Should business owners prepare their own returns?

The answer is not whether you can but whether you should.

Preparing one's own personal income tax returns is not necessarily difficult. Many people have straightforward income from jobs and only a few deductions. Business returns are another story.

For business owners, there are 2 important issues to consider.

Misuse of resources

First and foremost, a business owner's responsibility is to run the business. That means generating sales and purchasing merchandise and finding, hiring and managing employees and other service providers and on and on. A tax preparer can't do any of those things. When an owner prepares their own return they are misusing their time and energy.

Mistakes and oversights

I've seen many returns prepared by business owners. A number of them contained mistakes that resulted in larger tax bills than were necessary. The most common is not being aware of what expenditures might be deductible in the first place. Other returns get audited, not so much because of the deductions they took, but because of the way the deductions were presented on their returns. 

One example is a N.M. gross receipts tax case where the return contained the wrong standard industry code (SIC). The code was for a real estate development business yet the owner was actually a real estate sales associate who are not subject to GRT. Using the wrong SIC code caused N.M. Taxation & Revenue Dept. to mistakenly believe this was a taxable business that had not reported its GRT. In the end, no tax was due. Nevertheless, there were other consequences.  The business owner had to take time away from earning their living; and, when they were faced with an audit they decided to pay for professional representation rather than representing themselves.  Not to mention, the owner worried a lot about having to undergo an audit.

Another case involved a return where the deduction for office expenses included other types of expenses. The owner used office expenses as a catch-all for everything that wasn't a preprinted line item. The result was that the amount of the office expenses deduction was unusually large compared with the business's sales. The IRS noticed this and flagged the return for an audit. While many of the misclassified expenses were legitimate, the IRS uncovered some that weren't. Consequences? More worry and more taxes and penalties and professional fees.

Please share your stories about what went wrong because you prepared your own return or the success you had by having your return professionally prepared. I've started out with mine.


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