By Richard M. Rothman, E.A.
Every year Money magazine conducts a tax return test by giving 40 different kinds of preparers the same information and has them prepare the return. To most people's amazement, this usually results in 40 different bottom line amounts ranging from owing tax to getting a big refund. The "correct" answer as determined by the IRS is usually somewhere in the middle, but it brings up a lot of questions in the minds of taxpayers. Why is there such a range of results? Do these preparers use tax software and if so, why aren't the results more alike? What happens to my return if it's at either extreme - owing more tax than necessary or getting back a refund that isn't substantiated? When I do my own return am I getting the best result?
This range of results has many probable sources. Human error in overlooking data or entering information incorrectly is probably high on the list, but incomplete tax knowledge is the cause of most of the errors. If you don't know that there is a credit for foreign tax paid, you probably will never enter it on a return if necessary.
These days, almost everyone uses tax software to prepare a return. The few who don't probably have more errors in calculations and may miss numbers that need to be transferred from one form to another (computers do this very nicely). For the rest of us, there is a wide range in the quality of software available for figuring taxes. User friendly software, such as Turbo Tax or Tax Cut, is probably ok as long as you have a simple return, you are comfortable using a computer, and you understand all the concepts and terms involved. You will only a correct return only if you input the correct information. Professional programs are geared to do more complex returns, but generally lack the question and answer format used in commercial software, thus requiring more tax knowledge to input information. So -with a wide range of programs and preparers, you end up with a lot of different answers.
If it's your return with a high or low answer, what happens? Obviously, you could end up paying a lot more taxes than necessary -- a bad result, or you could end up having to answer questions in an audit down the road -an equally bad result.
OK - so if you buy Turbo Tax and do your own return, what are your chances of getting it right???? Probably not quite as good as the 40 professional preparers! And what is your best bet at an accurate return? As the survey shows, tax preparation is not an exact science and using a computer does not ensure an accurate result. So your best bet is to find a tax preparer who has solid tax knowledge, up-to-date tax preparation software with the latest changes in the tax code, and a desire to research any ambiguous questions (of which there are many).