Monday, January 28, 2013

The Pros and Cons of Tax Preparation Methods

Tax season is upon us, and now is the time to start thinking about how you will be preparing your returns for the 2012 tax year.  Here are the pros and cons of tax preparation methods. 
  1. Use a Certified Public Accountant (CPA)
    1. Pros – CPAs are the most educated tax preparers out there.  They are the most likely to be up-to-date on this year’s tax code changes and know the circumstances under which you can make the most of deductions.  They are easy to use, will save you time and usually can get you the lowest tax bill possible due to their extensive knowledge.  CPA’s will represent you well in the event of an audit and have experience handling IRS agents.
    2. Cons - Be sure you are comfortable with the CPA’s ethics and style.  You want to develop a good rapport with your CPA and feel confident that he or she has your best interests in mind.  CPAs can sometimes be more expensive than other types of preparers, but you will usually make that cost up in additional deductions they find that others might miss. 
  2. Use an Enrolled Agent (EA)
    1. Pros – Enrolled Agents are well-educated in finance and taxes and are likely to have a good grasp of important changes in the tax codes.  They are simple to use and save you time.  EA’s will usually represent you in case of an audit and likely have experience handling these types of issues.
    2. Cons – You may need to check out an EA’s credentials more carefully to be sure you are comfortable.  While they are a great resource for tax preparation, they will not generally have the in-depth knowledge and training of a CPA.
  3.  Use a “tax preparation store”
    1. Pros – Franchised tax preparation stores tend to be very simple to use, simple to locate, and fairly inexpensive.
    2. Cons – While the preparer is required to complete tax return preparation “education,” you can’t be sure how much experience and knowledge the person working with you has.  The stores are generally open only during tax season.  Consequently, it can be difficult to track down someone who can represent you in case you are audited. 
  4. Use an “off-the-shelf” or online tax software program
    1. Pros – Tax software will identify many of the deductions you should be taking.  It’s also relatively easy to use and fairly inexpensive.
    2. Cons – It takes a fair amount of time to input all the necessary information. Preparing your own return can also be fairly confusing, and you may miss possible deductions as a result.  As your return becomes more complex, it becomes more difficult to effectively utilize do-it-yourself software.  If you are audited, you are responsible for appearing at the audit and substantiating your claims.  This rarely works in your favor. 
Keep these pros and cons in mind when choosing the best method for your individual situation.


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