the need for a CPA or attorney above that of a financial planner or CFP. Even the smartest people in the world can't be experts at everything, and if you value your time and a professional opinion it usually a good decision.

Evan
Evan

Jeremy,

I go back and forth on an issue and I think you can help me out. Why is it ok for people to NEED CPAs and attorneys (attorney here), but when the concept of paying an investment advisory is brought up PF Bloggers freak out, and assume that everyone has the desire and capacity to learn about asset allocation?

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