“Should I do my own taxes or hire a professional?” is a question that doesn’t get asked as much as it should.
In fact, if you haven’t explored that question in some time, I urge you to read on.
Sure, your odds of being audited by the IRS are slim to none, but that doesn’t give you permission to be reckless.
You see, the U.S Tax Code has over 4 MILLION words and it’s growing every day.
With so many words, the odds of missing something important are increasing every day too, and I’m not just talking about instances where you could owe more taxes.
You could also be missing out on deductions and credits that can get you back even more than you originally thought.
So, can tax software help you sort through these “tax weeds” or is hiring a tax professional in your future?
Well, before we figure that out, let me give you a little background.
Back in 2009, I was hired as a Tax Compliance Officer at the Internal Revenue Service.
That title meant that I got to invite select people into my office and review how they filed their tax returns.
Over the two years I was in that position, I got to see firsthand the errors that people who did their own taxes made.
My recommendations below are based on that experience.
When It’s OK to Do Your Own Taxes
When I was first hired at the IRS, I went through a training period where I audited some very specific parts of a standard tax return (Form 1040 + Schedule A).
Those areas included deductions for real estate taxes, mortgage interest, medical expenses and charitable contributions.
What I found was that most people who filed by hand or used some sort of tax software ended up with no changes to their original return.
Therefore, if you have a very basic return, I’d say go ahead and file by hand or use tax software.
What do I consider a “basic return”?
Well, if you just have a few W-2’s, earned some interest from the bank, and paid real estate taxes and mortgage interest on your personal residence, you’ll probably be just fine using tax software.
What Software Should You Use?
If you’re going to use software, there are many options out there.
Personally, I’ve used TaxACT for the last five years and couldn’t be happier.
Their software is top-notch and based on my experience, it asks the right questions and is easy to understand.
With TaxACT, you can file your federal return for free and your state return for a nominal fee. You can input your information on their secure website or download their software to your computer.
When You Should Trust Your Taxes to a Professional
After my training period, I moved on to auditing more advanced deductions and this led to a higher rate of adjustments (i.e. the taxpayer owed more taxes).
What were these more advanced deductions? Here are the main ones:
- Unreimbursed employee business expenses (i.e. stuff required for your work that your employer doesn’t pay for)
- Rental property expenses
- Selling a rental property
- Small business income and expenses
- Business use of your home
If you have or think you have expenses in any of those categories, I highly recommend you seek the help of a tax professional.
Many of the people I audited thought they qualified to deduct some of these expenses, but were wrong.
Even if they had deductible expenses, many times tax software led them astray and it resulted in them taking much larger deductions than they were allowed by law.
You see, when you’re using tax software, it’s easy to fixate on that little box at the top of the page that shows your refund.
You keep trying to find ways to get that refund to increase.
That’s dangerous and often leads to taking deductions for things you don’t understand.
So take it from a former IRS auditor, use a tax professional if your situation is even slightly complicated. It’s worth the cost.
Who Should You Hire?
If you need to hire a tax professional, I usually recommend an Enrolled Agent (EA).
An EA is an individual with specific testing and training that’s monitored by the IRS.
Enrolled Agents specialize in personal and small business income taxes and they can even represent you in front of the IRS if you are audited.
Because Enrolled Agents only specialize in personal income tax, they can be less expensive than a Certified Public Accountant (CPA).
CPA’s typically charge a higher rate because they specialize in more areas outside of personal income taxes such as corporate taxes and general accounting.
Therefore, if you’re looking for added services beyond just filing your return, you should find a CPA in your area.
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Once again, I highly urge you to think long and hard about how to file your taxes.
If you think you’ll fall into one of the categories above, please hire a professional.