There is a lot written about how financial planners get paid and how to avoid paying excessive fees, but not so much about CPA. How do you know if you are being well represented or simply wasting your money?
A Certified Public Accountant’s services may be expensive, but in many cases well worth the money spent. People who need strategic tax planning such as small business owners or individuals with complex returns, those who pay high income taxes, or have unusual circumstances appreciate the services of a CPA over an enrolled agent or general tax preparer. You would think that filing your taxes would be very black and white, but where CPAs really provide value is in grey areas. They give advice on which tax strategies to take or not to take based on their interpretation of IRS rulings and past experience.
When a CPA simply files your tax return and doesn’t provide strategic tax planning or advice, you may not be getting your money’s worth. Case in point, my CPA of ten years decided to concentrate his practice on small business clients and that meant I was being referred out. The new accountant left me with some nagging doubts due to his lack of advice around reducing our tax bill and also because he seemed keenly interested in referring us to a network of financial professionals (especially his real estate agent). On the very first phone call, he set us on a “selling our investment property” track that I didn’t necessarily think was in our best interest so we didn’t pursue it further. It made me wonder if he was getting more out of referring us to his network than his actual professional relationship with us.
The old CPA gave us extensive guidance to reduce our taxes including paying special attention to areas sensitive to IRS audits. For example, a home office deduction is an audit red flag but I had a legitimate reason to take it even with the audit risk. I stretched the limits and took what deductions I could so ultimately I paid the lowest taxes I was legally required.
What is your CPA doing for you?
Are they really working for you?
Here are some things to watch out for:
They aren’t actually a CPA. A Certified Public Accountant is required to have a bachelor’s degree usually in accounting, finance or management, and then take a series of four rigorous exams on auditing and attestation, business environment and concepts, financial accounting and reporting, and regulations. There are also practice requirements whereby one must work under a practicing CPA for a period of time. Their expertise and experience demands higher fees since their body of knowledge and expertise is higher.
They might have passed the exam, but is their license current? In my career as a financial planner, I surprisingly ran into many planners who held themselves out as a Certified Financial Planner™ professional when in fact they were a candidate for the CFP® designation. It doesn’t hurt to double check that your CPA has a current and active license since it is so easy to do. To determine if your tax preparer holds the CPA license, check the AICPA association website here. CPAs must also complete 120 hours of continuing education every three years. CPAs are not required to join the association so if you run a search and they aren’t listed, try your state board of accountancy. Also check the AICPA site to see if they have been disciplined by the board in the past.
They are not doing strategic planning. There should not be a surprise if you owe the IRS when your return is completed since your CPA should talk to you throughout the year and not just at tax time. Your CPA should be doing ongoing strategic planning, not simply filling out and filing your tax return. A computer can do that; what you are paying for is the advice relationship. Your CPA should be advising you on such things as monitoring your investments to take gains and harvest your losses as appropriate, monitoring when you are bumping up against phase-out limits on deductions (click here for blog on phase outs), and keeping current on upcoming tax legislation.
They are charging you twice. Let’s face it, CPAs are business people and they are trying to earn a living and grow their practices. If there are ways to add income streams they are going to consider them. For years, CPAs have been referring business to financial planners and insurance agents, and in the past ten years there has been a trend to bring those professionals in-house instead of referring this business away from their firms.
Be sure to watch how they get paid. When CPAs charge a fee for their tax work and a separate fee for investment advice that is fine. But if they also receive a commission for the sale of investment products in addition, this is known as “layering fees.” They should receive either a fee for investment advice or a commission from the sale of an investment product but not both.
Also note that your accountant may provide a financial plan, but if they also charge for and manage your investments, they must be registered with FINRA – the Financial Industry Regulatory Authority. You can run a broker check on any licensed investment professional on the FINRA website.
If you are looking for a CPA or want to find a new one as I plan on doing, start by asking around to get a referral from friends and colleagues who seem to be in a similar situation as you. You can also search for a CPA on the American Institute of Certified Public Accountants website. When you find one, ask questions about their experience, what they specialize in, and specifically how they are compensated. The Minnesota Society of CPAs provides an additional resource.
So do you even need a CPA? If you own a small business, there are complexities and deductions you can easily miss and a CPA may also be vital in long-term strategic planning. When you have complex investments or are constantly subject to the Alternative Minimum Tax (AMT), a CPA may be able to help with smart tax moves that can reduce taxes on the gains. When you are doing estate planning – gifting to family members or charitable giving – a CPA can help. However, if you have W2 income, mortgage interest, and a few investments in your portfolio, an enrolled agent may end up being the right tax professional for you. No matter who you choose, just as with anything else in life, you have to make sure you are getting what you pay for.