Q. Should I use TurboTax or hire a tax professional to do my tax returns?
A. There is no single answer to this question. Many real estate professionals prepare their taxes themselves, and often with the aid of tax preparation software such as TurboTax. Such software makes preparing your own returns far easier than it used to be, and it can save you money.
Most tax professionals would likely charge somewhere between $250 and $500 to prepare your return. Tax preparation software typically costs less than $100.
If you’ve kept good records and have a relatively simple return, doing it yourself can work just fine. This can work out particularly well if you used a tax pro to prepare your return for a prior year and your return for the current year is much the same.
However, preparing your return will take time — time that might be better spent selling real estate. Moreover, if your return is complex, you have poor or no records, or this is the first return you file for your business, it may be wise to hire a tax professional.
It’s important to understand that tax pros are not all alike. There are three types, and they differ widely in training, experience, and cost.
Choosing a tax preparer:
As the name implies, tax preparers prepare tax returns. The largest tax preparation firm is H&R Block, but many mom-and-pop operations open for business in storefront offices during tax time.
Most tax preparers don’t have the training or experience to handle taxes for businesses and, therefore, are probably not a wise choice.
A 2006 study by the U.S. Government Accountability Office underscores this. Posing as taxpayers, GAO investigators visited 19 outlets of several commercial tax-preparation firms and asked them to prepare returns based on two hypothetical situations.
The 19 preparers arrived at the correct refund amount only twice. The GAO said that several of the preparers gave very bad tax advice, particularly when it came to reporting business income.
Enrolled agents (EAs) are tax advisers and preparers who are licensed by the IRS. They must have at least five years of experience or pass a difficult IRS test. They can represent taxpayers before the IRS and in administrative proceedings, circuit courts, and possibly tax courts, if they pass the appropriate tests.
Enrolled agents are the least expensive of the true tax pros and are reliable for tax-return preparation and more routine tax matters. They can be quite adequate for most real estate professionals.
Certified public accountant.
Certified public accountants (CPAs) are licensed and regulated by each state. They undergo lengthy training and must pass a comprehensive exam. CPAs represent the high end of the tax pro spectrum, and are generally the most knowledge and expensive tax pros.
In addition to preparing tax returns, they perform sophisticated accounting and tax work. CPAs can be found in large national firms and in small local outfits. The large national firms are used primarily by large businesses.
Some states also license public accountants. State-licensed public accountants are competent but are generally not as highly regarded as CPAs.
How to find a tax pro
Often, the best way to find a tax pro is to obtain referrals from business associates. If this doesn’t work, there are a number of professional organizations that have online databases of tax preparers. These include the:
- National Association of Enrolled Agents (www.naea.org),
- American Institute of CPAs at (www.aicpa.org), and
- National Association of Tax Professionals at (www.natptax.com).
You can find other directories at:
Note that you don’t have to go to a tax preparer’s office to prepare your return. Tax-return preparation can be handled completely online, by e-mail. There are no laws preventing you from using an accountant online.
Thus, you can use a preparer in another city or even another state. However, it’s wise to stick with a preparer located in your home state because he or she will likely be more knowledgable about your state’s taxes.
Your relationship with your tax pro will be one of your most important business relationships. Be picky about the person you choose. Ideally, your tax pro should have experience preparing returns for real estate professionals like you.
A tax pro already familiar with the tax problems posed by your business can often give you the best advice for the least money.
Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.
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