Monday, May 7, 2012


Joel Stein Has Four Accountants” is an interesting article at BLOOMBERG BUSINESSWEEK written by an apparent tax illiterate who decided to see which was the best way to prepare his 2011 federal and state tax returns. 

As the title suggests, Joel used 4 “preparers” –

1., an online tax service that cost $30.00 to “self-prepare” the return with “help” from the program,

2.   Henry and Richard (i.e. H&R Block), which cost $400,

3.   his own family accountant of many decades (who had been preparing his returns since college), to whom he mailed the return, who also charged $400, and

4.   a “high-end” firm, which charged $1,200.

In describing the Henry and Richard experience he correctly observed that they were “not particularly cheap”.  Luckily H&R no longer pushes usurious refund anticipation loans (RALs) on their clients, or the cost would have been greater.

Joel did not specifically identify the family account or “high-end” firm as being CPAs, although I got the impression they were.

He got 4 very different results – from $119,554 in federal and CA state refunds via (enough, as Joel puts it, to buy a summer home – although where I do not know), to owing $4,544 combined via the “high end” firm.  Henry and Richard had the best result with $2,387 in refunds, and the family accountant had him net “out-of-pocket” $469.

Joel sought out the wisdom of former IRS Commissioner Mark Everson (2003-2007) before beginning his experiment – who, wrongly, “predicted that all four of my returns would come out the same, since, unless you lie, the numbers all plug into one formula”.  Everson told Joel that “paying more for an expensive accountant doesn’t mean he’ll find lots of loopholes that will get me more back”, which is a true statement.

In the article Joel pointed out that Everson, a former IRS Commissioner, CPA, and current vice chairman of a tax advisory firm, doesn’t do his own taxes.  And he also reminded us that “Treasury Secretary Timothy Geithner, who filed his own returns with TurboTax, got audited for failing to pay $35,000 in self-employment taxes for years 2001-04”.

Unfortunately Joel never did try to determine what the “correct” answer was via an independent source.  He apparently provided the same information to all, or rather answered the individual questions of all using the same information.

This story reminded me of the item that MONEY magazine used to run each year at tax time (I do not know if they still do) in which a tax scenario was created and the exact same information was provided to several types of preparers (i.e. large and small CPA firms, non-CPA preparer, Henry and Richard, etc).  As with Joel, each preparer had a very different result, although MONEY did have what they considered the “correct” answer (or the “most correct” answer) to which to compare the different results.

I remember that one year the closest to the “correct” answer was provided by Henry and Richard.  However, the H&R representative who prepared the “return” was not the local seasonal employee whom one would encounter when walking in to a local office off the street, but an upper level manager.

The differences in the answers Joel received resulted in some instances on the level of “aggressiveness” of the preparer.  As one example –

“. . . my donation of four boxes of books to the local library was worth $250 to him {the “high end” firm), $400 to H&R Block and $1,250 to {the family accountant}.”

And the H+R preparer suggested claiming a home-office deduction on Joel’s 1040.  FYI, Joel is the owner of a one-man “loan-out” corporation (a term Joel did not understand, and, frankly, I have never heard in 40+ years).  The family accountant advised against this, citing the dreaded AMT and the fact that the office deduction had been claimed on Joel’s corporate return, I assume as a reimbursed employee business expense (which, to me, is the correct way to go).

The result was utterly ridiculous – further testimony to the obvious fact that the tax illiterate should never use a software preparation package, whether online or via a box, to self-prepare anything other than a basic 1040A – an obvious example of Garbage In – Garbage Out. 

I am obviously prejudiced toward the “long-time family accountant”, since that sort of describes me as well.  Although I certainly do not agree with his “estimate” of the value of the books donated, unless he knows something about the books that was not indicated in the article (I would actually be closer to the H&R deduction, depending on the number and type – hardcover or softcover – of books). 

If the cost of using Henry and Richard and an independent preparer are the same always chose the more personalized services, and probably more correct results, of the independent preparer (to be honest I would actually say always chose the independent preparer over H&R or any other fast-food chain commercial preparer).

And, as one would expect, the “high-end” firm cost 3 times as much as the independent preparer – a result of much higher overhead that does not provide additional benefit to the 1040 client.  In the firm’s defense, it did provide Joel with long-term tax planning recommendations based on his individual situation.  

Of course to properly evaluate the work of the 3 different human preparers I would need to know much more detail on the differences in the specific returns.  I would need to actually look at the 3 different sets of returns.

In case you are wondering, Joel decided to file the returns prepared by the long-time family accountant because –

He’s affordable, a little aggressive with the deductions {not necessarily always a good thing – rdf}, and knows me.  He makes the process painless, which . . . is what I’m really looking for.”

While interesting reading, Joel’s article was more a humor piece than a serious analysis of different types of preparers.

I hope Joel was well paid for the article – since “researching” it cost him at least $1,630 “out of pocket”.


No comments: