Thursday, December 02, 2021

We have really become a do-it-yourself society. As technology advances (and more videos are posted on YouTube), we have become increasingly confident in our own ability to do things. Whether it’s fixing our home appliances, cementing the front steps, or changing a tire, we can now do anything we want with no experience necessary. Or can we? In many cases, this is really a false sense of knowledge and ability. We all should have some red line that we dare not cross. For example, my red line is any­thing that involves a pipe—water, sewer, I don’t care. If it involves a pipe, then count me out. Maybe it’s from watching too many cartoons as a child where a pipe bursts and sends water shooting everywhere, but I just don’t touch them. However, sometimes we only realize that red line has been crossed after it’s too late. Take my good friend as an example. A few years back, he got an oil change on his car. Days later he noticed that the mechanic forgot to put the oil cap back on. Taking matters into his own hands, he went to the nearest dollar store. Minutes later he exited the store with a rubber chicken in his hand. This chicken was to be his new oil cap. Long story short, his engine ended up being covered with a melted rubber chicken. I know what you’re saying, “Your friends are just idiots and this has nothing to do with me.” My friend may be an idiot, but is this idiot friend of mine really all that different from many of us?

When it comes to preparing our tax returns, software such as TurboTax makes too many people feel like they can simply do it themselves. Why not save some money on hiring an accountant, right? After all, it’s just answering a few questions and letting the numbers flow to some lines, isn’t it? I say “too many people” and not “all people” because in some cases it may actually make sense to use software such as TurboTax. If your return is very basic, such as a W-2, some interest income, and you rent, then there’s very little that can go wrong. So I’m not completely against TurboTax for everyone. However, for most taxpayers you are much better off hiring a tax professional. This isn’t just a cheap ploy to get your business (although I will take it, contact info is below).

The following two reasons explain why when it comes to taxes, too much confidence in your own ability can be a bad thing. The first reason is what I refer to as “cheapest gas syndrome.” We all know those people that are obsessed with getting the cheapest gas prices when they fill up their car. These people will literally drive 20 miles out of their way, thereby using $5 of gas, in order to save a total of $2.40. Did they end up with the cheaper gas? They did indeed. But they cost themselves $2.60 to get it. This is what happens to many taxpayers when they do their own taxes. TurboTax can only process your return based on the input you put in. If you don’t know about a certain tax break, then tough luck. Recently, a reporter from CBS Moneywatch did an experiment by comparing how much of a tax refund she would receive using various tax software programs as opposed to hiring a real, live, breathing human accountant. What she realized was that even though she paid more out of pocket to hire the accountant compared to the cost of the software, her tax refund made up for this difference and much more. The accountant was able to advise her on various deductions relating to business expenses, 529 college savings plans, and a home office deduction that she would not have known about otherwise. Without knowing the ever-changing nuances of tax law and the correct applications, you may end up leaving a whole lot of money on the table.

The second, and more serious reason, is appropriately referred to as “the rubber chicken syndrome.” This is when, due to a lack of knowledge, you make a mistake resulting in a proverbial melted rubber chicken all over your engine. And when these mistakes happen, do not expect sympathy from the IRS or Tax Court. One of the more famous incidents involving TurboTax in a Tax Court case was Lam v. Commissioner in 2010. Ms. Lam used TurboTax to prepare her return, including her Schedule C, which is used to record income and expenses for self-employment. While consistently confusing capital gains and losses with ordinary income and expenses, her defense was that she relied on TurboTax to prepare the return properly. Citing the court from an earlier case, the judge stated, “Tax preparation software is only as good as the information one inputs into it.” Ms. Lam lost the case when the court ruled that reliance on TurboTax was not a valid defense. I personally know of a few people that have been on the receiving end of notices of deficiencies and assessed penalties by the IRS after incorrectly filing a return using TurboTax. By no means does this mean it can’t happen even if an accountant prepared your taxes. After all, they are humans. But having a trained eye to be able to review a tax return may be the difference between you and a $10,000 bill from the IRS.

Daniel Magence, CPA, Esq. is a principal at Pristine CPA Solutions, LLC (www.pristinecpa.com). Pristine CPA Solutions offers tax and accounting services to individuals and businesses of all sizes. He can be reached at [email protected] or (201)326-6908 if you have any questions, comments or are interested in using Pristine CPA’s services.

By Daniel Magence

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