The IRS is reporting that more people than ever are filing their tax returns electronically. But is this a good thing?
As of the first week of March, more than 27 million taxpayers have electronically filed their self-prepared tax returns — a 5.8 percent increase over the same time last year. Tax preparers also favor e-filing for their clients. Compared to those using software, however, only a relativley few (about 5 million so far this year) have sent in the old-fashioned paper tax forms.
Joe Mastriano, a CPA in Houston, Texas, worries that using tax software, in some cases, may lead to difficulties.
"The government is hungry for money," Mastriano says, "and the IRS is auditing people like crazy. Whoever does the return, regardless of whether it is the taxpayer or a preparer, must have an understanding of the rules. The name of the game is documenting the return."
This means that just putting in figures in a software program is not enough. The example Mastriano gives is the mileage expense. He says the IRS, in an audit, will want documentation for the mileage such as records from an inspection or a repair where the mileage is written down. "The IRS will look at the beginning mileage and then, on a later document, the end point and then estimate the miles driven rather than take your word for it," he says.
He also warns that bulletins from the IRS may look at this or that rule change, but information in isolation can get people into trouble. "Every time you change something in the code it messes up other stuff in other parts of the code," he says.
Naturally Mastriano, a CPA, says people should go to a licensed CPA firm to avoid mistakes, like claiming unwarranted deductions. On the flip side, she said that fears of an audit may keep some people who do their own taxes from taking legitimate deductions.
The danger, Mastriano says, is that people will always have a tendency to enter information and use the software in a way that makes them get the most money back and pay the least amount of taxes. One of Mastriano's clients does his own return on a software program and then brings it in to him to check it. "Everytime I get done with it, he owes more taxes," Mastriano says. "He usually has a refund of 6 grand with the software. When I get done he owes 3 grand."
Mastriano says if people have a relatively simple return, they can probably use the various software programs safely. He recommends, however, using a book like "Your Income Tax" by J. K. Lasser and checking everything in the return.
"You've got to go behind the numbers," he says. "It is not complicated, but very time consuming. If people want to do their own return, and it is a simple return and they don't have a lot of schedules, then it is not a big deal to look up a few things. But if they have a lot of schedules, if they are self-employed, if they have a lot of rental incomes, or they have a lot of stock transactions, then they are really foolish for trying to do it on their own."
Wave of the future
Another CPA, Lisa Greene-Lewis, has a different perspective and sees the growth of e-filing as a trend that will continue. Greene-Lewis works for TurboTax, one of several self-preparing software companies, and naturally thinks people are better off doing their own e-filing.
"Sixty million taxpayers have relatively simple tax returns — maybe just one W-2 and some bank interest, so a 1099," she says. "People are taking their taxes to someone and paying hundreds of dollars to get them prepared, when they can easily and accurately file their taxes themselves online. Definitely the money savings is influencing this trend."
She also says e-filing using software such as TurboTax saves time and gets the refund back to people quicker.
Greene-Lewis says simple returns can be done in a matter of minutes. TurboTax even has an app called "SnapTax" that works for people who don't have a home and just have a W-2, interest or unemployment income and earn less than about $100,000 a year. The app takes a photograph of a person's W-2 and then imports it automatically into the tax form. The app asks a few simple questions and then allows the user to file the taxes to the IRS directly from his or her smart phone.
"You don't need to know the tax laws," Greene-Lewis says. "Software like TurboTax just asks simple questions about your life like, 'Did you have a baby last year?' or 'Did you get married?' We do all the calculations in software behind the scenes and prepare your taxes for you."
She says that there are different levels of software products depending upon the complexity of a person's financial life. "And you can get additional help if you need it," she says. "Less than 1 percent of people are audited. Most letters people receive from the IRS are really just asking for backup information."
Greene-Lewis does, however, admit that people make mistakes using the software. "The top mistake is people putting the incorrect Social Security number," she says.
Other problems are putting in the wrong number of dependents. "People incorrectly type things in," she says. "People rushing (through their taxes) causes the problems."
One way to cut down on mistakes in self-preparing returns, Greene-Lewis says, is to keep all tax forms and documentation in one folder. "Take your time," she says. "Have things together. Use the correct Social Security number. Don't leave out expenses that would be worth deductions."
Whereas Mastriano sees a worrisome trend, Greene-Lewis sees the inevitable.
"I do think it is definitely a shift we are going to continue to see," she says. "Everybody wants to do things online. They shop online. They do their banking online. People are looking for things that are quicker and easier. Software definitely makes it easier for people to do their taxes. … It is definitely the wave of the future."