The American Recovery and Reinvestment Act of 2009 signed into law by President Obama will cost American taxpayers $1.16 trillion dollars according to some estimates. Before this piece of legislation, the United States of America already had a mind-boggling $1.5 trillion deficit. Who is going to pay down this deficit? The easy answer is the American taxpayer.
However, the answer isn’t quite that easy. There will be a significant number of taxpayers who will unknowingly and unwillingly pay more tax than necessary. Most of this group will come from the 43% of filers who prepare their own tax returns. Face it, the Internal Revenue Code contains over 3.4 million words and had nearly 500 changes during 2008. If you are not a tax professional, the odds are against you!
Our elected officials in Washington D.C. are well aware of this, but do not speak publically about this windfall. All the public ever hears about is the “Tax Gap”. The IRS defines it as “the difference between the amount of tax that taxpayers should pay and the amount that is paid voluntarily and on time”. Estimates of this “Tax Gap” vary from $40 to $123 billion annually depending whose number you want to accept. I suspect if we could determine the amount which is overpaid annually, we are probably looking at a wash with the “Tax Gap”.
Here’s my question. Why would 43% of tax filers WANT to prepare their own tax returns? I can appreciate paying qualified tax professional can be expensive, but isn’t the alternative more expensive? The one thing that troubles me is the number of people who rely on software such as Turbo Tax and Tax Act to prepare an accurate tax return. Here’s the thing, tax software is a tool. If you don’t know how to use the tool, you will NEVER get the right result. Tax software can guarantee accuracy in terms of mathematics. It cannot guarantee the Internal Revenue Code will be correctly interpreted. No software can make that guarantee.
At his confirmation hearings, Timothy Geithner admitted to more than $40,000 worth of mistakes on his tax returns from 2001 to 2004 while he worked for the International Monetary Fund. Geithner says it was an innocent mistake. When Senator Chuck Grassley asked him what program he used to prepare his taxes, he answered, “I’ll answer that question, but I will say these are my responsibilities, not the tax software’s responsibilities, but I used TurboTax to prepare my returns.” In case you didn’t know as Treasury Secretary, Geithner is responsible for the Internal Revenue Service. Talk about someone who doesn’t know how to use a tool properly.
Once you can fully appreciate why tax software can never guarantee that you receive every legal tax benefit, let’s address what is your time worth to you? The IRS estimates a self prepared tax return with the use of software will take you approximately 24.2 hours to complete. This doesn’t include the time spent preparing your state tax returns. Can you imagine the time estimate to prepare tax returns by hand?
The IRS encourages the use of tax software, but this is only for their benefit. Most tax software will allow taxpayers to file their tax returns electronically to the IRS. This means the IRS doesn’t require as much manpower to manually process tax returns. The IRS touts this as a benefit to the taxpayer because there will be fewer data processing errors. There is some truth to that because I have seen a number of illegible hand prepared tax returns. The real truth is the IRS wants taxpayers to rely on tax software and potentially overpay their tax.
The IRS has gone as far as strong-arming tax software companies to create the “Free File Alliance”. This program is touted as a “partnership” between the Internal Revenue Service (IRS) and private sector tax software companies. The “partnership” provides free federal income tax preparation and electronic filing for eligible taxpayers. Eligible taxpayers are those whose adjusted gross income for 2008 is less than $56,000.
Why do you think the program is limited to taxpayers with adjusted gross income less than $56,000? It’s pretty simple. The IRS understands most tax filers who will qualify for this program will prepare their own tax returns. We know why the IRS wants you to prepare your own tax return. They want you to overpay tax!
How does a taxpayer pay less tax legally? They need to work with an experienced and qualified tax professional. Who is qualified? I would suggest staying away from those retail tax preparation chains and those clowns who prepare tax returns “on the side”.
Here is why? In September 2008, the Inspector General for Tax Administration issued a report on commercial tax preparation chains and independently owned seasonal tax preparation offices. The report suggested 65% of the returns prepared by these establishments were incorrect and understated tax. The erroneous tax returns contained “mistakes and omissions considered to have been caused by human error and/or misinterpretation of the tax law”. It sounds like returns prepared by these establishments are audits waiting to happen. Another interesting aspect of this report was the average tax preparation fee for these erroneous tax returns was $175. I guess you get what you pay for!
Qualified tax professionals will charge rates commensurate with their level of experience and their investment in technology, tax research services and continuing education. A good tax professional is ethically bound to make certain you will legally pay the least amount of tax. This is the “peace of mind” every taxpayer should expect when working with the right tax professional.
Anyone can fill out a tax form, but only a qualified tax professional can do it right.
Remember in this economy, now is not the time to be penny-wise and dollar-foolish!
For more information about The Tax Dude® and how he provides value to his clients, please visit http://www.thetaxdude.com/.
0 comments:
Post a Comment