Preparing your own return carries risks

As an accountant I am wired to always look for opportunities to save money. I think being spend conscious is just part of the nature of being an accountant. If I can find a way to save money then I usually will pursue that choice. However, over the years I have found that doing a task myself may not prove to be the most cost-effective solution in the long run when all is said and done. Unfortunately learning these lessons has proved costly over the years at times.

From the time I changed my own oil and did not put the oil cap back on properly and had to spend $900 at the repair shop to get my car repaired to the time I plugged up all of my plumbing when I grouted my new kitchen floor myself, I have found doing an infrequent chore that seems easy may not end up saving me money.

This holds true to preparing your own tax return.

There are two risks associated with preparing your own return: missing credits and deductions you are entitled to, therefore paying more tax than you should, or claiming credits and deductions you are not entitled to along with misrepresenting some types of income and therefore paying too little tax and being exposed to penalties and interest when correcting the error.

This tax season alone I have helped two new clients who selfprepared their own tax returns in order to save money.

The first client failed to originally claim the education credit on their return. They thought that since the education was not for them, but for their dependent child they could not claim the credit. This taxpayer utilized a commercially available software product and wondered how their return could be wrong. Not taking this credit reduced this particular taxpayer’s refund by thousands of dollars each year.

The second client reported their self-employment earnings as wages rather than self-employment income. This led to the IRS sending a notice with not only additional income taxes due, but penalty and interest charges on top of it. The taxpayer failed to pay the self-employment taxes of Social Security and Medicare and also failed to claim the Qualified Business Income Deduction which they were entitled to. It was a real mess that we are still working through.

As with any field there are terms and definitions which have specific meanings to those in the field which are not apparent to those not in the field. Most of the software programs ask numerous questions to assist the user in preparing the return. What may seem like a subtle difference between two answers may have a large impact on the return being prepared.

For instance, this tax season our offices have prepared dozens of returns as married filing separately. This is done because we analyze each married return to optimize the overall tax situation including state and city taxes also. Those returns that ended up filing separately saved anywhere from a couple of hundred dollars of tax overall to $4,000 in one case. This type of savings would generally be missed if a taxpayer filed their own return.

Often taxpayers are not even aware of the various filing statuses and requirements that go with them.

For a single parent there is a filing status called Head of Household that is available and offers significant tax savings that can be overlooked without the proper expertise involved when preparing the tax returns.

Saving money is a goal that most of us hold. However, as I have aged and acquired life experiences, I have also learned that sometimes the most costeffective method is to hire someone to complete a task for me and my family. For those of you wishing to prepare their own return I recommend that you go to IRS.gov and review publication 17 before beginning to prepare your own return.