Is Tax Preparation Software the Answer?

One of the biggest technology trends of the past decade has been the increased sophistication of tax prep software. What began as a pilot project by one of the major tax preparation firms back in the 1990s has become one of the largest software industries in the world. Once a rarity among individual taxpayers, software in the cloud or in downloadable versions are now the most common way for people to file their tax returns each year.

While it’s now “the new normal” for adults to seek out online help with all sorts of financial chores, from shopping for a broker to finding a reliable company that’s selling a life insurance policy, tax prep is a special case. In fact, any time citizens interact with the government, and expect to owe or receive refunds on their taxes, the stakes are higher. Software needs to be precise, reliable and easy to navigate.

Here are the main pros and cons of tax prep software, along with a few important facts about the state of the market that can weigh into your decision about whether or not to use to file your returns:

The Facts

While people claim to know plenty about software, it’s a fact that about 60 percent of filers have no idea what their tax bracket is. In addition, only about 10 percent are aware of the fact that people who earn less than $60,000 per year can usually get free tax preparation from either the government or one of the firms that offers tax prep services. Finally, according to industry sources and surveys, it seems that taxpayers want to use tax preparation software that is both accurate and easy to understand. When shopping for tax prep software, these are the two most important traits the programs should have in order to appeal to taxpayers.

The Downside

For many taxpayers, software is not the way to go. Complex situations call for in-person, professional help. If you itemize your deductions, are self-employed or own a business, then software will not be the ideal approach. For filers who want to feel completely confident that their return was prepared correctly, using a CPA or Enrolled Agent is a better choice. In some cases, it doesn’t cost much more to have a real person file your taxes. And if the government audits your return and you need someone to represent you, software falls far short.

Advantages

Tax software is great for what it’s designed to do. It can quickly, accurately and inexpensively help an average person file income tax returns. The user-friendly aspect is a big plus for people who are not adept at online tasks and who are equally stumped when it comes to tax laws. Every year, hundreds of millions of personal and business tax returns are filed electronically via one or another of the big software programs. This is good for taxpayers, who get their documents filed on time and accurately, and good for the government, who gets to collect its tax bills quickly and efficiently.