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The New World Of Tax Return Preparation

Things are rapidly changing in the world of tax return preparation. Take for example the notion of mailing in a paper tax return. More than 80 percent of tax returns are now sent to the IRS electronically. Consumer software for tax return preparation is providing more and more people a way of handling their tax filing without having to even set foot in a tax preparer's office.

Should you prepare your own return?

My answer is a qualified maybe. I get asked this question a lot, and the answer is simply not the same for everyone. If you have a modestly simple tax situation, then yes handling your own return is no big deal. If you have W-2 income (employee), a mortgage on a primary residence, participate in an IRA or a qualified plan at work, and nothing more exotic than this, filing on your own is a reasonable option.

Even for a W-2 employee, filing a tax return can quickly become complicated. If you have expenses as an employee that your company does not reimburse you for, they MAY be deductible. There are a lot of rules, and you can only deduct expenses that surpass a minimum threshold. This one wrench thrown into the equation may be more than you want to deal with.

Other situations, such as operating a side business, owning rental real estate, or having gains/losses from investments, raise the level of complexity to a point that is beyond most people. The various software programs are great, but they can only work with the information you input.


What software should I use? What about free software? 

To begin with, much of this has become cloud based. So, for most people, you don't need to go down to Office Depot or Wal-Mart to buy a boxed version of your preferred software. These days, most people will simply navigate online to the provider they want to use and prepare their return 'in the cloud.' 

Major Players In Tax Prep Software


H&R Block

Tax Act

Here is a great side by side comparison from PC Mag.

Many tax software programs today offer a 'free option' for those filing the most basic of returns. If your income is below $60,000 the IRS offers access to free tax prep software as well.


Hiring A Tax Preparer

The tax preparation field is really made up of two levels of professionals. There are individuals that have a basic knowledge of the tax law gained through a several week training program. You will find them at various retail locations in your community. You will even see these firms open up temporary offices during tax season. 

The second level of tax preparation professionals are those that are formally trained accountants. This would include CPAs but also individuals that practice as accountants year round without a CPA credential. 

If your return involves business income, rental real estate, substantial work related expenses, or gains/losses/dividends from investments, you likely need help from a year round accounting professional.  

Just as in the world of software, you will also hear about 'free tax preparation' in many communities. Honestly, I simply can't recommend this option. I am all for saving money, and these volunteers mean well, but if you have anything beyond the most basic tax return, this is not a viable option.

The Tax Preparation Field Is Largely Unregulated

Hard to believe, but anyone can hang out a shingle as a tax preparer. The IRS had plans of regulating tax preparers, requiring them to register, and pass a competency exam. A federal appeals court ruled in favor of those that sued the IRS wanting to keep the status quo.  Many unregulated preparers get into the business to set up multi-million dollars scams. Miami, Florida is ground zero for tax refund theft.

What about having a friend do your taxes? 

I am hearing more and more about these kind of arrangements. You may know someone that is good with computers and they offer to prepare your return for you. Maybe you buy them dinner in exchange for their time. I recently heard about a scenario where a twenty-something was preparing returns for their entire circle of friends and family. It was also added what a 'great job' they were doing as everyone was getting very large refunds... refunds larger than they had ever received in the past. Hmmm.... well, you can guess what I thought about this. I just don't like the idea of such informal arrangements. My concern is just as much for the good samaritan volunteer tax preparer. Even if they are doing the return for free, they are taking on a liability in the event that there is a problem with that return. The IRS has taken an ever increasingly strident position with tax preparers who push the boundaries of the tax code. While not officially in the business of preparing tax returns, volunteering like this does bring a significant liability to your doorstep.

What about those new health insurance penalties?

Yes, the penalties do really kick in this year for those that do not have health insurance. For those (like me) that have opted out of Obamacare, you must file IRS form 8965 to claim your exemption. Otherwise, you will pay a penalty based on your income. If you did not have health insurance coverage in 2014, you will owe a penalty that is generally based on 1% of your gross income. The penalty goes up to 2% for not having coverage in 2015. 

Biggest Mistakes To Avoid

The most common error is neglecting to report all of your income. It can be easy to overlook a 1099 from your online business, or a side job that you did. The IRS computer system will catch this, and although the taxes may not be significant on a small amount, you may have to file an amended return.

Another common mistake is simply typing in Social Security numbers incorrectly. It is easy to do, especially if you are claiming dependents. Just one digit off and your return will be flagged.

If you have your own tax season strategies for saving money and avoiding headaches, please use the comments section below and we can start a conversation. 

Helping you make the most of God's Money!

James L. Paris 
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