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When to Use Either a CPA or Tax Software

I am a local Certified Public Accountant in the Dallas-Fort Worth area.

The advantage to using tax software is it costs less than a CPA. Most tax preparation software companies offer free returns, either on their web sites or through the IRS for those with limited incomes and simple returns. Returns for which tax software companies charge range from about $50 to $200. Additional services may be on top of that. A local CPA may charge $300 for a basic individual return, about $600 for a return with one business, and on up for more complicated returns. So, when is it worth it to pay the extra cost?

Here is the short answer: If you have the time and are sufficiently organized to prepare your taxes with tax preparation software, do it. Some companies do not even charge for its online products until you are done and ready to file. For not too much more, one can pay a software company to have each line reviewed or to have the entire return prepared by one of its preparers.

If you feel you need more expertise, you can have a local CPA review the return you prepared with tax software or have a CPA prepare the entire return. Generally, CPAs are used as the complexity of returns increase.

Tax preparation companies provide a tool or services for a particular year but do not provide a continuing relationship with a tax preparer. If one keeps using the same software year after year, numerous loss and credit carryforwards as well as business and rental assets with accumulated depreciation will automatically be included in the following years’ returns, but there will not be a continuing relationship with a local business professional who knows you and your company.

The costs for varying levels of software products are reasonable and increase appropriately for added complexity. For people who have the time to do research as needed, can set aside the time to organize their documents and prepare their returns, and do not need tax planning or accounting services, tax software may be best for them.

However, one drawback to completing one’s own return is that individuals make more mistakes than CPAs. The main reason for receiving IRS notices is that information in the returns does not match that from third parties, such as from W-2s and 1099s. If a person does not have the time or incentive to carefully prepare his or her taxes, he or she may be better off using a CPA. Getting a notice from the IRS almost always turns into a costly and time-consuming event.

Additionally, CPAs offer tax planning. There are dozens of elections, or choices, that are offered in tax law. These elections involve restricted stock options, foreign housing exclusions, lump sum distributions from retirement plans, premature retirement withdrawals, profitable versus unprofitable companies, active versus passive activities, the aggregation of rentals, and more. Making these fork-of-the-road decisions requires knowing your individual situation as it applies to tax law, regulations, procedures, and tax court decisions, and will materially affect the amount of tax one pays not only in the current year but in the years to come.

Although tax preparation software can handle complicated tax situations, the individual involved may not understand all the consequences. These may include buying and selling real estate, partnerships and other businesses, pension and corporate distributions, international commerce, and more.

Whether or not one uses tax software, it is advisable for an entrepreneur to establish a relationship with a CPA. They are business and tax experts, and can assist you in setting up your accounting system to help you understand your company’s finances. CPAs have accounting degrees and have passed rigorous national examinations to be granted state licenses to practice accounting.

Many first-time small businessmen and women do not understand estimated tax payments and consequently may lack sufficient cash to pay self-employment taxes and subsequently incur penalties after their first year. Also, some realtors or contractors may take accelerated depreciation of vehicles only to find out that they owe a very large tax bill should that vehicle cease to qualify for such depreciation.

Additionally, as an individual or married couple earn more, whether from wages, business, or investment income, the cost of a CPA compared to taxes owed decreases. There comes a time when it does not pay to be penny-wise and pound-foolish.

A local practitioner knows you, your business, and your goals. It is a good idea for business owners and high wage earners to establish a relationship with a CPA early and keep with the same one for a long time. They may only meet annually but often that is enough.

Please call or email if I can be of assistance. I do not charge for initial client discussions. We can do a Zoom call or talk over the phone. My hourly rates are reasonable. Once we talk and I know how much work is involved, I usually provide a flat tax return cost over which you will not be charged.

Steven Martin
Steven Martin CPA, PI, LLC
Richardson, Texas (Also serving Plano, Murphy, Sachse, Garland and the surrounding areas)
(855) 272-7477

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