If you have requested an automatic extension of time to file
your Form 1040 and are thinking about whether to use some of the free tax
preparation services on the Internet, here are some observations that might
be useful to you.
Clearly, anything that is free on the Internet is intended to be a magnet
to attract people who may be prospects for some other kind of product or
service. It's all about advertising. Most of us don't mind being confronted
with some advertising in order to save some money, so the free services
are likely to have some appeal. But how useful are these services?
I use a professional tax preparation program from Pro-Series, a division
of Intuit, the company that markets the Quickbooks and Turbo-Tax software
programs. Pro-Series is an excellent program and has a lot of features
that are designed to help the professional user to avoid mistakes. But
it would be very confusing for anyone who is not intimately familiar with
the U.S. tax system and how it works. I also think it would be difficult
to use this system if you don’t' already know how to prepare a tax return
by hand. The program is easy for me because it is so well designed that
it anticipates how a professional tax preparer works and thinks. A few
years ago, I also used the Turbo-Tax program. I found it to be somewhat
frustrating because it was designed for the consumer who needs to taken
through the tax return step-by-step. For those who know how to prepare
a tax return, it's very slow and sometimes frustrating to use. But it's
an excellent program for the novice and the cost is negligible. (I think
it's about $30.)
Every year Money Magazine has a contest between 50 tax preparers
-- one from every state. They give them all the same data and the preparers
use the data to prepare a tax return as if it were for a real client. The
preparers are even required to show how much they would charge for the
sample tax return. In most years, the tax preparers all produce returns
with different results and different fees. No two are identical.
Why? Given the same data, a computer program will produce the exact
same results every time. All of these tax professionals do use computers
to prepare their returns. So why are the results different?
It's because of the judgment and training that is still required to
prepare a tax return.
Is every source of cash taxable income? Is every expense a deduction?
When does an expense result in a tax credit instead of a deduction? What
kind of income is it or what kind of expense is it? What tax form does
it go on? When is this particular item subject to tax as income or deductible
as an expense? If a home is used for business, which items of expense can
be allocated to the home office schedule? Can you deduct the cost of a
mobile phone if it is used for business? Is the taxpayer at risk with respect
to an investment that has lost value? Is the taxpayer actively involved
in the enterprise? When is a business a hobby or vice versa? Can some worthless
securities be deducted this year? Are all living costs deductible for someone
in a nursing home? Can you deduct medical costs paid for an elderly parent?
Etc., etc, etc.
I'm working on a number of tax returns right now (on extension) that
other tax preparers have messed up because they didn't know the rules for
reporting income from offshore banks, mutual funds, business ventures,
etc. It isn't that they don't know how to prepare a U.S. tax return. They
just aren't familiar with obscure sections of the law relating to offshore
transactions and with the unique forms that relate to offshore activities.
I haven't tried to count them, but someone has said there are over
1,700 pages in the tax code. The IRS regulations are about three times
as extensive. There are thousands of court cases that deal with tax disputes
and there are many thousands of private rulings by the IRS to answer questions
that professionals have about ambiguous issues. There are literally hundreds
of different tax forms that may be required. Most of the various states
also have an income tax and their tax rules usually are different from
the federal rules in some respect. Many taxpayers have income from sources
outside their state of residence and they may be required to file tax returns
in multiple states. Nearly every kind of income from outside the U.S. is
subject to special rules and reporting requirements. About 15 years ago,
the Congress began phasing in various changes in the tax law and some provisions
were phased out over time. Many of the deductions or credits are changed
(indexed) each year to adjust for inflation. Even the tax rates change
every year.
Our income tax system is so far out of control that it has become an
absurdity. There is a bill being promoted by Representative Ron Paul for
Texas to repeal the 16th Amendment to the Constitution -- which would make
the income tax illegal. For some comments on the arguments for and against
repealing the income tax, see http://www.offshorepress.com/jacobsreport/repeal16.htm
For those who have very simple returns without any complicated issues,
a free tax preparation program on the Internet may be helpful as a way
to double check the accuracy of your return. Otherwise, it could be foolish
to use such a program if you might have some complications in your return
and you don't know the answers to the kinds of questions illustrated above.
It's unlikely that anyone who needs this newsletter would have a return
that is simple enough to justify the savings from using a free tax preparation
service on the Internet. If you are interested in some additional (free)
tips about preparing your tax return, see http://www.offshorepress.com/vkjcpa/taxtips.htm
Readers who may be interested in my professional
services as a CPA can find substantial information at www.offshorepress.com/vkjcpa/
I'm the co-author and publisher of a subscription newsletter
on Offshore Tax Strategies and information about that newsletter
is available at http://www.offshorepress.com/offshoretax/
That web site includes a free web-book on the subject.
I'm the Editor & Publisher of Global Asset Protection,
an email newsletter about risk management. A free web-book on that
subject is available at http://www.offshorepress.com/protection/
Offshore Press, Inc. sponsors a free public forum on asset
protection and offshore topics that is moderated by yours truly. Details
are available at http://www.offshorepress.com/freeforum.htm.
Offshore Press, Inc. sponsors periodic seminars and workshops
on international and/or tax subjects. A current list of seminars is available
at http://www.offshorepress.com/seminar.htm