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When Should I Consult a Tax Professional?

The following is a guest post by tax professional Kim Fourman, otherwise known as Mrs. Luke1428. She is a CPA at Loggins, Kern & McCombs in Jonesboro, Georgia. The following is not tax or legal advice. If you have questions about your own situation, please consult a professional to discuss your particular situation.

tax professionalWhen is it important to consult a tax professional? Well, as a tax professional, you may be surprised at my answer. At my firm, this is what we tell people who inquire about our services:

If you understand the questions and can answer them properly, then Turbo Tax works great.

It really does. It would make no sense for someone with a couple of W2s and some mortgage interest to pay a CPA to prepare their taxes. But, there are times when you need to consult a tax professional.

Consult a Tax Professional When…

1. You had a major, unusual event during the year, like a foreclosure or bankruptcy.  Did you know the general IRS rule is that debt which has been forgiven is actually counted as taxable income? Unbelievable, isn’t it! So if you couldn’t pay your credit card bills, and some of the debt was forgiven in an agreement, that amount (that was forgiven) could be counted as taxable income. Now, there are a multitude of exceptions, and then exceptions to the exceptions. This is where a professional can help make sure you aren’t hit with an unexpected tax bill.

2. You have your own business. Many people do their own taxes just fine, but once you get into the realm of small business taxation, it’s worth it to consult a professional, at least at the start. If the business is owned by just you, then the income and expenses are recorded on Schedule C of your 1040. If you understand the form, and there’s not too much complexity, then you are probably fine to do it yourself.

But, there are some issues that a professional can help you answer like… how much in estimates should I pay through the year? Do I have business assets that should be capitalized and depreciated? If my business operates as a loss, am I in danger of the IRS disallowing the loss because of hobby loss rules?

Handcuffs3. You haven’t filed your taxes in a while.  Here is where you definitely need some help. The laws change year to year, which means that the forms change from year to year.

Let me just add here – not filing your taxes can be a criminal offense, as in go to jail time. You have got to file your tax returns, even if you can’t pay the taxes.

Now, the IRS does not just pop up at your door with handcuffs if you are late in filing your taxes. There are all sorts of notices that you will get from them, and you will be well aware that the hammer is about to fall. If you have not filed your taxes in a while and you start getting those notices, (or even better – before you start getting those notices) get your butt some help. Now!

4. You are involved as a plaintiff in a lawsuit. Many people do not realize that the settlement proceeds can be taxable depending on how a lawsuit is structured. In most cases, if the money from a lawsuit “makes you whole” from a physical injury, then it is not taxable. This would include money received to compensate for medical expenses or for lost wages due to a physical injury.

Alternatively, punative damages (money received by the plaintiff because the court is trying to punish the actions of the defendant) usually are taxable. Believe it or not, the lawyer for the plaintiff may not even consider the tax implications of the settlement. In this case, it would be worth it to consult a CPA to see if there is a way to structure the settlement so that you are not losing 30-40% of the settlement to taxes.

Questions: What other times did you use a tax professional and you were glad you did?  Or, the flip side – you thought you needed a professional, but you were OK on your own?

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Comments

  1. “Did you know the general IRS rule is that debt which has been forgiven is actually counted as taxable income? ”

    No I did not know that. Thank you so much for enlightening me. Great article!
    Francis J recently posted…Managing Your Money: 5 Overlooked Tools Your Can’t Afford To IgnoreMy Profile

  2. I check out around that I could declare chapter 13 bankruptcy by myself. After doing a hunt for bankruptcy attorney, it all seems so frustrating. Apparently, I believe I should retain an attorney if I am taking into consideration declaring chapter 7 bankruptcy. Thanks. Satoe

  3. If there’s one thing you don’t want to mess with, its the IRS. If you have even the slightest impression that you might be doing something wrong, then get your taxes done right. I came very close to needing to do this for the first time this year with claiming blog income.

    • It’s always hard with income that is on the side like that. Just curious, did you get a 1099 for the ad revenue you received?

  4. Tony@WeOnlyDoThisOnce says:

    Great points, Kim. The legal ramifications of the last bullet are key.

    • I have heard of lawyers that tell their clients that they are not hired to consider the tax ramifications of the settlements. The client is already paying the lawyer probably near 30% of the settlement, its a little unbelievable that there isn’t room in there for a tax consult. (I am not saying that all lawyers do this, or even that it’s common — just an anecdotal experience).

  5. Great post, Kim! I do use a tax professional, even though I’m a financial advisor and probably could muddle my way through it. But I’m not a tax expert and I want to make sure that my taxes are not only done properly, but that I’m taking advantage of every credit/break I can! 🙂

    • Muddle through it — that’s a good description! I did just that prior to becoming an accountant, and it would take me quite a while to do our taxes because I wanted to make sure I did them right.

  6. I’m a freelancer and I could not imagine doing my own taxes. Even organizing my info FOR my tax person is a headache!

    • yes, and we GREATLY appreciate that you are organizing the info!! That helps keep your tax bill down, too 🙂

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