When Should You Hire a CPA to Prepare Your Taxes?
By now you should have your W-2s or 1099s, along with any interest statements, and are already envisioning that tax refund in your hot little hands.
But with all the ways to get your taxes prepared, you might be wondering if you should be using a private certified public accountant (CPA) or an enrolled agent (EA); or whether you can just use the latest tax software and do them yourself; or if you should pop in to the corner H&R Block for some help.
We'll help you figure out what the differences are between tax preparers, when to call in a CPA, and how much it's going to cost you.
The Differences Between CPAs, EAs, and Employees at Tax Prep Chains
"At the local tax retailers, you may get a CPA and often not," says Micah Fraim, of Micah Fraim, CPA, in Roanoke, Virginia. "The average person doing their own taxes on TurboTax is just about as qualified to prepare their tax return as the average worker at the national tax prep services."
To earn the designation of CPA, you must complete a five-year business degree equivalent to a master's degree, including at least 150 semester hours of education; pass the grueling CPA Exam; and go through at least 120 hours of continuing education every three years. That's in addition to practicing financial and managerial accounting, tax preparation, and tax planning on a daily basis.
An EA is an expert in the tax code, proven by working at the IRS for five years in a position interpreting the tax code, or by passing all three sections of the EA exam. EAs are licensed by the federal government to represent clients before the IRS and do tax preparation as well.
The national retail tax companies include H&R Block and Liberty Tax. They offer 60-hour and 80-hour courses to train their employees, many of which are hired only during tax season, to prepare taxes. The employees do not even need a bachelor's degree to do so.
So when do you need the training and experience of a CPA?
Work With a CPA When Your Tax Situation Is Complicated
If you have a simple tax situation, with just a W-2 and some bank and mortgage interest, you may not really need a CPA, and could use tax software to prepare your taxes as the most affordable option.
You need a CPA when your life, and how you earn and save money, is more complicated than that. That's because the tax code and its related materials came in at over 73,000 pages long in 2013, according to Wolters Kluwer, CCH, a firm that has analyzed the federal tax code since 1913.
"The more you have going on in your life, the more flexibility you have in the interpretation of the tax code to your situation, which is when a CPA can most benefit you," Fraim says.
What are some examples of complicated situations that benefit greatly from a CPA's tax preparation and guidance? Grafton Willey, managing director at the accounting provider CBIZ MHM, outlines a few.
- Divorce with children. Many attorneys are not familiar with the tax consequences of divorce. A knowledgeable CPA can actually create more money between the two sides by maximizing tax savings on both sides.
- Small businesses, corporations, and limited liability partnerships. The specifics of each benefit from the flexibility offered by using a CPA's knowledge and experience to pay the least amount of taxes possible.
- Investment portfolios over $200,000. People with high-net-worth portfolios, as well as those including alternative investments, limited partnership investments, and real estate investments, benefit from ongoing guidance from a CPA as to how their investment actions and choices will affect their tax situation each year.
If you're in one of these situations or any combination of them, such as a large family with a lot of different types of income, investments, and expenses, it is the CPA's job to find and maximize any and all tax benefits for you.
Tax software is just not meant to handle that level of complexity in one return. The software answer choices can be confusing, and what you don't know can cost you big money when it comes to paying taxes.
"I've amended discount and self-done tax returns and I find mistakes getting clients thousands of dollars back," Fraim says.
Hire a CPA When You Want to Develop a Relationship With a Tax Professional
Most CPAs are not looking for a one-off job to do your taxes. Instead, they want to help you with an ongoing relationship.
"It's worth it to work together with your CPA to create an ongoing tax plan that fits your overall financial plan," Willey says. "You confide in your CPA to a very high degree, and your tax return is just a subset of that ongoing financial discussion."
CPAs can also help with monthly and yearly business accounting services, and with paying quarterly taxes. If you are audited, you can rely on your CPA to represent you and your interests.
How the Fees Compare
A CPA generally charges fees per hour for the work involved. A National Society of Accountants fee survey released last year tracked the national average of what CPAs, EAs, and other tax preparers would charge to complete 2014 tax returns. Here are the results.
- $273 for an itemized Form 1040 with Schedule A and a state tax return
- $174 for a business Form 1040 Schedule C
- $634 for a partnership Form 1065
- $817 for a corporation Form 1120
- $778 for an S-corporation Form 1120S
"At H&R Block and Liberty Tax, they may charge as much as a small CPA firm for very basic tax preparation and sometimes they charge more, taking their fee out of your refund, so always read the fine print about their fees," Fraim says.
Paying the small fees to use a tax software program to prepare and file your basic tax return is definitely better than filling out the forms yourself to save money. With its built-in calculators to add, subtract, and insert numbers on the correct forms where necessary, the software can reduce math errors.
But no matter which method you choose to prepare your tax returns, double-check the numbers you supply as those on the final return. Both clerical errors and math accounting errors can result in interest, penalties, and assessments, and even a higher tax payment due. Also, double-check your filing status, number of exemptions, all bank routing numbers for receiving e-filed refunds, all social security numbers, birthdates, and names on the return for accuracy.
For those whose income is $54,000 or less, or who are elderly, have disabilities, or speak limited English, the IRS offers the Volunteer Income Tax Assistance program, where IRS-certified volunteers provide free basic income tax return preparation, along with electronic filing, for those in need.
Readers, how are you going to get your taxes prepared this year? Are you planning to hire a CPA, use tax software, visit a tax prep chain, or take another route? Let us know in the comments below!