Let’s Talk About Tax Software.

Snake Oil SalesmanBy now, I’m sure you have heard that it is the Year of the Snake, but not really – it is the “Year of You”. Or at least I’m sure that’s what you heard.

Let me assure you it’s still the “Year of the Snake”. (According to wikipedia and Cultural China, the year of the Snake is Feb 10, 2013 thru Jan 30 2014 – the Water Snake )

As technology advances, it is easy to see where we might think that the technology is as smart as we need it to be. Unfortunately I’m here to tell you that when it comes to software, the software is only as smart as the person using.

Before I talk about imperfections in tax software, let’s talk about commercials for just a second if we could. What is a commercial? A commercial is a salesman, or a company using  a method of advertising as a salesman, to get you to buy their product. Back in days of old, the salesmen were actually considered SNAKE OIL SALESMEN; because they were trying to do everything they could to get you to buy their product. A “snake oil salesman” is somebody that sells an item that claims to have some miraculous powers of some sort. This product was usually accompanied by a tremendous amount of hype. In an attempt to help push their products, the “snake oil salesmen” usually utilized planted accomplices who will claim that the product actually worked. Trust me television commercials are no different in this. Large corporations hire actors to read their lines and there you go – instant Snake Oil Salesmen.

So when you hear the term the “Year of the Snake” I have this to say – If you’re watching television and you’re buying into these commercials, it is always the year of the “snake”. Again, a commercial is nothing more than a salesman trying to get you, or persuade you to buy their product.

So let’s talk about the perfection of software. Well wait a minute, software is not perfect, there is no such thing as perfect software. Being this is a tax blog, let’s talk about tax software.

Do you remember back in 2006 Treasury Secretary Nominee Timothy Geithner?

For those of you who don’t remember please read Geithner Blames Turbo Tax For His Tax Troubles (TaxProf Blog – Paul L. Caron), there is a video  in this post that you should watch, it is kind of comical when you think about it.

Something I want to point out from this post and video. Notice the update,

Jim Lindgren (Northwestern) installed the 2004 and 2005 TurboTax programs on his computer and conclusively demonstratesThat “neither of the two major errors in Geithner’s returns … would have been covered by interactive prompts in the 2004 or 2005 versions of TurboTax.”

Notice that Mr. Lindgren points out that neither of the two errors would have been covered by the “interactive prompts” in the software.

I know what you’re saying, “that was way back in 2004, 2005 and 2006….” I assure you, although the software has improved, it still will have those interactive prompts. Again even though ALL the tax software programs have improved, they are still interactive and they still will not cover everything.

Interactive means the software has to have a user.   I do not mean to insult anybody, anybody at all, however you need to know that no matter what software / program you’re using, what app you are using on your moble device, what PC, Apple whatever computer you’re using, it doesn’t matter. The software is only going to be as smart as the user. Meaning that if you don’t know that the software needs you to do something, (Check a box or respond here and there both), then the software, with all of its database logic, is not going to know that you need something done. Tax-preparation software is no different.

Now I’m not just picking on box software that you as a consumer can go down to the store and buy, I’m talking about all the various tax software programs, even the ones that tax professionals utilize.

 An Example:

With the new tax season coming up, professional tax preparers all across the nation are testing their software. There is one such tax professional, running simulations in her software, who noticed the software had done something incorrectly. Now I would like to say this was user error, just like in 2006 when our nominee had his tax problems, unfortunately this was not the case- it was the software, let me explain.

 There’s a new tax this year that adds additional Medicare amounts due. Certain taxpayers will be required to use form 8959 Additional Medicare Tax to report these amounts. the software being tested wouldn’t take the excess amount of the withholding amounts (excess Medicare tax) and apply them to line 62 on the form 1040 where it supposed to be reported.

This error does not stop there. This enrolled agent knowing that that excess amount needed to be included on line 62 of the 1040, called the software provider. Like any good technical support team, when they don’t know, they make up their own rules. Initially the software provider representative told the enrolled agent that the IRS no longer allowed the excess amount to be refunded to the taxpayer and that is why the software did not do it. Like any professional in the tax world, she had to verify such a statement,  she called the IRS. Not only did she call the IRS, she contacted a few other people such as myself to ask them what they knew. Not so surprisingly, I agreed with her, that amount goes on line 62 to be refunded to the taxpayer.

The IRS confirmed this.

Any Additional Medicare Tax withheld by an employer will be applied against all taxes shown on an individual’s income tax return, including any Additional Medicare Tax liability  This appears at Question 18.

So you see, software is not perfect. Whether it is professional grade software or its box software that you’re paying $50 or $30 or whatever it’s going for these days. It is software, and it is going to be imperfect at this point. I say “at this point” because we as a people  of the human race are seldom able to create that perfect creation, but we may some day. Your television is not perfect, your car isn’t perfect, we aren’t perfect, the tax system is not perfect, and I assure you a software that manipulates our journey around the tax system – well, there is no way that is going to be perfect. It is impossible to have perfection guided and manipulated by imperfection.

I’m not saying that all software is bad and that you should find someone who does taxes using pencil and paper. I am also not saying that you cannot go to the store or should not go to the store and buy tax software in a box and prepare your own taxes. What I am saying is buyer beware. Remember its software, software designed around an imperfect system, the Internal Revenue Code and/or the American tax code.

In a perfect world the best thing you can do when it comes to your taxes, is be aware of your situation. Whether you do your tax return yourself, or you have somebody else prepare your tax return, you are ultimately responsible for your tax return. So be aware of your tax situation and the regulations surrounding it.

Box software is fine for people who don’t have a very complex return. However, if you do extensive itemizing, if you have a schedule C business, at the very least spend the time and spend the money to visit with a tax professional to talk about your situation – see if maybe tax software is a good choice for you or if you have so much going on that maybe it isn’t the right choice.

© 2014, Bruce McFarland. All rights reserved.

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  1. January 13, 2014    

    Great post Bruce! Taxes are difficult – too many things for us normal folks to keep up with. Much better to rely on a tax professional!

  2. January 13, 2014    

    I also found it a little odd the TT used “the year of the snake” as their marketing ploy. I think you make a great point about the tax software only being as good as the knowledge of the person putting the data into the program. It’s not always that simple and that’s how people wind up in tax trouble.

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