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Tax Preparation, or How I Learned to Stop Worrying and Love My Computer

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Get used to seeing these forms in your sleep! Photo courtesy of the IRS

It’s tax time again, which means the countdown to April 15th is on. According to a recent government survey (reported in Forbes magazine), taxpayers will spend a whopping 6.1 billion hours “complying with the tax code.” If you believe the latest census, that’s the equivalent of every man, woman, and child in the country spending 19 hours and 45 minutes on taxes. Taxes may seem difficult, but completing them doesn’t have to be.  You as Joe or Jane Taxpayer have several options to help you complete your taxes quickly and efficiently, leaving more time for less arithmetic-intensive pursuits.

The same Forbes article claims 60% of people use paid professional to complete their taxes, 29% use software, meaning 11% must either use paper and pencil or just not file at all. This is a bit misleading, as tax professionals use software as well. If we accept these numbers, 89% of tax returns are done with computer software. Your biggest question, then, is whose software to use.

Accounting firms – suppose you’re a C-2 pilot who never met a per diem check he didn’t like and won’t (that is will not) consider lodgings that receive less than 3 Michelin stars. Professional accounting firms are for you. You’re billed at professional rates for the preparation of your tax return, which is likely done on software by a recent accounting graduate. Your return is then reviewed by a CPA (who’ll bill for the time), and you’ll simply need to sign twice, once on the return and once on the check. The billing rates vary by location and firm, but a standard return could probably be done in about 2 or 3 billable hours.

Commercial firms – H&R Block, Liberty Tax Services, et al. These places will ask you a lot of questions, take your documents, and in a specified amount of time produce your tax returns. These tax returns are done on a computer, and many offer benefits such as “audit defense”, “instant refund,” or “free coffee that’s been warming since 8 am”. I ran my own return (some investments, itemized deductions) through H&R Block’s cost estimator, and found it to be around $300. This is from a “tax professional,” not a CPA. Not being a CPA myself, I offer that as an observation, not necessarily a value judgement!

VITA – Every military installation has free income tax assistance through the Volunteer Income Tax Assistance Program (VITA), and many communities have it as well. Free as in no cost. VITA volunteers are also trained, and the IRS claims military VITA volunteers receive special training for military-specific issues. Consider this a free version of the commercial tax prep firms.  You base legal office or finance office will have information on the VITA program in your area.

Software – Mac or PC, online (excuse me, the new buzzword is “in the cloud”) or on your hard drive, tax prep software is available for you. Ranging from free for bare bones software to up to a few thousand dollars for the suite used by the pros, you are sure to find a software program that meets your needs. A good program will walk you through the tax process step-by-step, help you e-file your return, and will provide support in case of software errors. I have used TurboTax for years and have found it to be easy and quick. As an additional bonus, if you use the same software from year to year much of the data can be automatically carried forward so you don’t have to do more than confirm what you submitted last year. If you do use the cloud to do your taxes, keep a hard copy.

Paper and pencil – suppose you’re a “lifer” Chief whose first Navy rating was “Sailmaker’s Mate” and you consider rudders and astern propulsion to be “modern nonsense.” You can go to the local library, obtain tax forms in paper form and complete your taxes the old-fashioned way. The IRS is perfectly content for you to do this, and there is no cost associated with this method excepting your time. Dust off your abacus and get cracking!  Ha ha.  If you want to really understand taxes, this is the best way to do it. Your education will not cost a cent, but you will probably spend more than the 19 hours we discussed before. Actually this method will cost you, as you’ll have to apply postage to the envelope to send your return to the Feds.

So, which method is the best for you?  Only you can answer that question.  Allow me to offer a few observations, however:

  • Not to pick on commercial tax preparers, but their professionals receive “over 84 hours” of training in one case, and some of that has to be how to work their software. By comparison, a CPA receives over 2,000 hours of training just to qualify to sit for the CPA exam, and (trust me on this) has spent many, many more hours in review and prep courses. Software-specific training accounts for zero of these hours. If you’re looking to pay someone to do your taxes for you, how much is it worth to you?
  • If you have all your documentation and you can point out where every number on your return came from, you have about all the audit defense you’ll ever need. Ultimately, you are responsible for the content of your return no matter who prepared it (read the fine print in the instructions, gentle reader), so if you keep decent records and don’t mind going slowly through a computer’s question screens, doing it yourself probably isn’t a bad idea.
  • Garbage in means garbage out.  I once prepared a client’s return whose “documentation” consisted of three pages ripped from a legal pad with some suspiciously rounded numbers written on it.  No kidding. Make sure you have proper (that is to say real and not made up) documentation for every number you, or someone else, enters in to your tax return!

    photo by Arvind Balaraman

Being a military family, you may have some special issues. It’s important to remember VITA volunteers and your legal office can help with questions in addition to doing your taxes, so you have support available even if you do it yourself. There’s always the IRS website at www.irs.gov, and as long as you enter in your question, you’ll find the tax topics and publications relatively straightforward and mostly helpful. You may decide just to pay someone and be done with it. That’s fine, too. Ultimately, the best way to complete your taxes is the way that works best for you. I realize that sounds like lame advice but it’s true.

Be diligent, take your time, and you’ll probably spend much less than 19 hours preparing your taxes. Caveat: the closer you get to April 15th, the longer completing your taxes will take. This is also personal experience talking, and the lines at the all-night Post Office aren’t nearly as fun as you might think. Don’t forget, any money you pay to have your taxes done can be deducted. Uh oh. Now you’ve got to go back to Schedule A and change line 14…