It’s officially tax season! You’ve likely noticed an increase in tax related commercials telling you that you don’t have to be a genius to prepare your own taxes. Well, that’s true. You don’t have to be a genius to prepare taxes but you DO need to know the right answers if you’re going to use a tax preparation software.
While many people are able to prepare their taxes correctly with online tax preparation software, it’s important to recognize that each income tax return is unique to the individual(s) and the correct solution is not always the obvious one. Even choosing the correct filing status can cause issues for you if you don’t answer all of the questions correctly.
What do we mean? Here are three real-life examples that might make you think twice about going it on your own this tax season.
Example #1: So you can’t deduct rental losses?
A taxpayer who owned rental property answered that they met the qualifications for “active participation” and therefore deducted rental losses from other income. When the return was flagged for audit the examiner asked all of the pertinent questions and discovered that the taxpayer did not meet the requirements for “active participation” and was not eligible to deduct the rental losses.
Example #2: The $10,000 tax penalty
After retiring, a former President of a local bank decided to prepare his own using an online tax software. Until he retired he had always used a professional tax preparer. He received a letter from the IRS, a year later, indicating that he owed more than $10,000 in additional tax, interest, and penalty on the self-prepared return. He called his former tax preparer and asked for help. After reviewing the letter and the tax return, the preparer discovered that the taxpayer failed to report the sale of several stocks. For this reason, the IRS sent a letter stating the taxpayer owed additional taxes on the entire amount of the stock sales. The professional preparer amended the return to include the income from the stock sales. The professional preparer also reported the cost of the stocks, which reduced the net profit of the stock sales and resulted in a loss instead of a gain. The IRS had not included the cost of the stock in their calculation. As a result the taxpayer was actually due an additional refund, instead of owing additional tax.
Example #3: All these things are deductible?
A police officer has prepared his tax return online, using a popular tax software for more than 10-years. After a conversation with a fellow officer, he realized he may not be including all of the deductions he could claim as business expenses on his tax returns. He decided to go to a professional tax preparer to have his return prepared. During the interview process with the taxpayer, the tax preparer discovered that the officer had failed to claim deductions for the following since he joined the police force:
- Batteries for flashlights and radios
- Uniform cleaning
- Weapon cleaning kit
- Leather gloves
- Latex gloves
- Ink pens
- Spray paint
- Razor knife and replacement blades
- Knife/bolt cutters
The above items were supplied by the taxpayer and never reimbursed. When the preparer started asking about these items the taxpayer was surprised that he could deduct such items. Since all of these items are used in performing his job and are either required to protect him, individuals he may encounter or needed to perform his job, they are deductible. The additional deductions resulted in a larger refund for the taxpayer. In addition, the tax preparer amended the last 3 years of returns to include the items, which had not been previously deducted. The net total of the additional refunds, for the 3 years of amended returns, was significant.
While you may be reluctant to pay a professional tax preparer to prepare your taxes, you should consider these factors:
- The time it will take to prepare your return – a professional preparer can prepare your return in a fraction of the time it would take you to prepare on your own.
- The cost of the software – while the cost is minimal as compared to a paid preparer’s fees; if you placed a value on the time it takes to prepare your own return, you would find that the cost of hiring a tax professional is a far more beneficial option.
- Communication – while a tax software can be intuitive, there is no substitute for human interaction. A one-on-one discussion, with a tax professional, often leads to the preparer uncovering deductions, credits or adjustments, for which the taxpayer is eligible to claim or deduct, thus lowering your tax liability.
- Knowledge – while tax software can be intuitive, a true tax professional has invested a great deal of time and money in continuing their education. They know how to research issues, interpret tax law, where to find answers and how to document their findings to protect their clients and obtain the lowest legitimate tax possible.
- Peace of mind – a tax professional or tax firm offers a second review, by another preparer, of all returns prepared in their office, an accuracy guarantee, year-round service, and audit assistance in case of an audit or assistance with correspondence received from the IRS.