Through mid-May 2019, about 44% – almost 56 million – of the returns filed with the IRS were self-prepared. From my experience in 2019, after preparing more than 150 returns, there are many types of tax returns that individuals could prepare using online or personal software, without the help of a tax return preparer. However, about three-quarters of the returns I completed did require professional assistance and for those taxpayers, the additional cost was well worth the expense. Here’s my take on the Do-It-Yourself (DIY) approach versus hiring a professional tax return preparer.
When Should I Prepare My Own Return?
If single and your income is less than $100,000, or married with income less than $150,000 per year, AND all your income is from an employer who provides you with a Form W-2, your return may be simple enough to self-prepare. At these income levels, there is online or tax return software that can be installed on your computer that will lead you through the process of entering your information accurately and electronically filing your own return.
Check out the IRS webpage E-File Options to see which returns can be filed for free. You should be aware that as your income increases your return will not qualify for the IRS free e-file program, but some vendors will file your taxes for free. If your income is higher than the IRS maximum, filing free with some vendors may allow them to share some of your information with others (e.g., loan companies, banks, investment companies, etc.)
Like repairing your house or fixing your car, taking the DIY approach for tax return preparation requires attention to detail, the willingness to keep up-to-date on the IRS rules that affect your tax return, and the patience to work through the multiple options presented by the tax return software.
Make sure you check and recheck your work, before submitting the return to the IRS and state tax authority. If you are taking the DIY approach, I recommend using online or computer software. You still can fill out your tax returns by hand and manually perform the calculations, but the IRS reports that returns prepared manually and mailed, are 20 times more likely to have errors than return prepared with software and e-filed. The IRS has published a list of common errors that everyone who self-prepares their return should review.
When Should I Hire a Professional?
Who are the professionals?
- CPAs who specialize in taxes
- Tax Attorneys
- IRS Enrolled Agents.
Each of these professional groups is required to take a minimum amount of training each year by their respective professional organizations. They need to do this to keep up the changes in regulations and the latest interpretation issued by the IRS or the U.S. Tax Court. These tax professionals can deal with the following situations and others that are even more esoteric. In an age of extraordinarily complex tax rules, many of the following situations are either beyond the ability of most taxpayers or cannot be handled by the online or personal tax return preparation software.
Tax Returns That Require Professional Help
High Income – Even if all your income is from employment and reported on one or more W-2 forms, once you or your combined income with your spouse exceeds $200,000, you may face a variety of extra taxes such as the Alternative Minimum Tax, the Net Investment Income Tax, and the Additional Medicare Tax. Participating in an employer’s qualified or non-qualified stock options program will also increase your tax return complexity and many times can’t be reported using online or personal tax software. The professional has more robust tax preparation software and the knowledge and ability to perform calculations not included in the software to achieve the most accurate approach to the tax calculation.
Consultants and Small Business Owners – If your income is not reported on a W-2 (i.e., you are self-employed) preparing a tax return becomes more complicated. You need to keep precise revenue and expense records. Knowing when to depreciate expenses and keep track of the records is essential. The rules related to expensing automobile and home offices further complicate your tax return. A considerable amount of information is carried forward each year throughout the life of the business and the ownership of the business assets. Most personal tax return software can do this, but you will need to use the same brand of software throughout the ownership years or manually re-enter the information each time you switch software. The IRS reviews and questions these tax returns at a much higher rate than tax returns based on W-2 income. Check my article What the IRS Expects from Small Businesses for more information.
Partnerships and S Corporations – If you are a partner of a partnership or shareholder in an S Corporation, you will receive information related to your income, expenses, and distributions on a Form K-1. Many online and personal tax preparation products either cannot help you enter this information or do not provide the complete number of entries to properly handle these forms. Professionals have the software and expertise to correctly add this information to your tax return.
Rental Income Property – If you own one or more properties that you are renting, including vacation homes and short-stay rentals such as Airbnb, HomeAway, or VRBO, you should consider hiring a professional. Each type of rental property rentals requires a different reporting method. Rental properties require precise revenue and expense records. With expenses, you need to decide whether they can be expensed in the year you paid for them or whether they need to be depreciated over a specific number of years. Once an expense is depreciated, you need to track its basis and carry forward the information each tax year. At a minimum, you will need to depreciate the property (but not the land). All the depreciation will need to be recaptured in the year the property is sold—even if you are no longer renting the property. Records must be kept for the entire time you own the property. Check my article Thinking Renting a Vacation Home for Rental? for more information.
Divorce or Separation – If you and your spouse decided to divorce or separate and live separately, a layer of complexity is added to your tax return. Deciding who gets deductions and exemptions related to the children, and the taxability and deductibility of alimony payments usually requires a professional tax preparer who can review the divorce decree and other legal documents to determine what is and is not allowed under the Federal and state tax codes. If the divorce is related to potential criminal acts of tax or financial fraud by one of the spouses, it is critical to seek professional help to determine if you qualify for Innocent Spouse Tax Relief.
Investment Income – If you have taxable investments or are taking money out of your 401(k) plan or IRA, paying the minimum amount
of taxes may require the help of a tax professional. The more income you receive from investments, especially if your investment income is reported on Form K-1, the more likely you will need a professional to prepare your tax return. Retirees with multiple sources of income—Social Security benefits, taxable investment income, and income from IRA or 401(k) withdrawals—can work with a tax professional to minimize taxes and maximize long-term income from investments.
Estate Issues – if you receive an inheritance, give gifts greater than $14,000 to one person, receive income from a Trust, contribute assets to a Trust, or just about any other issue related to an estate, you’ll need to seek out professional assistance.
Multiple States, Moving Expenses, and Home Sales – If you pay state taxes in multiple states or moved from one state to another during the year, a professional can make sure you pay the correct taxes to each state and obtain the deductions for federal moving expenses. Home sales, especially if you previously rented the property, can be tricky. You may need help to make sure you get the maximum capital gain tax exemption and pay the minimum amount of tax.