Doing Your Own Taxes or Using a Preparer

Doing Your Own Taxes

Software – Tax software programs have improved greatly over the years, but they’re not foolproof. I’ve been preparing people’s taxes for years, and I still find occasional problems when using software.  I suggest to our members that, as they enter their tax information, they think about what effect each entry should have, and then double check that the program is doing what you think it should be doing. Personally, I keep a running tally in a notebook as I prepare people’s taxes, checking to see that each new entry has the effect and magnitude I would expect.  Common spots for difficulties include multiple state tax returns, foreign taxes paid, scholarship income, and partnership income.

Personally, I have a strong preference for owning actual computer software (rather than preparing taxes online). With software, you have the program file, archive PDF, and all other materials available whenever you want (when I prepare taxes for people, I give them all of these to keep).  You don’t need to pay an online service to pull your previous year’s information – the software program pulls it for free. I also often use people’s tax program files to demonstrate the effects of different hypothetical situations (e.g. starting a SIMPLE IRA, or enrolling in graduate school), to estimate the next year’s tax bill, and to amend a previous return. With online accounts, you often don’t have the freedom to experiment without permanently changing your one stored tax file.

Using IRS forms to e-file – For those brave souls preparing their taxes without the aid of a computer program, the IRS offers electronic fillable forms.  These are identical to paper-based forms, but they have built in calculations and can be e-filed for free.

When to file – Congress and the IRS are often quite busy changing and tweaking things late in the calendar year.  As such, the tax software companies have little time to debug the final version of their software. For this reason (and a few others), I don’t even start preparing people’s taxes until February each year, after the IRS has issued its clarifications and the software makers have used early filers to find the bugs in their software.

Using a Paid Preparer

All tax preparers need to be registered with the IRS. We each have a unique Preparer Tax Identification Number (PTIN) that we use when signing people’s taxes.  If your preparer does not sign with a PTIN, s/he is not a legitimate preparer.

Beginning with this tax season, the IRS has instituted a preparer competency exam and annual continuing education requirements. On the cost side, the makers of tax preparation software for preparers are charging significant fees for each return that is e-filed. The result of these two developments will likely be far fewer “mom and pop” tax preparers this year, and a rise in the cost of return preparation.  I would also expect to see a lot more tax scams and unlicensed preparers refusing to sign returns and provide a PTIN.  Beware!!!