Wednesday, February 27, 2008

Choosing an Accountant

I like varied projects, and the very, very part time freelancing I do provides me with quite a bit of variety. This week, I met with someone who needed to get his accounting system in order for his small business to have his taxes prepared. He showed me an old return. The others are sitting in the IRS office under audit. After seeing the current return, it was no mystery why he was flagged for audit. It was obvious that the former accountant pulled numbers out of a hat. Worse yet, the accountant didn't even use the correct forms. Nor did he advise this client of 3 years regarding what expenses were deductible and which were not. Unfortunately, this man was under the impression that buying himself a burger from McDonalds while on the job qualified as deduction, since he was self-employed (ouch!). Plus (I kid you not), the form was handwritten. I've worked with a handful of people who have small business and work as consultants and I'm always saddened when previous accountants have never given them proper guidance.

So, here are a few tips if you are choosing an accountant:

1. Software: This might seem obvious as it is 2008, but the accountant you go to for any service should use software. The handwritten return filled out by a CPA is not the 1st return I've seen where software was not used. Another case I saw was a CPA who typed up a 1040 and missed a basic tax credit. One look at the form told me software was not used because software automatically ties up certain loose ends. Another mistake I saw recently, a W-2 with the incorrect amounts paid to social security and medicare. If you are paying for a service, make sure the professional uses software.

2. Garbage In, Garbage Out: I have seen tax returns where no expenses were taken for a contractor. I find it hard to believe there were no expenses. But, I do believe that no personal attention was given. Anyone with self-employment income should be looking for some personal attention because that additional 7.65% in FICA hurts badly. If the accountant can't prep you on record keeping and bookkeeping, you might want to keep looking.

3. Long Term View: There are some accountants out there who I am convinced just want to make sure that the clients pays as little taxes and/or receives as big a refund back so they client will feel good about the work they paid for. But, the idea of being in business is to maximize profit. If a business is growing and the proprietor has cash flow, the proprietor should look for an accountant who is forward thinking. There is nothing worse than seeing equipment expensed to the max in year 1 and nothing left to expense when the tax bill is going through the roof. Of course, a person could always re-file, but if you are paying for a service, you should only have to pay once.

4. Added Value: One of the accounting publications I receive addresses the subject of keeping the client's overall financial picture in mind. An accountant that has more than your refund on his mind, but can help point you towards financial tools that might be of interest to you (Retirement accounts, Coverdells or 529 plans) will prove far more valuable. While it is fair to charge a fee for time, you probably don't want someone who is going to nickel and dime you, like a friend's former accountant.

5. Yashrut: You have probably seen or heard advertisements lately for certain tax services. One ad claims that this company finds a large amount of missed deductions on average for previous forms brought in. One should know that not every mistake is worth fixing and in tax $1000 might not equal $1000. Don't get taken for a ride if an accountant recommends amending a return. If you pay $200 to get back an additional $100, you are now $100 poorer. Know what to ask. In addition, I've unfortunately seen reconciliations, general ledgers, taxes, etc, where it is clear that numbers were pulled out of a hat. Financial professionals are not magicians. If something doesn't seem right, it may not be. And, if you don't recognize a number, ask.


Anonymous said...

Can you share a list of questions to ask a bookkeeper or accountant before hiring them?

I spoke to a new accountant yesterday. He was recommended to me by a family friend (also an accountant). When I spoke to him, he recommended that I might want to use a bookkeeper (who will be less expesnsive) help set up QuickBooks or someother tracking system for my new store. He cautioned me to check that the bookkeeper who I had in mind (one he does not know but he admitted freely that he really doesn't interact with many bookkeepers) is truely capable of doing what I need. Your suggestions for what to ask SL?

rescue37 said...

I disagree with you on #3. The purpose is always to deduct as much as you in the current year. Why would I want to give the IRS a free loan over X amount of years if I can have my deduction now and use the saved tax money to further grow my business.
I think the issue you are trying to portray is phantom income which can be a very large number in real estate after depreciation stops. A good accountant will see this coming and at least warn his client that it is coming so he can prepare for it.

Orthonomics said...

Rescue37-A lot depends on what your business is and what you need to grow it. But you make an excellent point.

Anon-I don't have any interview questions. I think you should check references and listen carefully to why they believe a certain accountant is a good choice. You probably will have to read between the lines. I will see what I can find online about interviewing and accountant.

Anonymous said...

You do not necessarily want to take all deductions in the present year. The more you reduce income the less the deduction is worth (due to marginal tax rates). So you may want to preserve a deduction for a later year to reduce "top bracket" income instead or reducing "lower bracket" income in the current year.

Ariella's blog said...

Excellent points. Some people are taken in by the CPA to believe the person must be an expert -- and sometimes the most deluded on is the accountant himself. It's incredible to me that an accountant would not want to take advantage of the software available, as it would save him/her so much time. Actually, I know a CPA who asked for my recommendation on tax return software. I've used both Turbo Tax and Tax Cut.

miriamp said...

I like Turbo Tax online -- free until you want to file and print, and then the company that processes my husband's paystubs offers a discount on that. (A ton of companies have similar agreements.) We tried H & R Block online one year, and did Turbo Tax right next to it to compare, and they both completely messed up the (part-year/non-resident) MA and RI returns (completely different numbers of refund/tax due) so we do those on paper (with a spreadsheet set up line item by line item to mimic the forms and check all the math) instead.