Throughout my time running my own business, I have seen a variety of scenarios where clients waited too long hire a competent CPA and as a result owe the IRS thousands, sometimes tens of thousands in back taxes, interest and penalties. I have also seen the other side of the equation where clients with relatively easy tax situations are forking out hundreds of dollars for services when they don’t really need to.
Hiring a CPA may seem costly on the front end, but the benefits over the years will be well worth it. I tell my clients they are hiring a trusted advisor rather than simply a tax preparer, and that’s where the value comes in. They will help you run a more efficient and organized business, help you make important businesses decisions, provide financial analysis, and ultimately save you money.
Knowing When to Hire a CPA
The answer stems from a cost/benefit analysis and depends on a variety of variables, most importantly your need for an advisor, your working knowledge of the tax code, and your risk tolerance. If you stay current on tax regulations that impact your business, then you may be okay flying solo. Conversely, if you have a low tolerance for risk, you may consider hiring a CPA regardless of how simple your tax situation may be.
As a general rule of thumb, if your main source of income is from a W-2 job and you own a few investments generating interest, dividends, and capital gains, you may be fine sticking with software like TurboTax. If this is the case, your tax situation is relatively simple, and I encourage you to give preparing your own taxes a try. You will learn about tax preparation and save a few hundred dollars in the process. This will benefit you in the future when you need to review the forms your professional has prepared, as you will have a better idea of what to look for, and you will know when something doesn’t make sense.
When you buy, flip, and/or wholesale property, your taxes become inherently more complicated. You must keep track of business income and expenses, you may need to define an accounting method, you need to calculate basis and depreciation, you need to know when to issue 1099s, and you need to know what can and cannot be deducted. Incorrectly reporting these items will place an audit target on your back. In my experience, real estate investors and business owners are more susceptible to erroneous reporting, and it is at this point that I would recommend hiring a professional to prepare your taxes and act as a business advisor. I’ve seen many clients incorrectly report income and expenses, take losses when they weren’t allowed to, and calculate depreciation incorrectly. These errors end up flowing through to future tax years, causing all future returns to be unsubstantiated, further exposing you, the business owner, to financial risk.
I have seen many successful business owners who are confident in their tax positions absolutely butcher their taxes. If they are smart, they hire a CPA earlier on to review past returns and provide advice. If they aren’t smart, they wait until an audit comes around to hire a CPA and end up paying thousands in professional services fees. Be smart.
Finding a CPA Who Fits Your Needs
My very best piece of advice is to never take advice from a CPA unless they actively practice in your trade or business.
There are CPAs who have never prepared tax returns, even for themselves. Yet because they have the CPA designation, everyone assumes they are competent in the area of tax, accounting, and financial planning. Don’t make this mistake. CPAs working at large accounting firms, such as the Big 4, likely only see a very small slice of the pie. They could be on the audit team of a reputable Fortune 500 company but only be auditing the accounts receivable account, and even then they may only be looking at whether or not invoices were appropriately approved. Make sure the CPA you hire and subsequently take advice from is actively practicing in the area in which you need advice.
One of the best ways to find a reputable CPA is to ask for a referral. Prior to asking for a referral, consider who you are asking to refer you. For instance, if you are a real estate business owner, you will want to ask another real estate business owner for a referral. People asking for referrals in the BP Forums are a great example of what you should do.
Consider the pros and cons of local vs. non-local CPAs. A local CPA is great because as the client, you can physically shake their hands, give them your documents, and get a better feel for the CPA’s temperament. Limiting your search to local CPAs may not yield one that can meet your needs. The local CPA may be really good, but if only a small amount of his clients are real estate investors, he/she may not be the best fit.
Working with a non-local CPA also has pros and cons. On the positive side there is a larger pool of CPAs to choose from. More than likely, a Google search will direct you to plenty of firms specializing in real estate and possessing the ability to meet your needs. On the negative side, holding a face-to-face meeting may cost you an arm and a leg in airline fares. Many non-local CPAs utilize Skype and other meeting tools to conduct their meetings. Non-local CPAs place an emphasis on communication and client service and you may find they are more responsive then the local guy.
As an investor, you should be demanding the best possible service to fit your particular needs and that may not come from the local guy. Technology makes it increasingly easier to meet with clients who are hundreds or thousands of miles away and still easily meet their needs. If you feel comfortable seeking out a non-local CPA, I’d recommend giving it a shot.
Should My CPA Invest in Real Estate Too?
This is an interesting question that I see debated in the forums. As a CPA who invests in real estate, I don’t think it is imperative that your professional also invests in real estate. But I do think the majority of the professional’s client base should consist of real estate investors.
My reasoning for this is simple: Just because you invest in real estate doesn’t mean you know what you are doing. Would you invest with someone who is earning a 1% ROI? Unlikely.
If the majority of the professional’s client base is made up of real estate investors, there is a good chance that professional is up to date on the IRS regulations and knows which tax loopholes are ripe for exploiting. A professional’s competency on the issues surrounding real estate is a more important qualification than simply investing in real estate.
Questions to Ask a Potential CPA Prior to Hiring Them
- Do you have a PTIN (preparer tax identification number)? Every tax preparer should have a PTIN and should furnish this information to you. If they refuse to do so, seek out a different tax preparer.
- What is your tax background? This question allows you to understand the risk in hiring the preparer. Are they new to the game? Do they have corporate or Big 4 experiences? Have they assisted clients in your trade or business?
- What kinds of clients do you work with? Hopefully they say real estate investors. If not, move on.
- Are you available year round? As a business owner, you want to hire an advisor, not just a tax preparation service.
- What’s your experience with the IRS? You want to know if they have defended clients in an audit or have provided written correspondence to substantiate the basis of a client’s tax position.
- Who will be performing the work? You want the CPA’s expertise so you will also want to know if a junior accountant will be assigned to your account.
- Are you conservative or more aggressive, and can you give me an example? Answer this for yourself, then see if the CPA matches your risk tolerance.
- How do you bill for your services? Fixed rate vs. hourly. Are they transparent? Will they provide you with time sheets?
- Do you use tax software? Using software mitigates risk for errors. Hopefully your CPA does.
- Do you offer an initial consultation or is there a charge? Reputable firms will provide you with a free consultation.
- What records will you need from me? You will want the CPA to send you a tax organizer. Otherwise there will be a lot of time wasted in back and forth communications.
- Can I file electronically? Reputable firms have the ability to file electronically.
- What happens if I get audited? You want to know if and how the CPA will go about defending you against the IRS.