When not to use tax software
Should man or machine be your accountant? The old adage that you get what you pay for applies when hiring tax preparers as much as it does when buying tax preparation software.
The old adage that you get what you pay for applies when hiring tax preparers as much as it does when buying tax preparation software.
"There is no absolute answer as to whether using basic tax software is better than hiring a qualified and experienced tax preparer, but typically certified public accountants (CPA) have the latest and highest quality of tax preparation software on the market," said Jordan Niefeld, a CPA with Gerstle Rosen & Goldenberg.
Yet and still the idea of doing it yourself holds a special appeal for many.
"It is advantageous to prepare your own return when you have the time, ability and desire to do so," said Rebecca Pavese, a CPA with the Palisades Hudson Financial Group in Atlanta.
Taxsoftware.com launched the first iPad app for federal tax returns three years ago.
"Tax software can walk you right through the preparation of your 1040," said Niefeld, who uses Ultra Tax. "For taxpayers who have limited deductions and credits, there is no reason why preparing one's own return should take more than 1 hour."
However, consulting with a tax preparer has its benefits.
"It's time to use a professional tax preparer when you are not 100% sure what it is you're doing," said Craig Richards, managing director and director of tax services at Fiduciary Trust Company International.
The do-it-yourself crowd determined to figure out their own returns may find changes to the tax law and certain deductions overwhelming.
"Passive activity losses, the foreign tax credit, child and dependent credits and education credits can give taxpayers fits trying to figure out," said Richards.
Other sticking points include:
- The new net investment tax calculated on Form 8960. "It's confusing to seasoned preparers and will be a challenge for any taxpayer who attempts it on their own," Richards told MainStreet.
- Taxpayers who employ domestic employees. "You need to not only attach and file a Schedule H with the 1040 but also prepare W-2 forms and state unemployment filings for staff," Richards said.
- The earned income credit. "It was created to help taxpayers with the lowest income amounts but to claim it involves an extremely confusing process if when eligible," said Richards.
While the average tax software on the market today sells for $30 to $100, it is a preferred option for individuals with straightforward W-2s and not much financial activity throughout the fiscal year.
"Tax software programs have made it easier for non-professional to do their own taxes but unless you answer each question you are led through during the process correctly, you run the risk of getting your return wrong," Richards said. For those with more complicated tax situations, the hand of a professional can cut through frustrations.
"Individuals that are self-employed, owners of rental property, numerous investment accounts and Schedule D or Schedule K-1 activity would be considered complex," Pavese told MainStreet.
The minimum fee to prepare a tax return with Palisades Hudson Financial Group is $1,200, but the fee may not include services in the event of an audit.
"Procedures vary but typically a tax return engagement will cover routine correspondence with a letter you may receive from a taxing authority," said Pavese. "If you are subject to an audit, full support is usually provided by a tax preparer under a separate engagement."
Tax professionals that have full access to prepare as well as represent citizens in front of the IRS include enrolled agents, certified public accountants and tax attorneys who are members of their respective state bar associations.
No tax preparer can guarantee a refund, however.
"Consumers should consider price, experience of the preparer, reputation of the preparer and convenience when choosing a tax preparer," Pavese said.
Overall, there are no dangers when using a tax preparer that follows the IRS rules.
More from MainStreet:
- The IRS' new 'safe harbor' home office standard deduction
- What to give your tax professional
- Is the gender pay gap a myth?
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