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Tax Software – What Do You Really Get in That Box?
National Association of Tax Professionals (NATP) Appleton, WI – Like boxed American
breakfast cereals, do-it-yourself tax software claims convenience, time-savings, and implies
healthy long-term results. But does tax software really deliver on those claims? Or is do-it-
yourself tax software often sugar-coated, time-consuming, and less-than-the-healthiest
choice in the long-run? Here is some food for thought.
First, some facts. The Internal Revenue Service (IRS) statistics reveal that taxpayers using
do-it-yourself tax software, spent an average of 6 to 10.3 hours longer preparing their tax
returns (depending on the number of worksheets and schedules) than taxpayers who did
manual calculations. Further, the IRS estimates that do-it-yourself software users spent an
average of 10 to over 20 hours longer than a tax preparer, again depending on complexity.
Fact two: For 2005, legislation from eight tax bills, as well as annual inflation adjustments,
affect the tax returns taxpayers are about to file. Tax bills are lengthy, complex documents
filled with legalese and not easily deciphered. National Taxpayer Advocate, Nina E. Olson,
in a report to Congress stated, “Our tax code has grown so complex that it creates
opportunities for taxpayers to make inadvertent mistakes as well as to game the system.”
Complexities cause taxpayers to suffer and cause those in the tax preparation field to study
year-round so they can understand the law and help their clients.
Tax software attempts to make tax filing easier for taxpayers; however costly mistakes and
frustration can also accompany tax software. The most common errors result from not
understanding the questions asked by the software program, from entering amounts in the
wrong places or not entering some amounts at all,and from not knowing if the software is
indeed calculating correctly or capturing all of the information to give the taxpayer the
correct outcome. Says Thomas Rains, a tax preparer from Pulaski, Tennessee,
“Calculations are based on the answers [taxpayers give] to the online questions. This doesn’
t make the tax return accurate – only the calculations!”
Do you think you can do better? Consider these real-life situations encountered by
taxpayers using tax software programs to file their income taxes, as observed by tax
preparers from the National Association of Tax Professionals (NATP) at the end of the 2004
tax season.
Note that several of the problems encountered involved an oversight or misunderstanding
by the taxpayer, and for most, intervention by a tax preparer.
- A Cincinnati, Ohio preparer had a taxpayer walk in “just to e-file” his tax return, which he
had already prepared using software. Several places had already refused to e-file his
return, which piqued the preparer’s interest. She volunteered to look over his preparation.
He had one substantial entry on his Schedule A that she traced back to settlement papers
on a refinance. Under “costs of the loan” he had entered the full loan amount instead of the
interest, which was incorrect. When the preparer questioned the man about the incorrect
entry, he said that the software had asked a question, he had answered, and that’s what
the software did with the answer. When the preparer pointed out that this error meant that
he would not receive the $5,000 refund he had anticipated—in fact he owed $3,000—he
became belligerent and informed her that his $39 software was obviously smarter than she
was. He grabbed his tax return and left, never to return. This example illustrates some of the
most common hazards of using do-it-yourself software: Misunderstanding the questions on
the software products and incorrectly entering the amounts.
- Married taxpayers living near the Wisconsin/Illinois border purchased tax preparation
software in Wisconsin, but lives in Illinois; something they had done for years without
realizing that state taxes differ from state to state. This year, due to confusion with software,
they visited a tax preparer. The preparer immediately identified problems because they
were filing Illinois taxes using Wisconsin software. Pensions are tax-free in Illinois, but taxed
in Wisconsin. The preparer amended returns for three years, giving the taxpayer over
$1,000 in additional refunds for each year. In this situation, the taxpayers were not buying
the correct software, and if they hadn’t consulted a tax professional they may have never
discovered this costly mistake.
- When a now-retired taxpayer brought in his prior year self-prepared forms to a tax
preparer for a consultation and tax advice, the tax preparer discovered that the taxpayer’s
employer had erroneously taken withholding out for the taxpayer. The taxpayer had just
assumed the employer had done the accounting correctly and never questioned it; however
the tax preparer knew the law and spotted the error. Result? Amended returns and a
permanent client. (This type of error is more common than many people think.)
- Using software for a fairly simple tax return, a married Pennsylvania taxpayer filed as
married filing separately (MFS) and came up with a $285 refund [it appeared to come out
better than married filing jointly (MFJ)]. When the taxpayer did the same for her spouse, she
was horrified to discover that he owed $969. Had they filed as MFJ, they would have
received an $847 refund. The result? An amended return and taxpayers who will use a tax
preparer from now on.
- A taxpayer in New Jersey attempted to file his tax return using software. He had incentive
stock options and could not figure out how to handle them. The software product was
calculating a tax liability in the high five-figure numbers. Upon seeking the advice of a tax
preparer and after reviewing the taxpayer’s finances and tax laws, the liability was reduced
to approximately $1,000.
- A taxpayer from the Angola, Indiana area could not figure out how to do the state return to
file along with his completed federal return. He brought along his completed federal return
when seeking the help of a tax preparer. Not one line of the self-completed federal form was
completed correctly.
- After a visit with a tax preparer to review his self-prepared return, a retiree living in New
York learned that New York would allow his military pension to be excluded from his
adjusted gross income for state tax purposes. The adjustment saved him several hundred
dollars which more than made up for the tax preparer’s fee for 2004 and for the next ten
years.
- Using software in 2003, a Phoenix, Arizona taxpayer had assessed herself a ten percent
penalty on her normal retirement, which was incorrect. A tax preparer review uncovered the
error and after preparing an amended return, the taxpayer received a refund of $2,400.
- With software, sometimes the box is empty when it comes to customer service. Last year, a
software providers’ customer service agent made the following statement to a taxpayer who
had
questions on software: “We sell software; we don’t give tax advice.” So where do software
users
turn for advice? Some end up using their best guess. The wise ones end up seeking out a
tax
professional. Many become permanent clients afterwards.
These are but a few of many experiences, some of them too lengthy and complicated to
recount, of
taxpayer frustration which led to them consulting a tax professional. Misinterpretations can
be costly
in the long-run. Terri Zurcher, a tax preparer from Middleton, Idaho probably summed up
the results
best: “Just buying a software program doesn’t make you a tax preparer anymore than
buying a word
processing program makes you an author.”
To receive a free brochure on how to find a tax preparer, visit the NATP Press Room at
www.natptax.com and download a copy of NATP’s “Finding the Right Tax Preparer”
brochure. NATP
maintains a listing of professionals in your area at www.taxprofessionals.com.
Members of the National Association of Tax Professionals (NATP) assist taxpayers with tax
preparation and planning. NATP is a nonprofit professional association founded in 1979 and
provides professional education, tax research, and products to its members. The national
headquarters, located in Appleton, WI, employs 43 professionals and 25 instructors. NATP
exists to
serve professionals who work in all areas of tax practice and has more than 17,500
members
nationwide. Members include individual tax preparers, enrolled agents, certified public
accountants,
accountants, attorneys, and financial planners. Learn more at www.natptax.com
National Association of Tax Professionals (NATP) Appleton, WI – Like boxed American
breakfast cereals, do-it-yourself tax software claims convenience, time-savings, and implies
healthy long-term results. But does tax software really deliver on those claims? Or is do-it-
yourself tax software often sugar-coated, time-consuming, and less-than-the-healthiest
choice in the long-run? Here is some food for thought.
First, some facts. The Internal Revenue Service (IRS) statistics reveal that taxpayers using
do-it-yourself tax software, spent an average of 6 to 10.3 hours longer preparing their tax
returns (depending on the number of worksheets and schedules) than taxpayers who did
manual calculations. Further, the IRS estimates that do-it-yourself software users spent an
average of 10 to over 20 hours longer than a tax preparer, again depending on complexity.
Fact two: For 2005, legislation from eight tax bills, as well as annual inflation adjustments,
affect the tax returns taxpayers are about to file. Tax bills are lengthy, complex documents
filled with legalese and not easily deciphered. National Taxpayer Advocate, Nina E. Olson,
in a report to Congress stated, “Our tax code has grown so complex that it creates
opportunities for taxpayers to make inadvertent mistakes as well as to game the system.”
Complexities cause taxpayers to suffer and cause those in the tax preparation field to study
year-round so they can understand the law and help their clients.
Tax software attempts to make tax filing easier for taxpayers; however costly mistakes and
frustration can also accompany tax software. The most common errors result from not
understanding the questions asked by the software program, from entering amounts in the
wrong places or not entering some amounts at all,and from not knowing if the software is
indeed calculating correctly or capturing all of the information to give the taxpayer the
correct outcome. Says Thomas Rains, a tax preparer from Pulaski, Tennessee,
“Calculations are based on the answers [taxpayers give] to the online questions. This doesn’
t make the tax return accurate – only the calculations!”
Do you think you can do better? Consider these real-life situations encountered by
taxpayers using tax software programs to file their income taxes, as observed by tax
preparers from the National Association of Tax Professionals (NATP) at the end of the 2004
tax season.
Note that several of the problems encountered involved an oversight or misunderstanding
by the taxpayer, and for most, intervention by a tax preparer.
- A Cincinnati, Ohio preparer had a taxpayer walk in “just to e-file” his tax return, which he
had already prepared using software. Several places had already refused to e-file his
return, which piqued the preparer’s interest. She volunteered to look over his preparation.
He had one substantial entry on his Schedule A that she traced back to settlement papers
on a refinance. Under “costs of the loan” he had entered the full loan amount instead of the
interest, which was incorrect. When the preparer questioned the man about the incorrect
entry, he said that the software had asked a question, he had answered, and that’s what
the software did with the answer. When the preparer pointed out that this error meant that
he would not receive the $5,000 refund he had anticipated—in fact he owed $3,000—he
became belligerent and informed her that his $39 software was obviously smarter than she
was. He grabbed his tax return and left, never to return. This example illustrates some of the
most common hazards of using do-it-yourself software: Misunderstanding the questions on
the software products and incorrectly entering the amounts.
- Married taxpayers living near the Wisconsin/Illinois border purchased tax preparation
software in Wisconsin, but lives in Illinois; something they had done for years without
realizing that state taxes differ from state to state. This year, due to confusion with software,
they visited a tax preparer. The preparer immediately identified problems because they
were filing Illinois taxes using Wisconsin software. Pensions are tax-free in Illinois, but taxed
in Wisconsin. The preparer amended returns for three years, giving the taxpayer over
$1,000 in additional refunds for each year. In this situation, the taxpayers were not buying
the correct software, and if they hadn’t consulted a tax professional they may have never
discovered this costly mistake.
- When a now-retired taxpayer brought in his prior year self-prepared forms to a tax
preparer for a consultation and tax advice, the tax preparer discovered that the taxpayer’s
employer had erroneously taken withholding out for the taxpayer. The taxpayer had just
assumed the employer had done the accounting correctly and never questioned it; however
the tax preparer knew the law and spotted the error. Result? Amended returns and a
permanent client. (This type of error is more common than many people think.)
- Using software for a fairly simple tax return, a married Pennsylvania taxpayer filed as
married filing separately (MFS) and came up with a $285 refund [it appeared to come out
better than married filing jointly (MFJ)]. When the taxpayer did the same for her spouse, she
was horrified to discover that he owed $969. Had they filed as MFJ, they would have
received an $847 refund. The result? An amended return and taxpayers who will use a tax
preparer from now on.
- A taxpayer in New Jersey attempted to file his tax return using software. He had incentive
stock options and could not figure out how to handle them. The software product was
calculating a tax liability in the high five-figure numbers. Upon seeking the advice of a tax
preparer and after reviewing the taxpayer’s finances and tax laws, the liability was reduced
to approximately $1,000.
- A taxpayer from the Angola, Indiana area could not figure out how to do the state return to
file along with his completed federal return. He brought along his completed federal return
when seeking the help of a tax preparer. Not one line of the self-completed federal form was
completed correctly.
- After a visit with a tax preparer to review his self-prepared return, a retiree living in New
York learned that New York would allow his military pension to be excluded from his
adjusted gross income for state tax purposes. The adjustment saved him several hundred
dollars which more than made up for the tax preparer’s fee for 2004 and for the next ten
years.
- Using software in 2003, a Phoenix, Arizona taxpayer had assessed herself a ten percent
penalty on her normal retirement, which was incorrect. A tax preparer review uncovered the
error and after preparing an amended return, the taxpayer received a refund of $2,400.
- With software, sometimes the box is empty when it comes to customer service. Last year, a
software providers’ customer service agent made the following statement to a taxpayer who
had
questions on software: “We sell software; we don’t give tax advice.” So where do software
users
turn for advice? Some end up using their best guess. The wise ones end up seeking out a
tax
professional. Many become permanent clients afterwards.
These are but a few of many experiences, some of them too lengthy and complicated to
recount, of
taxpayer frustration which led to them consulting a tax professional. Misinterpretations can
be costly
in the long-run. Terri Zurcher, a tax preparer from Middleton, Idaho probably summed up
the results
best: “Just buying a software program doesn’t make you a tax preparer anymore than
buying a word
processing program makes you an author.”
To receive a free brochure on how to find a tax preparer, visit the NATP Press Room at
www.natptax.com and download a copy of NATP’s “Finding the Right Tax Preparer”
brochure. NATP
maintains a listing of professionals in your area at www.taxprofessionals.com.
Members of the National Association of Tax Professionals (NATP) assist taxpayers with tax
preparation and planning. NATP is a nonprofit professional association founded in 1979 and
provides professional education, tax research, and products to its members. The national
headquarters, located in Appleton, WI, employs 43 professionals and 25 instructors. NATP
exists to
serve professionals who work in all areas of tax practice and has more than 17,500
members
nationwide. Members include individual tax preparers, enrolled agents, certified public
accountants,
accountants, attorneys, and financial planners. Learn more at www.natptax.com
Tax Software – What Do You Really Get in That Box?