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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: freya on January 03, 2015, 12:44:07 PM

Title: DIY taxes vs CPA for "audit insurance"
Post by: freya on January 03, 2015, 12:44:07 PM
I've been lurking on the forum for a while and finally jumping in to start posting.  I've face punched myself multiple times already, and the main goal this year is to reduce housing costs to a more sane level, but I do have a question on the topic of taxes...

I've been having a CPA do my taxes for several years, initially because a CPA's signature was required in order to qualify for a specific reimbursement that is no longer applicable, but now for the simple reason that it will reduce my chances of being audited - and reduce the work/time I'd have to spend dealing with an audit.  Most of my income is from a full time job and I'm far below the AMT threshold (but perhaps high enough to be a juicy target).  However, I have income from a side business which goes into a solo 401K, and of course I have investments as well.

The CPA I go to does taxes as a side business from home, so as far as fees go it's a pretty good deal:  $300/year.  Since tax software would cost me around $70 (Tax Cut is on sale), I'm effectively paying $230/year for "audit insurance".   I would rather do my own taxes, but have been hesitant about dropping the "insurance."  Does anyone have a good sense of whether this is worthwhile??

Title: Re: DIY taxes vs CPA for "audit insurance"
Post by: MDM on January 03, 2015, 12:48:15 PM
If you want audit insurance, TurboTax will be happy to sell it to you as an add-on to their price.

Your situation doesn't appear all that complex.  If you understand previous years' returns, you should be fine at doing this yourself.  Good luck!
Title: Re: DIY taxes vs CPA for "audit insurance"
Post by: TerriM on January 03, 2015, 12:58:38 PM
I hadn't thought about the audit insurance, but if you're buying software, Hrblock is cheaper on Amazon... 
Title: Re: DIY taxes vs CPA for "audit insurance"
Post by: GizmoTX on January 03, 2015, 01:02:30 PM
We did our own returns for years until our financial life became more complicated. We've also been audited several times, & it's so much easier to have an arm's length expert defending you. You can probably expense your tax prep fee.
Title: Re: DIY taxes vs CPA for "audit insurance"
Post by: Roots&Wings on January 03, 2015, 01:26:28 PM
Another DIY tax person here.  Have never had audit issues even when self-employed.  There are many articles/lists of items that are potential 'red flags' for being audited that might help you feel more secure if you decide to go DIY.

I just use the IRS e-file website to calculate my taxes (, which has been pretty idiot-proof for me :)
Title: Re: DIY taxes vs CPA for "audit insurance"
Post by: brooklynmoney on January 03, 2015, 01:33:41 PM
I am not an accountant and this isn't tax advice just sharing my personal experience. I got audited during a year I had used a very fancy CPA. When it came to respond to the audit it would have cost more in CPA fee than what I was possibly going to owe. So I handled audit myself. For this reason I uae TurbiTax and buy the audit defense offering.
Title: Re: DIY taxes vs CPA for "audit insurance"
Post by: mcneally on January 03, 2015, 02:41:21 PM
When accounting firms offer "audit insurance", what that means is they'll represent you during a potential audit without additional charge. It doesn't mean that they'll pick up the tab if you additional taxes (though some firms pick up penalties and interest if it was their mistake).

I assume that's what OP was talking about anyway. Using a CPA certainly doesn't guarantee that your taxes are done correctly. CPAs can make mistakes. But more commonly a mistake would be the result of a miscommunication between the tax preparer and client, or an error in the client's records. Hiring a CPA to *audit* your books to assure an accurate tax return would obviously cost way more than it's worth.
Title: Re: DIY taxes vs CPA for "audit insurance"
Post by: marty998 on January 03, 2015, 04:30:49 PM
People sometimes get flagged for audits in Australia if their tax return differs substantially from the norm.

This is why you get asked for your occupation (if you are a wage earner). If you're deductions are significantly higher than those for people working similar jobs it raises a red flag.

In this day and age of income matching and reporting, the tax office already knows your wage income, interest, dividends and various other bits and pieces. Through each state land titles offices they also know if you've sold property and therefore are watching whether you are reporting CGT or not.

To the OP - you seem like the type who would have their affairs in order anyway. Why would it be such a hassle to be audited if you have nothing to hide?
Title: Re: DIY taxes vs CPA for "audit insurance"
Post by: freya on January 03, 2015, 04:38:42 PM
It may be that the difference in risk isn't that big for a return with otherwise few red flags.  The biggest one I have is filing Schedule C.

I've also had a lot of problems with errors in tax software, and blew a lot of time trying to fix them - had to resort to the "white-out algorithm" once.  However, their use apparently also reduces audit risk.

To the last poster...Not hiding anything, but an audit at a bad time (e.g. just before a deadline or while traveling on business abroad) could be a serious disruption.  As I recall, they don't give you a lot of time to respond and it was hard to figure out what it was they wanted.  That's a big reason why many of my colleagues hire CPAs; the CPA does the legwork for them and knows the "code".