Mr. Athena and I were self-employed for years, and during those years we had a CPA do our taxes. Now we’re both W2 employees and our tax return is much simpler, so we’ve been using Turbo Tax for the past couple of years. The first time I did it, I still retained our CPA, so I was able to show him what I prepared. He reviewed it and said “yep, you did good!”
So now we’re on my second year with no CPA, and we just finished our return today. Turbo Tax is great, walks us through everything. But there were definitely some parts, mostly around our employer’s stock plans, that we had to make some educated guesses. And there were other bits where the wizard would ask “Did you have any bumblesnatch hokeypoke level whooziwhatits last year?” and we’d go “Um, we don’t think so?” and click NO.
We finished it all up, we think we did good, and it’s not all that different than last year’s return, but I still feel a bit uneasy. Not uneasy enough to go back to spending several hundred dollars on a CPA every year, but that lack of a safety net is a little disconcerting.
I’m trying to just let it go, with the reasoning that:
our tax return isn’t ALL that different than thousands of other folks tax returns. No bumblesnatch hokeypoke deductions. Turbo Tax is a mature product, and it seems to know what it’s doing, so trust it.
given that we paid a decent amount of tax and we filed a return, I don’t think there’s anything crazy in there that would trigger an audit
even if we did get audited, it’s not the end of the world. A hassle, but unless something really weird happened, I don’t see that we could possibly owe a ton more than we paid. Like I said, the tax we paid is in line with our last many years of returns, adjusted for income ups & downs.
US tax is so damn complex, the IRS couldn’t possible go after every single person who possibly made a mistake. Right? RIGHT?
For years, I did my own taxes. Then a situation came up with my IRA that was a little confusing, so I went to an accountant. I learned I’d been doing things wrong all along, and hadn’t paid the IRS all they were owed. If they’d found out and contacted me, it could have been very bad. As it was, I 'fessed up and paid what was owed. The IRS got the last kick in anyway, dunning me for interest. (Sons of bitches.)
So…since then…I always used an accountant. I know the price of error.
We used Turbo Tax for many years, mostly without issue. I’ve had a growing sense of unease, similar to you, as our tax situation has grown more complex. Turns out I was right to feel nervous, but for the opposite reason to Trinopus. Either Turbo Tax missed or made it easy for me to miss the fact that you can deduct your sales tax based on an income based formula if you live in a state like Washington with no income tax. So the accountant paid for himself four times over on that issue alone. And that’s not even counting the amendments for previous returns that we will have him do to correct this issue in the past.
So our days of relying on Turbo Tax are over. Most of the other issues of concern don’t immediately effect our taxes, but require some professional advice on stock options, ESPP plans, rental depreciation, etc. so we minimize future tax obligations.
I think Turbo Tax is fine for a young person with relatively simple salary income. But as we’ve aged and our finances have gotten more complicated having a professional set of eyes on things has value.
You folks are NOT making me feel better about this.
That said, we ended up doing it ourselves with the advice of our CPA. We don’t have simple-young-person taxes; we own a house, we have ESPPs and other stock plans, HSAs, 401Ks etc etc.
But after doing it in tandem with our CPA the first year and coming up with just about exactly the same $$ he came up with, we mutually agreed we no longer needed his services. He was absolutely NOT paying for his own services when compared with TurboTax.
I live in a state with income tax and it’s vastly higher than my allowed sales tax deduction. Turbo Tax told me this was so indicating what I’d get as a deduction if I chose to go with sales tax in any case and asked me which I wanted. It’s done that at least once in the past. I can’t recall how many years. I don’t know how long ago it was you think Turbo tax missed this, but it certainly doesn’t now.
It may not have missed it in the sense that you can’t do it in Turbo tax. But I don’t recall it asking me. Maybe I missed it in the wizards or sections. Either way, I was on track to miss it again this year, because I did enter a lot into Turbo Tax before deciding to go with an accountant.
I don’t worry. Four years ago, I received an IRS letter claiming I owed them about $12,000 due to unreported investment income during the previous year. They provided a brief list of what they claimed was unreported income and after reviewing my return, I realized they were dreaming because the majority of this “income” was not subject to tax. I wrote them asking that they prepare my full return and provide a copy for my review.
After not hearing from them for 60 days, I recalculated my taxes and submitted an amended return. I did owe taxes and enclosed a check for about $350. End of story.
What price of error? You paid them back for money that you actually owed them. The interest they charged was modest, and was fair, considering you had (and they didn’t have) the use of that money for all those years. If you had invested it, then you would have come out ahead. If you had used that money to buy a car, then you would have reduced the amount of your car loan, thereby reducing the interest you paid on that loan. I’d say you did OK.
The hazards associated with accidentally underpaying are small. For starters, [url=How to Handle an IRS Audit of Your Tax Return | Kiplinger]your odds of being randomly audited are pretty low. And if you are audited, and it was a genuine mistake (not an attempt at tax fraud), you’ll probably just pay what you owe, plus some interest.
Like the OP, I’ve been doing my own taxes for years (using H&R Block’s software); I see no reason to stop any time soon.
I’ll take the opposite tack to the folks being scared. TT is just fine for typically complex upper middle class tax returns if you’re paying decent attention and aren’t a mental klutz.
There are mistakes, infractions, and crimes. They’re different. It’s worth understanding this breakdown.
In the old days working with a pencil, people used to make simple arithmetic errors. The IRS would detect that and send a bill or a refund for the difference with no more legal repercussions than a library book fine. Assuming you paid the bill. TT and other software has pretty well banished that class of mistake.
The next mistake is an entry error. Some number on your 1099-Div is $1100 and you key-stroke $1010. Or vice versa. The arithmetic is perfect, but you’re $90 off. Same outcome as above. Since the 1099-Div data was sent to them by your broker, they’ll eventually notice the difference. If it’s big enough and subject to some other secret mumbo-jumbo they’ll send you a bill or a refund. No biggee.
Here’s a different class of entry error: You donate used stuff to Goodwill and inadvertently enter the same donation of $150 in old clothes twice. Or maybe you forget to enter it at all because two receipts stuck together and you never noticed. Oops. That donation info is not separately reported to IRS and they will never detect it. Never. Because they don’t have any data to check it against. They are quite literally taking your word for all of it. *If *you are chosen for an audit for any reason, even a random one, they’ll dig into your records with you and the error will probably come to light. Time for a bill or a refund.
Where they get excited is you deliberately significantly over- or understating numbers to your advantage. Inventing expenses and donations. Running a business and “forgetting” to include the cash sales and only reporting the check and credit card sales. That’s where errors rise to crimes and shit gets serious. Don’t do that and you’ll be fine.
The other area of potential concern doing your own taxes is basic tax accounting. The “bumblesnatch hokeypoke” deductions. You can goof by not taking deductions you are entitled to or by trying to take those you aren’t.
IME TurboTax is real good about covering all this stuff, IF A) you use the interview mode, not the I’ll fill it out myself mode, and B) you buy the right level of TT. e.g. the basic level will let you fill out the forms for operating rental property, but won’t give you any help learning about what should go onto those forms. You need the fancier version to get the help on rental properties. The “good” news is in recent years the app has gotten real “good” at trying to upsell you to the higher level whenever you hint to it that you have a more complex tax issue.
IME trying to take a “bumblesnatch hokeypoke” deduction that you’re not entitled to usually becomes an obvious mistake as you wade into it and TT keeps asking you for numbers you don’t have and can’t possibly get.
The opposite mistake, skipping deductions you’re entitled to is potentially a bigger issue. And might more than offset the savings from not using a pro. Remember you’re under no legal obligation to take deductions you’re entitled to. The IRS is totally content for you to skip something like this and pay extra tax. So there’s no risk that you get in trouble. There’s just the risk you’re paying more than necessary.
That’s where paying attention when you do use a pro is valuable. If you’ve never looked at what they’ve done in the past, you’re truly flying blind. If you don’t know the difference between a traditional IRA vs a Roth IRA or know, at least in general, the differences in tax treatment of contributions and withdrawals from both, you need either some easy online learning or some pro help.
The biggest thing I ever gained from using a pro was learning some of the “going rate” on the vague judgment calls. Back when cellphones first came out I had one for work. Not a business I owned, but for my job which involved being away from landlines a lot. I also used the phone for personal calls as well as communicating with & on behalf of work. So how much phone costs could I deduct? 10%, 50%, 100%? Turns out the “going rate” at that time was around 100%. Folks getting audited were successfully defending that number despite making some incidental personal calls.
Fast forward to now when essentially everyone owns a cellphone for personal use. Sure, they might call the office or a client on it, but there’s no way they wouldn’t own it and use it even if they were retired. So what’s the “going rate” today? Depends on who you ask, but IME consensus is close to 50%.
Something like TT is not really going to help you know those tricks. But once you have learned these from using a pro or online research you can keep applying that learning for years to come.
My bottom line:
Maybe using a pro the first year something big changes like starting to rent out property or retiring and starting to draw from SS, IRA, etc., *might *be money well spent. Year after boring year with the same basic tax situation? A pro is a waste of money. You don’t even save much time since you still need to maintain and organize all the same records whether you wrap it up into a 1040 or they do.
Caveat: I’d go the opposite way if you’re running any kind of a business more complex than rental property or doing simple fee-for-service personal work. But the power of the pro in this case is all on the business side and not on your personal taxes that flow from the business.
I do my own, with whatever software that’s available for free. I have some freelance income every year (and sometimes take a loss), plus a long-term capital gains loss, but I’m not concerned. The IRS hasn’t objected to anything yet.
I figure that if they have a problem, I’ll just pay what they say I owe. No big deal.
I’ve faced the ire of the IRS. And won.
After some analyst kicked off a non-routine decade-long retrospective audit, I hired a tax-specialist accountant, and turned him loose. He found a LOT of money that I could’ve claimed, and since the IRS had, by means of initiating the audit, re-opened those files, filed me a decade worth of amended returns. Even after his fee, I recieved over US$10k back.
The IRS shuffled my case from Center to Center, over the course of 13 months, before I finally got paid - It’s fairly clear that no one wanted their name on the case. Instead of a nice recovery of the Agency, it turned into a large payout. NOT the sort of thing that looks good on one’s numbers. But, after it had been finally chased into the corner and pinned there, the Agency paid up.
Lessons learned:
If you’re not filing a 1040EZ (or other nations’ equivalent), get an accountant. A TAX accountant. They will find you legitimate money you didn’t know existed.
If the Agencey comes after you, they are NOT some unbeatable monolith. They can be beatten, and they DON’T want to spend a lot of money on minor cases. Especially if they’re have a chance of backfiring. Do not be afraid.
2.a. If the Agency comes after you, get an accountant. A TAX accountant. Worth every penny of their fee.
The IRS has an Ombudsman. Use them - their job is to be helpful. And they are.
What price of error? You paid them back for money that you actually owed them. The interest they charged was modest, and was fair, considering you had (and they didn’t have) the use of that money for all those years. If you had invested it, then you would have come out ahead. If you had used that money to buy a car, then you would have reduced the amount of your car loan, thereby reducing the interest you paid on that loan. I’d say you did OK.