Guest Post by Lee Reams, Sr.
If you have a simple tax filing situation, like being a single renter who lives in a state with no income tax and whose only income comes from one job, doing your own taxes just seems to make sense.
However, you never know when life is going to throw you a curveball.
Circumstances could be a cause to celebrate like becoming a high earner, getting married and starting a family, or buying a home. Less fortunate circumstances like filing for bankruptcy or inheriting assets from a loved one who died can also drastically alter your tax situation. Hiring a tax professional is the best course of action when your finances become more complex.
Over half of Americans who file taxes hire a professional tax preparer to handle their tax returns. According to IRS statistics for the 2019 filing season, 57 percent of all electronically filed tax returns were submitted by a paid tax preparer. While there are more self-preparation options out there than ever for taxpayers who still want to go the DIY route, here's why you should opt for a professional tax preparer.
Key Takeaway: Trust the professionals.
The Tax Cuts and Jobs Act (TCJA), better known as the 2018 tax reform, was the largest change made to the federal tax code in 30 years. While it's been two years since the law's passage, many aspects of it did not go into effect until 2019 or will not until future tax years. Various amendments were also made to the TCJA since its initial passage concerning tax breaks like the new deduction for small business owners and freelancers, and the individual mandate for the Affordable Care Act.
While the individual mandate penalty was repealed as of 2019, some states are beginning to institute their own, with California being the most recent.
Tax professionals stay on top of these laws so that you can focus on your professional and personal life, and not have to devote entire weekends to tax research and legal interpretations you may or may not be navigating correctly.
If you move, your tax situation can end up becoming more difficult as a result. Even if you're departing a high-tax state like New York or California for a state with no income tax like Florida, you can end up facing residency-based tax issues and may need professional assistance getting it sorted out.
Because states and local governments can have so many nuances that could deviate from federal income tax norms, working with a tax professional who is highly familiar with your state and local matters is imperative. An incorrectly prepared state tax return can have even more dire consequences than a federal tax filing gone wrong, because states do not have to provide you with the same process granted by the IRS under the Taxpayer Bill of Rights (codified in the 1998 tax reform).
Professional tax preparers like CPAs, Enrolled Agents, and tax attorneys must act with a duty of care in providing services to their clients. In addition to following through with the standards of practice set by the IRS, they may also be subject to state laws and the standards imposed by professional societies to which they belong.
This entails carrying professional insurance for errors and omissions so that in the event you are billed for a discrepancy, it's on the tax professional and not you. Since the tax professional is only responsible for what you tell them, this only applies to mistakes made on their part and not your omission of an entire source of income or other significant facts.
If the tax professional does not comply with federal or local laws on professional conduct, misuses your tax refund, or does anything else that could be worthy of disbarment, you can take it up with the IRS or state tax authority.
If you make mistakes on your own tax return, you are responsible for them. The "TurboTax Defense" does not hold up in Tax Court or with IRS appeals. While tax software may offer a helpline or audit assistance, it is not the same as working with a licensed and experienced professional from the start. You can get better results with a tax preparer prioritizing both the big picture and finer details of your tax situation, rather than being placed in a queue to get an answer for one question about a line item.
Your profession or lifestyle could entail various tax benefits that you might not have been aware of. Some of these tax credits are rarely claimed, such as the credit for the elderly and disabled, so they are not discussed much outside of tax professional circles. Inversely, there are several activities that people tend to think have an effect on their taxes, like paying medical bills or donating to charity, but actually end up not having an effect. This is especially true after the passage of the 2018 tax reform.
Deductions are of particular importance to the self-employed because they add up quickly, and many bleed into personal expenses that are otherwise not deductible. However, you might be unaware which deductions require more substantiation than just proof of payment.
The Internal Revenue Code is thousands of pages long, and it isn't getting any shorter. State tax codes are not much simpler and don't always align with federal tax items; so, what may be deductible on the state level is not deductible at the federal level and vice versa. Because tax professionals focus on these areas for a living, they can find all of the benefits you qualify for and help you plan for them for future tax years as well, making their fees all the more worth it.
If you file on your own using tax software and call the help line listed on the back of the box, you can only get assistance for the current tax year. You may have been cumulatively making mistakes on prior tax returns and keep receiving notices from the IRS, including for this year's return.
Licensed tax professionals who are held to a high professional standard can help you with tax matters from any year, not just the years that they prepared your tax returns. Some professionals focus on tax preparation while others focus primarily on tax resolution, audit defense, and resolving issues with the tax authorities. In either case, tax professionals can help you with issues from any tax year and even help you file amended returns if your own prior year returns were done incorrectly and/or you missed out on valuable tax benefits.
With your prior year and currently open tax returns prepared correctly, a tax professional can help you get a better grip on your tax matters and save you even more money in the long run.
Lee Reams Sr., BSME, EA is the Chief Technical Officer for ClientWhys, TaxBuzz, and CountingWorks. In addition to being an expert on taxation and a leading speaker on tax-related topics, Lee has experience in managing his own 700+ client tax practice.
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