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DIY or CPA?

Posted by SBC Team in Taxes and Payroll on Jan 29, 2010 8:53:00 AM
Which tax prep method makes sense for your small business?

By Reed Richardson

 


How do the costs/benefits break down among tax preparation choices?

 


This is a point of lively debate within the tax community. In the 2005 Form 1040 filing instructions, the IRS included a controversial table that compared time and cost estimates across the three filing categories (self-prepared without help, self-prepared with tax software, and prepared by tax professional). According to the IRS's estimates, no matter how simple or complicated an individual's tax situation, using tax-prep software not only cost more, it took several hours longer than preparing your taxes without help. Having a tax professional or accountant prepare the same non-business return, the IRS said, would save time, but the extra cost-on average, $155 more than doing it yourself-would no doubt be prohibitive to many taxpayers.

 


Soon after its publication, representatives from both the tax preparation software industry and the American Institute of Certified Public Accountants (AICPA) publicly disputed the IRS's time and cost estimates. A spokesman for Intuit, maker of the popular TurboTax software program, objected to the agency's assertions, saying the claims "fly in the face of logic." Similarly, the AICPA maintained that the IRS's estimates for the effectiveness of tax professionals "do not reflect marketplace reality."

 


And though a National Tax Journal article generally supported the IRS's controversial time and cost estimates when they appeared four years ago, it also noted that when demographic characteristics and tax complexity are factored in, "all groups appear, on average, to be using the cost preparation method that costs the least for them." In other words, most people do a pretty good job of understanding which method best fits their individual tax situation. (To see the IRS's tips on choosing a tax prep method, check out their online guide: www.irs.gov/individuals/article/0,,id=133088,00.html).

 


After encountering such strong pushback from the tax prep industry, the IRS backed off and since 2005, the contentious table has not reappeared. Instead, a shorter, less specific table that lumps all three types of filing methods-do-it-yourself, software, and tax professional-into one overall average has replaced it for the past several years. (You can find this table on page 98 of the 2009 Form 1040 instructions here: www.irs.gov/pub/irs-pdf/i1040gi.pdf).

 


For the 2009 tax year, the IRS estimates that the average individual return will take 17.3 hours to prepare and cost the taxpayer $225. Business 1040 returns, defined as those that include a Schedule C, C-EZ, E, or F, Form 2106 or 2106-EZ along with a 1040, will make up 31 percent of all individual tax returns and are anticipated to require an average of 31.9 hours to prepare and cost $434. Separate business tax returns, defined as those that file a Form 1065 (partnership), 1120S (S-Corporation) or 1120 (C-Corporation), will cost, on average, $551, $665, or $692, respectively, if you use a paid tax professional to file your 2009 taxes, according to a recent biennial survey conducted by the National Society of Accountants.

Doing it yourself vs. outsourcing to an accountant

 


So, who feels like going it alone is the best option when preparing our taxes? Increasingly, the answer is not many of us. The number of taxpayers preparing their own returns by hand dropped by roughly 75 percent between 1993 and 2006-from just over 40 to just under 10 percent of the population-according to a 2007 IRS Taxpayer Usage Study. And with thousands of pages of instructions and potentially dozens of different forms and schedules to be filled out (although, truth be told, only a handful are necessary for most individuals and businesses), the trend toward some kind of tax assistance is understandable.

 


For many, the fear of making a mistake and paying dearly for it in the form of an audit may just not seem worth the money saved. For others, spending hours flipping through obtusely written tax jargon is time better spent elsewhere. And then there's the worry that, as tax novices (how often do you read up on tax law changes, after all?), you might overlook a big deduction and inadvertently flush part of your small business's hard-earned money down the drain.

 


"If your taxes don't involve anything besides a W-2 and some 1099s, you probably don't need any kind of professional help to do your taxes," says Tom Ochsenschlager, vice president of the AICPA's taxation division. This is particularly true, he says, if you only plan on filing a Schedule C or Form 2106 with your individual 1040 return. In fact, even the most affordable tax-prep software products, which are now geared toward maximizing deductions for people with more sophisticated financial portfolios, real estate holdings, and small, home-based businesses, might be less cost-effective than doing your taxes yourself. Still, Ochsenschlager notes that mistakes happen on even the simplest of returns. "The IRS Inspector General recently released a study that found almost 250,000 people still take the wrong deduction," he notes. "Instead of itemizing, they take the standard deduction or vice versa, and it could end up costing them money." And missing just one significant deduction could easily equal or surpass the money your small business would have spent on a professional tax preparer.

 


Still, if you're adventurous enough and willing to hack through the tax instruction jungle, you might consider preparing your small business's tax return yourself. However, what you gain in money saved might be more than made up for in time lost, an important point to consider. And this challenge is not for the faint of heart, as the IRS estimates that just the record keeping and tax planning aspects alone could eat up the equivalent of several full working days.

 


Doing Your Taxes Digitally-The tax-prep software method

Computer-aided tax preparation, nonexistent 20 years ago, is now growing by leaps and bounds. Since 1993, the share of people using software to self-prepare their individual taxes has more than tripled and, increasingly, small businesses are taking the same route as these software companies have expanded their product platforms upmarket. These software programs' "plug and play" nature attracts Americans unwilling to try and decipher page after page of arcane tax instruction and uncomfortable with sharing their finances with an outside tax preparer or accountant. And whether or not the process actually takes longer than doing it by hand is almost beside the point-for them, the fact that it makes the process much less painful and ensures a more accurate return are the primary selling points.

 


If you're a small business with only a few employees and a relatively straightforward organizational structure, tax-prep software probably represents a fairly low-cost and highly effective alternative to doing it yourself or hiring an accountant. What's more, the level of customer service you can now expect to get has increased dramatically over the years as most major tax-prep software products now provide some form of free tax guidance via email and instant messaging chats, or live phone consultations. Additionally, these tax-prep software products offer the ability to save your tax data from year to year.

 


For some taxpayers, though, the tax-prep software model presents some drawbacks. That these software companies often archive your small business's tax data online, for example, raises privacy concerns among some people, despite the fact that this information is more likely to be compromised by someone rooting through your trash (or your accountant's) than hacking into a tax-prep software company's database. As more and more tax-prep software companies coax consumers (through lower prices) into switching from the traditional "disc-in-a-box" model to the online versions of their products, these worries have only increased in some quarters. And even using the "box" version of a tax-prep software product can lead to your tax data ending up on a remote server somewhere if you e-file your return rather than print it out-something else to keep in mind.

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