People who think they are saving money by doing their taxes with the help of tax software, instead of a certified tax preparer, are sorely mistaken. Because the federal tax law changes from year to year, picking up the nuances in the codes can be all but impossible for individuals who don’t prepare income taxes for a living, according First American Tax Services partner Alex Zorab. Located in Chicago, Zorab is a certified public accountant who helps both individual clients and businesses handle their federal and state tax needs. In this piece, he tells us a few of the pros and cons of using the tax preparation software currently available on the market.
The way I see it, every person should be using an accountant to help prepare his taxes. Here is a little bit more information, though, about the pros and the cons of using tax preparation software to do your federal income taxes.
Cost
Pro: The main pro, when it comes to tax preparing software, is that it is cheap. These online programs might cost less than $100, and for that price, they claim to help you file both your state and federal taxes online.
Con: Individuals who use tax prep software are much more likely to miss important deductions during the filing of their returns, which could cost them more money in the long run. If a person thinks he saved $150 or so by doing his taxes himself, but then ends up with a tax bill that is $2,000 higher because he did not put down all the correct deductions, then clearly that is costing him more money than if he had just paid a CPA $200 or $300 to handle his income taxes to begin with.
Time
Pro: When it comes to the time it takes to do your own taxes, there isn’t necessarily a pro when it comes to the tax preparation software. Oftentimes, it takes people many hours to complete their returns using these program — and even then, their returns are still done incorrectly.
Con: Even though people think they are saving time by doing their taxes on a computer from their home, what usually happens is that they spend much more time answering one specific question that seems confusing than they would have spent gathering every single document and taking it to a tax preparer. People tend to think that a particular question is taking too much time to read perhaps because it is worded in a lengthy way that is confusing. So they just pass it up and end up missing out on major deductions and tax credits that they would have qualified for.
Accuracy
Pro: The tax preparation software asks lots of questions about specific tax situations, which is supposed to help prevent errors. Unfortunately, when people are just looking at a screen and answering yes or no to a question without any actual professional to ask the follow up questions to, they tend to just skip any questions they don’t know the answer to right away. When it comes to taxes, you just can’t do that. When you pass up an important question about a possible deduction or tax credit just because you don’t know the answer, you could be passing up $2,000 or more sometimes in possible deductions or credits.
Con: Information about some of the most important tax deductions can be unclear on tax software programs. And as I said, when a particular question doesn’t seem clear or when a person doesn’t have the energy to search for the correct answer online anymore, they tend to just pass it up without answering it. When working with a certified public accountant, however, this just won’t happen. A CPA will be able to answer every single question that his clients have, and will make sure that the clients are getting every single deduction and credit that they qualify for.
Overall Value
When it comes to tax prep software, people are saving pennies but losing thousands. Even for the people who do all of their homework and try as hard as possible to do their taxes correctly, one thing they can never have when doing taxes on their own is peace of mind and security in knowing that everything was done legally and correctly.
Individuals who try to prepare their own taxes never know for sure if they are taking all of the deductions that they qualify for, either. For example, we had some clients in our office this year who came to us for the first time. They said that in the past, their refund was always around $400. But when they came to our office and we did their taxes, they got back $2,500 — perfectly legitimately and legally, too. Obviously, they were shocked. And they had been doing this for five years. So every year, they were saving $300 by not paying a tax prepared to handle their taxes, but then losing $2,000 because they were not getting the full refund that they qualified for.
So if you want to save $300 but you end up wasting $2,000 in the process, then anyone can see that is not a good deal. These are real numbers that we see here, and sometimes the numbers are even more substantial than that.
