If you are a small business owner who usually does their own taxes but things are more complicated this year it may be time to hire a professional accountant rather than using online tax preparation software. Or maybe you are an individual who usually uses online tax preparation software but your financial situation has changed drastically and you aren't sure how to go about handling your taxes this year.
Today the Rules of Thumb blog from MoneyThumb would like to help you make the decision about whether to use income tax preparation software vs. hiring a professional accountant or CPA to handle your taxes in 2019.
What You Should Know About CPAs
First off, keep in mind that a CPA isn’t the only type of professional who can help you with your taxes. Certified Public Accountants are accounting professionals who have passed a series of exams, have minimum experience in tax and audit, maintain continuing education requirements, and in most states also have a bachelor’s degree. (In fact, in some states you’re not allowed to call yourself an “accountant” unless you’re a licensed CPA).
Enrolled Agents (EAs) are also legally recognized tax practitioners. EAs are also required to pass an exam and undergo continuing education. But whereas CPAs are regulated on a state to state basis, EAs are regulated by the federal government, as the credential is awarded by the IRS.
To sum up the difference between the two, EAs usually focus on tax preparation and resolution. They’re authorized by the Department of the Treasury to represent taxpayers before the IRS for audits and other issues, but may not be well versed in tax and accounting issues businesses are faced with. The education and experience required to become an EA are also quite a bit lower than it is to become a CPA, as anyone who passes the exam can be awarded the designation.
CPAs, on the other hand, are usually more business focused. Many have experience in bookkeeping and expertise in tax matters beyond your personal return. If you’re a small business owner or need some long term tax planning help, you’ll probably want to speak with a CPA. But if you’re considering a professional for the very first time and only need someone versed in tax reporting and compliance, you may be able to save a few bucks by hiring an enrolled agent who’s not a CPA.
The Benefit of Hiring a Professional
Whereas software is an inexpensive and efficient way to tackle tax compliance, it’s severely limited when it comes to tax planning. And for most people, tax planning becomes more important as their financial picture grows more complex. All of a sudden they’re faced with more and larger financial decisions, the ramifications of which will have a big impact on how much tax they pay over time.
Yes, tax prep software can give you an answer into how a certain decision might impact your taxes (will choice A or choice B result in more tax?), but it’s very black and white.
As the number and magnitude of decisions you have to make grow, professional expertise can become very helpful to see the picture clearly. Over time, thoughtful planning becomes necessary if you want to minimize the amount you fork over to Uncle Sam, and its simply a job that computers can’t handle. At least until artificial intelligence takes over tax work.
When You Should Hire a Professional
So what are some examples of tax planning opportunities? What “red flags” should you look for?
It varies for everyone, and if you’re well versed enough in the tax code to identify these opportunities and make adequate planning decisions, you probably don’t need to hire a professional at all. But, most people I know prefer to spend their free time on activities that don’t involve mastering the tax code.
Here are common life events that often yield planning opportunities:
- You have or are starting a small business
- You have or are buying a rental property
- You’d like to begin planning for future generations (estate planning)
- You have material foreign income
- You are or in the past have been subject to the alternative minimum tax (AMT)
- When you’re making a big life change like retiring or buying into a partnership
- You’re unsure whether to accelerate or postpone income
- You have restricted stock or employee stock options
- You’re not sure how much to withhold from your paycheck or pay in quarterly estimates
Again, anyone can file their own taxes with or without the support of Turbotax or other software. But when tax planning opportunities arise, some careful forethought can go a long way.
If you do go the route of hiring a professional, make sure that they’re communicative with your other professional advisors (financial planner, investment manager, estate planning attorney, insurance professional, etc.). Taxes are a big part of the picture and should be integrated with your financial plan. It’s essential that whoever you hire shares the same vision of what that plan is with you and your other advisors.