Is using Tax Preparation Software a good idea?

The ability to prepare and file your own income tax return can be a very convenient experience.  There are many tax software programs available, and most do a good job of helping you prepare and file the income tax returns for a small fee. For the average taxpayer, these programs cover the main issues, and produce an accurate tax return after a few hours of data entry. Most taxpayers take paying their taxes seriously, and the process goes smoothly. The problem is when a taxpayer is not an “average taxpayer”, and does not realize it.

A good example of when you need professional tax help is when you have foreign bank accounts, have a business, or went through a major life event, such as you received an inheritance or are going through a divorce. In the example of having a foreign bank account, there are income tax forms to file and also disclosure forms, that only a tax professional should prepare to avoid costly mistakes. The penalties related to incorrect foreign disclosure of assets can amount to tens of thousands of dollars of penalties if not done correctly.

When a person receives a tax bill from the IRS, it is a very stressful time. We are here to help, and give sound advice on how to minimize the problem. One mistake I see often if when a person views a tax preparer as an expert that does not need your input in any matter other than given them the tax data (W/2 forms, 1099’s, etc). In these cases, the taxpayer basically hands all the tax forms to the tax preparer, who then prepares the income tax return. The taxpayer, without review, then signs the return since the preparer is an “expert”. What a Mistake!  Once the return is completed by the tax preparer, the critical next step is to review the details of the tax return and look for mistakes and issues. I realize this is not a fun process, but its critical to finding tax problems and issues before the tax return is filed and then needs to be corrected through an amendment or worse yet you get a big tax bill with penalties. If you follow the above advice, you will avoid notices from the IRS that you owe penalties and interest on understated taxes in most cases.

If a mistake does happen, and you were diligent in reviewing the tax return, we can assist and ask for penalty relief by meeting the IRS reasonable cause standards which allow penalty relief when a taxpayer meets certain qualifying standards (https://www.irs.gov/businesses/small-businesses-self-employed/penalty-relief-due-to-reasonable-cause). To obtain relief, in general you need to prove 1) the tax advice or return preparation was from a qualified person (such as a CPA, enrolled agent), 2) that the taxpayer supplied the tax preparer with a complete statement of the facts, and 3) and you relied upon their skills to file your taxes. This tax relief generally will be successful for one time events, but not for an issue that spans over many years. It also is not a good excuse where you failed to file your tax return, since that burden always falls on the taxpayer to make sure the tax return is filed. If the IRS does charge a penalty, then they will also charge interest on the underpaid taxes, and penalty. If they remove or reduce the tax penalty, then the interest related to the penalty will also be reduced.

Lastly, whether you prepare your own taxes, or have an expert prepare them, you still need to be extra careful avoid mistakes that will cost you extra taxes in the form of penalties

By: Timothy S. Hart

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