The first three months of the year mean many things to many people. Snow. Super Bowl. Groundhog Day. Valentine's Day. President's Day weekend. Mardi Gras. Lent. And the promise of pleasant spring to come.
So much for the happy associations. On a less enthralling note, it's also tax filing season. For many, that also raises the question: Should I hand off my taxes to a professional, or is a tax software program good enough?
It’s certainly something of a split decision, historically speaking. As of March 2014, the IRS reported that some 27 million taxpayers — using a variety of software products — had prepared and electronically filed their taxes out of more than 130 million returns filed overall.
But a new year has brought a sweeping amount of change. That makes the decision of how and who should prepare your taxes all the more significant.
A question of complexity
As a general rule, if your tax circumstances are fairly simple and straightforward, then a software program for your personal computer can be perfectly adequate.
What that means can vary. Generally speaking, if the details of your taxes are reasonably basic — one employer, little if any investment activity, a modest amount of deductible expenses — tax software can likely meet your needs.
“It always comes down to how complicated your tax situation is,” said Suzanne Luttman, a professor of accounting at Santa Clara University. “For many taxpayers, their situation isn’t really that complicated. And, if that’s the case, software packages can do an excellent job.”
“Of the 146 million taxpayers in this country, 60 million file a one- or two-page return,” added Bob Meighan, vice president of TurboTax. “That large group doesn’t need to go to a tax professional.”
One obvious appeal of tax preparation software is price. For instance, TurboTax’s most basic CD/download package costs $19.99. If that price seems steep, taxpayers also have the option of preparing and electronically filing federal tax returns online free of charge — one place to do that is Free File at IRS.gov. This option, designed for the most basic of returns, begins at the IRS site, then refers you to any number of free filing programs located elsewhere.
By contrast, using a human being comes with fees, many of which are substantially higher than most software packages. According to a recent survey by The National Society of Accountants, the average cost of professional tax preparation for tax year 2013 was $261 (this figure included preparation of a federal and state return as well as a Schedule A detailing itemized deductions). Without any schedules, the average dropped to $152.
The more involved the tax situation, the higher the cost. For instance, returns with a Schedule C outlining profit and loss from a business checked in at an average of $218. Additionally, tax prep for partnerships ($590) and various types of corporations (as high as $806) were also substantially more expensive.
Meighan from TurboTax allowed that more complicated tax situations probably warranted working with a pro.
“If you have a complex return, such as income earned in multiple states, they serve a valuable role,” he said. “If it’s a question of leeway — should income be claimed in this state or that state — they serve a strategic value.”
The ACA effect
Tax year 2014 has injected a new element into the software/tax pro question: the impact of the Affordable Health Care Act. And, for some in the tax preparation community, the ACA is a bona fide game changer.
“The ACA leaves many taxpayers with a lot of new issues to deal with,” said Cindy Hockenberry, tax knowledge center manager at the National Association of Tax Professionals. “If taxpayers have ever considered switching from software to a tax professional, this would be the year to do it.”
For many taxpayers, the effect of the ACA is happily moot. Those are the fortunate ones who were covered by an employee-based policy, Medicaid or Medicare for the entire year. If that’s you, all you need to do is report that on your return.
“If you’re covered by your employer’s health plan or there weren’t any other major sorts of changes in your coverage, then it can be perfectly fine to use tax software,” said Hockenberry.
If you didn’t have any type of health insurance for any part of 2014, you’re going to have to complete and file IRS Form 8965. This determines whether you can claim an exemption from the insurance requirement and, failing that, the need to calculate penalties for the months you didn’t have any coverage.
“The ACA has so many complexities, you may not be sure how it affects you,” said Hockenberry. “You’re going to want somebody to explain all that to you.”
The issue of ACA’s effect on tax returns has been overstated, Meighan countered.
“Ninety percent of Americans had insurance through their employers,” he said. “For those who didn’t, the questions are built into the software. It lets you figure out any exemptions and penalties.”
There are other issues to consider when choosing between tax software and a live preparer. Although tax software is geared to asking you a series of questions and checking the accuracy of responses, skeptics argue the system isn’t fail safe.
“Programs only work well if the information you’re putting into them is accurate,” said Luttman. “You have to work very slowly and carefully.”
Yet another question to take into account is the sheer hassle of preparing your tax return.
“New clients most often come to me because their tax lives are getting more complicated, because they are encountering a tax issue they've never seen before, or because they've decided that it's worth paying a tax pro who knows what he's doing to relieve them from the stress of preparing their own returns,” said Joseph Anthony, a Portland, Oregon, enrolled agent who, in addition to preparing returns, may represent taxpayers in matters with the IRS.
One final issue is the ever-dreaded IRS audit.
TurboTax offers users free audit guidance from a trained tax professional to help them sort through any IRS notices and address all audit-related questions and issues.
Another software package — TaxSlayer — also offers audit assistance for buyers of their "premium" edition.
That may be sufficient comfort for some. But, as Hockenberry quipped: “The TurboTax box isn’t going to go to an audit with you.”