Should You Use Tax-Preparation Software, or Not?

You’ve seen infomercials boasting about free software programs that allow you (yes, you!) to file your own tax returns. But the question is: How reliable are these programs, and should you use them?

The answer is pretty simple. If you have a general understanding of the US tax law and if you have enough common sense to comprehend your tax returns when completed, then it is okay to use tax-preparation software to do your own returns. However, if you have absolutely no idea what you are doing, then please hire a professional!

Most people foolishly believe that a computer program will be able to accurately file their tax returns. The truth is that most people don’t know what they are doing when it comes to taxes, and consequently would not be able to discern if information provided by tax-preparation software was right or wrong, which could spell big trouble later down the road.

Take this cautionary tale for example: I had a referral client several years ago come to me for tax returns. While in the process of filing them, I looked at her previous years’ documents, and was shocked at what I saw. My client, who had used her own tax preparation software, had declared an income of $28,000 while also declaring $32,000 of miscellaneous employee business expenses.  Because of this mistake, my client received earned income credit AND received a tax refund as a result of allegedly not making any money.

Now this may sound like a dream come true, but let me warn you that the IRS will catch these discrepancies on your tax returns and hunt you down to audit you! Sure enough, six months later, my client received an audit notice. My client had erroneously believed that her tax preparer software was accurate, when in reality she had been answering all the wrong questions and digging herself a deeper and deeper hole throughout the years. She merely pushed buttons and received her supposed “refund”. In the end, because she did not make enough money to justify the audit nor did she have the correct deductions that she had claimed, she had to repay her taxes plus penalty fees.

Tax-preparation programs are designed for processing generic tax returns. However, if you are self-employed, a tax-preparation program will not be sufficient; it will not be able to ask you whether or not you’ve accounted for all your business expenses, tell you what constitutes a business expense or be there for you to talk to during the middle of the year when you have an urgent question.

If you use tax-preparation software without any knowledge of how taxes work, you will be taking a huge gamble! Tax-preparation software won’t be able to tell you what mistakes you made or whether or not you are at risk for an audit. Like your schoolteachers, the “I didn’t know how to use it!” excuse won’t work for the government either. At the end of the day, you are accountable for your own taxes if you use a tax-preparation software program.

If you feel unsure about your taxes, let us help. Contact Simons Accountancy for a free consultation at 714.637.4552 or via our online contact form here

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