These days, you have many options when it comes to preparing your taxes. You can go to a storefront service such as H & R Block, Jackson-Hewitt or Liberty Tax, purchase preparation software such as Turbo Tax, use web based software offered by various companies or go to a licensed professional such as a Certified Public Accountant (CPA).
I often get the question; Why should I use a CPA and not just use Turbo Tax? Being a CPA, most would expect me to always have a reason why going to a CPA is the best possible route, but actually that is not the case. Truth is, sometimes it makes more sense for someone to go to a storefront service or use tax preparation software. The trick is knowing which type of taxpayers should use each service and why.
In this article I take a look at each type of paid preparation service and who should use them.
(1) Self Preparation Tax Software
To me, tax preparation software (either web-based or out-of-the-box) is usually best for the simplest tax returns. That’s not to say that it can’t handle more complicated tax situations, only that I feel it is best suited for easy to moderate returns. Preparation software usually runs you through a list of questions that you answer, based upon your situation, then will ask for further information depending on your answers (including amounts and other information from tax forms) and completes the return based upon your answers. This is a great way to prepare if you have a straight forward return, or if you are relatively tax-savvy and you have a mildly complicated return.
But the downsides to tax preparation software are increasingly obvious as the returns you try to prepare with it become more complicated. One downside is the lack of a human element on the software side of the equation. You know those automated telephone menus we have all come to accept and know so well that you have to go through when you call large companies? We all know it can get frustrating going through menu after menu trying to either get the answer to what may be a relatively simple question, or get through to a human being. Well retail tax preparation software can sometime give you this feeling. This type of software has been made to be as simple as possible when asking about your tax situation or explaining various parts of the tax code to you as you try and do your return. However there are many things in the tax code that are not easy to simplify. If you run into these types of issues and need further explanation, the software is limited in the help it can offer you. From that point you need to either spend time researching, or make a call to someone who can provide a better explanation.
Most simple returns won’t run into this issue, but even those who usually have simple returns can run into a complicated tax situation, such as a foreclosure, that retail tax preparation software may not be best suited to handle for you if you are not educated on the applicable tax laws.
To me the lack of a human element is a big issue. Many things in today’s society can be streamlined through technology, however the complicated tax code and the seemingly infinite amount of variables that go into a taxpayer’s individual situation still require the support of a knowledgeable professional in my opinion.
(2) Retail Tax Preparation Companies
That brings me to the store front tax preparation companies. These are the H & R Blocks and Jackson-Hewitts of the world. Those individuals who have moderately complicated returns that I wouldn’t recommend retail tax software for, should probably go to a company like this for their tax preparation. I have heard many horror stories about people using store front preparation companies and having someone who is basically reading instructions on their computer screen as they input your information. That can’t give you a very secure feeling. On the other hand, I am almost certain that this is not the true representation of what customers experience when they go to these companies to have their taxes done. On the whole, many of the employees of these companies are knowledgeable or have very knowledgeable people on site to assist them if needed.
If you have a relatively simple small business or a moderately complicated individual return, this is a great place to go. In some instances, you can walk in and then walk out with your tax return completed shortly thereafter.
There are a few downsides I see in the store front option. First there is the possibility of employee turnover at these retail locations. That means you may not have the same person preparing your taxes on a year to year basis and therefore you will not have any relationship with your return preparer. For the simpler returns this doesn’t matter much, but for those taxpayers that have more layers of complication to their tax situations, it is advantageous to have the same person preparing your taxes each year. This allows your tax preparer to know you and your tax situation more thoroughly which may lead to them providing tax planning suggestions.
Second, I feel that these locations tend to focus a lot on the current year and not a person’s future tax situation. Tax planning is an important part of the tax preparation process, especially for small business owners and should not be ignored. However the sense I get from retail tax preparation companies, and a former employee of one of these companies I have spoken with, is that taxpayers are moved along in a brisk manner in order to get to the next taxpayer which means they are primarily focused on getting the current year tax return finished and moving on to the next customer.
Lastly, a taxpayer may pay the same or even more in some instances, having their taxes prepared at a retail tax preparation site rather than having a CPA do the work. Most of these companies charge by the form, while most CPAs charge by the hour. This point depends a lot on the hourly rate of the CPA you may be comparing to and the complexity of your return, but on average each year I have about two clients come to me that pay less than what they paid a retail tax preparation company the previous year. It all depends on your situation, so do your homework and you may get more expertise for less money.
One last note, whatever you do, stay away from those rapid refund loans. You are basically receiving your refund a couple of weeks early while paying outrageous interest rates. E-filing with direct deposit has a very quick turn-around for refunds in most cases, so just try and wait it out.
Obviously I am a little biased since I am a CPA, but having a CPA prepare your taxes has many advantages. A CPA should take the time to analyze your current tax situation and make recommendations to possibly improve that situation for the short-term and long-term. By having the same preparer each year, you will develop a professional relationship and your preparer will be better equipped to help you with tax planning suggestions. This also allows you to easily contact your CPA and bounce tax questions off of him/her during the year without having to give all of your tax background since your preparer is already aware of your situation.
One of the types of taxpayers that I see most benefiting from a CPA is the small business owner. There are so many issues that go into owning a small business such as payroll, succession planning, retirement plans, benefit analysis of large capital purchases, etc., that retail software and retail preparation stores just are not equipped to assist you with.
I mentioned above that a taxpayer with a very simple small business could go to a storefront preparation location, but I would only suggest this if that taxpayer has no interest in growing their business. If the business owner intends on growing their business, a CPA will be a valuable asset from the beginning as they will be able to help with items such as choice of entity and explaining the tax situations associated with each option, registering the business with your state, assisting with or handling your payroll and helping you chose and set up accounting software. Those are just a few examples of what a CPA can do to assist the small business owner.
Taxpayers who have more complicated returns, such as those who own a few rental properties or investors that qualify as day traders, would be better served going to a CPA who has handled those types of situations before and are familiar with the particular tax laws that apply to them.
A CPA should be viewed as a resource for the taxpayer who can be accessed year-round and not just once a year when taxes are due. Most CPAs, like myself, work hard at developing relationships with other professionals such as attorneys, financial planners and bankers so they have a network of individuals they can draw from to help better assist their clients if the need arises. In fact, just this past month, I had a client get their loan request for purchasing another business turned down by a bank. After speaking with a contact of mine at that bank, I was able to have the loan application resubmitted and approved. Retail tax software definitely cannot help a taxpayer in that situation!
When all is said and done, a taxpayer need only review their situation and do a little research to determine what type of paid preparation is right for them. One rule that always comes to mind when discussing this subject with a potential client is “You get what you pay for.” This is true on a few levels. First, even if you have a CPA prepare your taxes, but they have a significantly lower hourly rate than their peers, you may not be getting the best service – so be sure to do your homework if you find a preparer who seems very cheap compared to their competitors. Second, if you don’t need that much assistance or advice since you have a simple return, you don’t need to be paying for that service by going to a CPA so software like Turbo Tax might make the most sense for you.
In the end each service has one goal in common; to assist you in filing your taxes while making sure you are paying the lowest amount of tax legally possible. Just make sure you are using the right type of service for your situation and you can rest assured that you will achieve that goal.