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?
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.