this article is from Ric Edelman's site
Why Do You Need an Accountant?
You turn to qualified medical, legal and (of course!) financial planning professionals. Make sure you seek the services of a tax professional as well.
The Internal Revenue Code is more than 67,000 pages long. Not only does it take hours to complete the forms — once you determine which forms need completing — but mistakes are costly. Overpaying wastes money and underpaying means paying penalties and interest. You could even be audited.
This fear causes many prepare-it-yourself taxpayers to deliberately refrain from claiming deductions, exemptions and credits they are entitled to. The result: They pay far more in taxes than they actually owe. And tax-preparation software is of debatable help. If you skip or misunderstand a question, the software will produce the wrong forms or complete them incorrectly.
It’s much better to have a certified public accountant,
or tax attorney prepare your return for you. With narrow exceptions, these are the only people who can represent you in matters pertaining to the IRS. (Everyone is familiar with CPAs and attorneys; EAs are tax professionals who have completed coursework and passed an examination certifying their competency to prepare tax returns.)
Not only will these folks help you in dealing with the IRS, they’ll stand behind their work. If your CPA, EA or attorney makes a mistake that causes you to owe additional tax, you’ll pay only the tax. He’ll pay any interest or penalties owed. (It’s unreasonable to ask preparers to pay the tax itself; that’s always the taxpayer’s responsibility.)
Why are these folks willing to stand behind their work? Because as ethical professionals, it’s highly unlikely that they will make such a mistake. (You can’t say the same about your MBA brother-in-law or your daughter.) And according to the Treasury Department, 56% of all the returns prepared in 2007 by volunteer tax preparers contained mistakes.
One of the biggest tax mistakes I’ve seen involved a client who owned mutual funds, sold his investments and replaced them with new securities. Because of his lack of understanding of Schedule D and the proper tax reporting of investment sales, he did his own taxes and was about to send the IRS a check for $8,000, which included hundreds of dollars in interest and penalties. When he told us about it, we immediately sent him to a CPA who was able to show the IRS that its calculations were wrong. Result: The client owed no additional tax, and therefore no penalties or interest, either.
But the CPA did bill the client $750. It was certainly worth it.
Taxpayers who insist on being penny wise and pound foolish should consider the professional’s fee from a different perspective. According to the latest statistics released by the IRS, the typical married couple in 2005 with an adjusted gross income between $75,000 and $100,000 per year paid $7,300 in federal income taxes. That’s an effective tax rate of approximately 8.4%.
If the CPA, EA or tax attorney’s fee is $600, that’s just 0.7% of their income. In other words, retaining the services of a tax professional means the family’s total tax bill, including the cost of tax preparation, is 9.1% rather than 8.4%.
And considering all the time and aggravation that the professional will save you, plus interest and penalties resulting from errors you might make, this small increase in your effective tax rate is well worth it.
By the way, the fee you pay your tax preparer is tax-deductible. (Even Congress acknowledges you need a CPA!) That’s why we strongly encourage our clients to work with a CPA, EA or tax attorney. If you don’t already have one and need a referral, contact us.