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Audit Risk - Tax from Table vs. Tax from Schedule

This year I stopped to check how my 'popular tax program' calculated the tax on my taxable income. It was clear that it was derived from a lookup in the tax tables rather than from the more accurate determination arrived at by using the tax schedule. From my humble perspective it would seem a lot more bother to load the entire new tax table for lookup than to write an algorithm that uses the tax schedule. The tax table appears to apply the tax on the highest income in the $200 increment to the entire increment. The difference is small, $3-5 in the 25% bracket. Somehow this approach does not fit the "we do everything to minimize your taxes" promise of the program. Does the IRS also use the tax table approach when doing a preliminary check on a return? Is there a higher risk of audit if they must stop and use the tax schedule? This is the only explanation I can find for the 'program's' using the table rather than the schedule. They promise to 'defend you' if audited. Perhaps the customer pays a bit more and the risk to the software company is a bit less? Thanks,

baumgrenze

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Reply to
baumgrenze
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It's not that one way is more 'accurate' than the other. The instructions clearly state that the tax tables MUST be used for taxable incomes under $100K and the tax schedule (computation) MUST be used for higher incomes. (Someone else will no doubt provide a reference to the actual code or regulations.)

-- Don EA in Upstate NY

Reply to
Don Priebe

I doubt that the software actually loads the table. Instead, it almost certainly uses an algorithm to compute the values in the tax table. I did this a while ago when I had an Excel spreadsheet for doing my taxes, and it isn't that difficult to figure out the algorithm. (But it isn't the one you think it is. See below).

When I last looked at this in any detail, the tax amount was computed based on the middle of the tax bracket, not the highest amount. (Downloading the instructions now). OK, picking one bracket at random, MFJ:

72,900 to 72,950 MFJ: $11,346

Schedule Y-1: 61,300 to 123,700 $8440 + 25% of amount over 61,300. Tax on 72,900 = 11,340 Tax on 72,925 = 11,346.25 rounds to 11,346 Tax on 72,950 = 11,352,50 rounds to 11,353

So, if you had actually computed this, you would have found that the tax tables do, in fact, do the reasonable thing and compute tax on the mid-point of the range. Finally, the brackets are only $50 wide, not $200, so you really can't have more than about a $6 difference.

Well, half of the time the tax table increases the tax by up to a few dollars and half the time it decreases it. But there really isn't any choice available to the software or to you as the tax payer. You have to use the tax tables unless your taxable income is above $100,000.

Presumably you would just get an automated notice correcting an arithmetic error on your return. Since there isn't any choice in the matter, you need to follow the instructions. Of course it the future, you could just try to increase your taxable income to the point where you don't need to use the tax tables anymore.

Reply to
Tom Russ

IRC section 3.

-- Phil Marti Clarksburg, MD

Reply to
Phil Marti

I'm not weighing in on the issue on whether or not the tax tables are indeed 'loaded' (or hardcoded right into the application) nor am I qualified to discuss any algorithms that may or may not be used instead, but I certainly can tell you there's not a problem in 'loading' any table. Those values and brackets are certainly extremely easy to have in the tax application; all they are is a fairly limited amount of numbers easily convertible to any data structure for lookup when needed. Easy programming. Now, again, whether it's done or not, I done know.

-- Regards -

- Andrew

Reply to
Andrew

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