It is tax return season again and the question always arises whether you should file your own tax return or hire an accountant to prepare your taxes? There are no absolute answers just contextual ones so think about the following this tax season.

There is always a cost of preparing taxes. Whether this cost is hiring an accountant to prepare your taxes, buying tax preparation software or the plain old traditional way of filing your taxes yourself, preparing your tax return takes time and money. Michael James conducted an experiment of how long it would take to prepare an  on-line tax returns; with the use of QuickTax, it took him 6 hours. Thus, it is inaccurate to say that preparing your own tax returns is done at no cost.

Assuming that one agrees that preparing tax returns costs something, the question then becomes one of opportunity cost?  In other words, is it more efficient for you to file your own tax returns if, in lieu of preparing your taxes, you were engaged in some other more economically efficient activity? For example, a lawyer friend of mine has always hired an accountant to prepare their tax returns. This makes perfect sense in this context. If their tax return costs $200-$400 and their hourly billable rate is $400/hour (plus), assuming we all clock in around 6 hours to prepare our taxes, my friend is weighing the cost of $200-$400 to pay someone to prepare a tax return versus potentially earning $2,400 in legal fees. This is a bit of an extreme example but what can you do with that extra 6 hours otherwise used to prepare your tax return?

The other factor to consider is efficiency and your own skill set. Can you find all the deductions that apply to you or is an accountant’s ability to find hidden deductions equal to or greater than their cost? This factor has been significantly reduced by on-line tax preparation software (and here is a thorough review of online tax preparation software) and, frankly, for most people who earn employment income only, tax preparation software is a very cost-effective manner to file tax returns.

If you typically hire third parties to file tax returns because filing tax returns becomes a question of skill, but you have a limited budget, then consider the following.  I tend not to like the tax preparation businesses that set up in malls and plazas during tax season. They are cheaper alternatives than accountants BUT, if they filed your tax return improperly, who can you complain to? I also worry about the obvious question of the skill level of people preparing your tax returns.

Professionals, although most people do not think of them as such, run their own businesses too. If cost is a barrier to hiring an accountant, some ways to reduce your costs are to speak to your accountant like a business person. For example, my tax returns are relatively cheap for someone making business income and all the paperwork that comes with it. However, I have also referred to my accountant numerous clients; given that accounting clients are “sticky”, this is a recurring source of income for him and, as a result, my tax returns are prepared much cheaper than they should be.

In other words, negotiate fees with your accountant by doing most of the book-keeping work or asking them for a deal if you refer clients to them.

There is no right answer on who should file your tax returns. The above are some factors to consider. As a side-note, for those self-employed, my experience has always been to find a good book-keeper before a good accountant; a good book-keeper can spot cash flow trends as they are unfolding and advise you to make adjustments. A good accountant may see you 1-2 times a year and the damage may have been done. Good luck.

I am on business travel this week so I may not be responding to comments that frequently. Thanks for your understanding.