Many taxpayers use “do it yourself” tax software to file their income tax returns. However, a fair amount makes a mess of it and pay the price when they make mistakes. It’s not unusual for tax preparers to receive calls from clients asking them to fix their messed up self-filed returns. What’s ironic is that the IRS is increasingly regulating paid tax preparers but not the providers of tax preparation software.
E-file providers top priority is the security of taxpayer’s accounts. Publication 4557, Safeguarding Taxpayer Data as well as Publication 4600 Safeguarding Taxpayer information provide best practices and guidance. Last year, Intuit, the makers of Turbo Tax, found incidences of stolen identity fraud when personal information was taken and used to file fraudulent claims.
Victims of the fraud had to manually file their tax returns as well as file police reports to prove their identities had been stolen. They also had to keep an eye on their credit reports to make sure their information was not being used fraudulently in other ways. Even still, Intuit was not subject to penalties and only had to make changes so it wouldn’t happen again the next year.
One of the main problems with using do it yourself tax software is that the majority of consumers have little knowledge about changing tax laws or how the software can work to their best advantage as individuals. They rely on automated prompts as guides, mistakenly thinking the process is simple. Kevin Thompson, CPA says “I remember an old line about automation … Garbage in, Garbage out. I don’t know the statistics of DIY but almost every time I have reviewed a self-prepared tax return, it was wrong.”
Costly mistakes happen even in the simplest returns. When something as insignificant as a city tax is missed using the software, it can cost taxpayer thousands of dollars. In the case of audits or other proceedings, the taxpayer bears the burden of explaining why he or she took certain deductions or made errors that could have been avoided if they had hired a tax preparer. Thompson says, “I have yet to see a scenario where I was unable to save the taxpayer a significant amount of additional taxes compared to the self-prepared return.”
Small business owners who know little about Schedule K-1s, misclassify expenses or do not send out required 1099’s. They don’t realize that the IRS matches third party filings with an individual return and may incur penalties as a result.
When business owners use do it yourself tax software and payroll programs, they may assume their company filed partnership and other forms correctly, when in reality, they did not. They may also not be consistent with filing and meeting deadlines.
A taxpayer needs to be aware that do it yourself tax software providers do not have to meet the same high standards that tax professionals do. It’s always better to hire professional help to avoid making costly mistakes. A tax professional’s fee will be significantly less than paying steep penalties incurred from mistakes. Overlooking even the smallest item may make the difference in the size of a taxpayer’s refund check.
The best way to avoid audits and keep money in your pocket is to let a professional preparer do the work for you. Thompson says “another old adage, you get what you pay for.”
Contact Kevin Thompson CPA
email@example.com or call him @ (310) 450-4625 x102.