The Quick Report

How to Choose: Tax Prep Service or Software

Deciding on whether to use a tax professional or to prepare your taxes yourself with software depends on each individual’s situation. Some people have complicated finances, while others are simple. Here’s how to decide.

Tax Software vs. Tax Professionals

Let’s compare the pros and cons of tax software versus a professional tax preparer.

Professional Tax Preparer

Tax preparers come in four basic types: enrolled agents, certified public accountants, tax attorneys, and non-credentialed tax preparers. 

While four of these types can prepare your taxes, only three of these (agents, accountants, attorneys) are allowed to represent their clients to the IRS in matters involving audits, collections, and appeals.

Let’s take a look at each one and what they do.

1. Enrolled Agent (EA)

An EA is a tax preparer approved by the IRS to represent taxpayers. EAs either have prior qualifying employment with the IRS or half past an exam on federal taxation and complete a background check. EAs must complete required continuing education credit hours annually in accounting methods and tax regulations.

An EA is a good option for more complex tax situations. Make sure their area of expertise applies to your situation. Fees and availability may vary but are generally less than a CPA. EAs are qualified in financial planning.

2. Certified Public Accountants (CPA)

CPAs have a college degree and are licensed after passing a state professional qualifying exam. They are the best choice for highly complex tax planning and preparation. Have a college degree (or the equivalent in work experience). 

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CPAs maintain continuing education programs to keep up-to-date with constant changes to tax laws. However, they may charge more than basic tax preparers.

3. Attorneys

Tax attorneys provide specialized advice on legally sheltering income, trusts, municipal bonds, estate planning, and more. They may charge higher fees as tax preparers.

4. Non-credentialed tax preparers

Non-credentialed tax preparers often work part-time or only during the tax season. They must have an active preparer tax identification number (PTIN) through the IRS. Regulation of tax preparers is done at the state level. 

In most states, anyone can prepare tax returns for others without having to take an exam, get a license, or comply with other government regulations. You may want to learn more about your state’s requirements, as well as be on guard against “ghost tax preparers.”

Pros of using a tax preparation service

  • Expert assistance: Qualified tax professionals can handle complex situations, optimize deductions, and minimize your tax liability.
  • Less effort: They take care of everything, minimizing your effort and stress.
  • Error-free filing: Professionals have the knowledge and experience to avoid mistakes.
  • Audit support: Most professional services offer additional support if you are audited.

Cons of using the tax preparation service 

  • Fees: Services can be expensive, ranging from around $50 to several hundred dollars, depending on your tax complexity.
  • Time commitment: You’ll need to gather your documents and meet with the preparer or deliver them digitally.
  • Limited control: You may not have direct control over your return or its filing timeline.

Tax Preparation Software

There are a variety of tax preparation software choices on the market. Some software is free, while others charge various fees. Some software can be installed on your home computer or used online via a website.

For those with simple returns, the IRS offers free tax filing online. H&R Block also offers a “Free Simple Tax Returns eFile.” Intuit TurboTax also offers a “Free Simple eFile with Expert Help.” TaxSlayer offers a $22.95 Classic Plan (Federal).

Pros of using tax preparation software

  • Reduced cost: Some software options are free, and many are significantly less expensive than services.
  • Convenience: You can prepare and file your return at your own pace and on your own schedule.
  • Full control: You’ll have full control over your return and can make necessary changes.
  • Increased learning: Preparing and filing your own taxes will give you valuable knowledge about your taxes for future filings.

Cons of using tax preparation software

  • Complexity and learning curve: Learning how to use the software and the tax rules may be overwhelming for beginners. Tax preparation is complex, and software does not change that fact.
  • Error risk: You are responsible for any mistakes on your tax return. This could lead to penalties or audits.
  • Limited support: Some software offers basic help but may not be as comprehensive as a professional’s. However, some tax software, such as “TurboTax audit defense,” will provide full representation for an additional fee.
  • Preparing complex returns: Software might not be suitable for complex tax situations, especially those involving self-employment, investments, or rental properties.

Questions to ask yourself before choosing a tax preparer or using software

Here are some basic guidelines to help you consider whether you need a tax preparation professional or may be able to prepare your taxes with software.

1. What is your tax complexity?

Complex: If you run a small business, are an independent contractor/self-employed, itemize deductions, or have a lot of investments – you’re likely to have a more complex tax situation. If that’s the case, you’ll require a professional. Tax laws change constantly, and allowable deductions come and go.

Straightforward: If you are an employee and only work for one employer, your tax situation is more likely to be straightforward. This also applies to couples filing jointly, each having a single employer. Software may work for you if you aren’t claiming too many deductions or the total amount of your deductions doesn’t exceed the standard allowance (meaning your deductions are a wash).

2. How tech-savvy and tax-knowledgeable are you?

The last thing you want to do is cheat yourself out of legal deductions because you don’t understand what you’re entitled to. Those who are familiar with all the ins and outs of a tax return are better equipped to file their own taxes with software.

Secondly, tech-savvy people are less likely to struggle with the learning curve of using tax software. Otherwise, using tax software could be a struggle for those who aren’t good with technology in general.

Choosing the right preparer

Use common sense precautions when choosing a tax preparer. Make sure to take the following steps to ensure your tax preparer is competent and trustworthy.

  • Get referrals from family, friends, and colleagues.
  • Check online reviews and check the BBB for complaints.
  • Review the tax preparer’s credentials. Depending on your tax situation, you may want to be sure your preparer is someone who can represent you to the IRS if need be. Only enrolled agents, certified public accountants, and attorneys are allowed to represent their clients to the IRS
  • Be wary of inflated claims. Watch out for promises such as “larger refunds than competitors.”
  • Consider availability. Ensure the preparer isn’t too busy to complete your taxes on time. Do you want a preparer you can contact all year long?
  • Consider the fees before choosing. Ensure you understand what the preparer charges and the final fee might be.