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Do-It-Yourself Tax Software: Is the ‘Ease’ Worth The Risk?

July 14, 2016

Did you file your own taxes this year using online software? You could have inadvertently cut yourself out of a bigger refund—Learn more.

Do-it-Yourself tax software has gained popularity in recent years, but its alleged ease and simplicity comes with its share of headaches, too. Oftentimes, those who prepare and file their own taxes find themselves calling on tax professionals to fix their returns, making self-filing rather pointless in many cases. Not to mention, one self-filing software system recently suffered a slew of fraudulent return preparations, which has caused many to reconsider this seemingly “easy” alternative to traditional tax preparation.

What’s the problem?

The primary issues with tax filing and preparation software are:

  • The software may not adequately report tax liabilities, nor comply with tax laws. What this results in, then, is costly penalties, lost refunds and more time spent with a tax preparer to fix filing errors.
  • The online self-filer often relies on DIY software to do the impossible, in other words, apply the extensive amount of tax law to his/her individual situation.

In many cases, taxpayers using self-filing software could end up with smaller refunds than those gained from hiring a storefront tax preparer or a tax accountant.

Picture this—In a recent case one family’s refund amounts differed when using a storefront tax preparer or tax accountant vs. a do it yourself program. The highest refund gained was a result of the returns prepared by the tax accountant.

Why the difference, you might ask?

Using the DIY software, the family overlooked a key item which the accountant found in his research. The family more than doubled their refund amount as a result.

Which method of tax preparation most effectively prevents fraud?

Though some have argued that filing online will guarantee fewer errors, quicker returns, and more thorough tax analyses, these programs have had issues safeguarding against fraud and identity theft. In 2015, a popular online tax preparation software system was reportedly hacked, leading to many fraudulently filed returns. In these cases, taxpayers had no knowledge of the hacks. Once they were enlightened of the fraudulent activity under their names, the victims had to manually file their returns, file police reports (in some cases), and monitor their credit reports to pinpoint any other signs that their information had been stolen.

However, fraudsters have been able to hack manually filed returns as well, leading individuals in the same path as online victims, which indicates that there really is no surefire way to prevent fraud. Unfortunately, hiring a tax preparer will not guarantee your safety against fraud, but it could be more effective than online filing. For this reason, it is crucial to make sure that your tax preparer is adept in his/her tax knowledge, has good reviews, and takes his/her time with your return(s).

Best practices

In light of this information, we recommend that you hire a tax professional for your tax preparation needs—however, if you are confident enough to file your own returns, make sure you:

  • Give yourself enough time to complete them. Experts advise that you prepare your taxes in full, and then set them aside for several days before filing. This will give you time to look over your previous filings and check if you have forgotten to include any expenses on your current form(s). Remember that you and you alone will be accountable for any errors on your self-filed return(s).
  • Enlist the help of professionals if you have complex returns, the IRS recommends- Some software programs have a somewhat limited scope when it comes to preparing returns beyond 1040s. Also, some IRS forms are not available online—only paper. The IRS has compiled a handy list of all forms available online, and those that are only available in physical copies.
  • Have updated antivirus software on your computer. When sending your personal information online, unfortunately, there’s always a slight risk of fraud or identity theft.

Don’t jump to e-file simply to get your refund faster; this has its advantages, of course, but it’s better to wait a bit longer for a bigger refund, than to receive an incorrect, smaller refund in a quicker manner.

Contact us for guidance on tax filing for next year.

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