The market has been flooded in recent years with an ever-improving number of do-it-yourself tax software packages. Each promises an efficient, effective and, most important, inexpensive way for individuals to complete the annual drudgery of filing taxes.
What might have cost $100 or more to have an accountant prepare a basic tax return can now be accomplished for as little as $39.99 with one of the plethora of tax packages readily available. Due in part to challenging economic times, however, more people are looking to save a buck by doing their own taxes, and the trend is no longer limited to individuals and families.
In 2012, more than 30 percent of Americans used at-home software to complete tax returns. Among that group were small-business owners. Though they typically have a more complex tax situation, some opted to go it alone. But experts warn about the pitfalls of bypassing your CPA in favor of your home computer.
Deborah Weber is a tax attorney and partner in the Buffalo law firm of Andreozzi Bluestein Weber & Brown LLP. She said some small-business owners are “penny wise and pound foolish” because they don’t understand all of the complexities in the U.S. tax code. Relying too much on a software package could land them in trouble.
“Say you are itemizing your business deductions and you have a neighbor or colleague who told you that you can deduct your country club dues,” Weber said. “The software is just going to take the numbers that you put in, where a tax professional would catch that and tell you that isn’t deductible.”
Not properly understanding tax-deduction rules is one of the biggest pitfalls for business owners who decide to file taxes on their own, she said, and although making improper deductions may get you in trouble with the IRS, it is an issue that goes both ways.
“Tax professionals are trained to listen to you and ask certain questions to make sure you are taking all of the deductions you are entitled to,” she said. “So a small-business owner doing it themselves may not think of all of those things and cost themselves money, as well.”
You get what you pay for, she added.
“CPAs and return preparers are trained and they go to school for a reason,” she said. “They have knowledge that the average person doesn’t have.”
That knowledge could mean the difference between sailing through tax season or ending up sitting across the table from an IRS auditor.
“You might be saving a few bucks if you pay, say, $75 for TurboTax and it might have cost you $250 to do your return,” she said. “But when you get audited and they disallow a ton, on top of additional taxes, penalties and interest, you are going to wish you paid the extra money.”
Tim Sawers, meanwhile, is a tax attorney with Hodgson Russ LLP who has a different view. He said he sees advantages to using at-home tax software — Sawers himself uses it to file his personal income taxes.
“Generally, it is a big improvement for people who have always done their own,” he said. “It does things automatically and it eliminates a lot of calculations. The law itself has become so complicated that it has become easier to just follow a computer program than it is to do it by hand, even for someone who knows the laws.”
He acknowledged, however, that the software certainly isn’t everyone.
“Unless you are running a really simple business — no inventory or employees, just a business you run in your own name — there are just too many complexities,” Sawers said. “I think you need to have a sophisticated practitioner handling your return.”
Like Weber, he said despite the many advances in tax software, the cost of hiring a professional may be money well spent in terms of peace of mind for small-business owners.
“I have seen even fairly simple returns fouled up, especially when using some of these online programs,” he said.
And when mistakes are made, he and other tax professionals say, a business owner doesn’t want to have to go up against the IRS.
Despite reports that the federal agency had softened its tactics in recent years following highly publicized reports of overly aggressive collection tactics, not much has changed, Sawers said.
“I do not believe the IRS has changed its stripes,” he said. “They can be very heavy-handed. Once in a while you might see a grace note from the IRS, but generally, they are as heavy-handed as they ever were.”
Mark Tronconi, a principal with Tronconi Segarra & Associates CPAs in Williamsville, said his office gets the call when do-it-yourselfers get in a jam.
“All the time — we handle those cases regularly,” he said. “What happens is the business owners starts to do their taxes and then realizes, ‘This is beyond my skill set. I don’t know where to go with this.’ And that’s when they reach out to us.”
Tronconi said another challenge for both individuals and business owners is a failure to do adequate tax planning throughout the year.
“I can’t tell you how many people come to us in January, February, March asking, ‘What can I do in terms of tax planning?’ We have to tell them, basically, it’s too late,” he said.
When a small business works with a tax professional, there are plans to manage receipts, think ahead on deductions and strategize on purchases and sales of equipment — all aimed at minimizing tax liability.
Experts say that those are all elements of the process that tend to get lost in the software.
CPAs and business owners also tend to create a team approach to their taxes, putting themselves in a stronger overall position.
“We can talk to your insurance person, your investment adviser, your attorney,” Tronconi said.
“The more people you have involved, the better off you are. But like anyone else, we can’t help if we aren’t involved and don’t know what you’re doing.”
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