[Editor's Note: This is a guest post by Johanna Fox Turner, CPA, CFP who many of you know from the forum where she serves as a moderator. Her companies, Fox & Company Wealth Management and Fox and Company CPAs are also paid advertisers on the site. In this post, she discusses an important topic that I am frequently asked about- how to hire a good tax preparer. Enjoy!]
If you want to buy a new car, you can look under the hood, take it to a mechanic or check the Kelly Blue Book, and have a pretty good idea about the value. Although it might help to know how an engine works, it’s not essential knowledge you’ll need when you’re car shopping. On the other hand, you’ll need a different set of skills to find a great CPA. It can be even more difficult than finding the best doctor to treat you. Word gets around when a doctor takes out your spleen instead of your gall bladder or misdiagnoses a fatal disease. When a CPA botches a tax return or overlooks deductions, you’ll probably never find out.
EA vs CPA
Johanna Fox Turner, CPA, CFP
For purposes of this article, “CPA”, when used in reference to tax preparation, designates either Certified Public Accountants or Enrolled Agents (“EA”s), even though only four states (CA, MD, NY, and OR) require tax preparers to be licensed and the federal government has no consumer protections. That’s right – the guy who does your taxes may have been a bartender a few weeks ago. Should it matter that you use a CPA as opposed to Debbie-Does-Taxes? I believe so. For starters, unlicensed preparers are not allowed to represent you before the IRS. And even though there are many good unlicensed preparers, if your tax calculations are complicated enough to pay for the service, you should hire someone who has demonstrated a baseline level of knowledge. That means passing a difficult test, practicing long enough to qualify for licensure, and completing required annual CE. In fact, some long-time EAs have more tax code knowledge than CPAs because they specialize only in taxes.
Do all physicians Need a CPA?
You should hire a CPA when your concerns extend beyond tax deductions. Tax law is flexible and complicated, and a CPA can advise on tax planning, estate/trust/gift planning, business planning, and can represent you in the event of an audit. You should use a CPA if you are a(n):
- Self-employed contractor (get paid by 1099): An expert will take the time to get to know you to uncover planning opportunities that arise when you own a business.
- Investor/owner of S-corporation or Partnership: Basis issues make these filings especially complicated.
- High income earner: You are four times more likely to be audited if you earn over $200k. If your return is marked “self-prepared”, your chances are even higher. AMT (Alternative Minimum Tax) and NIIT (Net Investment Income Tax) are other opportunities for tax planning.
- Real estate investor: passive rental income, sales and like-kind exchanges, and rules of depreciation and capitalization are complicated. Improper reporting can affect your tax liability for years into the future.
- HNW (High Net Worth) taxpayer: If you have investable assets of $1M+, tax compliance issues are likely to be more complicated.
Which Doctors Do Not Need a CPA?
On the other hand, if you are paid by W2 wages, don’t itemize, and/or don’t have outside business interests, you can probably handle your taxes just fine with TurboTax as long as you’re comfortable doing so. In this situation, the best way to learn about your taxes is to do them by hand and then compare your calculations to your software results. Before tax software became readily available, we all understood taxes and the consequences of various choices far better than we do today.
Four Steps to Find a Good CPA
Once you’ve decided you need a professional, the hard part starts. In my experience only about 1 out of 10 CPA are really competent and thorough at tax work; in other words, they are good tax preparers. If you want a pro who is also resourceful and proactive, you’re going to have more difficulty, maybe 1 in 50 to 100, so you should be prepared to pay for that expertise. But that’s ok. Over the years, the difference in having a long-term relationship with a great CPA versus working with a poor or even average CPA can be measured in hundreds of thousands of dollars for a HNW taxpayer, especially one who has multiple business interests and/or lives in a city and/or state with income tax regulations. Here are four steps to increase your chances of finding that needle in a haystack.
# 1 Get Referrals
Getting referrals should be your starting point, not the last (or the only) step, as it so often is. Find out why the referrer likes her CPA. Brains? Good golfer? Returns phone calls immediately? Always makes sure to get your friend a refund (not a good sign, btw)? Or is it because your buddy likes to be the one who always looks smart and has the “best” of everything?
# 2 Study the Firm’s Website
You may find enough information to decide whether the firm stays on your short list. You’ll also get an idea of your prospect’s culture, learn about any specialty areas, and be better prepared to ask specific questions.
# 3 Interview them – What Questions to Ask a CPA before Hiring Them
The reason taxpayers hire half-competent CPAs is because they are in a hurry to find someone and settle for nice, not qualified. You can interview just as well by video conference as you can sitting across a desk. It’s more difficult to do by phone as you cannot gauge emotions. Well-known, busy CPAs (typically in larger cities) may charge you for an initial consult. If so, ask for a brief interview on the phone so as not to waste everyone’s time. The responses to any of these questions can help you make a better decision:
- When you think you may not need a pro but aren’t sure: Can you explain why I need a CPA to prepare this return and why I shouldn’t be able to do it?
- Will I meet only with you? Always (or never) with you? Work with a team? You might as well find out now if you really like the person you’re interviewing.
- Will I hear from you after tax season? Why (or why not)? Meaning tax planning, not a birthday card. Will your preparer expect you to be in touch, reach out to you around November, or have a skeleton staff for part of the year?
- How long should I expect to wait for a phone call or email to be returned? Maybe the CPA doesn’t like to take calls (I prefer email myself) but that doesn’t mean he should be MIA when you want to ask a question.
- How many clients do you have like me? If you are the CPA’s only doctor client, she may not be aware of common pressures such as malpractice suits, partner buy-ins, embezzlement, SOLO-401k’s, divorce and remarriage, etc.
- Can you describe your review process (i.e. how do you ensure tax returns are done correctly and that opportunities are not missed)? Preparers, often 1st or 2nd year staff accountants, learn on the job. They will overlook documents, transpose numbers, use the wrong forms, fail to clear error messages, forget to check a box, and so on. The review and the corrections process determine the quality of the return and some firms allot little time to these steps.
- Can you give me a list of the continuing education classes you took in the last year or two? CPAs are required to take 40 hours of CE annually, reported bi-annually. Does your prospect focus on current, information-rich topics or marketing and compliance with an annual tax update?
- What is your average turnaround time in tax season? The rest of the year (extensions)? You don’t want to be that person who is always on time with information and fuming on April 14th.
- What licenses do you have and why did you get them? Jot them down, along with the CPA’s answers and do a little independent research. There are a lot of designations available for sale and only a few are really worthwhile. Also: Is Your Advisor Pumping Up His Credentials?
- What do you do if you find you’ve made a mistake on a return you prepared for me? If the CPA says, “Nothing, if it’s in your favor (wink, wink)”, it’s not a good sign.
- How would you support me in an IRS audit? Would I pay extra? How do you handle audits for out-of-state clients? Some firms include audit protection in the fee you pay, most don’t. Most audits are handled by mail and easily dispensed with. In the event of an office or field audit, the CPA can stand in for you except for the initial and exit interviews.
- Will you give me a reliable estimate of the cost in advance? Do you use Fixed Price Agreements (FPAs)? Would I expect my bill to rise each year? You are trying to find when the time clock begins and what to expect after the first year. An FPA means that you have an all-inclusive cost, usually for a year’s services detailed on the document, quoted in advance. If the firm does not use FPAs, they should still be able to give you a range of cost in advance.
- What does your firm do besides taxes? The general public typically views a CPA firm in the context of tax preparation, but, for a full-services firm, tax preparation is simply the end result of a year of planning and strategizing. Is that what you want or need? Or just a tax return and a bill?
- Do you have any outside relationships, i.e. insurance, investments, legal services? You need to know if the firm has a client-sharing affiliation with another firm. There is no problem with this as long as it is disclosed so you understand why a referral is made.
- How much of your practice is local? If you’re not local, your relationship will almost certainly be smoother and more productive if your CPA has been giving virtual advice for a few years.
- Can you describe your ideal client?
- Why did you lose your last 3 clients?
# 4 Get an Unbiased Second Opinion At Least Once
Even if you’ve never received a notice from the IRS, you don’t know what you don’t know. I believe you should hire an expert to look for mistakes or overlooked planning opportunities after a couple of years. You may have to pay for an hour or two of time but the peace of mind will be well worth it. If the second opinion is positive and the reviewer has no meaningful suggestions that cannot be explained by your current CPA, you probably don’t need one every two years. An exception is if your firm or preparer changes or you have a logical suspicion that something is wrong. Don’t let inertia be your guide. It’s amazing how long people will stick with a CPA who treats them poorly and makes multiple mistakes.
How long have you been with your CPA? Any other questions you would recommend for an interview? How did you find your current CPA? Comment below!
Timley blog. I was planning to use a CPA for the first time next year. I’m comfortable using TurboTax myself but after the sell (at a loss) of my rental and other changes I’ve decided to use a professional.
Thanks Johanna.
You always have great info to share. I have an eminently qualified CPA who does my taxes. He is knowledgeable, professional, respected, and affordable. Several CPAs and tax attorneys I know have him do their taxes as well. On the other hand he doesn’t seem very aggressive at reducing my tax load. I paid over 257K in state and federal taxes last year. I asked him what I can do and he basically said I could make less money. Most potential write offs get phased out in my income bracket, etc. I have gotten more good ideas from the WCI blog than I have from him (e.g. Individual 401K instead of SEP-IRA, income shifting by employing family, TLH, etc.) Should I switch to someone else? Or stay with him and try to have him implement ideas I learn about elsewhere?
Thank you for the kind words. I don’t know if you should make a change but this is a situation where I think you should implement step #4 and get a second opinion. That will give you a much a better idea of the right course of action for you.
You might want to have Johanna or another CPA review your prior year’s income tax return, discuss your situation and see if they bring up any ideas that could have reduced your taxable income. If they provide you with valuable ideas, you will have your answer. They can also potentially amend your prior income tax returns, if necessary, if that will provide you with tax savings for those years.
Like Johanna states, it certainly does not hurt to get a second opinion.
Good points, Johanna… and can I, as a tax CPA, share a couple of other major ideas and then a couple of minor points?
For one bigger idea, I wonder if most docs won’t find it a better fit to work with someone with educational credentials and training that sort of resembles their own. Many CPAs have a bachelors as their terminal degree, but you can also go for CPAs who have 3-4 years of graduate school (law school, masters degrees, etc). Similarly, while residency programs don’t really exist for CPAs, there are CPAs who’ve basically done residency-like training at the giant firms. I think highly educated highly trained clients often end up with a better working relationship when they work with highly educated highly trained professionals. Just a thought.
A second idea: I would look for a CPA firm (not an individual) that serves people with a tax profile and financial profile that matches your own: similar income, similar investments, etc. You want someone who sees hundreds of returns every year that looks like yours.
Two minor points, too. First, most people IMHO should use TurboTax if they can… and if they can’t because their finances are too complex, they should consider simplifying their finances. (That said, I believe WCI should use a CPA!)
Second, for what it’s worth, we try to have the administrative people in our firm get that EA designation. It takes about 3-4 weeks of studying.
Just because a person is very smart and highly credentialed does not mean s/he is a great CPA. Sometimes it means the opposite. I believe the minimum threshold is having credentials. The differential I see is in 1) attention to detail, 2) a attitude of serving others, and 3) a proactive (rather than reactive) mindset.
I’m not sure we disagree here, for the record.
I just feel like the “fit” is often better if the socio-economic-educational profiles of a profession and a client match a little better.
Then again, I may be completely wrong.
With due respect Stephen, you are wrong on that one imo. Business owners and owner-professionals in very demanding areas who have their business act together (medicine, law or in my case – top tier management consulting) don’t typically care about credentialed status beyond the minimum. They care about actual experience and results, as do their clients and customers.
Biggrey, absolutely accept that you may see data the leads to that conclusion.
But, honestly, that’s really not been my experience. Or my observation.
One example that’s not personal to me. I have a pretty good friend who’s the number 2 attorney at one of the world’s largest tech companies. He’s told me about meetings with this firm’s top lawyers where top management basically congratulates everybody on being alum of top tier law schools. My friend thinks this is funny because while he has had a stellar career and went to solid school, he didn’t attend one of the top 14. (The whole culture of that firm has been to go way beyond the minimum…)
On a personal level, I have seen (benefited) from similar, er, credentializing.
“Will you give me a reliable estimate of the cost in advance? Do you use Fixed Price Agreements (FPAs)? Would I expect my bill to rise each year? You are trying to find when the time clock begins and what to expect after the first year. An FPA means that you have an all-inclusive cost, usually for a year’s services detailed on the document, quoted in advance. If the firm does not use FPAs, they should still be able to give you a range of cost in advance.”
How much detail should the client expect with respect to how the FPA fee is determined? Is it reasonable to expect an estimate of hours and a rate per hour (single or blended) that were used in setting the fee?
An FPA typically does not limit the hours. Some years will require less time, others will require more simply due to complexities that come about in your life. When we get a complicated return from another preparer, the first year is going to require a tremendous amount of work, probably not so much the second year unless that is just the nature of the client’s finances. The FPA is a value proposition, not a time proposition.
For example, our FPAs for HNW and HIP clients include “audit protection”. (I’m sure other firms do the same, so please understand this is an example based on what I know, not on trolling for business). The year a client gets audited is going to require extra work on our part to manage the audit. It’s covered. It probably will never happen but there is value in that guarantee.
iow, without a crystal ball, there is no way to accurately estimate the number of hours. But you should be able to determine if there is value in paying X dollars for a year of tax planning, advice, and preparation.
IMO, transparency regarding fees is very important to a prospective client. How is she to choose between CPAs without knowing the underlying facts on which the fee is based? Of course, value is of prime importance, but so is time. It is understandable that some CPAs provide more skill and value than others. Their hourly rate should take this differential into account. Of course, contingent additional hours from added services like audit protection must also be taken into account. An FPA is certainly a proper way to bill, but shouldn’t both value and estimated hours be explained to the prospective client?
I suppose I could make something up for the prospective client to take into account, just to make him “perceive” transparency but that, to me, is just the opposite.
“Their hourly rate should take this differential into account.” How do you suggest that happens objectively? Just because I “think” I provide more skill and value than others, will you believe it?
You can’t have it both ways. Unless you want to be billed by the hour, for every phone call, etc., you go with an FPA. It’s up to you to choose whichever method you are more comfortable with. An FPA frees the client to be more involved with the CPA and vice versa. Should doctors bill based on the hours it takes to set a broken bone? Should you pay your doctor more if you take 30 minutes discussing a diagnosis rather than 10 minutes? How do you put a price on the value of open heart surgery?
I realize we are talking quality of life versus financial values but I believe it is the same principle. We’re not selling skateboards. I’m quite transparent and so are the costs that clients pay. My rate is $250/hr. How do you know if that is a “good” rate or a “bad” rate?
I don’t know the answer to these questions, but our clients seem to like having a firm quote before deciding whether to hire us. We’re taking a risk, too, so it comes down to our providing the value that justifies the invoice. I like that about capitalism.
I have absolutely no problem with the FPA; it does have the advantages you describe over a straight hourly rate fee. If I were the prospective client this is what I’d like to hear: “Your fee for the first year will be $2000. The fee includes audit protection and …. The fee was based upon our estimate of approximately 5 hours of my time at $250/hr, 5 hrs of semi professional time billed at $100/hr plus expenses incurred. We anticipate that fewer hours are likely to be incurred in the second and following years of this engagement, and the fee will be revisited at that time.”
Now if the client visits another CPA who estimates the fee at $1000, and if the lower fee is based upon rates of $150 and $50, and maybe different services, the client must consider the value question, and not just the absolute fee quotes. This, IMO, is the transparency that is needed.
Actually, I like the way you put that. It could cause our rates would go up, but at least we would be using the language that is most comfortable to some. And we do revisit the fees annually, which would be a good thing to let clients know. You’re correct in assuming that some bills actually do go down. It’s not the norm, but when finances simplify, so do tax returns. For more complicated returns, we sometimes use a separate set-up fee to distinguish the customary from the initial extra cost.
Yes, and these types of fee discussions with prospective clients would also be appropriate for any financial planning services. The dialogue would be virtually identical for fee discussions with financial planners who charge a set fee. For those who charge a percentage of assets under management fee, it would quickly become apparent that the % of AUM fee bears no defensible relationship to value and time.
John, just another perspective on this. (From a 56-year-old CPA.)
In many cases, when a professional bills by the hour (either explicitly or implicitly) the professional is not making a great living. Hourly billing (or anything that gets into a discussion of rates and hours) often kills the profitability of a professional services business unless the rates are sky-high.
Note: There are about 54,000 CPA firms in the country, about 37,000 of those are one CPA firms generating way less than $200K in revenue where owner makes, as a guess, $80K in income, which maybe equates to a $60K salary? And I think it’s hourly billing that kills these guys.
FYI, in our case, if a prospective client or current client wants to really get into the details of the hourly rates, our variable and fixed costs, and our upfront estimates of the hours, we’re really direct and say that we are not an appropriate option for that person. We simply can’t profitably serve that sort of cost-centric client.
Final comment about this: Some buyers aren’t shopping on price but rather on someone’s experience and expertise solving a specific technical problem, etc. because they’re looking to capture some big tax benefit. Those prospective clients or current clients can be just as demanding but about a firm’s skills. So it’s not like there’s a free lunch here.
From an idealistic 73 yr old CPA:
As I said above, I am fully in favor of FPAs and flat fees. It would be fine with me if all of the 54k CPA firms charged flat fees. If only basic information is available to give rough approximations of estimated rates and hours; prospective clients can then make their own cost/value assessments, and the market would determine the fee.
My problem is with the other side of the argument; lacking transparency, CPAs (or financial planners) can collude to develop fees based on whatever the traffic will bear. As long as the client is unaware of what is behind these fees, the CPAs and FAs win with higher fees, and perhaps greater inefficiencies. The prime example of this is the often exorbitant %AUM fees, but, to a lesser extent, the same practices can apply to fixed fees as long as the client is kept in the dark. Transparency, at least in some form, is needed.
🙂
Okay, good points. Especially with regard to AUM fees.
I’ve had financial advisors tell me the same thing about “cost-focused clients.”
Of course you have. Cost is A consideration but not the ONLY consideration. Tunnel vision “cost-focused clients” have been known to miss the forest for the big redwood they can’t seem to stop gazing at.
I agree; “cost-centric” or “cost-focused” clients can understandably be a problem for CPAs or FAs. That is why most advisors should prefer fixed fees (FPA), and probably most clients will also benefit from not having the hassle of dealing with hourly fee billings “you charged me $200 for that phone call?!”.
But from the client’s perspective, it is necessary to have some understanding of how the fee is determined. It is nonsense for the advisor to claim: “My services saved you many multiples of your fee, so consider the value received and accept that my fee is reasonable.” Simply requesting a rough estimate of hours and billing rates is not “cost-focused”. Any advisor who charges a fixed fee should be willing to do this. Of course, it is true that an advisor who charges %AUM will not be able to explain the $50,000 fee to his client with a $5m AUM in this way. Such fees are usually exorbitant and without justification.
I think this was a really good discussion and that participants who see issues differently that I do have strong points.
That said, focusing on costs isn’t always the right approach. If we’re talking investment advisory fees? I’m in total agreement… (Mostly because people don’t get the “alpha” they assume they’re getting for their 1% fee.)
If we’re talking a professional services relationship where the client wants highly talented, super-trained providers using top shelf tools, a focus on cost can be wrong way to think.
BTW, just to make this point again, I think most individual taxpayers should use TurboTax.
Very timely article and very detailed. I’ve always done my own taxes but this year I will likely use a CPA. We recently started freelance work and I’ve not done taxes on self employed income to date. I will likely return to self taxes the following year once I can observe the ins and outs as my business will be fairly simple, but just observing it once and ensuring I can replicate is important. At least tax prep is deductible.
Is it normal to ask all of these questions? I am afraid I may come off as annoying or a “know it all”.
In addition, is it common to have a “free” review of previous year taxes? Do most CPAs or firms provide this service or is it only once you have agreed to move forward?
Does Fox Company or Stephen Nelson provide a free previous year review?
No, it is not normal to ask all of these questions and, yes, you may come off that way. Part of that depends upon how you approach it and, for many people, all of the questions are not necessary. Ask what is important to you as I tried to put together a pretty all-inclusive list.
If your only question is “What will it cost?” then you probably get what you deserve. Personally, I appreciate prospects who come to a meeting with a list of well thought-out questions. It demonstrates to me that they take the relationship seriously and value good advice.
iow, for a basic return w/o a lot of K1s, business ownership, rental prop’s, etc. you are seeking a compatible relationship with an experienced preparer who has the qualities described in my response above to Mr. Nelson (his post #4). As your return is more complicated and will be more expensive, you should be much more nosy. If you are rebuffed or the CPA doesn’t seem to have time for you, or takes offense that you are asking questions (or doesn’t know the answers!), that might be an indicator to move on.
If someone wants a review as a prospective client, we do not charge. If you want a review simply to get an audit of your return, so to speak, there w/b a charge (my rate is $250/hr, minimum of 2 hours, so $500). Before we can quote for an FPA, we must see the prior year return and have a discussion about your concerns and upcoming issues so, no, we don’t do this only after you have agreed to move forward.
We don’t do free reviews. (Some CPAs do do this… but my hunch is that people who are out looking for free consultations aren’t probably ever going to become good clients. Also, even if you did pick up a few good clients this way, you’d get killed by the moochers. E.g., think about what your medical or dental practice, etc., would look like if you did the first exam or procedure for free. Yikes.)
Johanna? Gosh, I don’t know why you’re calling me “Mr. Nelson.” 🙂
I was in a hurry and it was faster lol. btw, we don’t get killed by moochers 🙂
You’re maybe doing it smarter than we did. Or, maybe, we mean different things.
For a client who’s a real prospect, I do want to talk with them, check fit, see the previous tax return, I don’t charge for that. (How could I?) It’s really just a “sizing up” that both professional and client engage it to see if an ongoing relationship makes sense.
BTW, years ago, and aping a friend, we once ran a deal where we’d do a free consultation as a lead generator. And it did not generate good clients. I’m not sure, now that I think of it, whether it generated any clients.
Great post with perfect timing. Johanna and Steven do you take out of state clients? I need to make the jump to a CPA this year and I do not have the time to properly vet one like I should.
80% of our clients are non-local (95% of doctor clients). You can schedule an appt at http://www.meetme.so/JohannaTurner (I hope I don’t get in trouble for posting this. WCI, pls delete if inappropriate).
I’ll let it slide since someone asked directly for it, and that someone didn’t post from your location!
🙂 won’t happen again.
Great article! Maybe the weak tax advisors would step up their game if more people started asking the tough questions like those you suggested. One point i’d add… when getting a second opinion, it seems like the second CPA tends to push the grey envelope. They know if they can find “errors” and money, it increases their chances of getting hired. If someone has complex taxes, it’s easy for an aggressive CPA to find money when reviewing another quality CPA’s work. Thats all good until they cross the line and cause future problems with the IRS.
Thanks for your kind words. As for pushing the envelope in a 2nd opinion, I have never done that and wouldn’t want to take on a client who asks me to do so. Maybe I’m gullible, but I believe the great CPAs who are the target of this article would not do such a thing. And one who does so likely won’t give the answers you are looking for on the other questions. Of course, I’m talking about dabbling with illegality, not taking a position regarding a reg that is open to interpretation in favor of the client.
I am apparently one of those “cost-conscious” clients…..but I can’t lie. I don’t like being billed 54 dollars for someone to download my 2MB Quickbooks file to their server. Or 96 dollars for exporting an accountant copy of my file. My taxes have become much simpler over the last 2 years as I have divested many rental properties, and other holdings. Seems like the cost just keeps going up. I don’t understand why I get charge nearly 1000 dollars per entity. I have 2 entities that have less than 2 dozen transactions per year, and I get charged the same for that as I do for the entity that does 1000 transactions or more a year. I like the idea of an FPA, but my CPA doesn’t believe in doing any kind of estimates or asking for authorization ahead of time. Case in point, I needed a QBO file review so I could make some quarterlies. I was VERY specific that if it is going to be over 2 hours (they charge 135 an hour for a jr accountant review of stuff) that I wanted to know because I needed to decide if it’s worth it or not….what happened? I get bills totalling more than 700 dollars, including the nonsense noted in the first couple sentences.
One good thing about the DIY approach- You won’t rip yourself off on purpose!
Plus, it pushes you to simplify, which is usually good for life and often even better for your finances.
Yep. Wife is starting fellowship next week and downsizing from a 5000 sqft house with a pool and an acre of citrus trees to a two bed apartment in the city in Miami. Selling everything in the house right now. Verycathartic . Just need to figure out non cash donation strategies for what I can’t sell and end up giving to good will. Worse issues to have I guess.
Sounds like you need to get a 2nd opinion on tax preparation. As I said above, I never cease to be amazed at the people who stick with CPAs when they are not happy.
As for non-cash donations, I highly recommend you get a copy of Deduct It! Deduct It! (http://amzn.to/2diT5N9) – you will be amazed at the deduction you’ll get if you only keep track of it. This is better than the Goodwill site, btw – very detailed information and priced according to shape the item is in (Good, Fair, Poor). We have given these away for years to clients who have told us they are moving and I use it myself when I clean out clothes every year. Worth its weight in gold (well, almost).
Great post! Perhaps there are doctors out there with very simple taxes, but for most, our income is high enough and finances complex enough to warrant an aggressive, knowledgeable tax professional. I would liken it to patients who self-diagnose and treat themselves. Every sniffle and scratch may not deserve a doctors visit, but as the acuity and severity increases, seeing your doctor becomes more and more necessary or even required. Sometimes the outcome of self-diagnosis is benign, but sometimes the outcome is crippling or even lethal.
But you also have to find the right accountant. When I first got out of my surgical residency, my accountant was a friend from church. He was nice and honest but was not very aggressive. We got the easy deductions, but I couldn’t shake the feeling that I was leaving a lot on the table. As my income went up, my taxes seemed to increase exponentially. I was working from January until May/June just to pay taxes.
Thankfully, I made a change quickly. I talked to other doctors and found a great, proactive tax professional who specializes in doctors and other professionals. We looked at my finances and made several necessary changes. Now, I easily save between $50-75,000 per year on my taxes. (How much money do you have to bill to put $50-75K in your pocket? For me, it’s north of $200K in billing. That’s a lot of gallbladders to remove!) It costs me less than 30 minutes per month and about $3-4,000 annually. Could I have done it without him? Maybe. But considering the time I save and cost savings, it is WAY worth it to me.
If you wonder if you need an accountant, you probably need one. If you don’t like your current accountant or you are being “nickeled-and-dimed” to death, get a new one. You can do a nation-wide search if necessary. There’s no reason your accountant can’t live out of state.
“Now, I easily save between $50-75,000 per year on my taxes.”
I’m sure all readers would like to know the tax-planning techniques used by your CPA to save you $50-75k per year. Can you explain, in general terms, what they are?
Sure. Let me start with run everything through your own tax planner, because your situation is likely different from mine. Also, I’m not interested in being a test case in tax court with the IRS, but I am very interested taking advantage of any legal means of lowering my tax bill. So, if it requires a little paperwork on my part, I have no problem with that.
In “general terms”, you maximize your business deductions by using proper incorporation, a home office, car leases, business promotional activities, retirement accounts (401K/defined benefit plans), business meetings, business travel, depreciation of business equipment etc. On the personal level, make sure you are capturing home mortgage deductions, charitable contributions, 529’s etc. If appropriate (talk to your accountant), mix business and pleasure when possible, because you may be entitled to a partial deduction for some activities. If you are doing all of that aggressively, you will have a large bite taken out of your tax bill without pushing the lines very hard. I’m looking at some more aggressive things in the future, but I’m happy for now.
If you frequent WCI, you may already be using some or most of these techniques. The nature of my practice made it more challenging, and thus, the need for an tax professional and the resulting savings.
Johanna, any thoughts on Sam’s comments in the context of finding a great CPA and the additional tax savings possible?
John – I saw your question just before leaving the office yesterday and I’ve been mulling it over. I’ll have to admit that, when I saw the numbers Sam posted originally, it gave me pause – was the first CPA doing returns by hand? No itemized deductions?
The bulk of the savings appears to be the result of following advice to make strategic changes to Sam’s business rather than simply preparing a tax return more completely. This scenario appears to be going from one extreme – the worst possible results – to the optimal, or saving $50k+ annually in taxes. For example, if Sam originally had NO retirement plan at his business and set up a DB plan, that would account for some of the results, but he was presumably still a fairly new attending.
Of course, if Sam is one of the few doctors pulling in $1M – $2M per year, it would be easier to generate more tax savings via strategic decisions. (Maybe “Sam” is Ben Carson!!!)
What are YOUR thoughts?
Sam’s CPA should ask permission to post that testimonial on his website.
It is important to note that Sam states he is taking advantage of every legal means of reducing his tax bill. That is perfectly proper and a great CPA should be able to work with clients to do so. As you note, it appears that most savings result from making strategic changes to his business.
Is it possible though that there is an elephant in the room? What does aggressive tax planning mean, and when is the line crossed from acceptable (legal) to perhaps unacceptable (fraud). How aggressive should a doctor be when he is virtually assured that crossing the line will not have negative repercussions? Johanna and WCI, is this a topic that is worth discussing? Your thoughts?
Let’s first make clear that we are leaving Sam behind as he has not indicated his CPA is crossing the line.
My license is not worth someone else’s favor. I wish I could say all CPAs believe the same but, alas, I cannot. That said, there are plenty of grey areas in the code, as I’m sure you know. As long as I believe that I could successfully defend a position on audit, with integrity, I have no problem taking that deduction or position. I won’t sign a return that I believe otherwise about, simple enough.
Aggressiveness is fine. Fraud is not.
I’m an advocate for calling the gray areas in your favor. I think most of us worry too much about an audit. An audit is just a counteroffer.
Must disagree even though it has a catchy ring to it. An audit is not just a counteroffer. While a great preparer is actively searching for ways to exploit tax law, the IRS is actively looking for mistakes, fraud, and lack of documentation. I wouldn’t want to give blog readers the impression that the IRS is limited to counteroffers.
It seems that the elephant hasn’t left. WCI, is your definition of a gray area the same as Johanna’s? Johanna, you correctly state that there are plenty of gray areas in the code, but which, if any, exist with respect to your typical HNW doctor’s tax planning? WCI, can you give any examples?
Employee versus IC, hobby versus business, home office deductions, the meaning of “contemporaneous”, s-corp “reasonable” salary, business versus pleasure in travel, business entertainment, writing off auto deductions for business, valuation of non-cash deductions, use of your cell phone, capitalizing an asset versus directly expensing…
Not all are limited to HNW clients, of course.
I could go on for awhile but I have 4 computer screens begging for attention. I’ll think of lots more examples after hitting “Post Comment” and it will drive me crazy!
For sure the “reasonable salary” is very, very gray. I agree with Johanna’s list. Lots of others too. For example, what if you legitimately deserve a deduction but don’t have the documentation for it? (You lost it or whatever.) Should you claim it, knowing you would lose an audit?
Your taxes are a negotiation. Your 1040 is the first offer. It’s taken most of the time. In an audit, all the auditor can do is either force you to take their offer, or go to tax court. That’s it. It’s a counteroffer. You can just take their counteroffer and be done if you like.
I don’t mind the disagreement. The 1040 is a statement that “Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.” It is an affirmation made and signed by you, whether by hand or electronically. If it were merely an offer, it would say so. That is how some people start down the long road that ends up in jail.
I think you’re taking me slightly too literally. Of course I think you should feel comfortable signing your name to that statement.
Addendum to your comment re: the dog ate your deductions. You actually can claim most legitimate deductions, just need to know what you are doing. See the Cohan rule. Other examples are M&E under $75 and donations under $250.
I have been accused of that a few times 🙂
” As long as I believe that I could successfully defend a position on audit, with integrity, I have no problem taking that deduction or position.”
Johanna, I couldn’t agree more. Good list of gray areas. A great CPA should be able to advise with regard to limits on reasonableness in each of these areas; aggressive to such limit, but not beyond. If WCI is suggesting going a “comfortable” level beyond the limits, because, for example, you may succeed in the audit lottery, I would disagree.
I’m sure both Johanna and WCI would agree that inflating or creating deductions, or underreporting income is not appropriate. There are instances where such actions are possible, with a high degree of certainty that the taxpayer will not be caught. In other words, where crime does pay. My personal view is that this is wrong; you are not stealing from the government, but from other taxpayers who ultimately must make up the deficit in revenue. Johanna gets it right when she adds — “with integrity”.
No. I don’t advocate taking a deduction you know you’ll lose in an audit in hopes that you don’t get an audit. But if you have researched it and truly believe you are taking a legit deduction, then sure, go for it. But when it’s gray, I wouldn’t recommend being super conservative in hopes of not getting an audit and leaving a ton of money on the table.
I agree that while most inexperienced docs assume they are just preparing their taxes wrong, the big bang for your buck is living your financial life differently. i.e. maxing out retirement accounts, starting a business, incorporating etc.
$50K isn’t a huge change if you have a high income or multiple changes. I mean, you might save $23K just by maxing out an individual 401(k). I figure just our retirement accounts save us something like $90K a year just in federal income taxes, and that doesn’t include future saved capital gains/dividend taxes.
I didn’t know that certified public accountants were in great demand for those who were self employed! I have family members who are self employed, and I know that they have run into many financial roadblocks because they are not employed by anybody. I can only imagine how much of a difference a CPA would make with them!
You’re with a CPA firm and you didn’t know this? That seems odd…
One thing that many DIY users miss, is if they come upon a question in the tax software that is a yes / no, and they really have no idea how to answer it, they quickly make a mistake that can be costly, both in a missed deduction and possible IRS audit. We have found the best CPAs usually have excellent review profiles. Take a look at what real clients are saying about them on sites like Yelp, Google and TaxBuzz. Getting the opinions of many is much more credible than the opinion of one or web site ad copy. Robots are not accountants. They do not have intuition and many times the person driving the software can lead it astray.
You wouldn’t happen to be trolling for Your Own Site, would you? As in, say, TaxBuzz?
Trolling seems a little harsh. Was adding to the article on something that I believe is very important. Reviews and trust matter and that aspect seemed missing in the article. I did mention the top three review sites for CPAs. Ours is one of them. Your interview checklist is great. Just trying to provide tools for consumers and small business owners to match up with the best CPAs. I believe that was your intent as well…
Lee-
I’m interested in hearing about your business model on TaxBuzz. It sounds like the tax professionals pay a fee ($0-499) to be listed? Not sure what they get for that though, as I can’t seem to see any information at all without leaving my personal information. That seems very different from Yelp and especially Google. What happens if I go through all that process and then leave a negative review on someone that’s paying you $499 a year for their listing?
To claim a listing is free. Yes we are different than Yelp and Google. If we can, we verify that the review came from a real client (verified reviews). We also background screen (TaxBuzz Verified Badge) the paid subscribers that you mentioned. We do not suppress negative reviews. Our goal is to match the best-rated pros with consumers and small business owners. It is all built on trust (and data) and the pro is accountable for the quality of their service. A pro can not buy their way to a five-star profile. And unlike Yelp, we do not reward only active reviewers and suppress others. Yelp is more a foodie critique site now.
Here is an example of a professional who has a 5-star rating with an occasional unhappy client. I believe consumers realize not everyone can be pleased. And this makes the profiles more credible. But when you read through the reviews you can see real client stories that make the hiring decision much easier.
http://www.taxbuzz.com/find-the-best-cpa/georgia/mcdonough/karen-drescher-cpa
Hope I answered your questions. Thanks —
So is there any way to see reviews without giving you my email address? What do you do with my contact information?
Yes, of course, you can see reviews without providing your email address. All of the reviews are public and indexed. We don’t do anything with the reviewer contact information. Other than verifying against the pros database that they are a real “verified” client. If you are a consumer or small business who is using our TaxBuzz MatchMe service we do pass your contact data on to the pros you matched up with.
How do I see reviews for my area?
We use geolocation or your zip code. So if on mobile we would search around your exact spot. On the desktop we get pretty close. Or you can use the map search functions. All of this is available on the TaxBuzz.com home page. Some areas we have better coverage in than others. Still growing….
I’m either stupid, your website needs work, or this information is not available without giving you contact information. Am I missing something? I go to the website, put in my zip code, and hit “get your match” and it demands my contact info before letting me see any reviews.
I might be stupid, or your website needs work, but I can’t get to a single review of a tax professional in my state without giving you my email address.
Couple options. On the TaxBuzz.com homepage, there is a search professional by map link. It is just above the matches counter. We also have city pages that allow for map search. We don’t have coverage for every market yet. So areas with lower population concentrations might not have has many pros.
Here is the Atlanta city page as an example – scroll down to see the reviews and pros.
http://www.taxbuzz.com/find-the-best-tax-accountants/georgia/atlanta
That worked. Was it your intention to make it that hard to figure out in order to push people into doing the “get your match” thing? If not, might want to get with your developer and make some changes there.
Actually, the TaxBuzz MatchMe Engine makes it faster and easier to find the highest rated CPA or accountant for your specific needs. It does the search work for you. Over 30,000 matches to date. So it seems to be working great. Thanks for the feedback.
I didn’t realize getting a second unbiased opinion when hiring a CPA can help you make sure you don’t need a new accountant every two years. My sister just got a large inheritance from her in-laws, so she’s looking for an accountant to help with tax preparation. Hopefully, this info will help her in her search. Thanks!
These are some helpful ideas for finding a tax specialist. I love how you mentioned that anyone who ignores any mistakes they made isn’t the right choice. It’d be tempting to let someone make a mistake in my favor, but I know that would be bad in the long run!
I like that you mentioned that you should interview a SPA and ask about what kind of continuing education they are doing. That way, you can know they are focused on getting better and always trying to improve. I want to find a CPA to help me out with my taxes this year, and I want to choose the best. I will keep these tips in mind as I search, thanks for sharing.
I agree that asking a tax service how many clients like you that they have would be really helpful. Finding out how many they have would help ensure that they work with similar people like you. I’ve been trying to get a jump on my taxes, so when I hire someone to help out I’ll have to check what kind of clients they usually work with.
Why would you hire someone while advertising a tax prep business with your link? I mean, seriously? What are you hoping to accomplish by leaving comments like that? It’s a WordPress blog, the links are “no-follow.”
I am looking for CPA who has experience working with independent contractor physician and also has experience with real estate investing. I spoke to a CPA recently to start planning for 2018 tax year. I plan to work as locum tenens after I graduate from residency in June. I also plan to start investing in real estate and hopefully buy a property at the end of the year. CPA told me that the fees for tax planning would be from range of $3000-$8000. It seems so expensive. How much do people pay for CPA? I just want to make sure I am not ripped off.
That seems really high to me. Shop around. Do you know any docs who do real estate investing in your area? Ask them who they use for a CPA.
That sounds pretty pricey to me. If you have set up an S-corp and the fees include payroll and bookkeeping services along with business and personal tax preparation, I can envision rates in that range (although that is a pretty wide range!)
If you’re interested in virtual services, you could check with Laura at our firm and get a set quote (look under Recommended Advisors–>Tax Strategists). If you choose not to use our services, that would at least give you something to compare other quotes to. Good luck in your search.
My general rule of thumb is no more than 1k (my cost has reduced slightly over the years as I have remained with the same CPA) per return. I have 1 single member LLC taxed as an S-Corp, and a partnership where my s-corp is the member for my side and obviously a personal return. So last year, I paid approx 2500 for all three returns, plus some small sums (2-300 bucks) for amendments that were needed. I handle payroll through ADP which is around 50-60 per month as I only run payroll one time per month, and about 100 a year for w-2 delivery. So all said and done with everything i would be in the low 3k range for a fairly complex set up. I used to have several rental properties held in a series LLC (in Utah) but those have all been disposed of over the years with the last year filing a return on them maybe being 2015. So i cant comment much on that since i dont really remember but my general rule of thumb as i have had multiple tax planning/cpa/tax prep types over the last 15 years, is that MAX 1k per return is what to expect. It sort of evens out, because my partnership return is stupid easy, but my scorp and personal ones are more complex. I do ask and get responses (many times without charge) through the year on some ideas for write offs, or other planning activities which is nice, but generally dont get much by way of proactivity from the provider i use. So thats a big value add that I feel like i am missing out on especially when paying between 3-4k per year.
If they are just doing your taxes…that is expensive. If they are managing your books, fielding constant questions about the tax code, providing tax planning, working with your other professionals in your life (retirement, lawyer, etc.), dealing with state/Federal tax bodies then that’s not too bad. Talk to other doctors and get their recommendations. Humble opinion, a CPA should save you on your taxes and save you on your time (which is valuable). If you pay them $3K and they save you $15K and 20 hours work, that’s a good trade. If they cost you time and money or it’s a wash, look elsewhere.
I basically told him I need tax planning for locum job like possibly setting up
LLC /S Corp and also for real estate investing (hope to buy my first property this year). He told me that range for tax planning . I will clarify what’s included. It shouldn’t be too complicated so even $3k seems pricey . He said if he can save me 20-30k then the fee won’t be bad. Do you know a good CPA who has experience with medical professionals and real estate that u can recommend?
Did this post get picked up somewhere? This thing is over a year old and I have a dozen comments on it today. Kind of odd.
Everyone who originally commented on the post get any followup comments in their email, so I think the responses are from ppl who first participated with the exception of Amy.
Take that back – Lee Reams, TaxBuzz promoter extraordinaire, appears to have been reincarnated as Joanne Doan.
To be honest, I have a process when looking for any trustworthy professionals… doctors, accountants, contractors, etc. I first ask around for personal recommendations. From there, I google the referrals to see what pops up. I like to see if they have a legit website and good reviews. Besides google, I also yelp. If that isn’t enough, I look up websites for specific industries that will vouch and vet those professionals. For last year’s taxes, I googled and used the Taxbuzz Match me option. Might not be the best for everyone but it helped narrow down the search for me. Hope that helps.
Why is it that people here are so savvy when it comes to selecting a CPA at a reasonable fee, yet so naive when selecting a financial advisor. “1% of AUM?; well okay, if that is the going rate.”
Thank you for all the tips to find a great CPA. My workplace really needs to find a good CPA, but we don’t know what kind of things to ask. I really like your idea about asking them what their average turnaround time is during tax season. It would be good to know if they can get things done on time.
You’re welcome and good luck with your search!
Do you have any recommendations on good physician CPAs who are familiar with locums work on the side ?
https://www.whitecoatinvestor.com/tax-strategists/