Tax-Preparation Software Perils
It is inevitable that technology will continue to move forward, giving us access to more information and allowing us to do more things by ourselves than ever before. This will affect everyone, though in many different ways. Personally, my profession has seen a shift with more people preparing their own taxes with the proliferation of do-it-yourself tax software.
Of course, it is both not surprising and a bit self-serving for me to say that I don’t think this is the greatest strategy for people to employ. It may also be a bit hypocritical, for I’m sure there are some (former?) travel agents who would tell me that I do not find the best deals when I book my own trips on the internet. Still, there is a recent story that shows the potential dangers of tackling the tax code alone.
This case concerns an insurance consultant who used software to prepare his returns. The IRS believed he claimed too many deductions. This led to the consultant saying he had evidence to prove some, while blaming his tax software for “luring him” into claiming others.
Now if you are actually interested in the details of the case, feel free to read the linked article from taxadviser.com. In this space, however, I want to look at it from a larger view.
First, I don’t question that tax software is made by designers with good intentions. They do not want to produce a product that leads to people filing incorrect or fraudulent tax returns, for they would not remain in business long with that tactic.
Also, I think that this software can help many people with simple financial situations quickly and easily file a legal return. If your financial picture is not complicated, there are an easy series of questions that could be asked to fill out the necessary forms and have it be a less painful process than actually reading over the actual IRS forms and instructions by yourself and going at it completely alone.
As this article shows, however, not everyone has such an easy tax picture. And if you are not 100 percent sure on any question the software asks or on any deduction you’re claiming … well … let’s just note that the case in question involved a claim of a net operating loss of $185,673 that the IRS disallowed all but $142 of. That’s the type of mistake that can haunt someone for years. Now I don’t know if there was any willful, or at least optimistic, reading of what the tax software said, but this is not the type of mistake any credible tax preparer would have allowed.
I don’t think that the only danger in tax software is the possible claiming of deductions to which you are not entitled In fact, I think the biggest danger when filing a return is such a manner is that you will miss deductions for which you legally qualify. You see, no matter what questions the computer asks, it cannot understand your situation in the same way as another person, someone who can better understand you as an individual, and not just as some answers on a flowchart.
Either way, allow this to be a cautionary tale, even if self-serving.
To ensure we don't make the folks at the IRS ornery, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
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