DIY Tax Software Insufficient

Amen, brother. I've been at it for 31 years next month. And one thing I've learned is: I don't try to remember the stuff I pay the software folks to remember for me, but I have a pretty keen sense of when I need to tell a client, "I don't know, but I'll research it!"

One of my long-time clients, owning an S corporation, fell on hard times (who hasn't?) a few years ago and tried to do his own return on one of the DIY programs. Unfortunately (for him), he forgot to include the Schedule K-1 info on Schedule E. As you pointed out, he was faced with the accuracy-related penalty in addition to the regular penalty and interest, and nothing I could do could sway the IRS from its collect-the-penalty mission. End result: it cost him: (a) that penalty and interest; and (b) my fees to get it right and try to get a waiver of the penalty, about twice what I would originally have charged him (I had offered a significant discount because of knowing his circumstance). Lesson learned.

And yesterday, another of my long-time clients, treating his household as a business, made the uncomfortable decision that this year he has to go the DIY route. He does understand the risk he's taking, and for him tax preparation is thoroughly distasteful, so I have no doubt that he will be back as soon as his finances permit.

Gene,

As a non-professional, I am grateful for the input from you and Tom and all of the other usual contributors.

I use home tax software, but I've never regarded *this* forum as a place to get answers about how to use the software. Rather it is a place where I can come to get answers to questions about taxes; as I've done a few times this year.

When my taxes were more complicated (running a business), I used a CPA. And I still stay in touch with him as he is a good resource. (And this year he's doing the income tax returns for my Mom's estate and various trusts that she had).

I find that, with the tax software program I use, if you don't have a good idea of what goes where, things will get messed up. But in the example you cite, although the taxpayer may have tried to blame his tax software program, I wonder how that could lead him to NOT include the premature distributions. (rhetorical question).

--ron

And even the pros need to give at least a passing glance at the finished product.

A couple of years ago a friend came to me with her return prepared by her accountant and a nastygram from the IRS. After less than 60 seconds looking at the return, during which I saw a Schedule F, I told her something was terribly wrong and she needed to go back to her accountant and have her fix it. Who knows what was on the data puncher's mind, but it was clear that no one had reviewed the return, including my friend. (She got a stern talking-to also.)

I'm not a pro, but I'm often accused of being a shill for the pros when I tell people they're nuts if they don't go hire a good accountant. It doesn't have as much to do with return prep as it does years of dealing with failing businesses run by people who knew nothing about the financial side of things except they were working 80 hours a week and losing money.

It's important for us amateurs to know our limits too. When I sold a rental and took one look at the 4797 I ran to find a good preparer even though I've been doing VITA returns for 15 years. I know when I'm in over my head.

Phil Marti VITA/TCE Volunteer

My usual example is that tax software is a great tool for those who know what they're doing,

In the same way, a chainsaw or a blowtorch are great tools if you know what you're doing.

Congratulations!

And, yes, Virginia, there are really are some weird folks who actually enjoy doing taxes:^)

This NG is a

I'm blushing. Thank you.

Helen currently hangs out, quite actively, on the NAEA Webboard.

If you've been looking for a reason to join NAEA, the Webboard alone is a very good reason.

In the last few years I've been seeing more and more one-year drop outs. Regular clients who took one year off to DIY, and came back, about half the time after receiving an IRS Nastygram. It seems to take just one year to convince many folks this DIY stuff is for the birds.

Gene, your post was right on, Thanks.

I'm one of those nuts who kind of enjoys my annual tax prep time. It's kind a spring ritual, and while I wouldn't call it "fun", as long as I feel comfortable that my situation is not more complex than it's ever been and that I've done extensive reasonability testing on both the current year's form and it's comparison to the prior year, I will continue to use DIY software.

That said, I've done my own taxes since I started working, which is decades ago. I did it manually when all I had was a W-2 and maybe some interest and dividends. For many years it was just that straightforward. Eventually I had to deal with capital gains/losses. No big deal; I understand my investments and the transactions are so vanilla, I don't need someone explaining how to subtract sales price from cost basis. Eventually I needed to itemize deductions; again Schedule A doesn't require a master's degree IMO. Over the years I've learned a little more each time a slightly new situation came up. However, the first(and only) time I bought an investment property and sold it (probably in two years because I was not cut out to be a landlady) I went to an accountant. When I retired from W-2 work and started consulting, I had no clue about depreciation and went to an accountant. When my father's estate generated a K-1, the accountant for the estate told all the heirs exactly how the k-1 figures should be handled.

Knowing how to prepare (noncomplicated) tax returns should be a prerequisite to using software. For all but the most basic 1040A, a naive user can get themselves into so much trouble. If you want to see how many of these naive users are out there, check into the Turbo Tax Community and read some of the questions. Some make you want to cry because it's so clear that the person has no clue how to fill out any tax form whatsoever and thinks the software is going to make it happen magically. I'd say TT (my choice) does a good job of making something tedious and error prone much, much easier, but one still needs to understand the fundamentals behind the process and to also know when it's time for a professional to provide guidance. That said, I always checked the returns that came back from my accountant during my early Schedule C years, and unfortunately found mistakes. Sometimes they were clearly data entry errors, but his firm also fouled up a city tax form for several years before I caught a nuance in the instructions which they were not paying attention to. I stopped using him after that; my Schedule CZ was primitive by then - I was retired on disability and it was a service business, very low income and few expenses-- and I didn't feel it was beyond my capacity to file it, having had the accountant set up the basic pattern initially.

This is a long winded response that is essentially in agreement with the original poster on the way DIY software should be used. It's hardly a magic bullet. You have to know your limitations, in all areas of life.

On Fri, 19 Mar 2010 16:53:51 EDT, jo wrote Re Re: DIY Tax Software Insufficient:

Well put.

I've always done my own taxes, using TT ever since it first came out (as Macintax then), and I've wondered how pros can do a much better job. With tax software, you enter the data from forms like W-2 and 1099's, and it copies them to the appropriate fields in the form and does the math. If you don't enter something, your taxes will be wrong. But there's no way for the software to know that you didn't enter something.

How is using a tax preparer any different? If you don't give them the form for the premature distribution, they won't enter it into your return, either.

I suppose the victim in the OP could have been using the interview method of the software, and it never asked "Did you receive any premature distributions?" Is this something a tax preparer would be sure to ask?

Good points, Barry. I am in the same MacinTax/TurboTax camp as you. I've seen the questionnaires a number of pros give their clients to fill out, and for the most part, those are the exact numbers the client could just key in to tax software on their own.

I'd suggest that there are a number of things that a pro might offer that would help the client yet not be readily obvious from software:

- For retirees who don't itemize, the donation from IRA rule (past few years haven't seen if renewed for 2010), this saved $500 for someone I helped.

- Discussion of Roth conversion - by March, it's a bit late, but a November dry run tells me how much they can convert to top off current bracket, avoiding the every rising RMDs.

- The itemized deduction grouping. Those who are very close to the standard deduction high or low can be advised how to legitimately cluster payments (prop tax, one months' mortgage interest, charitable donations, etc) to odd years to blow through the number, and take the standard deduction in even years.

I don't know if Tax Preparers consider this to be outside of their expertise, but it would seem common sense that as people get more comfortable with software, the pros might want to show more value than merely copying numbers over, as you observe.

Joe

That's all tax *advice*, not tax *preparation*. TT has a "deduction finder", and at the end it offers to give advice for the current year based on what you entered for the previous year, but I've never bothered with any of those areas (my life situation is pretty simple: no dependents, no business, no regular medical expenses). I have a financial planner, he helped me improve my tax situation years ago with more tax-advantaged investments.

Me too.

I can't speak to the others, but I can assure you that TurboTax does ask about IRA distributions (premature or otherwise) and handles them appropriately, and I seem to recall that it's been asking about this for as long as I've been using it to do my taxes.

Therefore, while I appreciate the point that Gene Utterback was trying to make at the start of this thread, I have to agree that the decision he referenced actually has little to do with DIY tax software and much to do with an idiot who got a tax form in the mail and proceeded to ignore it when filing his taxes. He could just have easily ignored it when being interviewed by (or filling out a questionnaire from) an accountant.

A semi-rhetorical related question I've often wondered about: how are people entering the workforce / leaving their parents' houses supposed to find out about filing taxes? It's not something they teach in school. I've encountered college students who don't have a clue about it. How many people are there who just don't file because they don't know they're supposed to, and whom the IRS hasn't bothered to go after because they'd probably get a refund if they bothered to file?

Two ways:

2) after receiving that first paycheck and asking who took all that money out of their check and how do they get it back.

I can certainly appreciate not knowing all the details of how to fill out your taxes, but you'd have to be totally ignorant to not know that you're supposed to do it.

Back before The Flood IRS published a basic overview for use in high school called "Understanding Taxes." Fate recently introduced me to a fresh permanent resident alien who is a prime candidate. Lo and behold, Understanding Taxes is still around, and you can do it through the IRS website. Ah, technology.

When I'm crowned benevolent dictator all high school students will be required to take a basic life skills course. Basic home maintenance, basic cooking, basic finances, etc., including taxes.

Phil Marti VITA/TCE Volunteer

Well, I feel that is part of my job as a parent. In fact, I'm about to go over that with my oldest son this week.

I guess I have a similar view of learning how to properly use credit cards.

Interestingly, the Boy Scouts Personal (Financial) Management merit badge doesn't include taxes, though.

I have been doing one person's taxes for many years and she had been unable to efile because her ex always filed first & claimed her son. She tried dealing with IRS herself and after case had been closed against her she finally told me what was going on and I was able to get her case re-opened and settled in her favor. (Pro to the rescue?)

This year she did her son's taxes. When we tried to efile her it bounced because she apparently let her son claim his own exemption. Now his return has to be amended and she had to file a paper return once again. (Unfortunately, she lives across across the continent and we do everything by mail.) DIYer carelessness?

We've had a lot of these with VITA clients, albeit not self-inflicted like your case, ever since these refundable credits started showing up. Someone in a college dorm would be running around telling students who had never learned anything about tax law to file quickly because there's free money to be had.

Phl Marti VITA/TCE Volunteer

. . .

On two occasions I have been asked by members of Parliament, "Pray, Mr. Babbage, if you put into the machine wrong figures, will the right answers come out?" I am not able rightly to apprehend the kind of confusion of ideas that could provoke such a question.

-- Charles Babbage, 1792-1871

Seth