(This column originally appeared in the Inquirer)
Now that it’s tax season, a lot of business owners are considering whether to use a tax preparation software — like TurboTax, Drake Software, or H&R Block — rather than paying an accountant. These applications are popular and can have significant benefits.
“Besides the obvious benefit of being able to do calculations much faster than by hand, using the software allows you to organize documents and information more easily and have that information carry over from year to year,” said Joe Hare of Professional Income Tax Service Inc. in Media. “Furthermore, once the return is completed, you can easily e-file the return with federal and state agencies. Doing so speeds up processing of the returns, which can equate to receiving refunds quickly.”
Would using a tax preparation software application make better sense for your business than paying an outside accountant? Here are a few things to consider.
The complexity of your business
Tax preparation software works best when things are relatively straightforward.
For example, if you’re running a very small or very stable business, or you’re a freelancer reporting your business income and expenses on the Schedule C to your individual tax return, then your tax return probably isn’t very complicated and can be completed with a software package. The same is true if you’ve had a year devoid of any significant transactions, like the purchase of another company, a loss (or addition) of a partner, an unusual transaction or if you operate in just a single jurisdiction and have never had any trouble with the Internal Revenue Service (IRS) in the past.
The less complicated your business is, the better chance of using one of these applications.
The tangible and intangible, costs
It could cost your business thousands of dollars for an accountant to prepare your tax return. This can be significantly more expensive than using a tax preparation software, which can cost just a few hundred dollars.
However, there is also an intangible cost, which is the time you’re taking to prepare your taxes and the risk that you could still get something wrong, which could incur potential penalties and interest down the road.
Remember that this is not just about federal taxes. Filings are also required for state and city, too, and these localities have their own nuances.
For these reasons Robin Wagner, a certified public accountant based in Doylestown, says she always tells her clients to stick to what they’re good at.
“If you’re a landscaper and love to create beautiful outdoor spaces but hate to look at your numbers, know yourself well enough to call in a professional to help you,” she said. “The most successful businesses do what they love and find professionals for the stuff that has to be done but that they don’t love.”
Wagner says filing returns for your business can be more costly in the long run because “with no knowledge of what you might be doing wrong, you may be putting you and your business at risk with the IRS.”
The data you’ve got
Wagner says that tax software can be a wonderful tool, but the end result is only as good as what goes in — and how good your underlying books and records are.
“If you don’t have a way to compile your income and categorize your expenses, tax software is useless,” she said. “If you don’t understand the basics of accounting and bookkeeping and like how to reconcile bank accounts, then tax software is not going to help you.”
However, Wagner says, “if you have a good set of books that you keep updated throughout the year, and you’re confident that your financial software captures all your transactions, then you might be a good candidate for the software.”
At the very least, it may be helpful to still have a tax professional look over the returns prepared by the software to ensure that nothing significant is misrepresented.
“Remember that any failure to report information — or even a mistake that the software makes — is still ultimately a client’s responsibility,” Wagner said.
The need for tax advice
Most experts agree that tax preparation services and software will continue to leverage artificial intelligence to do most of the routine tasks that many accountants do to prepare tax returns.
But regardless, there will always be a need for a savvy tax professional who looks at both you and your business and helps you make a personalized tax plan.
Steven Fromm, a tax attorney based in Fort Washington, warns that even in the most basic situations, tax software cannot provide insights as to any tax options, elections, or strategies that a human tax practitioner can provide.
“Business owners are gambling that the software will be able to provide the experience, expertise, and guidance a tax professional provides,” he said. “In many cases it cannot.”
The security and government risks
Some professionals believe that the proliferation of easy-to-use software is a growing security threat and advise business owners to understand where their data is stored and what controls are in place to ensure data security. They also advise finding out whether data is subject to being sold to a third party.
Hare is also concerned with the IRS’s recent launch of its own software to allow individuals to do their taxes and file directly with the agency.
“How can you trust the people who are tasked with collecting the most taxes from you to fairly determine how much that amount is?” he said. “Can the government, who collects the tax, also be your advocate at the same time? It’s like going into a car dealer and having them negotiate with themselves over what a fair price is.”
