Surprisingly, ethical paid tax preparers agree that many people are capable of filing their own tax returns. The initial consideration for most individuals is not about what type of tax practitioner to select but whether to use one at all.
However, the IRS reports that about 60 percent of all personal tax returns are professionally prepared. The need for tax preparation services is mostly caused by taxpayers with multiple income sources, little free time to understand more than basic tax matters, or individuals with life changes affecting their tax status – such as marriage, divorce, new children, or children entering college.
Taxpayers with business interests, rental properties, royalties, and life changes most likely benefit from having a federally authorized tax professional. Maybe these people only need help for a year or two before learning to tackle recurring tax preparation situations with computer software.
A lot of tax matters are seamlessly handled by tax preparer software. But there are limitations. For example, software doesn’t know cost basis of sold assets. This is particularly cumbersome if property was acquired by means other than purchase. In addition, finding the right way to deduct expenses and tax credits from pass-through entities is tricky to program into software. Then, there are the really complex situations such as Roth IRA conversions and sales of business property.
There are several considerations involved in first deciding whether to self-prepare or hire a pro and then knowing the optimal choice among tax practitioners. Individuals with complicated tax matters usually find that their main decision is an enrolled agent vs. CPA. These professionals tend to provide long-term relationships.
Self-prepared returns are normally a viable option for those with straightforward tax circumstances. This group is mostly wage earners with a W-2 and perhaps also a 1099 reflecting some interest income. The do-it-yourself process applies to these individuals if they can use software to speed up the process and eliminate math errors.
Engaging a professional for income tax preparation is best when there’s a high likelihood of something going wrong. This usually coincides with time-consuming tax returns involving several types of income. In these cases, taxpayers will find that enrolled agents are tax specialists. Their career training and experience involves preparing tax returns plus representing taxpayers with IRS notices, IRS audits, and negotiation of tax relief plans with the IRS. Enrolled agents are not usually distracted by other accounting work involving bookkeeping-related matters.
CPAs often represent self-employed business owners with their tax matters. That’s because a CPA has training to understand financial statements and is capable of rendering business advice. As a general rule CPAs are more expensive than enrolled agents but also attempt to provide more one-stop services. For example, a CPA is more likely than an enrolled agent to provide overall tax planning. Some CPAs have extensive knowledge about investments and provide consultation about entity structures, estate planning, and stock options. However, many of these areas are better handled by hiring tax attorneys for specific tasks. They are more expensive than enrolled agents but can add extra knowledge at only the occasions when needed.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
