Another April 15th has come and gone. Time is definitely speeding up. It seems like I just packed away the last of the Christmas decorations a few weeks ago. Yikes!
For myself and our CPA firm staff, it was a very busy tax season. We prepared a lot of complicated tax returns.
We encountering such things as "Forgiveness of Debt" income due to a lot of repossessed homes; "First Time Homebuyer Credit" due to a lot of folks buying up those repossessed homes; "Rental Income and Losses" due to a lot of folks buying up repossessed homes and turning them into rentals; "Loss Limitations" for businesses due to ownership tax basis being used up; "Net Operating Loss Carrybacks" as far back as five years, generating quite a lot of refunds; "Capital Gains and Losses" due to a lot of stocks being sold in 2009; "Residential Energy Credits" due to quite a few folks taking advantage of making energy efficient improvements to their homes; "Education Tax Credits" due to a lot of college students out there, some draining their parent's savings; "Early Withdrawal of IRA Penalties" due to folks needing those funds to pay all those bills that piled up; "Oil Royalty Income" - quite a few folks rediscovered the upside of higher oil prices; "Gambling Winnings," one couple won AND LOST more than $1 million at one local casino; etc.
One of the interesting things that we noticed this year was how many folks attempted to prepare their own returns using software, such as TurboTax, etc. Some of those programs work pretty well. I'm a bit spoiled though. The software we use in our office is much more capable and powerful. Given all that, we are still dependent on knowing the tax law inside and out. A simple wrong box checked here or a missed item there and major errors can appear in the actual return. We check our work extensively to reduce such occurrences.
Folks who use a simple tax preparation software are equally at risk of checking the wrong box, entering some wrong data, etc. and ending up with very wrong tax returns.
Recently, there was a Tax Court case where the tax payer used TurboTax to prepare her return. She made several mistakes and the IRS assessed a 20 percent penalty because her mistakes resulted in her not paying enough tax. The penalty ended up being over $5,000. She argued that she was not liable because she used a tax program. Bad news! The court did not buy her defense. They found that the errors were caused by her faulty input, not by any "bugs" in the program. (Lam, TC Memo 2010-82)
The moral of the story, paying $50 for a program and doing it yourself, may end up costing you $5,050 or more!
If you have a very simple tax situation, preparing your own tax return, even with the help of a program like TurboTax, might work out. If you have any of the complications I listed above, you may want to seek out professional help rather than risk doing it wrong and paying more tax than you really owe, or underpaying your tax and getting dinged with penalties by the IRS.
• Kelly Bullis is a Certified Public Accountant with over 30 years of experience. Contact him at 882-4459.