As an accountant and a lawyer, I’ve heard my fair share of jokes regarding my profession. Take for example, “When does a person decide to become an accountant? When he realizes he doesn’t have the charisma to be an undertaker.” Then there’s “What’s the difference between an accountant and a lawyer? The accountant knows he’s boring.” I’m not sure if I should be more offended as an accountant or a lawyer by that last one. Despite being the butt of many jokes, every year around this time of the year, everyone needs their accountant. The question is, how do you choose the right accountant? While many people assume that it makes no difference, it could easily be a difference of hundreds if not thousands of tax dollars that you or your business may be paying. Additionally, as the taxpayer, you ultimately are responsible for the information reported on your return. If an error is made, you will be the one to pay any taxes, penalties and interest that are due. Below are a few tips to help you make this important decision.
Tax Preparation Chains: Walk-in tax preparation chains like H&R Block or Jackson Hewitt are modeled to move as many tax returns as possible in the shortest amount of time. In fact, the tax preparers are almost never accountants, but merely briefly trained, seasonal employees, working in an environment where there’s very little quality control. Would you take your broken down car to a therapist or have your teeth cleaned at a 7-11? Of course not! So why would you have your taxes prepared by someone who isn’t an accountant? Not surprisingly, a few years ago the Government Accountability Office went undercover to get their returns done at the big chains and nearly all of the returns were incorrect to some degree. In other breaking news, the therapists’ mechanical skills were deemed to be subpar at best.
Preparing Your Own Taxes: Sometimes it may make sense to prepare your own taxes from an economical standpoint, but be prepared to spend a lot of time doing it. Last year the IRS estimated that it took the average taxpayer 23 hours to prepare and file a Form 1040. 23 hours is a very long time. That’s 46 episodes of Seinfeld – with commercials! You should do a cost-benefit analysis to figure out how much your time is worth (or how much you like watching Seinfeld reruns). Additionally, the US tax code is incredibly complicated, with about 3,400 tax law changes since 2000 alone. A mistake one way or the other can be incredibly costly. Even when using tax preparation software, it may still be unclear as to whether you qualify for a deduction or tax credit. For instance, health insurance premiums are an allowable deduction in some instances, but not all. If you qualify but don’t take the deduction, you could miss out on additional savings. However, if you do take the deduction and it turns you were wrong, it could cost you a nice chunk of change in the way of audits, penalties, and interest.
Hiring a Professional: While I may be biased in my opinion, I think in the overwhelming majority of cases, it’s always best to hire a professional accountant. Referrals from colleagues and friends are a great way of finding the right accountant. However, besides just wanting to hire a reputable, qualified professional, you also want someone who’s a good fit and you are comfortable working with. A good accountant should not only be someone you see once a year to drop off papers, but will be there to answer any questions you have and be an advisor on tax matters as well. You should also be weary of accountants who was overly aggressive and liberal in suggesting deductions to take (for example, I just reviewed a client’s prior year return prepared by someone else in which they took a deduction for some general house repairs, which the IRS does not actually allow). You could ask hypothetical questions about your own tax situation (e.g., deducting for a home office) to see the kind of advice your preparer would give you. This will give you a good sense of how he or she handles these situations in general. A good accountant will strike that delicate balance of ensuring you get all the tax deductions and credits you are legally entitled to without putting the client at risk.