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The Right Preparer Can Ease the Pain
One of the most difficult decisions taxpayers must make each year is not whether to itemize or file electronically. It's deciding who will prepare their returns in the first place.
More than half of U.S. taxpayers turn to paid preparers, ranging from part-timers working out of their homes to certified public accountants and attorneys.
The remaining 45% of taxpayers tackle their returns themselves, either by hand or using tax-preparation software. The result is sometimes a mismatch between the complexity of the return and the competency of the preparer. For example, each year more than 750,000 taxpayers pay a preparer to file the simple two-page 1040EZ form--probably an unnecessary expense.
Other taxpayers tackle some of the most difficult returns without professional help, wrestling with business depreciation schedules or the alternative minimum tax--elements that even do-it-yourself advocates agree are usually best left to pros.
Finding guidance on the question of who should prepare a return is difficult, however. The IRS steers clear of advising taxpayers on this issue, although the agency offers tips about what to look for in a pro.
But tax experts offer some general guidelines about when it's smart to do it yourself, and when it's better to hire someone--and who that someone should be.
Most people can tackle a simple tax return--a 1040EZ or 1040A, for example, with one W-2 form from one employer, no itemized deductions, no tax credits and little or no investment income.
Eric Tyson, author of "Taxes for Dummies," also believes that many people can successfully wade through more complex returns, including those with mortgage interest deductions, multiple employers, child tax credits and some investment income. But taxpayers who want to prepare their own returns must be willing to invest some time.
Although the simplest returns take only a few hours, the IRS estimates that it takes more than 28 hours to research, organize and complete a standard 1040 return with three common schedules--Schedule A for itemized deductions, Schedule B for interest and ordinary deductions and Schedule D for capital gains.
Do-it-yourselfers should clear a full weekend early in the tax season to give themselves time to do necessary research and in case they run into trouble that requires professional help.
Preparers who have plenty of openings in February often have to turn clients away as the April 15 deadline approaches.
Taxpayers preparing their own returns also should consider using tax-preparation software and filing electronically to reduce errors and save time, experts say.
Software programs check for math errors and flag other problems, such as deductions that aren't allowed. (The two leading software programs, Intuit's TurboTax and H&R Block's TaxCut, also offer links to tax preparers who can help answer questions for a fee.)
E-filing--which must be done through a third party--catches the most common mistakes. The electronic system won't accept a return if the math is incorrect or if the filer used the wrong Social Security number.
But Tyson believes most taxpayers can do just fine preparing their returns by hand, particularly if they have a professionally prepared return from the previous year to use as a guide.
Many people lack the time or inclination to do their own returns. Others may want to but probably shouldn't.
People who need ongoing tax advice generally should hire a tax professional. This group includes business owners, people with extensive investments and those who may be affected by the alternative minimum tax, a parallel tax system that operates by different rules.
People who have lots of itemized deductions or who have used incentive stock options to buy company stock often trigger the alternative minimum tax.
"A lot of people need tax professionals when complexities come up in their lives," said Barbara Rosenbaum, a Santa Monica certified public accountant. "You can't strategize with [tax-preparation] software."
Complex tax returns have more gray areas where judgment calls are required. Tax pros usually are better at making those judgments than lay people, who may not have read the latest Tax Court decision on the issue, Rosenbaum said.
A visit to a professional also is a good idea after any major life change: a marriage, divorce, birth, adoption, death or big increase or decrease in income.
Certain returns may be more likely to trigger an audit, in which case a professional can be handy in preparing the return and in helping the taxpayer deal with the IRS, tax experts said.
Among those more likely to face audits are small-business owners, people in the entertainment industry and those employed in cash-based businesses such as waitressing or cab driving, according to CCH Inc., a tax research firm.
Not all preparers can represent a taxpayer in an IRS audit, however. Only enrolled agents, certified public accountants and tax attorneys are allowed to handle such matters.
Those who want to hire a tax professional should first determine how much help they need. Relatively simple returns can be handled by storefront or chain operations. More complex returns may need more expertise:
* Registered tax preparers are the first rung of the tax-preparer ladder and are usually who you meet when you go to a national tax preparation chain such as H&R Block or one of its competitors.
California law requires that anyone who prepares a return for a fee must first earn this designation, which requires instruction in tax law and continuing education.
Unless they have another credential, such as EA (enrolled agent) or CPA (certified public accountant), registered tax preparers can't represent you in an audit. They are best used by lower- to middle-income taxpayers with relatively simple returns. Costs range from $60 to $150 for a typical return.
* Enrolled agents are tax preparation specialists and many are former IRS employees. They have ongoing education requirements and can be a good fit for many taxpayers with moderately complex returns, and those who want their preparer to represent them in an audit. Enrolled agents charge $100 to $300 to prepare a return. For a referral, visit www.naea.org.
* Certified public accountants have stringent education and experience requirements, but not all specialize in tax return preparation. CPAs who do prepare returns tend to charge more than most other tax preparers--usually $500 to $1,000 or more, depending on the return's complexity. But business owners and those with complicated financial situations may need a CPA's expertise. The California Society of CPA's Web site at www.calcpa.org offers referrals.
* Tax attorneys are the big guns of the tax world. They represent high-income taxpayers and those whose complicated finances tend to attract the most IRS attention. Some tax attorneys are also CPAs or EAs and prepare their clients' returns while others hire out the work. And don't forget--if you do decide to hire someone to do your taxes, the fees you pay may be deductible. Be sure to ask your preparer.