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
Don't be afraid of doing your own taxes, you'll probably learn something useful
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!
I remember the number of times you’ve mentioned that paying taxes is like a game where you get to figure out how to save the most money possible with the rules given to you. As an extremely logical person, that is very appealing to me. This post also gives me even more encouragement to fight the good fight and to do the work on my own. And, hey, when have you ever done DIY work that didn’t end up feeling satisfying that you finished it yourself. It can be frustrating, but in the end it is usually rewarding.
While I don’t use someone else to do my taxes, I do use tax software (which I have to pay for) to do them just because it’s simpler.
Do you use tax software or just old school pen and paper? When you have questions do you just go to the IRS website or google away? You’ve mentioned several times that you had to fill out “x” form for the first time this year. How do you know each time that there is a new form for that particular situation?
Thanks for the thoughtful and encouraging post,
TPP
I actually do both. My personal tax return was Turbotax last year, but I did the partnership return by hand.
I typically search “irs.gov mortgage interest deduction” or whatever.
Usually the 1040 instructions tell you which other form you have to fill out. My new form this year will be a corporate return.
Agree. You cannot learn to put in a central line (do taxes) by watching someone else (accountant) do it. Turbo Tax makes it so easy. You just answer their questions and away you go. Every now and then I have to write down some things I am not sure of, and sometimes I’ll consult with my accountant for 30 minutes to confirm I did it right. It is straightforward. T.T. does not charge you until the end, so giving it a try for 90 percent of it is risk free. The only way to understand it is to do it yourself. Most custodians such as Vanguard and Schwab allow you to pull in the data from their website electronically. It could be the easiest $650 you save this year.
Thought-provoking for sure. I don’t disagree with most of this.
Personally, I don’t do my own taxes. It takes me hours just to gather all the documents and think about the big picture ideas around tax issues. My CPA usually asks me questions I had never thought of and he can quote the codes to resolve any confusion. He produces my documents (several inches thick) and sends electronic documents to the states willing to accept those. I have investments and companies that are spread out a bit. He charges for his time but he charges less per hour than what I’m paid. I’m glad to take advantage of that comparative advantage.
Right. Most of the work is in the gathering and inputting all the documents.
Nothing wrong with paying someone to do it. You’re clearly NOT in the 90% where your taxes are super easy.
I wanted to pay someone to do it and have once. However, the part I hate is the gathering, preparing and checking for accuracy of the documents. Entering the info after is easy. No one can nor will they do that other part for you, which I’d gladly pay if it was possible.
So I just do it myself.
That’s the same problem I have with house cleaning. I don’t mind the toilet scrubbing, sweeping, and wiping. It’s picking up all the crap on the floor. I can’t seem to find a house cleaning service that will pick up after me and my kids and put all our stuff away.
If you have a comments hall of fame, this comment should go in there.
Great post, so many truths here. I did my own taxes, by hand, up until 2 years ago. You are absolutely correct, when you go through all the calculators in the form and do them by hand, you learn how this stuff works! I know how the AMT works because I had to do the darn egregious AMT calculator every year. And I was very close to having to pay the AMT, but never made the threshold.
I started using Tax Act 2 years ago. I refuse to use any software that takes my data over the net and into their databases, especially with my social security number. Turbo Tax will be hacked one day, and they have all your stuff. Heck, earlier this year TurboTax announced they will be allowing other companies to access your data – anonymized, but still. No Way. Those API’s just open the door to more hacking possibilities.
Tax Act is software you download to your machine and you can use it to do all the work while you’re disconnected from the web. Then you just print and away you go. They never get your info. And I’m not affiliated in any way, just like the product and it meets my needs.
You can choose to purchase and use any of the major tax preparation products in the way you want. In other words, you can choose to use the desktop version of TurboTax and print your return as you are doing now. Alternatively, someone could use the online TaxAct product or EFile with the desktop product.
There are some excellent analyses comparing the advantages/disadvantages/security risks of paper filing vs e-filing. Paper filing is not risk free.
Thanks for that Katietsu, I honestly didn’t know TurboTax had an offline version. TaxAct is free however and has been doing me well so I’ll stick with it, don’t see the need to pay. Plus that article and announcement from TurboTax really irked me.
I guess my bigger point was that my general M.O. is to never give my ss number over the web to anyone. I know a lot of ethical hackers (folks who are employed by companies to hack and thus improve their sites). Their stories scare me. Everything can be hacked.
Many physicians can use tax software to save money during residency, and perhaps in the early years in practice. But at some point, doing it yourself is often more expensive than using a professional.
In my 25-30+ years of practice (first as a physician, then as a financial planner) I have saved a multiple of what accountants cost me in fees from good advice. I’ll admit that getting this advice often takes being aware of finance and taxes, and asking questions. But it has paid off immensely.
Like it or not, our tax system is extremely complex (on purpose). Even the new “simplification” tax bill is 500 pages long and will have tens of thousands of pages of “interpretation” eventually.
Telling physician readers to do it themselves is probably a disservice, except again in the early years of practice and then again only if they are savvy and take the time to be informed.
I don’t get this criticism of using advisors. As physicians, that’s what we do! We are advisors. We use specialty consultants as advisors. How is it that we’re automatically smart enough to “do everything?”
Weird that someone who works as an advisor would be more pro-advisor than someone who doesn’t!
My point is that while you may use an “advisor” to help you with your dialysis, you don’t need to use one to care for a 1 inch by 1 inch second degree burn on your arm. At least you don’t need to use one twice!
Most tax returns in this country are a 1 x 1 burn.
Spouse inherited money from one trust this year, and jointly with a sibling inherited land in another state. Sold the interest in the land to the sibling. Invested some of the money in mutual funds with distributions, interest. The first trust, with the money, had gains that were distributed to spouse of their father, and some taxes were withheld on the gains, some not. Need to do state tax returns for the land sale and the inherited money, and need to do home state tax return, Federal return. Too much for us this year so we will be going with an accountant. Not a tax-preparer at H&R block, a CPA.
I don’t know what I don’t know about the tax implications of our finances this year, but I know there IS a lot that I don’t know. I’ve found limitations in TurboTax in the past when I had questions that went unanswered and I was left guessing what to do. I am not feeling bad at all about letting an accountant do the taxes for 2017 and charging me for the advice and the work he will be doing.
My taxes haven’t yet been this complicated but early on TurboTax and other programs just weren’t covering all my situations. Part of why I don’t bother using them. I sure wish, though, that the IRS used fillable calculatable forms. My AL state taxes do this and other than forgetting when I can only change the entry by going back to the page it came from, this can all be done on computer and on line, all cascading from my entries. IRS I have to pull up each separate form and it kills me that the calculation pages in the instructions often aren’t even fillable pdfs.
I agree that would be super helpful.
Have you considered using Free File Fillable Forms? https://www.irs.gov/e-file-providers/before-starting-free-file-fillable-forms It is only available starting mid-January. It sounds right in line with what you’re looking for.
Sounds like you’re not in the 90% with easy tax returns either.
But make sure you go over it when the accountant is done and learn what you can from it.
I have used an accountant since age 30. I find my accountant is not proactive. She has never suggested Roth conversions, DAF, or tax loss harvesting. I have read and done these things on my own. When I no longer own a medical practice I plan to shed the accountant.
Same here.
But…I consider my annual preparation fee kind of like an attorney retainer – I have a CPA who can answer questions prn. Examples: referral for living trust, discussion about buying into a new business, advice about a micro-business. If I had a friend who was an accountant, this would be something they could help with….
Agree with above…. similarly I’ve used a CPA for the past 5 yrs due to an out of state rental property. I thought my CPA tax prep entitled me to a couple Of curbsides per year until I had a tax related question this year and received a $300 bill for time “researching the answer”. #backtoturbotax
I think that’s the typical situation. We all want some kind of a tax strategist, but most are just document preparers.
i end up using backdoor Roth as a litmus test for tax preparation people, not sure if this is fair but it seems like it to me.
multiple friends/colleagues have talked to me about what their accountant said and when i find out that the 2 MD couple making $600k has never heard of backdoor Roth i tell them to find a new accountant.
I have the same experience. Mine gives all my documents to someone else then bills me. It’s about $400 a year. He is a CPA graduated from the same program my grandfather taught CPA for 2 decades. But, he isn’t proactive. He never returns calls and actually billed me per hour once for a single page analysis on projected retirement savings. That was years ago before i became DIY.
Now that I don’t have 2 houses in different states with some rental income I’ll probably drop the CPA in a few years.
For more context, here is the full comment made by the commenter quoted in the article.
https://www.whitecoatinvestor.com/12-things-i-learned-from-doing-my-own-taxes-kids-corner/#comment-454749
In my comment above, I noted ” I’ll admit that getting this advice often takes being aware of finance and taxes, and asking questions.”
Many accountants have become fancy versions of turbo tax-taking what you give them and having it entered into software. I think they are wary of getting on an IRS list of “aggressive tax preparers”, and thereby exposing many of their clients to audits (hard to document, but I’ve heard it from a couple of accountants).
There are some proactive accountants out there, but you need to search them out. Kinda like good and not so good doctors, right?
Having a good accountant AND doing at least a little reading on taxes and finance makes a great combination.
Thanks for the encouraging post, I find as our world become more and more automated (i.e. GPS phenomenon), the areas where we are able to still DIY are quite satisfying and fulfilling.
And, as an endodontist, I appreciate the qualification of getting a root canal *without anesthesia*! However, when the pulp is already necrotic, many patients still prefer having no anesthesia 😉
I have met a tax preparer twice. Once when I was in college and they offered it free on campus. The guy had no idea what he was doing especially given 99.9% of college kids can file a 1040EZ. The second time was last year. I setup an appt with HR Block as my wife and moved from casually taking photos to incorporating and making it a true business. I scheduled with their top tax person and noted it was for a new personal business. I get there and that person is running behind. Was going to be a two hour wait (I’m a doctor, I can deal with that) so they move me to someone else. She essentially opens the HR Block software and starts asking me for numbers to punch into the fields. She had no idea how to actually look for other deductions or what they would be. I got up, walked out, went to walmart and bought Turbotax small business and filed my own taxes about 3 hours later….
Bravo! I once loved doing my taxes when it was easy, now I still prefer it to letting someone I figure isn’t as smart as me try to do what I’ve managed pretty well for 35 years now. All I gotta do is patiently hunt down every line item and its instruction form to convince myself that once again that line item is $0, and now I can usually tell by the name on the 1040 if I need to go that far or not. (AMT I still figure every year; stopped calculating married filing separately over a decade ago.)
And one year- when I could have most used it doing British taxes- I got a free tax prep accountant session at the kid’s school fundraiser auction. And she told me to take a deduction that looked illegal and immoral to me. Thanks, I’ll follow my American principles here.
Similar to you every 3 years the IRS tells me I’ve made an error. Sometimes I send them an explanatory letter and the documentation again- when I’m smarter than them. Sometimes I thank them and accept the extra refund (I’m the Queen of ridiculous math or copying errors. And I use a spread sheet!) and change a digit on my own records (they don’t even ask for a 1040X then). Sometimes I check my records and admit “Yeah you’re right that $20K 1040ES payment was for the prior year, not this one, here’s my check.” and after that was more careful in my records keeping- coming up with $20K to spare unexpectedly is painful. I have to admit that the year I had the heaviest British AND US taxable income I came up with 3 different figures (for the US- British taxes are easier) on 3 assays at calculating the tax due. So I picked the middle number and paid up and got no corrections.
Trying to pass off doing my kid’s taxes to her- at 24 she isn’t as keen as me; next year hers will be easier and I’ll just proofread them after she does them.
Great post. I also (as some of the previous commenters have mentioned) use software (Turbotax). I have used a CPA in the past, but wanted to actually look at my taxes the last 2 years, and with some nudging from my wife, we used TurboTax and found it very simple. I imagine it might be just as easy to file without the software. Perhaps there is even free software that can easily perform these calculations somewhere out there. My only complaint about paid software like TurboTax is that if you worked in multiple states, you are hit with nearly double the fees. Filing two states and a federal nearly doubled the cost compared to filing federal alone. Kind of upsetting.
Thanks for a great post!
Very intruiging post. I imagine it would be educational doing my own taxes, but I think between my wife’s dental practice and my partnership…our tax situation has gotten a little more complicated. Speaking to your point: if you are going to pay, make sure it is reasonable and there’s more than just preparation (which we can all do). We are making that change now to a dental CPA that can help us with metrics of my wife’s practice.
I did my own taxes for a couple of decades with TurboTax.
With moonlighting, a rental home, two states with houses in them, and federal, state, local returns due, I turned it over to a CPA two years ago.
Used to take me a whole weekend to do them. Now, instead, I’m paid to work that weekend ($4000). My 12 hours is worth more than the $600 I pay.
Last year, someone tried to file a fraudulent claim with my information. The IRS contacted me. I have all the stuff to the CPA, and he filed a complete paper return as the IRS would not accept electronic after the tax fraud attempt.
Mine might not be too complex, but for $600 total it’s a bargain.
Again, with multiple states and rental properties, I think it’s pretty clear you fall into the more complex 10% category.
I’m somewhat like this as well. I’m a W-2 employee but we own a rental home in another state, and my wife owns her own in-home business. She pays quarterly sales tax, and we also take advantage of a home office (actually home studio) deduction.
My first year out of fellowship we had two state’s worth of income plus a rental house in a third state, my wife’s business in two states, and got to deduct repayment of a stipend from my gross income. Was certainly glad we paid to have our taxes done that year, and we’ve just stuck the CPA since then. We are hoping to sell the rental home this year, then after we are down to one state only and no depreciation and depreciation recapture I’ll probably take it over myself.
I did my taxes by hand for many years (i’m kind “old” pre-internet), and then used Turbo Tax. I think I filed my first return in 1986. I’m sure I have made mistakes , but over time doing them every year I became more knowledgeable. The most work is organizing everything and rummaging through old boxes looking for paper forms of stock purchases in the late 80s/early 90s (even for something I didn’t intentionally sell but maybe a M&A forced cash in lieu, capital gains on the mergers etc)…A CPA does NOT come to my house for that!
In 2013 we moved and I just decided I didn’t want to spend the day doing Turbo Tax, so I hired a CPA. We pay $450 which in 2013 included 1040, Schedule A, B, C, D and E and all the worksheets which go along with them. We have unlimited contact with him which that has been invaluable as we have significant tax burden he has helped tweak (mostly more of an FA role which he also holds credentials for). I truly believe he is not providing any additional savings that Turbo Tax couldn’t do, but for $450 i’ll pay to free up the weekend not sitting in front of Turbo Tax anymore…… Our taxes are actually simplified as we dumped Schedule E and A but he still does 1040, B, C and D for us. Plus I can vent to him…it is hard to vent to my friends or family about our tax burden when it is like 6x what most of them make a year. I’ll probably do my 18 yo taxes this year by turbo Tax and show him how to do it……
I totally agree with the message of the post. I do take issue with the $409 billion estimate of tax compliance costs, which is based on a study from the conservative Tax Foundation. It also includes both individual and business tax compliance.
Politifact has a few other estimates in an article on topic, some of which are Much lower. http://www.politifact.com/texas/statements/2015/may/20/ted-cruz/ted-cruz-americans-spend-500-billion-complying-tax/
Another estimate from the left-leaning Tax Policy Center puts the cost of tax compliance for individuals (not including time spent ) at $28 billion.
http://www.taxpolicycenter.org/sites/default/files/briefing-book/4.6.2-how_costly_is_complexity.pdf
Sore subject. I just spent 4 hours trying to figure out how to submit federal and state income tax and federal and state unemployment tax for a corporation online.
I don’t see why you wouldn’t include the value of time spent. Can you think of a reason not to include that?
The argument against is we don’t include value of time in most other estimates and it’s tricky to calculate.
If you are going to include value of time, I would say the $400 billion number is still too high of an estimate (see links). That would be over 2 % of US GDP, so the average American would spend the equivalent of one full workweek on taxes. That doesn’t seem accurate.
What number do you prefer to use? Is it really big? I bet it is.
“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.”
Don’t forget that gifts to charity is also a deduction.
I used to do my taxes on paper, back in the day. Then I progressed to H&R Block tax software, which I compared with my own Excel spreadsheet … just to double check them. For $20 on sale, the tax software is worth it. On rare occasions, the tax software and Excel spreadsheets come up with different numbers. The last time was four years ago when my daughter went off to college. I had no idea (at the time) that there were education tax deductions.
Yes, I have already done an Excel spreadsheet for the new tax bill, IF it passes. I was not going to wait for the tax software to catch up. It looks like I may pay an extra $2K in 2018. But then again, would you expect anything less of an engineer…
I am a retired dentist and I have my 30+ hours I took for the CPA exam. I have also been an Enrolled Agent before the IRS for about 35 years. My daughter is a physician. There are several tax mistakes I see doctors make when it comes to taxes.
First, most people assume that CPAs are specialists in taxes. A few are, most are auditors and its related functions. The CPA exam used to require only six hours of basic taxes. Just like medicine, the fact that you are called doctor does not mean that you know everything. Unlike medicine, mistakes on tax returns usually go unnoticed and the IRS does not notify you when you have overpaid nor do they send you a thank you letter.
Second, doctors need tax professionals that specialize in healthcare taxation if you own your own practice. Case law and letter rulings are constantly changing in this field. I regularly see depreciation not properly utilized, credits not taken, and expenses put where they are not maximized.
Finally, Turbotax and related software are fine if you just have a W2 and very little more. If you are an active stock trader or have a lot of passive income and losses, you need a tax professional. Personally, I would like to see the postcard tax return, but lobbyists for the large accounting and tax firms will do their best to keep that from happening.
Not sure just a lot of passive income requires a tax professional, but I agree that real estate investing in particular offers a lot of opportunities for a good tax strategist to add value.
I disagree that the IRS doesn’t notify you when you’ve overpaid. I’ve had exactly that happen to me.
Great and timely topic. I need fed and state forms most. schedules self employed no rental property. Accountant charges $15000 is that fair.? Living in California. Thanks
$15,000!? No, that’s not fair. Surely you mean $1,500 though, right? That’s a little on the steep side, but not insane. $15,000 is insane.
It’s the fear that I’m getting screwed that makes me keep considering paying someone, but at then end of the day, I’m a W2 employee and really there’s nothing else I can do to lower my taxes so I’ve stopped worrying about it.
Below was a very depressing NPR episode I listened to about a Stanford Tax Professor who used his own money to lobby for easier tax forms (basically IRS competed form you just sign and mail in, like other countries). Listen to it, politics is what ended up blocking something the people did ASK for in regards to filing taxes. This would have taken care of a majority of taxes filed in the US.
https://www.npr.org/sections/money/2017/03/22/521132960/episode-760-tax-hero
I’ve heard that podcast. I thought it was excellent.
Great discussion. I’ve had the same accountant/preparer for over 20 years. The counsel I’ve gotten over that time is hard to quantify, but is easily worth six figures today. I think the key, as you mention, is to find the minority candidate that can offer value beyond the filling out of forms. I hope to pay him well into the future, but I’d be tempted to DIY if he were no longer available. I think part of the benefit provided has been due to the simple fact that observation of many individual scenarios can provide insight into best practices, that can then be shared. Tom Stanley found a unique way to do the same thing in researching for his books. Thanks for provoking thought on this issue!
My first year out of residency I asked one of my partners who to use for tax preparation. He recommended a CPA who I assumed would be amazing. Nope. Paid $595 and got no advice and the next fall when I asked a question about changing my withholdings, I got a form letter back and a bill for $50. Asked a buddy who’s a financial advisor and found a new CPA. Got so much more advice and planning from her and only paid $120 for my return. This year have emailed her several times with questions and have received prompt responses without a bill. I consider that a bargain compared to my time trying to prepare them myself.
Have done my taxes in various years with either filing myself, tax software, tax attorney, and cpa. For simple years, I’d do it myself with turbo tax or h and r block software. However, if you dont fit their box, then i think the advice of a good cpa is worth it. the year after residency I found myself consistently not sure how to accurately categorize some deductions or other income, and went with a cpa. Only charges me 400 for taxes, and I get access to email him at any time for questions (free) and projections (paid prn) if needed. Interestingly, the only time ive been audited was when using a tax attorney (previous career before med school), only to realize he was basically pushing the grey area into evasion territory, in which case I promptly paid my tax fine/audit and dropped his company. He himself fled the country while on being charged for tax evasion on over 1 million dollars from his own tax business a year later.
Your book inspired me to do our taxes by hand last year. It took about 6-8 hours and I double checked it with Turbo tax in only about 30 minutes. It could be argued it wasn’t the best use of my time, but it was a fun challenge, I feel I have a better understanding of the tax code, and I’m proud of myself for successfully doing it. So thank you.
Yes, I think it’s a good exercise to do once. Now you can actually have a rational conversation about the tax code.