Monday, March 08, 2010

Checking Your Accountant's Work

Someone recently at work wrote the following in favor of getting someone else to do your taxes:
Has anybody talked about time spent and stress yet? I'm in and out between 1 and 2 hours, sip some coffee while sitting on a leather chair, and I'm out to have lunch right after.
Well, because of my Munich trip 2 years ago, I still have lingering after-effects due to tax-equalization, foreign tax credits, and what not. Therefore, my employer paid a tax-accountant to do my taxes. Unfortunately, with such a complicated tax return, the number of ways for errors to creep in multiply, not just from the accountant doing things wrong, but also from your very own communications to him as well. This makes it imperative that even if someone else does your taxes for you, you still have to check the numbers yourself. Here's how:
  1. Check all the sources. That means that for every 1099-INT/DIV/B, those numbers need to show up in your tax forms. If they don't or they've been aggregated, you need to do the aggregation yourself to make sure that everything lines up. The same goes for W-2, etc.
  2. Look for obvious missing items: If you usually have to file a Form 2210 but don't have to this time, make sure you find out why.
  3. Schedule E (if you have one) needs to be triple-checked, as it's very hard for someone else to guess what expenses of a business are deductible, and what are not. You really can't just dump the receipts onto someone else and have them guess.
  4. If you have incoming tax credits (such as first time home buyer's, energy efficiency improvements, etc), make sure those line items exist in the tax forms as well.
  5. If you have foreign tax credits and they are large, make sure that all the forms exist (you need one for each form of foreign tax credit, and one for each tax system, so that's 4 Form 1116).
  6. Run Turbo Tax and verify your own numbers for income tax purposes and make sure that your accountant isn't very far off. If he is far off, make sure you get an explanation in writing.
Does this all seem like so much work that you might as well do your own taxes? Yes. Even though you paid someone else to do it, you are still liable for paying the taxes, and ensuring that nothing gets lost. You're the one stuck dealing with the IRS if your accountant gets too aggressive. Unfortunately, by paying for someone else to do it, you can't just make the changes to the tax form, you'll have to get your accountant to understand why his numbers are wrong, and get him to fix it.

Over the years, if I've learned anything about finances it's this: You cannot outsource or abdicate responsibility for your finances. No one else will know or even care as much about our financial situation as you do, and if you think otherwise, you'll end up learning that lesson expensively.
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