Hiring a Tax Professional Versus DIY’ing With TurboTax

Posted 04/15/2020

In normal times, early April means hunting down your W-2 and other forms, and slogging through TurboTax. Because of the COVID-19 crisis, however, you have an extra three months to file your taxes. You now have until July 15, 2020 to file your taxes with the IRS and your state. California is one of 43 states that have income tax; only Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have no income tax.

Take advantage of this tax breather to decide whether to continue DIY’ing with TurboTax. In this article, you’ll learn:

When TurboTax is sufficient.
When it’s worth paying a tax professional (spoiler alert: having equity compensation like stock options, RSUs, and ESPP.
The services that tax professionals provide.
How to find a tax professional.

When TurboTax is Sufficient

For people who have straightforward tax situations, TurboTax and other DIY software work well. An example of a straightforward tax situation is if you only have one job at a company that pays you a regular paycheck, an annual bonus, interest income from your savings accounts, and dividend/interest income from a brokerage (non-retirement) account.

Prospective clients have asked whether home ownership is a reason to hire a tax professional. I don’t think you need a tax professional as long as you’re careful about these key forms:

Mortgage interest statement from the bank (Form 1098)
Property tax statement (this number may be on your mortgage interest statement, Form 1098)

You can itemize mortgage interest. And property taxes can be itemized, subject to the $10,000 cap on state and local taxes (“SALT” deduction).

Three Reasons to Consider Hiring a Tax Professional

You Have Equity Compensation: Stock Options, RSUs, ESPP

It’s unfortunately easy to overpay taxes if you sell stocks from your stock compensation. Your stock plan administrator sends you a Form 1099-B in mid-February. This form includes the number of shares sold, your proceeds, and something called cost basis.

Cost basis usually refers to your original “purchase price”. If you buy a stock for $50 per share, your cost basis is $50. And if you later sell at $75 per share, your capital gain = $25.

Cost basis for stock options, RSUs, and ESPP isn’t as simple. The Form 1099-B includes cost basis data. You’d think that you could simply copy the cost basis data from this form into TurboTax. HOWEVER, the Form 1099-B often has the wrong cost basis!

This isn’t the fault of stock plan administrator (Schwab, E*Trade, Shareworks, etc). The IRS has bizarre rules about what these brokerage firms can and cannot report in the Form 1099-B. These bizarre rules could lead you to enter cost basis that’s too low, and lead you to overpay taxes.

A skilled tax professional with experience in stock compensation will know how to report the correct cost basis in your tax return. This will ensure you’re paying the correct tax bill, and not a penny more.

You Have a History of Filing Your Taxes Late, Leading to Interest and Penalties

When you owe taxes and miss the deadline, the IRS will charge interest on any unpaid balance, plus two penalties:

Failure-to-file penalty
Failure-to-pay penalty

And your state will have its own set of rules on interest and penalties.

In case you’re not up to date on filing tax returns from previous years, hiring a tax professional can help you calculate the interest and penalties. They’ve helped MANY clients in this situation, and you absolutely shouldn’t feel embarrassed about reaching out for help.

And if you’re in a situation where you can’t pay taxes owed, not to worry. They can advise you on setting up payment plans with the IRS and state tax authority (here’s the California Franchise Tax Board).

A tax professional will help you avoid this problem in the future. Tax firms send tax organizers in December or January to help you get a head start on gathering forms, and they will politely follow up and keep you on track.

You Have a History of Receiving IRS Notices

I’ve seen many clients make honest mistakes on their tax returns. For example, they forgot to download a 1099 from a bank or brokerage. This led them to inadvertently omit interest and investment income. The IRS and your state will catch this because financial institutions send reports directly to tax authorities.

New clients contact me in a panic when they receive letters from the IRS and California FTB. I assure them that they simply need to pay taxes and interest/penalties owed as outlined in the letter.

A tax professional can help you avoid omitting income. They always request your prior year’s return to compare to this year’s return. This helps them identify bank or brokerage investment income that was omitted accidentally. They can help you get a head start on gathering forms rather than procrastinating until April 14th, reducing the risk that you forgot a form during the last-minute frenzy.

What Services Do Tax Professionals Provide?

Tax professionals provide two services:

Backward-looking: tax return preparation
Forward-looking: tax projections

The first service is widely available. Every spring, tax professionals are diligently gathering clients’ documents (W-2s, 1099s, etc), and preparing tax returns before the April 15^th deadline (July 15th in 2020). “Backward-looking” means there isn’t much the tax professional can do to reduce last year’s taxes. I offer tax return preparation services to clients who aren’t working with a tax professional.

The second service is far more valuable, but not as commonly offered. Let’s say it’s April 1st. You have nine months left in the year to plan. For example, you can learn the tax cost before you exercise stock options. This helps you make an informed decision about whether you should exercise.

I run tax projections for my clients to help answer questions like:

What else can I do to save on taxes besides contributing to my 401(k)?
Am I withholding enough taxes from my paycheck?
How are my RSUs, stock options, and/or ESPP taxed?
What’s the tax impact of exercising my stock options this year?
I got a large RSU grant/job promotion/significant cash bonus. What does this mean for my taxes?
How can I avoid a surprise tax bill next April?
How much will I owe in taxes if I sell some/all of my company stock?
If I’m better off itemizing, did I miss deductions?
What’s the tax impact of my company going public?

Can a Tax Professional Help With My Investments or Financial Planning Questions?

Probably not, unless they also have the CFP (Certified Financial Planner) or PFS (Personal Financial Specialist) designation.

Can a Financial Planner or Investment Adviser Help With Taxes?

Probably not, unless they also have the CPA (Certified Public Accountant) or EA (Enrolled Agent) license, they offer tax planning as a core service (see “One-Stop Shop), or they partner with a CPA or EA (see the “Vetting Tax Professionals” section below).

One-Stop Shop: Taxes, Investments, and Comprehensive Financial Planning

The traditional tax professional will prepare your tax return. But they will not answer investment questions such as, “What should I do with the cash if I sell my company stock?”

The traditional investment advisor can help you figure out an investment strategy balancing risk and reward, but they can’t or won’t give tax advice.

The best-case scenario (which unfortunately is rare) is to find a professional advisor who is competent in taxes, investments, AND comprehensive financial planning. I believe this ideal person has the:

Certified Financial Planner (CFP) designation
CPA or EA license (see the next section), has deep experience with tax planning as a core service, and/or they partner with a CPA/EA to complement their investment and financial planning skills

This person can address questions from all angles:

Should I sell some/all of my company stock? I’m worried about a giant tax bill, but I’m also worried about concentration risk.
If I sell my company stock, what should I do with the resulting cash?
Should I exercise my stock options this year?
What should I do with future RSU and stock option grants as they vest?
Am I on track to meet my goals?

I offer this one-stop shop service for my clients.

How to Vet Tax Professionals

CPA or EA

Focus on these two designations:

CPA: Certified Public Accountant. CPAs must pass four exams, amongst other rigorous requirements. You need a CPA who focuses on taxes. It may be odd to read this because most people think CPA = taxes. In reality, of the CPA’s four exams, only one covers taxes. The other three exams will be of limited use to you as a client: financial accounting, business law and economics, and financial statement auditing.
EA: Enrolled Agent. This license is administered by the IRS. It consists of three rigorous exams. All three exams focus on taxes only.

Both CPAs and EAs can represent you on any matters including audits, payment/collection issues, and appeals.

Tax Attorneys

A third category is tax attorneys: lawyers who specialize in tax law. In addition to the JD, they sometimes have a Masters of Law in Taxation. A tax attorney makes sense if you need help with the legal implications of your tax situation. A tax attorney probably won’t prepare tax returns, and they will be less focused on finding ways to save on taxes.

IRS and California Requirements for Tax Preparers

The IRS doesn’t require tax preparers to have either the CPA or EA. Instead, the IRS only requires tax preparers to have an “IRS Preparer Tax Identification Number” (PTIN). This is a short application that verifies you weren’t convicted of prior felonies, and that you’re up to date on your personal tax returns. That’s it. There are no education, experience, or exam requirements.

PTIN holders have limited “practice rights”. They can only represent clients whose returns they prepared and signed, and they can only represent those clients to a subset of IRS employees. They can’t represent clients regarding appeals or collection issues even if they did prepare the tax return.

If you’re a California resident, California law requires tax preparers who meet the following two criteria to have the CRTP designation, which means they register as a tax preparer with California Tax Education Council (CTEC):

Prepares (or assists with) tax returns for a fee.
They aren’t an attorney, CPA, or EA.

CRTP stands for “CTEC Registered Tax Preparer”.

How Much Will it Cost?

Tax return prep: buy TurboTax for about $50, or pay $300-$800 to a CPA/EA.
Tax projections (sometimes advertised as “tax consulting”): hire a CPA or EA for $400/hour.
If you want help with your total financial picture, find a one-stop shop (the “best-case scenario” described above). Ask the professional about how they handle taxes (do they run tax projections and/or prepare tax returns?), investments, and comprehensive financial planning.

When to Get Professional Help

For tax return preparation, don’t wait until right before the April 15^th deadline (July 15^th in 2020). Although it isn’t impossible to find a CPA or EA to prepare your taxes, many tax professionals will stop accepting new clients as the deadline approaches.

In terms of tax planning (i.e. getting a tax projection), find a professional before you make an important decision.

Have questions about your specific situation? Schedule a free consultation.

Jane Yoo

Jane Yoo, CFP®, MBA, is an Oakland, CA fee-only financial advisor. Jane Financial provides comprehensive financial planning and investment management to Superstar Women in Tech who need help with their stock options and RSUs. The typical Jane Financial client is a high-performing Gen X or Millennial woman whose company has an imminent or recent IPO. Jane Yoo serves the wider Bay Area, including San Francisco, San Jose, and Berkeley. As a fee-only, fiduciary, and independent financial advisor, Jane Yoo is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.