With the proliferation of DIY tax software programs such as TurboTax flooding the market, it can be tempting for financially pinched small business owners to forgo the services of an accountant when filing their taxes. But according to several experts, that could be a serious mistake. Following are some reasons why a small business owner should, at least, have a tax accountant review their returns before filing.
Computers are not infallible
Believe it or not, there are several salient items that even the most deftly assembled software program can miss. Unlike an accountant who deals with thousands of returns over a career, software programs are not designed to detect oversights.
“They're all highly simplified,” says Eric Levenhagen, an Iowa-based CPA who runs his own firm ProWise Tax & Accounting, which specializes in small businesses. “They don't catch everything.”
To prove his point, Levenhagen, who launched his business four years ago, says he is frequently contacted by small business clients who use software programs to file their taxes. In one instance, his client, a sole proprietor, didn't understand that business and personal returns are filed together. The software missed this.
“He had already filed his personal returns and he came to me and said, 'I'm going to file my business return and I want a second opinion on the figures that I'm going to plug in,'” he recalls. “I said we need to go back and change that.”
Financial pros know what to look for
An accountant with years of experience working with small businesses will have likely encountered any tax situation you present. Sure, it might end up costing more than the investment in a tax software program, but the short-term pain of parting with a few dollars compensates for an outcome that could be dire to your bottom line.
“Tax professionals will know additional things to watch out for like audit red flags,” says Levenhagen. “For example, you get people who have too many round numbers on their returns because they're just guessing or estimating their expenses. And there'll be a lot of numbers that end in zeros. That's not a good situation.” Levenhagen explains that such facile approximations could raise the suspicions of the IRS.
Second opinions are valuable only if provided by competent professionals
Make sure that the tax professional you're consulting has a solid reputation as someone who is knowledgeable, reliable and well informed when it comes to current tax laws and trends. Ask trusted colleagues or associates for referrals. Don't pick the first name in a Google search result without doing your due diligence.
Linda de Marlor, president of Tax-Masters, an accounting firm in Rockville, Maryland whose client base is also heavily comprised of small businesses, agrees wholeheartedly. She recalls an example of small business owner client who came to her after dealing with an inept CPA.
“He was a successful real estate broker who was married and had twin sons with asthma,” she explains. “Their previous accountant never informed them that they qualified for a medical reimbursement plan. [If the accountant had done that], it would have saved them at least $5,000 in taxes a year for the 10 years since the twins were born.”
Tim Kerin, who with his wife Tracey, owns several businesses including a commercial construction firm, learned a very difficult lesson when he and his wife visited an ineffectual CPA several years ago to get a second opinion.
“He did not explain the returns to us nor did he go over how we used expenses,” recalls Kerin. “He just took our numbers and did the return. We should have questioned every line and understood it before signing the return.”
What ensued was a business owner's nightmare—an IRS audit. Kerin says that he and his wife have paid $95,000 in legal and accounting fees, and that the ordeal has been a financial drain on the couple's business operations. Although they did not lose their various businesses, Kerin notes they did have to lay off several employees, sell two company vehicles, and close a storage unit.
The ordeal inspired the Kerins to launch Learning Lessons in Business, a two-year old consulting firm designed to educate business owners on various challenges. Kerin's negative experience with the CPA notwithstanding, he does feel that small business owners who do their own taxes are taking unnecessary chances.
“As much as you may not like to have a professional prepare your taxes, [you should do this] at least once every three years,” he advises. “That way you can probably get some tips from your tax preparer on things that you should have been doing, such as categorizing expenses correctly based on your business activity code (which classifies a business type) and the round number syndrome. And if there are mistakes that the preparer finds by going through your records, then you can see if that same mistake exists in the past.”
Small business owners looking to save money by preparing their own tax returns may be doing themselves—and their companies—a serious disservice. With tax laws continually changing, there may be deductions or other items that you, as a busy entrepreneur, simply can’t keep up with. Even if you feel confident about the reliability of your software program and your gift for numbers, always seek out the opinion of a tax professional who is trained to file returns just to make sure you’re not missing anything. It may be the best money you ever spend.