This topic comes up quite often and the answer, just like many tax questions, is it depends. As your tax return prep becomes more difficult, the more likely you should engage a tax professional. Often there is a triggering point that causes someone to consider engaging a tax professional. The taxpayer starts a business or has new rental activity. The taxpayer is selling rental property. The taxpayer receives an IRS letter. The taxpayer owes a lot of taxes and doesn’t understand why. 

But how does a taxpayer know that they should engage a tax professional? In my view it is when they are not confident that they can prepare the return accurately themselves. Or when the taxpayer doesn’t want to do the effort and spend the time needed to make sure the tax return is prepared accurately. Let’s talk about some approaches to DIY tax preparation.

DIY Tax Preparation Approaches

 

  1. Just follow the retail tax software. Let technology lead the way.It is relatively easy to follow retail tax software. It does not tell you everything you need to know or do. And just because you have never had a problem with the IRS doesn’t mean you did it right. How do I know that just following the tax software doesn’t ensure accurate results? Because of the many times I have found errors in new clients’ tax returns and was told by the client “I just followed the tax software”. I have also explored several retail tax software options and I have seen where they mislead or leave things out. I have also worked as a tax pro assistant for a retail DIY tax software company, helping taxpayers with their tax returns. It was incredible how many cringeworthy things taxpayers were messing up. Did I use “cringeworthy” correctly? More on tax pro assist later.
  2. Have a friend or relative do the tax prep for me, because they are really smart. This has the same problems as #1 and possibly #3. I see no difference in error rates. Even when the friend or relative has years of experience. Often error rates can be high even when the friend or relative is an accountant or CPA who doesn’t specialize in individual income taxes. 
  3. Okay, fine. I’ll use the free tax review or tax pro assist.Or maybe for a small fee. This will reduce your risk for errors. But I don’t like this one unless combined with the third method. As you might expect, I will tell you why. There is certainly good to be said about it, for both the employee and the customer. But the first problem is that you don’t know who you are going to get. You might say it is like a box of chocolates. You might get one of the top 1% of tax professionals in the country. You might get a tax pro with true expertise in the area you need expertise, like perhaps rental property tax preparation. However, often you don’t. The amount of times I had to correct something that was previously advised by another tax professional was very disappointing to me.   I have done the assist gig. And I had trouble too. I couldn’t see the client’s source tax documents or spreadsheets. Ever try walking someone through a 1099 B when they have never looked at one before and when you can’t see what they are looking at? It can be difficult. I did get better at it over time. Too bad for the first few I helped. Can I guarantee what they told me was on the document was indeed what was there? No.
  4. The right way to DIY tax prep.

Here is the secret to doing DIY tax prep accurately: do it like a tax professional. Correction. Do it like a good tax professional or at least as close to one as is reasonably possible.

Here are the things you need to do and know:

  1. Remember the tax software is a tool to help you get the correct results. You produce the correct results, not the tax software.
  2. You need to read and research IRS publications and instructions at a minimum. In many situations you should also refer to the internal revenue code, treasury regulations, and other tax authority. In many cases you can do reasonably well with just the IRS pubs and instructions. But do you want to do reasonably well on your tax return or do you want it to be accurate?  
  3. Which pubs and instructions? First start with IRS Publication 17 and the 1040 instructions. If you or your spouse is in the military also use Publication 3. As you go through those two or three references, situations applicable to you will come up. When that happens, you often need to refer to additional references. The real fun begins when you need to go to things like the tax code, federal regulations, and revenue procedures.For those with residential rental property these publications and instructions are usually applicable: Schedule E instructions, Pub 523, Pub 527, Pub 530 (possibly), The Guide to Business Expenses, Pub 551, and Pub 946.This is not a complete list. You don’t have to have them all memorized. You don’t have to read every word in each one. You need to read enough to make sure you cover what you need to know. Make sure you are using the reference for the correct year.
  4. Stay up to date. Tax laws change. Sometimes they even change retroactively. You probably aren’t going to do all the continued education I do each year and you don’t have to. The first tip to stay up to date is that the IRS wants you to stay up to date. So IRS publications and instructions each year have a “What’s New” section. Simply review that section for the publications and instructions that apply to your tax situation. Many states do something similar.Also, the IRS has a “newsroom”, and you can subscribe to newsletters there. Many states offer newsletters as well. Be careful about tax articles (like this one?) and news. Always verify information.
  5. Do pay attention to tax tips and information provided by your tax software. Just make sure you validate the tips and information and how they apply to your tax situation.
  6. Be diligent. This simply means take the time and effort to get it right. Don’t accept “good enough” or “probably right”. Be sure. That is the short version. Tax professionals actually have much more detailed guidance to follow.
  7. Check your work. Look at the actual results, the tax forms. Compare them to the previous year and make sure any differences make sense. If you are sure you made a profit from the rental property, but the schedule E doesn’t show a profit, make certain that you know why and that it is correct. If you are expecting to owe money, but the tax return shows a $10,000 refund you better know why before filing the return.
  8. Know that states with income taxes do not always conform to federal tax law. Meaning you need to do the same things for state tax preparation that you need to do for federal and some of the rules are indeed different. For example, if you are familiar with bonus depreciation (you should be once you start DIYing your landlord tax prep), many states do not permit the bonus depreciation that is allowed under the federal income tax system.
  9. Know that you don’t know what you don’t know And strive to know it. This is hard for both taxpayers and tax professionals. Unfortunately it is often learned the hard way. Sometimes you read a publication or a section of the tax code and you think you have your answer, but no. There is another publication or section of the tax code that can apply. How do you know when to look for that other section? You know that you don’t know what you don’t know. Some of that comes from experience. I don’t know how to teach it.

So. The question. Should I DIY my tax preparation?

If the answer to all these questions is yes, then yes:

Am I comfortable doing DIY  tax preparation the right way, as described above? 

Am I willing to take the time needed to do DIY tax preparation the right way?

Am I really going to be diligent while doing DIY tax preparation the right way?

Can I really develop the level of expertise needed to handle the complexity of my tax returns? 

If I said yes to the first four questions, am I being honest with myself?

If all your answers are yes: Great, enjoy your tax preparation. 

If not:

And you know you want to find a tax professional, here are a few tax professionals you may want to consider contacting.