This time of year, you usually can’t get through a television program without seeing a commercial about how easy it is to prepare your own taxes using [insert tax software company here]’s affordable software.
While it may seem like a relatively painless way to get your taxes done, it’s actually not if it causes you to pay more in taxes or get into trouble with the IRS. Tax software is a tool, not a replacement for a well-informed and educated tax professional. If you haven’t learned tax preparation, a mistake could easily happen simply from not knowing the tax laws or the flow of a return.
Tax software companies make mistakes in programming. If the user has no formal tax training, he isn’t going to realize there is a programming issue within the software. How do we know this? We use tax software everyday as a tool to help our clients. The difference is that we know the tax laws and double check calculations so that we can catch mistakes if and when they happen.
Here are 5 ways tax software can mess up.
1. The flow of the return could be off
If you’re trained in tax law you know there is a specific flow that needs to be followed to ensure everything is calculated correctly. One way that tax software can goof up is by transferring totals to the incorrect pages. This could result in the tax law not being applied appropriately for your circumstances and will essentially get you in trouble with the IRS.
Sometimes a form (or series of forms) need to be prepared by hand to determine if the software is correct in the calculations for the return. Without tax knowledge, there is no way to determine the accuracy of a calculation.
In the same vein, losses can be allowed without any statement or warning to check basis calculations.
3. Misinterpretation of tax law
Exceptions to the tax law are not always clearly defined in tax software, thus allowing a huge margin for error in certain situations. An uneducated taxpayer will most likely miss those exceptions, causing them to either overpay or underpay his tax liability.
4. Issues with Net Operating Losses
Net Operating Loss (NOL) calculations are rarely consistent between software companies once you throw in the right mix of nuances. For example, tax software typically tries to create an NOL out of the foreign earned income exclusion by failing to reduce certain expenses by law.
Items such as carryover losses from capital gains or unused tax credits are easily overlooked by the untrained person.
5. Forgetting forms and statements
There can also be issues with the printing and submitting of forms. Here are some examples.
- Software sometimes fails to print Form 6251 when required, which is detrimental, especially when an NOL exists.
- Form 8889 doesn’t print or register when there is a 1099-SA entered, which can result in the IRS sending notices and tax bills for unreported income that may be excluded from income in the first place.
- Penalties can be costly for the taxpayer when a return is inaccurately prepared. An uneducated taxpayer may not realize that a statement is required to accompany a return (required by some forms and types of income); therefore, omitting the statement. The omission of the required statement could result in a costly fine.
Some software companies say it doesn’t take a genius to prepare taxes, but what we know is that it does take an expert. If you haven’t made your 2017 appointment to come see us, schedule it online today.