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Self-Prepared Tax Returns – What Makes the Most Sense to You?

January 16th, 2018 Leave a comment Go to comments

Self-Prepared Tax Returns

What Makes the Most Sense to You?

We were curious how much the average American household spends on income taxes. Looking at data released in August by the Bureau of Labor Statistics as reported by CNSNews.com, Americans on average spent more on taxes in 2016 than they did on food and clothing combined. It was also reported that in three years, from 2013 to 2016, the average tax bill for Americans increased 41.13%. The only expense category that exceeded the payment of income taxes was the cost of housing, which included the cost of the housing, property taxes, utilities, public services, household operations and supplies, and furnishings. It is quite apparent that income taxes are a major household expense.

Per the IRS, 51.763 million taxpayers self-prepared their returns for the 2016 tax year. The IRS statistics show that this number has been increasing annually.

Why are more Americans self-preparing their returns? We can only guess as we could not find any studies. Our guess is that people find the lore of self-preparing a tax return for under $100 more appealing than paying the average fee charged by a tax professional of $300.

The U.S. tax law is constantly changing. There are exceptions to certain provisions found in the law, and sometimes there are exceptions to the exceptions. Everybody says the U.S. tax law is complex and confusing. We would agree with that statement. And yet, Americans continue to convince themselves that it is in their best interest to self-prepare their returns.

Each year we have about 2-3 new clients who self-prepared their returns and have received a very significant tax bill from the IRS and want us to review the tax notice for accuracy and to advise them. Our review almost always results in the taxpayer erroneously preparing their returns, and whereas the IRS was demanding an additional assessment, the taxpayer in many cases actually was due a refund from the IRS. If a tax return filed with the IRS contains an error and the IRS tax liability was understated, the IRS will send an audit notice to the taxpayer. On the other hand, if the tax liability was overstated by the taxpayer, the IRS is under no obligation to notify the taxpayer of the overpayment and the overpayment goes unnoticed. Thus when a taxpayer says that their return must have been prepared properly because they never received a notice from the IRS, they don’t understand how the IRS operates.

Assuming a taxpayer wants the peace of mind knowing that their tax return was prepared by an experienced and competent tax professional, what should he/she do? Don’t go to the nearest accountant’s office and engage that person due to the convenience of the location. Don’t call and your first question is to ask how much do you charge to prepare a tax return? Don’t assume that only a CPA or attorney has the expertise to prepare a tax return. Instead, visit with a few tax professionals and learn about their experience and expertise.

While all men (and women) may have been created equal, that does not mean that all tax professionals are of equal talent. You need to do your due diligence in finding a qualified tax professional. We have seen the Tax Court impose penalties on taxpayers for failure to substantiate their tax positions. When the taxpayer argued that they had relied upon the advice of their tax preparer and should not have the penalty imposed, the Court rejected that argument stating that although the taxpayer had hired a tax preparer, the taxpayer did not demonstrate that the preparer was competent.

Did you know that a CPA practicing in PA, while required to take 80 credit hours in continuing education in a biannual period, is only required to take a whopping 8 continuing education credits in taxation over that 2-year period? That is equivalent to spending one day over a two-year period studying taxes. Amazingly, that requirement ends effective January 1, 2018 and CPAs are no longer required to take any courses in taxation to maintain their license.

PA attorneys are required to take 12 continuing education credits each year, and 2 of those must be in ethics. There is no requirement to take tax courses.

Enrolled Agents, licensed by the IRS, have the most onerous requirement. They are required to take 24 credits in taxation each year.

Due to the complexity of the tax law and wanting to have the expertise to best serve our clients and to ensure that they pay the lowest amount of taxes due, Bryan and Frank have taken over 220 credit hours in taxation over the past 2 years. 

If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

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