Can You Do Your Own Taxes, or Do You Need to Hire a CPA?

As your tax documents start to arrive in January, you might start to wonder: Do I need expert help to file my taxes? Regardless of how savvy you are financially, the arcane structures of the tax code can leave you feeling overwhelmed and doubting yourself.

“The complexity of a tax return has grown exponentially over the last 30 or so years, starting with the 1986 Tax Act under Ronald Reagan—it has become much more complicated,” says Daniel Rahill, an Illinois-based Certified Public Accountant (CPA).

So, do it yourself or bring in a professional? It really depends on your personal financial situation and how complicated it is. Let’s take a look.

There are plenty of scenarios where filing your own taxes is probably just fine. If this sounds like you, you can likely handle it on your own:

• Your income is all reported on a W-2

• You don’t have a side gig

• You take the standard deduction

• You don’t own a home

• You don’t have any significant assets outside of retirement accounts

• You don’t have any dependents

• You haven’t had any big life changes in the past year[1]

“Who can be trusted to do their own return? I believe somebody with a W-2 with minimal capital gains and losses could do it,” says Rahill. “The question really is: Are you catching all of the deductions that you’re qualified for by allowing software to crunch the numbers?”

Meet the Expert

Besides being a CPA, Daniel Rahill is the managing director of Chicago-based Wintrust Wealth Management. Previously, he served as a tax partner with KPMG and practiced law in Chicago, specializing in tax and estate planning.

If you’re taking the standard deduction rather than itemizing and your financial world overall is pretty simple, doing your own taxes will likely be as straightforward as entering the right numbers in the right boxes and e-filing. Just make sure you keep copies of all your records.

Tip

If you meet the annual income requirements (currently an adjusted gross income of $73,000 or less), you can file for free with the IRS’s FreeFile program.

Of course, even with the most simple tax return, you might have a few questions even if they don’t rise to the level of hiring a tax pro. The IRS FreeFile program offers answers for simple questions at no charge.[2]

There are a variety of scenarios where calling a tax professional is a smart idea. These are just some of the most common reasons you should hire a tax professional:

• You own a business or run a side hustle

• You have to file in multiple states

• You itemize deductions rather than taking the standard deduction

• You own a home or other property

• You have dependents

• You have significant assets and/or investments besides retirement accounts

• Your situation has changed dramatically in the past year, perhaps because of marriage, home ownership, parenthood, having a parent or adult child move in, starting a freelance gig on the side or making way more money than you did the year before[1,3]

To illustrate just how quickly things get complicated, Rahill recommends looking over President Joe Biden’s latest tax return.[4] “We could spend all day going into the nuances, but let’s just look at the first page,” he says. “Right there, you run into some complexity as to who can be claimed as a dependent—for example, an elderly parent. A lot of people, if they’re a caregiver for an elderly parent or have a child back from college and living in the basement, can claim a dependent, but you might not know that if you’re not talking to a tax professional. So just on page one I see questions a tax preparer could ask that could be a savings opportunity for a taxpayer.”

It’s not necessarily about the fact that you might make a horrible error—though that certainly can happen, especially with a complex return and a constantly evolving tax code—but more that you may be missing out on ways to save money.

“When you use basic tax software, you pay $60 or $80 and it runs the calculations for you,” Rahill says. “But the more important thing is getting the input correct and making the decisions of what is and isn’t included in the return. It can become so complex that I would recommend talking to a CPA or a very knowledgeable financial planner.”

With so much information available online and so many tax filing services offering an easy, streamlined experience at a low cost, why spring for a professional? Rahill says that no matter how money smart you are, you simply don’t have the same familiarity with IRS rules—such as Rule 72(t)—and the things that could trigger an audit.

“A tax professional spends 2,000 hours a year working with these rules and doing planning while an individual who is not in the profession may spend five hours a year,” he says.

Fun Fact

A third of Americans say they actually like doing their own income taxes![6] Those who enjoy doing their taxes said refunds are their main motivation, while those who don’t like doing their own taxes cited the amount of complicated paperwork.

Avoiding a penalty or audit from the IRS is just one of the benefits of hiring an expert. Tax professionals can also save you money by maximizing your tax savings and helping you make smart long-term financial decisions. “Preparing the return and compliance with IRS standards is just step one,” says Rahill. “Step two is the planning and the savings opportunities.”

A 2020 survey from the National Society of Accountants found that the average fee for an individual tax return was $220 for returns with a standard deduction and $323 for returns with itemized deductions.[5] An expert that finds some savvy savings opportunities could quickly pay for themselves.

They can also pay for themselves by helping you avoid an IRS audit. In 2017, you had a 1 in 184 chance of being audited by the IRS, and 90% of individual audits resulted in the taxpayer ending up with a different tax bill than they had planned on.[7]

And that’s without penalties. If the IRS finds that you were inaccurate, they may penalize you by adding an additional 20% of your total tax bill to the tab.[7] Since the IRS has raised the cost of their accuracy penalties by 854% since 2005, making a mistake on your taxes is potentially very expensive.[7] Even if a tax expert isn’t cheap, their help can save you a lot of time and money while keeping you out of hot water.

If you’re now convinced you need professional help, it’s time to find the right expert. Tax scams abound, and you should be careful to find a reputable and qualified professional.

When seeking out an expert, you want to look for someone with “unlimited representation rights.” This means they have the credentials needed to represent you in an audit, an appeal or for any collection issues.[8] There are three kinds of professionals with unlimited representation rights:

• Certified Public Accountants: CPAs are licensed by state boards and have to pass a challenging four-part exam. They also have to meet high ethical standards and continue to take professional courses to keep the CPA designation.

• Enrolled agents: These are tax pros licensed by the IRS. They have to pass a three-part exam, a suitability check and continue to take professional courses throughout their career.

• Attorneys: Licensed lawyers can also be tax experts—many lawyers specialize in tax planning. Like CPAs, they have to pass the bar, meet professional character standards and continue to take professional courses.[8]

You should carefully vet a tax professional before handing over any details. Scammers might masquerade as an intimidating IRS agent—or “ghost” tax preparer— to lure you into handing over valuable information or steal your tax refund. [9]

Tip

Use online registries to check that the expert you’re looking to hire is qualified. CPAverify will let you search to see if a CPA is licensed, while your state bar association does the same for the legal profession. The IRS keeps a listing of all of its active enrolled agents as well.

While you shouldn’t skimp on a tax preparer, if money is an issue, you may be able to get free help with your taxes via the IRS. If you make $58,000 or less, have a disability or speak limited English, seek help through the IRS’s Volunteer Income Tax Assistance.[10] If you’re 60 or older, you can take advantage of the IRS’s Tax Counseling for the Elderly program.[10] Many nonprofits also offer free tax clinics during tax time—take a look at your local organizations to see if you qualify.

Taxes can be daunting, and if you feel out of your depth, help from a tax pro might be the answer. If you decide to hire an expert, make sure they’re a reputable and qualified one—then sit back and relax and let them do the work.