For the past year, I’ve been spending a lot of time learning about the IRS rules for income tax, particularly the rules for a business. After many hours of the IRS website and pouring through other books, I finally decided that I’d be better off sitting down with a CPA. I’ve talked with several and so far I’m not impressed.What I’m finding is that at least some CPAs seem to be very use to people just taking their advice and not asking any questions. A recent conversation went something like this:
Me: It appears that my business can deduct X. Is that correct?
CPA: No.
Me: Why not?
CPA: Because publication 15b says you can’t.
Me: I just read publication 15b and it says I can deduct X except in certain circumstances–none of which apply to me. Also based on 15 b, if I can’t deduct X then I can’t deduct Y or Z because it is the same test. Can I deduct Y and Z?
CPA: Yes most definitely.
Me: Then why can’t I deduct X?
CPA: I think I read it in a book somewhere. I’ll get back to you.
As you can imagine these, types of conversations at $100 per hour are frustrating. Technically they cost quite a bit more than $100 per hour. If I’m talking to a CPA I can’t be working for one of my clients.
What is strange is that most of the time I’m not dealing with obscure issues here. I’m asking basic questions about common health insurance and retirement setups. When I do get into obscure issues I understand that the CPA might need to consult a reference, but I’m getting the impression that CPAs are just reading the same tax books you can buy from your local bookstore.
I assumed that a CPA would have some type of product that would let them type in an issue and see a consolidated list of all the guidelines issued on a certain issue, all the U.S. Tax Court cases related to the issue, and all the appeals (and results) that moved from Tax Court to the regular legal system.
So here is how I suggest you select a CPA. Find a few areas of the tax related to your business and read everything you can on it. Look up the topic on the IRS website, read anything you can find about it in the library, browse the local books store tax section and read the pages dedicated to your selected topic. It doesn’t matter if you come to a full understanding of your particular topic, but you need to be familiar with many of the issues and exceptions.
When you sit down with a prospective CPA, give them enough background about your situation and setup and then ask them questions about the topics you’ve researched. Don’t tell them you’ve done extensive research on the topics. You should be able to tell enough from their answers if they will be a good match for you. If they simply type every question you ask into Google while you sit there, you should probably consider someone else. What I would be looking for is something like:
Well, the tax code says you can do X, Y, and Z. The IRS says you can do X & Y, but the tax courts generally hold that you are in compliance if you do X, Y, this part of Z, and keep these particular records.
I may be better off going directly to a tax lawyer and using a CPA simply for filing the paperwork. I imagine the cost per hour would be much higher, but the overall cost would be much lower. If a CPA gives you bad advice it can become very expensive.
Here are some resources for anyone wanting to learn more about income tax:
- www.irs.gov – This can be a little difficult to navigate, but most of what you need to know can be found on the IRS site.
- www.ustaxcourt.gov – You can find all of judge’s opinions for tax cases here. This is extremely valuable because it shows you how tax code is actually being applied. The opinions are surprisingly accessible for non-lawyers. The amount of information can be daunting and the opinions aren’t cross hyperlinked so it can be difficult to navigate to the cited cases.
- Free Tax DVD – This is a DVD of a small business tax workshop. It is free and has some good information about tax issues for small businesses.
As I recall, only a teeny-tiny proportion of a CPA’s training has to do with tax law. The people who are going to know the most about taxes, honestly, are dedicated tax preparers. I may just say this because my mother is one – she started out taking an H&R Block tax course and now has ~30 years of experience under her belt – but she can answer just about any question you may have about taxes.
What an ordeal. I have to admit, I find your experience frustrating as well, especially since I work for a CPA firm. I’m not yet a CPA, but hopefully by the end of next year I will have passed the exam(s).
It is true, you really do need to know if you want a tax preparer or a CPA. There is a major difference.
In response to your dillema, however, and assuming you choose to find a CPA, may I suggest the following:
First look for a firm that specializes, or at least focuses in your industry.
Second, if they will not consult with you for free (no advice, only consultation) don’t bother, unless you are asking for and leaving with tax advice, your appointment should not cost you.
Third, prior to your meeting with the CPA, and if you plan to pay for advice, give them a list of questions you have, that you would like answers for. If, after you have taken these steps, you still get the run around, find another CPA.
While CPAs do have resources that can be used for researching specific topics, these resources still require knowledge, time, and patience. I have a complete Internal Revenue Code setting here at my desk, it has over 9,558 pages (8 point font). The last code section is numbered 9832, which does not include any of the numerous subsections in each code. That’s a lot of laws to have in memory, for anyone. Any CPA that knows everything there is to know about your industry, will be well experienced, and if you’re lucky, $100 may cover 30 minutes, not an hour!
Hope this helps.
@Tammy – Thanks for the advice. I actually followed most of what you suggested. I called the larger accounting firms and asked who specialized in my industry with my size of business. Granted, I am in a very small town so people probably tend to be generalists at everything. I imagine some of them do accounting work in exchange for tomatoes and chicken eggs. :)
http://www.fairtax.org
You make a good point, but tax attorneys are way more expensive.
Even cheaper is using Turbo Tax just to get an idea of your taxable income and then reveiewing your expenses to see what is deductible on your Schedule C. I am a bookkeeper, not a CPA, but I often know more about what can be deductible than my client’s CPA.