Do you really need an accountant to file your taxes? And will an accountant actually save you money versus using an off the shelf tax program like Turbo Tax?
In this post, I discuss my own personal experiences filing my tax returns with 2 different accountants vs using Turbo Tax and Tax Cut.
Specifically, this article will shed some light on…
- Whether an accountant will save you money on your taxes
- Whether an accountant will save you time on your taxes
- Whether an accountant will do a better job than Turbo Tax
2010 was the first year that my wife and I decided to hire an accountant to file our tax return and I remember being very nervous about the decision.
Even though I absolutely hate taxes, I’d been filing my own returns for well over a decade and I avoided accountants because I don’t like sharing my financial data with anyone.
I also like the feeling of control knowing how all of the numbers are calculated in my return. Now that’s not to say that you shouldn’t trust accountants but in the grand scheme of things, no one cares about your money more than you do.
Probably my biggest reservation about using an accountant back then was that I hated the idea of turning over all of my sensitive financial data to a stranger and paying him/her to file a crucial document that could have a significant effect on my finances.
However both times that I used an accountant, I ALSO used Turbo Tax to compare the results which I’ll share at the end of this article.
Why We Went With An Accountant In The First Place
Back in 2010 when I used an accountant for the first time, I was running an ecommerce store, writing for my blog, working full time, and helping to take care of a newborn child. As a result, I didn’t have the mental energy to think about anything else.
When I file my own taxes, it typically takes my wife and I a good solid weekend to gather the data. Then, it takes another day to enter everything into TurboTax and then another few days to double and triple check everything.
All told, it takes me about a week to file and I was hoping that the accountant would save me that time.
I was also curious whether my accountant would save me money by finding additional deductions that Turbo Tax didn’t know about.
Sounds reasonable right? Unfortunately, things didn’t exactly pan out how I expected. Here’s what I learned.
What Does An Accountant Buy You Exactly?
Our accountant charges $200 an hour. As a result, having him file our taxes costs approximately $500 which includes our LLC. Compare that to the $75 that we usually spend on Turbo Tax and it costs us an extra $425.
So what does this extra $425 buy us?
The accountant prepares and file all of our taxes for us. All we have to do is provide him with all of the necessary data. Everything sounds pretty straightforward except for one thing.
The accountant typically does not audit the data we provide and we are the ones responsible for any writeoffs we make with our business. While he will alert us of any red flags, by default he will not challenge or check up on our business deductions and will only do so if we ask.
Needless to say at $200/hr, the cost of his time can really add up if we just hand him a bunch of receipts. But that being said, it’s nice to have a tax expert available to ask questions regarding any borderline deductions that could trigger an audit.
I was also under the impression that our accountant was responsible for filing our taxes correctly. In other words, I thought that our accountant would be on the hook if we ever got audited.
While this is true to a certain extent, it turns out that you are ultimately responsible for providing the correct numbers for the tax calculations.
In the event of an audit, the accountant is responsible for only the calculations and not the actual baseline data. For example, even if our accountant advises us to take a borderline tax deduction, we are still responsible for proving that the deduction is legit despite his advice.
In addition, in the event of an audit, it costs extra money for the accountant to respond if he is not at fault.
The good thing about having an accountant is that in theory, he is supposed to file your taxes optimally based on your numbers and your current tax situation.
He may be aware of obscure tax rules that could save you money and you don’t have to lift a finger. If you trust your accountant, everything should be taken care of correctly with no worrying on your part.
What About Turbo Tax?
Good ole Turbo Tax is super cheap. It costs us only $75 because we buy the home business deluxe version which covers single member LLCs. The base version I believe is free for the federal filing.
In theory, Turbo Tax should be aware of all of the latest deductions and ask you the right questions so you can take advantage of all of the tax breaks much like an actual accountant would.
While Turbo Tax is supposed to act like a virtual accountant, I personally find myself always erring on the side of extreme conservativism when it comes to taking deductions with Turbo Tax.
Sometimes the descriptions are obscure and not well explained so I’d rather not take the risk. The thing I hate about Turbo Tax is that I’m always afraid that I’m leaving money on the table by not taking deductions that I’m entitled to because I don’t understand the deduction thoroughly.
That being said, one of the things that I like about Turbo Tax is that they offer this program called Audit Defense. For an extra $40, an accountant or an account representative will take care of dealing with the IRS for you in the event of an audit.
One of my friends was audited last year and “Audit Defense” took care of everything. In the end, they discovered that he made a typo on his filing that was easily correctable and he didn’t have to pay anything extra.
There was no hassle at all because Audit Defense took care of everything.
The other thing that I like about Turbo Tax is that you get to keep an electronic version of all of the worksheets that can easily be imported into Turbo Tax the following year.
You can also try different scenarios to see what effects certain deductions and filing options have on your bottom line. In other words, you have complete visibility over your taxes and it’s dirt cheap.
Ultimately, Turbo Tax is great for control freaks like myself who like to do everything themselves.
Since I’m a skeptic, I decided to conduct an experiment with our accountant. Even though I paid him $500 to file our taxes, I went ahead and prepared my tax return with Turbo Tax and compared the two to see if there was a difference.
If the accountant saved me more than $425, then it’d be a no brainer to use him again. Here’s what happened.
The Outcome Of Accountant #1
Our accountant fulfilled his promise and delivered our tax return way ahead of the April 15th deadline. The bad news is that our experiences with our first accountant weren’t exactly positive.
Before I continue, I just want to emphasize that the conclusions I’m making in this article should be taken with a grain of salt and are not indicative of accountants in general. There are thousands of CPAs out there and our experiences represent just a single data point.
To provide some context, my wife and I worked with this accountant for over a year to discuss tax strategies prior to using him to file our taxes.
We Got Off On The Wrong Foot
Because our first accountant worked about 40 minutes away by car, it wasn’t very convenient for us to talk face to face or to drop documents off at his office.
Pretty much the only convenient way to send our accountant information was through email or snail mail.
For those of you wondering why we chose an accountant so far away, it’s because he came highly recommended by a coworker of mine.
In any case, since we didn’t want to make the drive up to his office, we decided to scan all of our 1099’s and other tax forms into pdf format and emailed encrypted versions to him for review.
That’s when the trouble started.
Because we emailed him an archive of about a dozen password protected pdf’s, his assistant got fed up because she didn’t feel like opening each pdf up and printing them out. So she called and asked us to mail a physical copy of our tax forms to their office instead.
Personally, I thought this was ridiculous. We wasted more time on the phone than she would have spent printing out the forms. Even though I offered to condense all of the forms into a single pdf, she said that she would have to charge us $200 an hour for her to take the time and print out our pdfs.
Needless to say, this left a bad taste in my mouth from the start. But what could we do? We ended up sending her copies via certified mail, but I was pretty annoyed (mainly by the $200/hr threat).
Our Accountant Was Difficult To Get Ahold Of
Once our accountant received our tax information, things proceeded much more smoothly but what annoyed me was that it was difficult to reach him to ask even the most basic of questions.
Since it was tax season, I understood that he was probably swamped working on many other tax returns outside of ours but it would have been nice to receive quicker responses.
Perhaps it’s because I’m impatient and am used to doing everything on my own, but I like knowing what is going on and I need reassurance that everything is proceeding smoothly.
With our accountant, after dropping off our tax forms, we basically didn’t hear from him again until he was done with our return. Outside of a brief questionnaire in the beginning, there was no feedback loop and no additional questions asked.
The Accountant Made Errors
Not providing us with feedback during the process was all fine and good as long as he did a good job. But as soon as we received our tax return, we immediately noticed some errors thanks to TurboTax.
For one thing, there was a typo and the cost basis for one of our stock transactions was completely off. Granted, it wasn’t a straightforward transaction, but it should have been entered correctly.
To provide some background, the discrepancy was with a stock that I had purchased in several lots which had undergone a reverse split and then finally was acquired by an overseas company.
With Turbo Tax, I simply imported everything in directly from Schwab. But my accountant completely missed one of our buy transactions which resulted in a lower cost basis. In short, even though we took a loss on the stock, his return showed that we had a gain.
The second thing he missed was an energy tax credit provided by the government. Because we recently added insulation and drywall to portions of our house, Turbo Tax said that we were eligible for a 1K tax credit.
However on the return filed by our accountant, this credit was nowhere to be found. Later on when we confronted the accountant, he explained that he could not have possibly known about the work done on our house.
But shouldn’t this question have been covered on the questionnaire? Why did TurboTax ask me the question when he did not?
The final discrepancy that we noticed was that information from one of our 1099’s was not entered at all. We currently leave some of our money in Paypal’s money market fund and there was a minuscule dividend(around 20 bucks) that we were paid during the year.
However, we could not find this amount anywhere in the return.
Most Of The Tax Work Is In The Prep
My wife and I went into all of this thinking that using an accountant was going to save us time in filing our taxes. But instead, we discovered that we had to do most of the prep work.
In fact, we ended up spending many hours collating our business numbers and gathering all of the tax data for the accountant.
One of the reasons we spent extra time was because our accountant wanted our business numbers in a different format than we had them in.
In the end, all of our numbers tied out the same way but massaging them into his format took a good chunk of my wife’s time.
In any case, once all of the data was ready to go, entering all of the numbers into Turbo Tax took hardly any time at all. And this prep work was required whether we used an accountant or not.
Arguably, using our accountant took more time because after finding the initial error, we went through his return line by line to check for additional discrepancies.
The Benefits Of Using Accountant #1
I don’t want to come across as completely negative towards our first accountant because we actually got along really well but we were very disappointed with the results.
That being said, one of the benefits of using an accountant to file our taxes is that we learned the right way to file our LLC paperwork.
One of our motivations for using an accountant in 2010 was that we converted our business to an LLC midway through the year and it was unclear how to indicate this properly in our tax return. Because we used an accountant, we learned how to do this ourselves.
The other benefit is that our accountant helped us perform a more accurate assessment of our estimated tax payments. In the past, I had done a poor job of under paying my taxes which resulted in penalties.
In any case, our first accountant taught us how to file our LLC taxes the right way. As a result, we decided to file on our own returns for the next 6 years until something major occurred in 2016.
We Got Audited By The IRS – Enter Accountant #2
What happened in 2016? We got audited by the IRS and it was terrifying:)
In the grand scheme of things, the dollar amount in question was minuscule and simply paying the penalty would have been a drop in the bucket. But the problem is that if you admit any sort of guilt, then your chances of getting audited again go up exponentially.
Because, we wanted to respond to the audit the correct way on the first try, we decided to consult a tax accountant that was highly recommended by a friend in the ecommerce space.
Accountant #2 was significantly more expensive at $350/hr but they ended up being worth every penny. They helped us fight the audit and we ended up clearing everything up without any penalties.
As a result, we decided to use them to file our tax return that year as well. Once again, my anal retentive nature forced me to run the same numbers using Turbo Tax and compare the results:)
Here’s what happenned.
The Outcome Of Accountant #2
First off, unlike accountant #1, accountant #2 was always available to answer questions throughout the entire process so the tax filing process was a much better experience.
However once again, we found discrepancies in their work vs ours. In other words, they made a pretty big mistake that significantly impacted our return.
Here are the details.
2016 was the first year that I held my conference, The Sellers Summit. And as part of running an event, I spend a lot of money on food and beverage to feed the attendees.
Typically, food and beverage can only be deducted at 50% when you are traveling for business. However in the case of running a large event like a conference, it should be deducted at 100%.
In any case, the accountant only deducted our meals and entertainment at 50% which grossly reduced our deductions.
If we did not run our own numbers with Turbo Tax, we may not have found this discrepancy.
However despite this mistake, accountant #2 did manage to find a few additional deductions that Turbo Tax did not find. In addition, they advised us to open up a SEP IRA which ultimately saved us a ton of cash.
All told, accountant #2 ended up saving us a significant amount of money because of his advice which made it worthwhile overall. However, it was upsetting that they made a careless mistake even though we were paying them $350/hr.
So what conclusions can we draw from my 2 experiences with using an accountant vs Turbo Tax?
- No one cares about your money more than you – Accountants make mistakes and it’s up to you to double check their work. Is it a coincidence that we found discrepancies with both accountants? Maybe. But it pays to be super anal.
- An accountant can’t change the past – Using an accountant is probably not going to save you much money versus Turbo Tax for just filing a tax return. In general, Turbo Tax does a pretty good job of finding deductions.
- Hire an accountant when your tax situation has changed – If you need hand holding throughout the tax filing process, then it makes sense to hire an accountant. For example, accountant #1 helped us learn how to file taxes as a single member LLC
- An accountant can help you improve your future tax situation – The SEP IRA was a great suggestion from accountant #2 that we might not otherwise have considered.
Overall, I don’t think that an accountant makes a huge difference when filing your tax return and Turbo Tax does a pretty good job. In addition, if you are super anal like I am, you’ll end up double checking your accountant regardless which means you probably won’t save that much time either:)
The true value of having an accountant on board is to provide future guidance and answer your tax questions going forward.