MONEY MANAGEMENT

SHOULD YOU USE "DO-IT-YOURSELF" TAX RETURN PREPARATION SOFTWARE?

If you have a complex return, using a commercial "Do-It-Yourself" tax software program may not be the best way to maximize your tax savings. For taxpayers with complex deductions or income from a business, investments, rental property, a farm, or a trust, using the services of a CPA may save time and money. A CPA will make your return preparation easier, generally help reduce your taxes, and keep you in top financial condition.

Unlike tax software, a CPA offers judgment, experience and the ability to explain options. If you have basic financial and tax circumstances, self-help tax software may work just fine. But beware that not all software programs are easy to use. If you’re too conservative, you may end up paying more in taxes, and if you’re too aggressive, you may be saddled with unnecessary penalties. To play it safe, consider engaging the services of a CPA who understands the tax law and can help you resolve complicated tax issues. You may sleep better knowing that you’ve taken every appropriate deduction and are less likely to have penalties imposed or problems in an IRS audit.

Because of their training, experience and ethics, CPAs do more for clients than a tax software program. Generally, to become licensed, CPAs must meet a series of stringent requirements, known as the “three E’s” — Education, Experience and Examination. Requirements in Virginia mean obtaining a Bachelor’s degree that includes 150 hours of college credit (beginning July 1, 2006), completing at least one year of work experience, and passing a comprehensive national examination which only 25 to 35 percent of candidates, on average, pass the first time.

That’s just to get into the profession. Once licensed and active, CPAs must stay current by taking continuing professional education in order to maintain their licenses. CPAs also adhere to a strict code of ethics, with violators facing sanctions, including possible expulsion from the profession. In fact, effective January 1, 2004, all Virginia CPAs, including those working in industry, must take two CPE credits in ethics each year.

Some software programs give you the option of consulting a tax professional for an additional fee, but be careful about choosing that route. If you do, you may not know who’s working on your taxes or if that individual is a CPA. In addition, the virtual adviser may not understand your individual tax circumstances and, as a result, may not be able to answer your questions correctly and efficiently, or provide any recourse for errors. Conversely, CPAs stand behind their advice. They will represent you in a tax audit and know how to work on your behalf with the IRS.

Additionally, self-help tax software may not include feedback on certain topics such as:

• How to avoid the Alternative Minimum Tax (AMT) affecting more and more people in the middle class

• Why a “dividend” from some preferred “stock” is really interest and therefore not eligible for the 15 percent rate

• Whether you should, on an after tax basis, pay off your mortgage and invest, or reduce your credit card debt

• The best way to save for your child’s college education (529 plan, Education IRA, Uniform Gift to Minors account, etc.)

• Advantages and disadvantages of electing accelerated depreciation

• If you qualify for a home office deduction and should claim the deduction

You may find some explanations of these issues on the software’s help screen (generally straight out of the IRS instruction booklet) but the “judgment” and “experience” factors are completely missing.

CPAs are dedicated professionals who understand the business of taxes and finance. Their knowledge and training in tax matters enable CPAs to develop effective techniques that often result in substantial tax savings. Year round, they can help you with tax issues as they arise and develop a plan to minimize your taxes. But they don’t just prepare tax returns. CPAs review your overall financial picture to find ways to help you achieve your goals. Considering the expertise and quality of services they provide, CPAs outshine the virtual competition.

 

The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.