Many taxpayers use computer software to prepare their annual federal income tax returns, but are they worth it?
To be clear, it pays to work with a finance and accounting outsourcing team. It doesn’t matter if you plan to use software or not. Letting professionals guide and even do it for you helps you avoid unnecessary problems with your taxes, especially with the IRS.
Image by Steve Buissinne
Nevertheless, this article examines the benefits and risks of using such tax preparation software, so you can decide more effectively:
Why Use a Tax Preparation Program
Depending on one’s level of self-assessment, using tax preparation software provides various benefits, including:
1. Avoidance of a penalty for filing a return that’s unduly complicated, such as one that requires additional schedules
Return preparation software helps you avoid this penalty by flagging potentially problematic entries and directing them to appropriate lines within the main tax form or an attached schedule.
2. Avoidance of common errors on paper returns
While good records-keeping practices will help you avoid these common errors, an easier alternative is to start with a return prepared by your tax software.
The best programs check for common mistakes and flag those entries likely to require attention (especially if there are lots of them) before asking you to confirm the entry. The benefit of this is that you don’t have to correct the mistakes with a paper return.
Instead, you can check your work and make any necessary corrections on the fly using the software itself. This helps reduce errors by giving you a chance to catch them before they become part of your official tax return.
3. Ability to E-file Returns
Electronic filing is fast, easy, and free. It also gets your returns processed more quickly than paper returns.
Downsides of Using Tax Software
No platform is perfect, and tax preparation solutions are one of them. Here are the possible risks and challenges of using one:
1. Difficulty finding valid deduction and credit information
For example, you may claim a dependent child who’s no longer your dependent because she or he has left to get married.
If this is the case, you won’t get any of the benefits that would have come from claiming your child. However, because tax software doesn’t include instructions on which dependents qualify for various deductions and credits, it won’t explain this to you either.
You may thus be unaware that you’ve made a valid change to the original return you prepared using tax preparation software. Even if you later realize your mistake, the IRS may still question your change because it wasn’t flagged by your software.
2. Difficulty understanding tax laws and their changes
Sophisticated tax preparation software does a good job of explaining the ins and outs of various deductions and credits, but its explanations aren’t always complete or up to date.
For example, a common tax credit for married couples is the Earned Income Tax Credit. The software may not clearly explain the factors that can affect the calculation of this credit, such as the size of the family or the combined income of the household.
3. Difficulty estimating your tax liability or expected refund, especially if you’re using the software for the first time
The IRS encourages taxpayers to correct any mistakes on their tax returns as soon as possible, particularly before they file. While this is good advice even if you’re using paper returns, it’s especially important if you’re filing electronically. Doing so allows the agency to quickly identify and deal with the error without delaying your refund.
Since tax preparation software isn’t required to file returns electronically, it may not allow you to fix your return after the filing deadline or alert you that you’re about to miss it.
4. Difficulty finding help when you need it
Although tax preparation software doesn’t support the use of tax forms, its user interfaces often mimic those forms. This causes problems if and when users encounter a situation that their software fails to explain or for which they need further assistance.
It can be problematic for people who are not tech-savvy. The learning curve can cause issues like not being able to file on time and receive the correct refund.
No doubt, tax preparation platforms have made it easier for anyone to file taxes on time. But it is not foolproof. You still have to be diligent in filing your taxes on time and be knowledgeable at least of the basic tax rules. In the end, the best way to manage tax returns is to seek help from a tax professional who can guide you throughout the process and avoid mistakes.
