There are only 2 weeks left until personal income tax returns are due on April 18th. As you might expect, many last minute taxpayers are finalizing theirs plans on how to prepare their return. While hiring a CPA or Enrolled Agent (EA) is typically the easiest and least risky way to file, it may not be the most economical. Instead, many taxpayers are likely seriously considering using an online tax software program (i.e. TurboTax or H&R Block Online) because they seem to be quick, easy and cheap or at least the commercials make it seem so. We decided to take a deeper look at the online tax software programs and see how they compare to using a CPA or Enrolled Agent.
How much does it cost?
The advertised cost for purchasing online tax software is cheaper than hiring a CPA or an Enrolled Agent. Many of these tax programs are free to file a SIMPLE Federal tax return and may cost only $20 to $30 to file a state tax return. A simple tax return is generally for taxpayers with one stream of income (1 W-2 Form) and a limited number of deductions. Taxpayers that have multiple sources of income such as rental or investment income or work multiple jobs may need to select a “Deluxe” version which generally costs $40 to $80, depending on the tax program. This is just the base price; there are many other services that the software programs offer such as Audit Protection which is similar to an insurance policy in case you are audited. As the clicks to sign-up for these services increase, so does the total cost for using the software. For instance, an initial expectation to pay $30 or $40 to process federal and state tax returns can easily turn into an investment of well over $100.
Many tax programs use clever marketing tactics as the taxpayer navigates through the online filing process. Specifically, the amount of the taxpayer’s federal and state refund will usually be highlighted on top of the screen to show “savings”. This apparent savings allows the software provider to successfully up-sell the taxpayer with additional services.
The Cost of Mistakes
Online tax software programs can be a very affordable option when things go smoothly. But what happens when something goes wrong? Let’s suppose that a taxpayer filed their tax return but later realized that they forgot to include certain income and deductions and thus had to file an amended tax return. If this is the case, the taxpayer can likely use the same online tax program but it is more complicated than filing a simple 1040 form. In addition, if any of the data from the initial tax return gets lost (it happens), the taxpayer will be forced to manually file an amended return or hire an outside accountant. This would be time-consuming, frustrating and certainly more expensive than the initial expectation of paying $30 to $40.
As another example, let’s suppose a taxpayer made a mistake by not including investment income on their tax return and only realized it when they received a notice from the IRS, two years later. The IRS notice informs the taxpayer that they made a mistake and have to pay the outstanding tax liability in addition to the interest and penalties incurred for the error. Note that interest and penalties can add up quickly, especially if the outstanding tax liability is significant. You may be asking yourself how could this possibly happen? The answer is that, while online tax software programs can be very easy to use and most of them have automated reviews to reduce the likelihood of mistakes, they aren’t fool-proof. It is ultimately the responsibility of the taxpayer to input the correct income and expense amounts.
The Cost of Using a CPA or Enrolled Agent
The cost can range from $150 to $500 per return depending on the complexity & the CPA or Enrolled Agent’s experience level. These tax professionals are trained to thoroughly review the return, understand audit risks, and interview the taxpayer. Online tax software programs on the other hand, heavily rely on a computer to perform the interview.
While a reputable CPA or Enrolled Agent may not be the best option for everyone, especially those filing a simple tax return or with an accounting background, they remain the least risky way to file a return.
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