I actually don't have a problem with someone paying a reasonable price for tax preparation and advice from a competent professional. But you know what I'm getting sick of? I'm tired of the mistruths being put forth by what I call the Tax Industrial Complex that the majority of us should never do our own taxes. Forbes says we spend $409 Billion a year on tax compliance (not taxes, just paying taxes.) That's almost as much money as there is in the Vanguard Total Stock Market Mutual Fund. It's almost as much as our military costs each year. It's a massive sum of money.
Part of the reason for the existence of the Tax Industrial Complex is the complexity of our tax code. It is the ultimate tragedy of the commons. We all love our little pet deduction, but in total, these deductions and the complexity that comes with them are killing the goose that lays the golden eggs. I don't blame Congress, they're just giving us what we ask for. I don't blame the IRS either, as they're just doing what they're told to by Congress. In fact, it's a vicious little triangle with us telling Congress what to do, Congress telling the IRS what to do, and finally, the IRS telling us what to do. But that's not all of the reason for the Tax Industrial Complex. A big part of it is that tax preparation is so darn profitable. Even among do-it-yourselfers, Turbotax and H&R block have revenue of $3-4 Billion each. These are big businesses. And like any industry in a capitalistic society, marketing and profit are key. But the marketing for tax preparation services has gotten way out of hand. The mistruths and lies are being told so frequently that they are being accepted as truth. It's time to put a stop to that.
Eight Lies The Tax Preparation Industry Tells Us
These aren't all outright lies, some are just mistruths and others are merely implied. But they should each be examined carefully.
# 1 Everyone should have their taxes done by a professional
Here's one that is often implied and sometimes outright said. Here's a comment left on a blog post on this site recently:
So, it’s easy to misinterpret the law by even experienced financial folks. Just remember, consult your tax pro for tips that will save you more than the fee you pay…we tax pros are here to ensure the BEST outcome for the clients…the money spent on a plan is worth its weight in gold saved from the guvmint!
The best part about this particular comment (which I am merely singling out because it is the most recent one) was that it demonstrated a misunderstanding of the kiddie tax by the “tax pro” and that it was directed at a person with an income of $2K and a tax burden of $0.
Here's why it is a lie. 47% of working Americans don't owe federal income taxes anyway. The main reason they're filing their tax returns is to get the earned income credit and/or the refund from having tax withheld that they didn't owe. They don't need a tax pro. They need Publication 596. You don't even have to figure out your earned income credit yourself. The IRS will do it for you. Another 13% of people file Form 1040EZ (and many of those filing 1040A and 1040 should be doing 1040EZ.) I'm sorry, if you can't figure out a 1040EZ without professional help, you don't deserve to keep the $100 H&R Block will charge to do it for you. Politicians have been talking about simplifying the 1040 down to a postcard for years. Guess what? The IRS has already done it. It's called the 1040EZ. It's one page and only 14 lines.
90% of American workers are employees. Preparing their tax returns consists mostly of transcribing their W-2 on to their 1040 and deciding if the sum of mortgage interest, property taxes, and state income taxes is more or less than the standard deduction.
So maybe there are 10% of Americans with complex personal tax situations. But even their taxes don't change much year to year. If you're using your tax pro to educate you, all you have to do the next year is copy what was done the year before. Your 8606 has the same numbers on it every year. Schedule A isn't that tough people, you can do it. At any rate, the majority of people don't need a professional tax preparer, much less everybody. The majority of us can do our own taxes.
# 2 We have extensive training and experience
Here's another terrible mistruth. Tax preparers want us to think they've got years of education, training, and experience. In reality, it is easier to become a tax preparer than a financial advisor or an insurance agent. You need a high school diploma, $50, a few pages of paperwork, and some on-the-job training. If you walk into the tax prep firm on the corner, chances are good you'll sit down across from someone with exactly that and they'll do their on-the-job training on your return while you wait and pay for the privilege.
That's not to say there aren't tax professionals out there with degrees, credentials, and years of experience. There certainly are. But they're a distinct minority. Here's another secret. Let's say you know most tax preparers are just yeahoos with a seasonal job. So you find the very best person in town with the highest fee and you take your shoebox of receipts and tax forms in to see them. They nod their head, smile, show you the fee schedule and tell you to come back in a week. As soon as you leave, they drop the shoebox on their $15 an hour employee's desk and have them input the data into the equivalent of Turbotax. They look it over for 2 minutes a week later before you walk in, tell you to max out your 401(k) next time, and you go out thinking you're something special and $1500 poorer.
# 3 You need to understand the entire tax code to do your own taxes
This one is usually just implied with a phrase like “The tax code has almost 75,000 pages.” Well, guess what, 99% of them have nothing to do with your tax situation and you don't even have to read the 1% that does. That's because the IRS has put out a bunch of plain English publications and instructions. There is one for every form, schedule, or subject you may be interested in. They are updated every year or two, cost nothing, are available instantaneously on the internet, and have a great table of contents, section headers, and tables. Chances are if you can't learn it from the relevant IRS publication or line by line instructions, you don't need to know it. Besides, you really think those tax pros have read the whole tax code? Give me a break.
# 4 The IRS is out to get you
The Tax Industrial Complex loves to make the IRS out to be this bogeyman in the closet who is coming to get you as soon as the lights are shut off. Guess what? The folks who work at the IRS are just like you and me. They just want to get their job done in the least painful way possible and make their kid's soccer game that night. Less than 1% of tax returns are audited. That number doesn't creep over 1% until you make over $500K a year and doesn't hit 10% until you hit $5 Million a year. But even those folks are still only getting audited on average once a decade. Heck, I've got to recertify my board certification that often and I assure you it is way more painful than an audit! The IRS wants you to think they're out to get you, so you'll be honest on your taxes, but they actually aren't out to get you. We've had a kinder, gentler IRS for 20 years, but their reputation persists and they're fine with that. But the tax preparers have even more incentive than the IRS to sustain that reputation.
# 5 If you make a mistake on your taxes, you'll go to jail
Here's another lie- that you can make an honest mistake and you'll end up going to prison. The truth is that you only go to prison for tax evasion. What's tax evasion? Well, here are some examples:
- Knowingly failing to report income
- Underreporting income
- Providing false information to the IRS about business income or expenses
- Deliberately underpaying taxes
- Substantially understating your taxes
- Failing to withhold, report, or pay FICA taxes from employee paychecks
- Paying employees in cash and not reporting those payments to the IRS
- Filing false payroll tax reports
Notice the wording there. “Knowingly.” “Deliberately.” “False.” These are not honest mistakes. Honest mistakes cost you interest and maybe a penalty in addition to the tax owed, not jail time. That's no excuse to be ignorant of the tax laws that apply to you, but see if you can find someone who went to jail for anything even close to an honest mistake. Go ahead, I'll wait. This resource might help. <2,000 people were convicted of tax crimes and even fewer did jail time. And that's with an estimated 16% of people not complying with tax laws.
# 6 If you make a mistake on your taxes, you'll be audited
Making a mistake might result in an audit, but more likely it will result in the IRS sending you a letter (and maybe a check if the mistake is in your favor!) Or they may not notice at all. Trust me when I say I've made plenty of mistakes on my taxes. I'm the king of the 1040X. The IRS doesn't even notice little mistakes most of the time.
# 7 Audits are terrible experiences
Both the Tax Industrial Complex and the IRS want you to think an audit is the equivalent of a root canal without anesthesia. In reality, an audit is just a counter offer. Every year you negotiate your taxes with the IRS. You get to make the first offer, it's called the 1040. And 99% of the time, they take it. When you do get audited and the IRS says you owe another $1,000 or whatever, you can always just cut them a check for $1,000 and walk out the door. You don't have to argue with them. But most people do, and after a little back and forth, they come to an agreement. Worst case scenario, if you can't come to an agreement, the IRS can only force you to go to Tax Court, where you get to start over with a judge who is often more lenient than the auditor (although he is likely to look at the entire return whereas the auditor was likely more limited.) I'm not going to lie when I say that I think I'd enjoy doing an audit once. Imagine how many blog posts I could milk that for. Especially if I go to Tax Court too! But a rational analysis of the value of my time would probably dictate that I try to clear up the issue with the auditor as quickly as possible.
# 8 We will save you more than our fee
Here's one that tax preparers will always say, but never guarantee. It might even be true sometimes. But underlying it is this assumption that many people, particularly doctors, have about their taxes. They seem to think that if they just knew a little more about the tax code or just had the right person preparing their taxes that their bill would be dramatically lower. That just isn't true. If you really want to lower your tax bill dramatically, you have to change your financial life. You need to save more for retirement, start a business, get a mortgage, have some kids, or move to a different state. Sure, you might miss a little deduction you hadn't thought of here or there, and that might be worth more than your fee, but chances are there isn't one of those lying around out there for you to discover every year.
The bottom line is that you need to see through the lies, partial truths, and underlying assumptions being fed to you by the tax preparation industry. It's perfectly fine to use a tax professional, but make sure you're using them to teach you and be sure to look at your tax forms afterward and try to learn something. Ask a lot of questions about ways to optimize your taxes going forward. Don't be afraid to give DIY taxes a stab before going in to see the tax pro. You might be surprised how easy it is, and you've probably got a good use for the few hundred bucks you'll save.
What do you think? Do you do your taxes all on your own? How do you use a tax professional to assist you? How did you learn the parts of the tax code that apply to your situation? Have you been audited? What was it like? Comment below!