Doing My Own Taxes Cost Me $10,000

3 Lessons I Learned from My DIY Mistake

This article was provided by Devin Carroll, a financial advisor colleague who practices in Texarkana, TX at his firm Carroll Investment Management.

Doing my own taxes cost me $10,000 last year. It still stings and it has been on my mind a lot lately as tax season approaches.

I was reminded of this the other day while I was shopping with my wife at our local wholesale store. When I passed by the big display of tax software, I thought about the ad that’s been playing over the last few weeks. This ad is a humorous take on just how easy it is to do your own taxes. It’s so easy that everyone in the ad is just using their phones to file! At the conclusion of the ad, the text comes up: “You don’t have to be a genius to do your own taxes.”

Well, I’ve never considered myself a genius, but I can figure things out pretty well. When my accountant retired a few years ago, I decided to give the do-it-yourself tax software a try. The idea was pretty simple: “I’m a smart guy,” I thought. “With today’s technology, there’s no reason why I can’t do my own taxes.”

Doing My Own Taxes

At first, I only had my 1099 and my wife’s W-2. Then I became a half-owner of an insurance agency which added yet another tax form. Still, that wasn’t too bad, so I simply adjusted the version of the tax software I purchased to handle the partnership. In the next year, we bought an investment property and made an entity change for my financial planning practice. Over the next couple of years there were a few other changes that resulted in even more tax forms.

I suppose I didn’t realize just how complex my situation was getting. So, in early 2015, I made my annual pilgrimage to the wholesale store to purchase my tax software. Just like every other year, I set a Saturday aside to do my taxes. I plugged in all of the various income forms and then started working on the deductions.

My tax software showed a big counter at the top of the screen that revealed my current federal tax liability – as I would enter data, the dollar figure would update. When I started getting close to the end of my deductions spreadsheet, the number was still really big. It was so big that my heart rate increased and I was starting to feel a little sick.

A few hours later I was finished. There was nothing left to deduct and I still had an enormous tax bill! In a state of panic I called an accountant friend to get a second opinion. We set a meeting and a few days later we sat down with my nearly complete tax return to discuss options. He told me, “Devin, if you’d made a couple of simple changes at the first of the year, you could’ve saved about $10,000 in taxes.” I was dumbfounded – and really angry at myself.

The Valuable Lessons I Learned

Now, almost a year later, I can look back on this experience and remember the lessons I learned. Here are three takeaways from my do-it-yourself mistake . . . .

1. I don’t know everything.

As much as anything, this was a lesson in humility. Before this, I didn’t think that tax advisers had anything to offer me. In fact, I’d even mentally dubbed them with titles such as “document processors.”

I should’ve already learned to be more humble and hire professionals. I can’t tell you how many projects I’ve looked at and thought, “Why would I hire someone when I can do that?” The results in many of those projects have had similar results, too. One that immediately comes to mind was my attempt to save $50 by moving my own cable line in the attic. Yep . . . I fell through the attic, ended up in the emergency room, and had to pay several hundred dollars to get the massive hole in my ceiling fixed.

In our information-rich world, you can find a how-to for everything. It’s really tempting to read about a topic for a few minutes and think we understand all the nuances. That’s not the case with the federal tax code. Consider this for a moment . . . . In 1984 the tax code was 26,300 pages. Today, it’s a monstrous 75,000 pages. That’s just too much information to fully comprehend along with everything you need to know for your “real” job.

2. Sometimes it pays to hire early.

I can’t tell you how much I wished I would have hired a tax adviser before I thought I needed one. I was so caught up in what they would charge, I let a $10,000 surprise smack me in the face.

The same could be said about many of my prospective retirement planning clients that request information. They hear that I charge an hourly fee and simply turn to the internet for advice that’s much cheaper. The result is often a missed opportunity, missed filing deadline, or some other mistake that has consequences for the rest of their retirement.

If you think you may need someone in a few years, hire them today!

3. Hiring a professional reduces anxiety.

When I was doing my own taxes, I was constantly worried about getting a letter from the IRS. Not because I was intentionally doing something wrong, but I was always scared that I’d missed something important that would come back to haunt me.

Today, I no longer have that fear. I feel the likelihood of getting that dreaded letter from the IRS has tremendously declined. It may not have, but I sure sleep better.

This tax season, do yourself a favor and hire a tax professional.

Like all professionals, not all tax advisers are created equal. Some are coaches and some are not. Some will help you and some will just let their assistant screen your calls. If you start looking for an accountant who meets your expectations, start before tax season. It’s just too crazy once it gets to mid-February.

As an additional resource, here’s a great article from Kelly Phillips Erb on hiring a tax preparer.

What are your thoughts? Do you plan to hire someone this year?

Devin Carroll is a financial advisor who practices in Texarkana, TX at his firm Carroll Investment Management. He writes about Social Security and retirement related issues on his blog at socialsecurityintelligence.com.