It’s the tax season, and soon we’ll all have to file our taxes.
How should we do it? How much should it cost? And what happens if we make a mistake?
Let’s take a look at the options.
1. Preparing the taxes yourself, manually – It’s a big no-no. Of course, you can download all the necessary forms from the IRS web site, but what if you make a mistake? What if you’re supposed to fill a form you don’t know about? What if you misunderstand the guidelines? There’s no safety net. But yes, it’s free. On the long run however it may be the most expensive option, both because of higher taxes you’ll pay because of a mistake, and because of higher costs in case of an audit. Costs to file are $0, however.
2.Preparing the taxes yourself – with an aid of a software. That’s a better option. In fact, this is what I’m going to do myself. There are many different software programs available. For example, TurboTax by Intuit or H&R Block At Home by H&R Block. Each of them has several different “ranks” – “Deluxe”, or “Home & Business“, or “Premiere”… How do you know which one to chose? Well, reviews, of course. Let others share their opinions and experiences. I’ve linked the Amazon pages for each of the products for your convenience, so that you could find the reviews easily. Note, that TurboTax Deluxe Federal + e-File + State 2010 is #1 selling software at Amazon.
Worth to note, that the software providers provide, at an additional fee, an audit protection option. That means that in case your return is chosen for an audit by the IRS, the accountants behind the software will handle all the negotiations with the IRS on your behalf. This is worth the additional $30-$40 they charge, because in case you do get audit and you don’t have this protection, the representation may cost you thousands of dollars, even if you end up with no additional tax liability. Also, they will cover the additional tax liability if it was because of their mistake in filling the forms correctly. Overall, with the most comprehensive tax filing option, it will cost you up to $150, including the audit protection option. For most tax payers, it may be well below $100.
Note that different versions of the software contain different tax forms. If you only need to file the 1040EZ form (the simplest one) you may be able to do that for free by downloading the form from the IRS, or using one of the online tools I describe below. If you need to fill itemized deductions form (Schedule A), you’ll probably need the more expensive “Premier” or “Deluxe” version, and if you need to fill more complicated and unusual forms (like 1040NR for non-residents, or various very specific deductions, or small business) – better get a CPA.
3. Going to a tax store. Well, H&R Block are the most famous of these. But what does really happen there? Do they have something special to offer other than someone read the questions the software asks you and then type your answers back in? I don’t think they do. You will pay more, but will end up with the exactly same software product being used as the one you can buy on Amazon and use yourself in the convenience of your home. Costs: Same as software, and then some more for the personalized service. Some people find it more convenient, and it also may be helpful to talk to a real person in case of a tricky situation. However, most of the H&R Block representatives are not CPA’s, so keep that in mind.
Note of caution: Do not let the H&R Block representative to convince you into taking one of their refund loans. Be patient, with eFiling option, you will receive your refund within 2 weeks. The rates on these loans are outrageous, and there have been hundreds of complaints to the BBB on that issue.
4. Filing with an accountant. This is the most expensive option. CPA’s charge $100 and more per hour, and a single tax return may cost you $400 and more. However, that still would be the best option for people with a non-standard situation. If you have never filed your taxes by yourself, or this year is substantially different from your previous returns, do yourself a favor and go to a CPA.
Note: Make sure the CPA you work with provide you the audit protection and will represent you in negotiations with the IRS in case of an audit, this should be part of the deal, and one of the reasons for the high price tag.
5. Filing using an online tool. The software you can buy on Amazon, is also available online. TurboTax, H&R Block, and other companies have on-line programs similar to the software they sell in-store. When using these, the most trivial reports can even be filed for free (at least for Federal tax returns). But, it means that your personal information will be stored somewhere on the web. There are many sites that provide on-line tax preparation services, some are much cheaper than the two I’ve mentioned above. However, make sure that your personal information is safe and protected on the site you chose to use. Never provide any of your personal information on a site that doesn’t have a valid SSL certificate.
Note: These companies want to encourage you to use the on-line versions. If you check, you’ll find that the CD version of the software on their sites is more expensive than the same software on Amazon. But, if you use sites like Ebates, or Mr. Rebates, you may find that for on-line software the companies will give you hefty cash-back (as of today – up to 8% for Turbo Tax, 12% for H&R Block).
So take it into your consideration. It is still a little too early to file, but you should start thinking on how you’re going to do that.
Your Little Advisor.
PS: A disclaimer – I’m not a tax adviser or a tax professional or a CPA. When in doubt – consult with a professional. All the information in the article is based on my personal knowledge and experience only.