The Early Show

When To Hire A Pro To Do Your Taxes

February 5, 2009 / 12:47 PM EST / CBS

While you may want to forget about your taxes until April, that's almost impossible if you're a regular TV watcher: The airwaves have been flooded with commercials for various tax services. But should you use a professional company or individual to prepare yours? Is it worth it? When is it strongly advised? If you do, how much should you pay and how do you find one you can trust? The Early Show's money maven, Ray Martin, provides in-depth answers to those questions, and more, in this column.

For a lot of people, preparing and filing their own taxes is confusing, time-consuming and loaded with potential problems.

Living proof of that is newly-confirmed Treasury Secretary Timothy Geithner. He endured a hailstorm of criticism when lawmakers learned he had underpaid more than $34,000 in taxes. Geithner says he did his taxes himself using TurboTax to prepare his taxes in years 2000 through 2002, and again in 2005.

Geithner, the former head of the New Your Federal Reserve Bank, was nominated by President Obama to head up the U.S. Treasury Department which, ironically, oversees the Internal Revenue Service, because of his extensive knowledge of and experience in financial and tax matters.

So, how could someone with this experience make mistakes on his tax returns, even when he used a tax preparation computer program? Apparently, he got tripped up because he failed to pay self-employment taxes on the income he earned while he working at the International Monetary Fund - an error he blamed on his "careless mistakes" and not the tax software. Maybe he would have been better served had he hired a professional to do his taxes.

Do it Yourself or Hire a Tax Pro?

The IRS estimates that about half of all tax returns are prepared by a tax professional.

The most common reasons individuals cite for using a professional tax preparer are not having the time, willingness or ability to prepare their own. With times as tight as they are today, a lot of folks may be tempted to try to save a few bucks, forgoing the tax preparer's fees, and prepare and file their own tax return.

But that may be penny wise and pound foolish.

Examples Of When To Consider Turning To A Professional Tax Preparer For Help:

Short Sale: If you sold a home through a short sale last year -- a transaction in which the lender allowed you to sell the home for less than the mortgage balance and cancel the remainder of the debt -- you will need to report the sale. A temporary tax law effective for such sales from 2007 through 2010 allows individuals in this situation to avoid reporting as income the amount of the debt that was cancelled. A tax pro can help to ensure you report this properly.

Rental Income: Many homeowners who cannot sell their homes have turned to renting their house, in the hope of waiting out the decline in home prices and selling later, when the market improves. If you've received rental income, you'll need to report it on Schedule E, Supplemental Income or Loss (from rental real estate, etc). The rules for rental property deductions are complicated, especially when you lived in the house part of the year and rented it out for the remainder. To be deductible, some expenses must be apportioned over the rental period and other expenses -- such as repairs -- need to be classified as repairs or capital improvements, which affects how they can be deducted.

Recovery Rebate Credit: Last year, the government issued the "recovery rebate credit," checks that totaled $600 per person, or $1200 for couples, or more. While eligibility for receiving the rebate check is based on your 2008 income tax return, since this was done last year, Congress based the initial round of checks on 2007 tax returns as a way to get the money into the hands of folks more quickly. Since the rebate was really a credit against your 2008 taxes, many folks who did not receive a rebate check in 2008 may be able to claim it when they file their 2008 tax returns. If, in 2008, you lost your job and will report lower income, had a child, graduated college and were no longer claimed as a dependent, or are a retiree who did not file a 2007 tax return, then you may be eligible to claim an additional "recovery rebate credit" on your 2008 taxes. See an experienced tax pro to help you figure this out.

Self Employed Income: If you are self employed, there are a lot of tax deductions and complicated tax issues to consider. While you can deduct business-related expenses, this is an area in which a lot of folks are likely to go too far, and the IRS is on the lookout for that. Also, computing and reporting the correct amount of self-employment taxes is tricky - just ask Mr. Geithner!. A tax pro with experience in reporting self-employment income and the unique and legitimate tax strategies of your specific work or situation can also help you maximize your tax savings.

Investment Sales: If you report sales of stocks or mutual funds in non-retirement accounts, you'll have to compute the capital gains or losses from the sales. You'll need to complete Schedule D - Capital Gains and Losses. But to calculate your gains or losses, you'll need to figure out your cost basis, which includes what you originally paid plus any reinvested dividends. And if you sold shares of stocks or mutual funds you've owned for a long time, then you may have a hard time doing that, especially if you cannot locate all your records. A tax pro with experience in reporting investment income can help track down the information you need, or come up with a good faith estimate that the IRS will accept.

Tax Preparer Responsibilities

There are no studies that suggest that tax professionals get bigger refunds for their clients. Having a tax professional prepare your taxes is no guarantee that you'll file an error-free return. In 2006, the Government Accountability Office had tax returns prepared at 19 outlets of tax preparation chains and they found mistakes in all of them.

But there are strong incentives for tax preparers to accurately complete your returns. An income tax preparer can be subject to civil penalties and barred from practice for knowingly preparing returns or claims for refunds that understate your tax liability or overstate the refund based on unrealistic information. While preparers are not required to review all of your tax documents or statements to independently verify your information, they must make reasonable inquiries if what you gave them appears to be incorrect or incomplete, relative to the deductions you intend to claim.

Having a preparer's signature at the bottom of your return doesn't mean it has more credence with the IRS. But it should give you comfort to know that a signing preparer generally is viewed under the regulations governing tax preparers to have overall authority over the accuracy of the client's tax return and, as a result, could be subject to penalties for taking unreasonable positions on deductions, etc.

What You'll Need

Whether you'll prepare your own return or seek the help of a professional, the first thing you need to do is to get your tax information organized. Gather any and all records that you will need:

Last year's income tax returns

Checkbook register, checking account and credit card statements

Canceled checks

Pay stubs and W-2s

1099s, brokerage and investment account statements

Year-end mortgage statements

Property tax receipts

Receipts from expenses that may be deductible

Financial and investment property records

Use A Tax Pro To Back Up Your Work

A lot of folks are tempted to save on a tax pro's fee by "following last year's forms" to prepare this year's tax return. I don't recommend doing that but, if you do, at least hire a tax pro to look over what you did to determine if you prepared your return correctly and are using all of the forms you might need to file. According to H&R Block's "Second Look" service, they'll offer to review your 2008, 2007 and 2006 tax returns - regardless of who prepared them - for accuracy and to ensure you have claimed all eligible credits and deductions. Their fee for this service is $29 per return. They claim to have found errors on four-out-of-five 2007 returns they reviewed for folks who took them up on the offer.

Finding A Tax Preparer

Tax preparation professionals can offer a variety of services beyond completing your return. They can be more familiar with the tax saving strategies unique to your situation or profession. They can help you organize and plan for next year's taxes by suggesting what records to keep and what financial moves to make this year that can lower your 2009 tax liability. They can also help you determine if you are required to pay estimated taxes each quarter and calculate what to pay and file each quarter. The bottom line is to make sure the preparer you choose to work with offers the services you need.

The IRS does not require tax preparers to have a license or certification to prepare someone's tax return for pay. Only a few states require a formal license to provide this service to the public. It's recommended that you seek a tax pro who is an Enrolled Agent, Certified Public Accountant, or a Tax Attorney. These preparers have passed extensive examinations on tax matters, must stay current by meeting continuing professional education requirements, and are qualified to represent you if your return is audited. There are several associations and affiliations, such as the National Association of Tax Professionals, that encourage tax practitioners to obtain designations and adhere to professional standards of practice.

Asking family, friends and co-workers about whom they use is the most common advice given for seeking out a tax preparer. Also, search for a tax preparer near you through trade organizations such as the National Association of Tax Professionals and read their online brochure, "Finding the Right Tax Preparer." Ask for references and check them. You should interview a tax preparer before you hire him or her.

How Much And How To Pay

The cost of your return will vary depending on the complexity and completeness of your information. Being well-organized and having excellent records is a common reason for discounting fees by tax preparers.

Preparers charge in a variety of ways. Some use a set fee for each form and schedule, others use a fee based on the prior year's cost adjusted for changes in the client's situation, and others use a formula of billable hours based on the IRS guidelines for time estimated to complete certain forms. Others charge a flat fee per return, and still others charge for actual time spent to prepare your return and provide other services. The best way to proceed is to present all of your information and get a firm estimate before you agree to go forward, especially if this is the first time you are working with this person.

A fee arrangement to avoid is where a tax preparer bases their fee on a percentage of your refund. Also, when the tax preparer is employed by a chain that bases its pay on the number of returns they prepare, this should raise a concern about the incentive to produce a high volume of returns, which could compromise the quality of their work.