Kirk Johnson, MJLST Staffer
With the rise of automated legal technologies, sometimes we assume that any electronic automation is good. Unfortunately, that doesn’t translate so well for extremely complicated fields such as tax. This post will highlight the flaws in automated tax software and hopefully make the average taxpayer think twice before putting all of their faith in the hands of a program.
Last tax season, the Internal Revenue Service (“IRS”) awarded its Volunteer Income Tax Assistance (“VITA”) and Tax Counseling for the Elderly (“TCE”) contract to the tax software Taxslayer. For many low income taxpayers using these services, Taxslayer turned out to be a double-edged sword. The software failed to account for the Affordable Care Act’s tax penalty for uninsured individuals resulting in a myriad of incorrect returns. The burden was then thrust upon the taxpayers to file amended returns if they were even aware they were affected by the miscalculations. This is hardly the first time a major tax preparation software miscalculated returns.
American taxpayers, I ask you this: at what point does the headache of filing your own 1040 or the heartache of paying a CPA to prepare your return for you outweigh the risks associated with automated tax preparation services? The answer ultimately lies with the complication of your tax life, but the answer is a resounding “maybe.” The National Society of Accountants surveyed the market and found that the average cost of a 1040 without itemized deductions is $176 (up from $152 in 2014) while the preparation of a 1040 with itemized deductions and accompanying state tax return to be $273 (up from $261 in 2014). Many taxpayers can find a service like TurboTax or H&R Block if they make less than $64,000 per year (enjoy reading the terms of service to find additional state filing fees, the cost of unsupported forms, and more!). Taxpayers making less than $54,000 or 60 years or older can take advantage of the VITA program, a volunteer tax preparation service funded by the IRS. Filing your own 1040: priceless.
When a return is miscalculated, it’s up to the taxpayer to file an amended return lest the IRS fixes your return for you, penalizes you, charges you interest on the outstanding balance, and retains future returns to pay off the outstanding debt. I assume that for many people using software, your intentions are to avoid the hassle of doing your own math and reading through IRS publications on a Friday night. Most software will let you amend your return online, but only for the current tax year. Any older debt will need to be taken care of manually or with the assistance of a preparer.
VITA may seem like a great option for anyone under their income limits. Taxpayers with children can often take advantage of refundable credits that VITA volunteers are very experienced with. However, the Treasury Inspector General reported that only 39% of returns filed by VITA volunteers in 2011 were accurate. Even more fun, the current software the volunteers are using enjoyed three data breaches in the 2016 filing season. While the IRS is one of the leading providers of welfare in the United States (feeling more generous some years than they ought to be), the low income taxpayer may have more luck preparing their own returns.
Your friendly neighborhood CPA hopefully understands IRS publications, circulations, and revenue rulings better than the average tax software. Take this anecdotal story from CBS: TurboTax cost her $111.90, refunded her a total of $3,491 in federal and state taxes, and received a total of $3,379.10. Her friendly neighborhood CPA charged a hefty $400, received $3,831 in federal and state refunds, and received a total of $3,431. Again, not everyone is in the same tax position as this taxpayer, but the fact of the matter is that tax automation doesn’t always provide a cheaper, more convenient solution than the alternative. Your CPA should be able to interpret doubtful areas of tax law much more effectively than an automated program.
Filing yourself is great… provided, of course, you don’t trigger any audit-prone elements in IRS exams. You also get to enjoy a 57% accuracy rate at the IRS help center. Perhaps you enjoy reading the fabled IRS Publication 17 – a 293 page treatise filled with Treasury-favored tax positions or out-of-date advice. However, if you’re like many taxpayers in the United States, it might make sense to fill out a very simple 1040 with the standard deduction yourself. It’s free, and as long as you don’t take any outrageous tax positions, you may end up saving yourself the headache of dealing with an amended return from malfunctioning software.
My fellow taxpayers that read an entire post about tax preparation in November, I salute you. There is no simple answer when it comes to tax returns; however, in extremely complex legal realms like tax, automation isn’t necessarily the most convenient option. I look forward to furrowing my brow with you all this April to complete one of the most convoluted forms our government has to offer.