For decades there have been qualified accountants available to assist in filing individual and corporate taxes. While many people now use popular tax software to file their own taxes, there are still a good number who rely solely on a CPA to prepare their tax filing. If you are a trader or investor and are thinking of using or currently use a CPA, there are some things you should know that some CPAs don't want you to know…
Many CPAs use software also. And some CPAs try to use software to handle bigger accounts, or areas of accounting that they are not familiar with. For this reason, there should be a certain measure of caution when hiring your accountant. You want to make sure that the firm you choose is truly qualified to handle your account and the special requirements for traders and investors.
You have the responsibility to choose a firm that understands the mechanics behind rules for traders and investors, most of which report capital gains/losses on Schedule D. This involves understanding trade matching, as well as specific identification, wash sales, and types of trades that are categorized as “other income”. Some CPAs don't want you to know that they don't understand how to correctly file a Schedule D! Over the years, we have talked with a good many accountants who admitted they did not understand wash sales, trade matching, or other parts of IRS Publication 550.
Before you interrogate your firm though, understand that the Schedule D is one of the most complex tax forms. It involves more than a recorded profit/loss, but rather proof of every single trade you made throughout the year! And the wash sale rule adds a second level of complexity to the already complex form. It’s no wonder that some CPAs choose not to deal with this form altogether. So how can you tell if a CPA is right for your needs? Here are some suggestions I'll make:
The first thing I suggest is that you talk to the firm’s advisor. Please do not get this confused with a consultation visit – which you are often charged for. Talking with the head of the firm gives you a great sense of direction on how to proceed. For example, you can ask who in the company has the most experience in dealing with your type of situation. As they respond, look for modesty and candor. Often, the ones that display these qualities are more likely the accountants who will work closely with you to ensure that their work is accurate.
It's important to address specifically how they handle Schedule D reporting (or MTM reporting if that is your status). There are few Schedule D software programs that CPAs will support. Qualified firms like Green Trader Tax use a software program such as TradeLog to generate trader tax reporting. Some firms ask that you provide the Schedule D report yourself as they do not want to be responsible for that part. If your CPA plans to use a broker provided report such as a P&L report or 1099b, then you may want to beware – these reports are not designed to be used for your tax filing! Finding out this information can be a key to knowing how qualified your CPA is for trader taxes.
Finally, before agreeing to hire a particular firm, get the assurance that you are getting your money’s worth. This does not mean looking for the cheapest guy on the block, but rather look in detail at what your accountant is doing for you. Consider if they are willing to go the extra mile. I've often talked to TradeLog users who have seen the truth in the adage "you get what you pay for" when it comes to their choice in CPA.
These are just a few tips. Of course, each trader and investor has a different situation – therefore, you need to identify all of your needs and address them with your potential CPA. The key is to be patient and realize that filing your taxes is very important and encompasses more than a fee. Tax time may seem like many months away – but don't wait till April to look for a good CPA. In my next post, I will give some tips for traders who need to provide their own Schedule D to their CPA, or who want to save some money by doing so.
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Please note: This information is provided only as a general guide and is not to be taken as official IRS instructions. Cogenta Computing, Inc. does not make investment recommendations nor provide financial, tax or legal advice. You are solely responsible for your investment and tax reporting decisions. Please consult your tax advisor or accountant to discuss your specific situation.