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Tax Software Is Not for Everyone; It's Often Best to Stick With a Pro


Yes, online tax preparation is better, easier and cheaper than ever. Most people can now prepare and electronically file their state and federal returns for less than $20.

That doesn't mean we should, however.

No amount of technological sophistication can compensate for taxpayers who don't know what they're doing. Although the best programs can guide you through a relatively straightforward return, there are many instances where a professional tax preparer is a much better bet.

Strongly consider hiring a tax preparer if any of the following apply to your situation:

* You don't follow instructions well.

A friend recently asked which schedule he should use to write off as business expenses costs his employer had already reimbursed. When told he couldn't do that--that it was not a matter of whether to use Schedule C or Schedule A--he insisted he'd been writing off these expenses for years.

This friend had been steadfastly ignoring all the "help" boxes in his tax software that could have explained he was making a mistake. A tax preparer could have made the issue clear in about two minutes--and a good one would not have signed off on his tax return had he insisted on deducting nondeductible expenses.

* You want, or need, to be told what to do.

Using tax software requires you to be inquisitive and willing to sort through all the advice provided to find what applies to you. This makes preparing many tax returns time-consuming, and you can still not get all the information you need.

Some people just don't want to go to the effort. If you've got anything more complicated than a 1040EZ or 1040A, you can expect to spend several hours researching tax law and typing in data on your own. It's much easier to spend 30 minutes to an hour with a tax preparer and let him or her do the work.

Personally, after five years of testing tax software and several dozen hours of professional tax training, I have never gotten through a complete return on any program without having to resort to a tax guide or a call to my enrolled agent for clarification on some point of tax law not adequately described in the software's help package.

* You don't want to keep up with the latest in tax law. Just because you understood what the rules were last year doesn't mean you can file a correct return this year. Congress passed new laws, the IRS came out with new rulings, and judges made decisions that could have affected your tax situation. Your daily newspaper will cover developments that concern a large number of people, but it won't report on every change. Certified public accountants and enrolled agents subscribe to newsletters and alert services and take continuing-education courses to stay up to date. They live, eat and breathe this stuff 24/7, whereas the rest of us have lives to lead.

* You own a small business. If you can explain what a mid-quarter convention is and when it does and does not apply, you might be able to look over your tax preparer's shoulder while he or she prepares the return. Most other small-business owners should simply hand over their records and do whatever the tax preparer says.

Depreciation schedules, payroll taxes and Section 179 expense limits are just the start of what an entrepreneur must understand to tackle a small-business return. There are many gray areas of tax law related to business, and returns with Schedule Cs tend to get audited more frequently. A tax preparer who understands your business and has a good relationship with the IRS and the state Franchise Tax Board is an invaluable business asset.

Besides, the expense of preparing your business return is an above-the-line deduction.

(Above the line, by the way, refers to the line on your tax return that discloses your adjusted gross income; it means that these deductions reduce your taxable income dollar for dollar. By contrast, below-the-line deductions such as itemized and standard deductions reduce your tax bill by a percentage that roughly equals your tax bracket. Below-the-line deductions are inferior, in terms of tax savings, to above-the-line deductions.)

If you have a retirement program that includes your employees, a benefits-savvy tax preparer is a must. Any errors could disqualify your plan and make contributions taxable to you and your staff.

* Your taxes are otherwise complicated. How complicated is too complicated to do it yourself depends on the software--and the tax preparation skills of the taxpayer. Generally, though, if you have extensive investments, household employees, rental property or foreign income, or if you live in more than one state or country, you probably could benefit from a professional's advice.

Tax software varies in its ability to guide inexperienced taxpayers through common but difficult areas, such as determining who qualifies as a dependent or whether the earned-income credit applies. TurboTax is probably the best of the batch, but still requires some work on the taxpayer's part.

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