For a lot of military households, tax preparation is simple, straightforward, and free. Every year, just collect the paperwork and head down to the VITA (Volunteer Income Tax Assistance) office, and the staff can help you do your taxes. Or, if you’d rather do it on your own, you can either use a software provider such as TurboTax, or go to the IRS FreeFile website. The IRS also has a link to find free state filing options, based upon certain eligibility criteria.
However, you often get what you pay for. Over the course of your military career, you might find yourself in situations where the free offerings no longer make sense. If you find yourself in that situation, you may want to consider hiring an accountant or other tax professional.
In this guide, we discuss the following tips:
- 3 Reasons to Consider Hiring a Tax Professional
- Different Tax Services and Types of Tax Professionals
- Questions To Ask a Tax Professional
- How to Decide Which Tax Pro to Hire
3 Reasons To Consider Hiring a Tax Professional
Below are three types of situations in which you may want to hire your own tax professional
Tax Professional Reason Number 1: Your situation has become more complicated.
Over the course of a military career, you can expect many things to progress. Rank, household size, and income are three things that generally grow over the course of a 20+ year career. With that progression comes a certain complexity.
That complexity comes at us a little at a time. Getting married, buying a home, having a kid—those are all examples of the slow and steady way that our life becomes more complicated. Before you know it, you’re dealing with a lot of stress…we’ve all been there. A tough deployment, an extended TDY, or unexpected PCS—sometimes, you feel like you’re barely holding it all together.
Then, at tax season, you’re expecting to plug away all this stuff into TurboTax and get it 100% right? Usually, we’re looking at taxes as another ‘to-do’ or ‘honey-do’ list item that we’ve got to check off before we move on to the next thing. When it comes to calculating our tax liability (and subsequent refund/taxes owed amount), is this the right way to proceed?
If you knew the difference between properly calculated tax return (with all the deductions & credits you’re entitled to) and what you usually do, you’d probably take the time to ensure they’re calculated correctly. However, if you’re so busy that you don’t know what you don’t know (in the infamous words of Donald Rumsfeld), you might be overlooking a lot of opportunities without realizing it.
Conversely, if you’re improperly calculating taxes that you OWE the IRS, don’t worry. They can help you make sure that you pay the proper amount and remit what you owe (plus interest). But if your situation has gotten complicated, you might want to have your taxes professionally done so you don’t leave money on the table.
Tax Professional Reason Number 2: You have significant events on the horizon.
Sometimes, you’re going to do something that’s financially significant. Whether it’s selling some of your investments, liquidating retirement savings, or retiring from the military…these are all events that have tax implications. Some of these events can be done in a tax-efficient manner or a tax-inefficient manner. Before doing anything, it might be worthwhile to discuss your options with a tax professional or a fee-only financial planner so that you end up with as much after-tax money as possible.
On the flip side, sometimes you’re going to make a decision, pay the taxes, and move on. In that case, you want to make sure you accurately calculate your tax liability so you can budget for it, pay it, and not have to worry about the IRS knocking on your door.
For example, most people want to buy a home. In the military, many people who buy a home either sell it or rent it out due to PCS. Once that house becomes a rental, you’ll have to calculate Section 1250 depreciation, which is deductible against rental income, but recaptured when you sell it. When you sell your rental, calculating your tax liability by yourself is a tedious, confusing task. When selling that rental, should always hire a tax professional to ensure that you have the correct tax liability calculation.
Other major circumstances in which you may want to consider hiring a professional include:
- Working with trust assets (such as an inheritance)
- When you’re managing other people’s property & money (such as dealing with elder care)
- Working with people who have special needs
- Having a business (even if it’s a sole proprietorship)
- Selling or liquidating assets (such as retirement accounts, 529 plans or after-tax investments)
Tax Professional Reason Number 3: You want a second set of eyes to help you understand your financial picture.
Perhaps you’re doing just well on your own. You might feel that your situation doesn’t warrant assistance, and that you’ve got a handle on your entitlements. If that’s the case, keep on truckin’!
However, you might have that little bit of doubt in the back of your head…Am I doing this right? But how do I know? Even if you’re pretty sure about taxes, it might not hurt to have a second opinion. If you do, one of two things will happen:
- You’ll be right. If that’s the case, then you’ve bought yourself some peace of mind. Even then, you might pick up a piece of tax advice based upon your situation.
- You’ll be wrong. If you’re wrong, here’s your chance to either save some money, or to save some peace of mind with the IRS. You can also go back (up to 3 years) to see if filing an amended return is in order. Odds are, you won’t be completely off. However, tax calculations are complicated enough so that even one adjustment or one new piece of information will change an entire tax return. Having a professional set of eyes looking at your finances could mean a huge difference.
Different Professional Tax Services & Types of Tax Professionals
So, where do you go for tax help? You can choose between tax preparers, national tax franchises, independent tax firms, CPAs, enrolled agents, and tax attorneys, for example. Here’s an overview of each type of tax professional, so you can determine which one may be best for your situation:
Should You Use a Tax Preparer?
A tax preparer is someone who’s willing to help you complete your tax return for a fee. Anyone can run an ad or print a business card and call themselves a tax preparer. They may or may not have any specialized tax education or experience. So it’s critical that you make sure someone who claims to be a tax preparer is truly qualified or comes highly recommended. Never work with an unknown tax preparer if your tax situation is at all complex due to ownership of a small business, rental property, investments in the stock market, or working outside of the U.S., for example.
Should You Use a Tax Franchise?
The national tax franchises–such as H&R Block or Jackson Hewitt–have thousands of offices in the U.S. They employ tax professionals with varying levels of education and experience. Here’s a tip for working with a tax franchise: Always request to work with the most senior tax preparer in their office. It won’t cost you any more, but should result in you getting to work with a more seasoned professional. If your tax circumstances are somewhat complicated, be sure to ask if they can provide the specialization that you need.
Should You Use an Independent Tax Firm?
Independent tax firms are locally owned accounting businesses that work with individuals and companies. They usually have accountants on staff with a range of tax specialization and experience. If you have a fairly complex tax situation, a local firm may be your best option. In my experience, independent firms can get to know your individual needs and offer a high level of consulting and customer service.
Should You Use a CPA?
Certified public accountants, or CPAs, are professional accountants licensed by the state where they work. They must pass a rigorous exam and usually go on to specialize in a certain area such as business consulting or corporate accounting. They can even represent you before the IRS; but not all CPAs handle tax issues. The American Institute of Certified Public Accountants website at aicpa.org has more information about this profession. You may find CPAs that specialize in taxes at a tax franchise office or at an independent firm.
Should You Use an Enrolled Agent?
Enrolled agents are another type of licensed tax professional. Like CPAs and attorneys, they can represent taxpayers before the IRS in the event of an audit or dispute. They must pass a rigorous exam and are qualified to prepare tax returns for individuals and businesses. They must complete continuing education and adhere to a code of professional conduct. They may work for a tax franchise office or an independent tax firm. You can learn more at naea.org, the website for the National Association of Enrolled Agents.
Should You Use a Tax Attorney?
Tax attorneys are lawyers who have chosen to work exclusively in tax law. They’ve been admitted to their state bar by passing a licensing exam. Tax attorneys are needed for complex legal matters such as disputes that go before the U.S. Tax Court. In special cases they may prepare or assist with extremely complicated tax returns for businesses or individuals.
Questions To Ask a Tax Professional
Before you enlist the services of a tax pro, be sure you fully understand how qualified they are to handle your specific needs. Here are eight basic questions you should ask to get to know the company and your preparer’s level of experience:
- How long have you or your firm prepared tax returns for clients?
- Who would actually be preparing my tax return?
- What licenses and experience would my tax preparer have?
- How do you charge for your services?
- Do you specialize in any certain tax issues?
- When could I expect to have my tax return completed?
- What’s your policy for doing return amendments if changes or corrections are needed in the future?
- How do you help me if I’m questioned or audited by the IRS?
If a tax preparer won’t sufficiently answer your questions, keep searching for one that makes you feel comfortable. The best tax professionals should also ask you questions to determine if you’re qualified for specific deductions and tax credits to lower your tax bill.
The fee you pay for professional tax help usually depends on the complexity of your return. Some professionals charge by the number of tax forms you require, some charge by the hour, and some bill a flat fee. The bill for one of my tax returns for a simple LLC with a single rental property has been as high as $875 with a large firm and as little as $200 with a local CPA–so don’t be afraid to shop around!
Here are some red flags to watch out for:
- a firm or individual who wants to charge you based on how much refund you’ll receive
- being asked to sign a blank tax return form
- a recommendation that your tax refund be sent somewhere besides directly to your bank account
- a promise of an immediate tax refund – this tax refund schedule should give you a decent idea of when to expect tax refunds.
How to Do a Background Check on a Tax Preparer
After your interview with a potential tax professional, you can do a background check to verify their licensing status and uncover any disciplinary action taken against them. Your state’s board of accountancy will provide information about CPAs. The IRS list of disciplinary actions reveals suspensions, disbarments, and censure taken against CPAs, enrolled agents, and attorneys. And the American Bar Association offers a directory of lawyer disciplinary agencies by state.
How to Choose a Tax Professional
You probably know that you have until April 15 to file taxes most years (unless you qualify for a tax extension from a deployment or other situation). If you haven’t started, now’s the time to begin gathering your information and to decide who’s going to do your taxes. If your tax return is not complicated, a qualified tax preparer or tax franchise office may be a fast and inexpensive option for you. But if your tax return has any degree of complexity, they may not have the expertise to maximize potential deductions. Use a CPA or an enrolled agent to manage a complicated situation and help lower your tax liability.
Always consider whether anyone who prepares your tax return will be in business in the future if you need their help to explain information on your return to the IRS. Whether you choose to prepare your own return or hire someone to do it for you, remember that the person ultimately responsible for its accuracy is you! When you sign or submit your return, you are responsible for the accuracy of the information. That’s the law—even when the return is prepared by someone else or with the help of tax software.
Most people are able to do their own taxes and carry on with their lives. However, the more complexity your life has, the more complicated your tax situation becomes. Eventually, you may reach the point where hiring a tax professional can be worth more than the cost of their services.