Doing your own taxes, or using a professional -

What is the best choice for you?

Your choices when it comes to preparing your tax return appear to be simple.

•  You can do it yourself with paper, pencil, the forms, the instructions, and your caffeine loaded drink of choice.

•  You can augment the paper, pencils, forms, and instructions with your computer and specialized software (you'll still need the caffeine drink).

•  You can hire someone to do the task for you.

This WJH FAQ is designed to address the issue of how to make this choice.

Our recommendation is to consider the following issues.

1.  How complex are your circumstances?

Obviously financial circumstances, and the tax returns that accompany them, come in all shapes and sizes.  An individual (or family) with only salary income and limited deductions has a relatively easy form to file.  Of course, more complicated circumstances - for example, multiple types of income from multiple sources, complex deduction opportunities, and a wide range of business situations - require more complicated returns.  Complicated is, of course, in the eye of the beholder and actually has little to do with the forms themselves and a lot to do with the rules underlying the forms.  And, that leads to the next question you need to consider.

2.  Are you willing to personally comprehend the tax rules?  (And, keep current with them?)

Consider the following.

In 34 of the last 37 years there have been changes to the tax laws enacted by Congress.  That includes 78 major changes since 1986, plus the Tax Relief Act of 2000.

Prior to 1998, the tax code was over 9,400 pages with about 1.3 million words.  Did you ever read War and Peace?  It is only a little over 1,440 pages.  And, it has characters and tells a story.

That all seems like a lot to expect someone to dig through and understand, but we are not finished yet.  Naturally, the laws enacted by Congress - Congress and laws being what they are - are often not clear.  Clarification of these laws comes from IRS rulings and regulations and the outcome of various court cases.  As you would guess, it takes a lot more paper and words to tell you what Congress meant when they wrote a law than it takes to actually state the law. 

Now, you do not have to understand every word on every page of all the laws and regulations and know exactly how to apply all of those laws and regulations to prepare your own return.  You only have to know the laws, rules, and regulations that apply to you. 

The net here is that if your return is relatively simple and you can do the math, you might want to do the return yourself or use a low cost third party preparer.  On the other hand, if the situation is complicated and you clearly need to hire an expert for help, the type of preparer you hire becomes the critical issue. 

3.  Where do you get your tax information?

There is a lot of information available regarding tax return preparation, and, a fair amount of it is wrong.  It is not unusual for us to read news articles or hear advice on the radio that is either totally correct or, at least very misleading.  It is amazing how often we hear the "My neighbor, the doctor, is deducting all of his auto expenses because he put a magnetic sign on his car advertising his wife's part-time Amway business."  Similarly, we hear lots of urban legends about things like home office expense deduction and other "loopholes" that the IRS closed years ago.

If you are considering undertaking the task of completing your own return, make sure you have correct information from reliable sources.  Many software packages offer good information if your circumstances are not very complex.  The WJH web site has a lot of helpful information that is professionally prepared and free.  See the Federal Tax Tools and Tips and the Business References sections on the WJH Access page.

4.  How much time are you prepared to spend on research and preparation?

Regardless of who prepares your return, there is a time cost.  Preparing your own return requires the largest time commitment.   But even if you hire a preparer, you still have to collect data and communicate the facts of your financial situation to the preparer.  The rule is fairly simple - regardless of how the return is prepared - the more time you can spend putting the facts in order, the less time the actual preparation will take (and the less it will cost if you use a paid preparer).  For a paid preparer, this means putting your information  in the order the preparer needs, not the order you think is appropriate.  Professionals  understand the rules and their tools.  They will therefore have an opinion about how  they want your information organized.

4.  How much are you willing to pay a third party?

There is a definite hierarchy of paid preparers.  A general review of that hierarchy - sorted by expertise - might look like the following.

• At the high end of the hierarchy are the accredited professionals - Certified Public Accountants and Tax Attorneys.  These are people who have made a career out of understanding the tax code, regulations, rulings, and court decisions.  To maintain their credentials they are required to take continuing education courses on a regular basis and they typically spend significant time and money ensuring that their knowledge of the laws and various rulings are up-to-date.  They also have rules of ethics and even rules of process and procedure by which they must abide.  These pros, as a group, are the most knowledgeable tax preparers and planners and have the best access to the most current and reliable information.  However, they are not the people you typically want to use if you want to cheat on your taxes.  They sign the returns they prepare under the same penalties of perjury as the client does.  Their reputations and livelihoods are at stake.  They have significant interest in doing the return correctly.  For more information about Certified Public Accountants go to the American Institute of CPAs web site or the Texas Society of CPAs web site.

• The non-certified specialist is probably at the next level in the hierarchy.  There is some variation in this group since some of them are as experienced as CPAs, but simply do not have the certification while others are focused on specific areas or do taxes on a part time basis.  This category includes enrolled agents.  It also includes people in a CPA or law firm who work side-by-side with the accredited practitioners and have the same access to information.

• The non-certified technician category is a much wider and more diverse category.  These folks range from people who focus on tax issues year round, but perhaps only have a small number of clients, to people who work for the national store-front preparation organizations on a part-time basis.  This group can be an excellent choice if you have one of the simpler returns and simply don't want to do the math and fill out the forms. 

• The brother-in-law, your barber, your insurance agent....  There are lots of people who prepare tax returns on a seasonal basis and make most of their living some other way.  Again, the price may be right if the return is simple.  However, these folks may also be the source for an inaccurate return.  Keep in mind that they are generally subject to no regulatory authority, often have limited access to tax code and regulations information,  and may have little reason to remain current with regard to the tax code and rules. 

• The final category does not really cover those who prepare returns, but is the category that covers the perhaps well-meaning, but inaccurate rumors and advice from friends, family, and others.  This advice usually includes something like "My next door neighbor says that he has always done it this way, saved thousands of dollars, and has never been audited."  Another classic is "I heard a guy on the radio who said..."  Tax advice gathered this way if often wrong or at least not applicable to many circumstances. 

In choosing your tax return advisor and/or preparer it is most important to make sure their knowledge and experience level fit with your tax situation.

Of course, expertise, experience, and credentials cost more money.  If you use a paid preparer, the money spent is being used both to a) ensure accuracy and quality, and b) buy you time to do something else.  You need to figure out what the time/money trade-off is for you personally.  And, you need to have an idea of what the preparer will charge.  Ask them up front about their fees. 

You might want to be a little cautious about the "All returns $14.95" deals unless yours is truly simple.  There are major differences among individual tax returns.  Some quality has to suffer on the non-trivial returns in this kind of deal. 

For complex returns it is not always possible for the preparer to give an exact cost number.  This is especially true if you have not worked with the preparer before, and they do not know how your information is organized.  Experienced preparers have learned that virtually all clients believe their information is in perfect order.  Unfortunately, that is seldom the case.  In any event, it is still reasonable to get a fee estimate and to understand what that fee estimate does and does not include.

5.  How important is tax planning as opposed to simple tax return preparation to you?

Again, the more complex the return, the more important it is that you consider this question. 

If you are going to hire a preparer, make sure you leverage their experience and knowledge.  If they are simply going to plug numbers into your return, you are not getting all of the value you can from them.  One main reason for using a paid preparer - especially at the high end of the previously discussed hierarchy - is to get advice and to develop a plan that is appropriate to you and your circumstances.  Consider the other services offered by the preparer.  Can they also help with financial planning, estate planning, business planning, etc.?  Make sure that they are not only the person you want to prepare last year's return, but also the person to help you get ready for future years.

Look for someone who asks questions and really gets to know your situation.

Make sure the preparer understands not only your financial situation, but also your long term goals and your tolerance for, or aversion to, risk. 

So, the decision of who should do your return has a lot to do with the complexity of your situation.  If you think you can do it yourself or can use a store-front preparer, you still might consider consulting with a certified professional on tax planning issues.  Spend a little money to see what ideas they have.  This can help you clarify your position and ease any doubts about the financial decisions you are making.  Most professionals will consult with you on a "by the hour" basis, but don't expect them to do this review and planning for you in the middle of their busy tax preparation season (before April 15 and October 15) - especially if they are not preparing your return.