When To Hire a Tax Preparer

It’s February, and that usually means that you are ready for winter to be over, you are thinking about what to get that special someone for Valentine’s Day, and you can’t decide whether to do your own taxes or to let someone do your taxes for you. For years, taxpayers have been baffled by the federal income tax system and for good reason. The number of pages in the Wolters Kluher CCH Standard Tax Reporter reached 73,954 in 2013!  However, there’s probably only a handful of those pages that actually apply to the average taxpayer, while the rest of those pages are technical jargon, legalese, and other stuff that’s most irrelevant to you and me. 

That said, we are bombarded with TV commercials suggesting that if we don’t use a tax preparation service, we may be losing lots of money. I agree we may be losing lots of money but I don’t think most of that money is lost to unclaimed tax refunds. Instead, I’m of the opinion that lots of money is wasted in hiring tax preparers to do what the average taxpayer can do on their own.

That’s not to suggest that there isn’t a need for tax preparers—after all, there’s still the other 73,950 pages that apply to some taxpayers—but with all of the education and tax preparation software that is out there, I’m convinced that most taxpayers can simply prepare their tax return without the assistance of a preparer.  So with that said, when DOES it make sense to hire a tax preparer?  Consider the following:

How complicated is your situation?

Most taxpayers live and work in one state, have one or two sources of income, and are not actively buying and selling taxable investments throughout the year. For these taxpayers, their tax returns will be pretty straight forward. If your taxable income is less than $100,000, you don’t have self-employment or rental income, you don’t itemize your deductions, and you have limited or no adjustments to income, then you may qualify to use a simplified version of the form 1040 (i.e., either form 1040A or 1040EZ) to prepare your income taxes.  Since these forms are less complicated, you may be able to fill these out by hand without too much trouble.

On the other hand, if you:

  • worked in multiple states or countries
  • lived in multiple states or countries
  • own and operate a business
  • actively buy and sell taxable investments and property
  • are a non-U.S. citizen

then you may want to work with a tax professional.

Are you tech savvy?

Unless you have been living under a rock for the last 20 years, the Internet is here to stay, and that means easier tax preparation using online tools and resources.  So if you don’t mind answering a few questions on a website, then you can probably file your taxes online for little or no cost. If your income is less than $60,000 you can file your federal return for free, along with many state returns for little to no charge, using FreeFile from the IRS.  If your income is over $60,000 then you can eFile using any of the popular web-based tools such as TurboTax, TaxSlayer, or TaxAct, or an online tool from companies like H&R Block, Jackson Hewitt, and others. If you shy away from PCs and the Internet, you may be a good candidate for using a tax preparation service.

Do you have the time?

Even if you are comfortable using technology, it will still require time to fill in all of the information. This could take several hours and span several days depending on how much of that information is readily available. The nice thing about using software is that once you set up your return, much of that information automatically populates future returns.  Also, depending on which software you use, the application may be able to import tax documents like W-2s and 1099s. All of that said, if you don’t have the time to prepare your own tax return, you may want to consider hiring a tax preparer.

Can you afford a tax preparer?

Hiring a tax preparer may cost several hundred dollars, while using tax preparation software may cost you nothing as we saw above. Even if you don’t qualify for free software, tax preparation software usually runs only $30 to $100 depending on the complexity of the program. If you don’t have the money to spend on tax preparation services, you may want to try filing your own return this year.

Will you be able to sleep at night?

Some taxpayers, no matter how simple their return, will feel queasy about the idea that if they make a mistake, it may get them in trouble with the IRS. If you ever do have trouble with the IRS, you can always contact the Taxpayer Advocate Service for help. But the presence of insecurity may be enough to warrant the hiring of a professional tax preparer. If you do hire a tax preparer, make sure they have a Preparer Tax Identification Number (PTIN). Verify that the person you are working with is a CPA, attorney, or an Enrolled Agent—or someone at their firm is—so that they can represent you in case there is an audit.

If you would like to read more about choosing between a tax preparer and doing it yourself, check out this article by Forbes contributor Kelly Phillips Erb (a.k.a. Taxgirl), as well as this article in The Motley Fool.  If you would like help choosing a tax professional, visit http://www.irs.gov/Tax-Professionals/Choosing-a-Tax-Professional. In any case, tax season generally starts mid- to late-January, so once you have all of your tax forms get started on your filing, especially if you think you may be getting a refund.  As for what to get your Valentine—you’re on your own for that.

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