Tax Preparation Software

views updated

Tax Preparation Software

Faced with a tax code which inevitably changes from year to year, many small business owners choose to use one of the many tax preparation software packages which are now widely available. These packages are available for computers running any of the more popular operating systems—Apple OS, Unix, or Windows—and most use a spreadsheet format.

The advantages to using tax preparation software are many. First, they result in more complete and accurate returns. The typical paper tax return has an error rate of 20 percent. Because of built-in math calculators and other automatic checks, electronic tax preparation reduces this error rate to less than 1 percent. Tax preparation software packages may also steer the taxpayer toward greater savings or little-known deductions, paying for themselves with the returns they yield. But even if no direct tax savings are realized, many analysts believe that use of the software saves many business owners a considerable amount of time, thus freeing them to use their talents in other business areas.

Purchasing the software to prepare tax returns, no matter which package is purchased, will undoubtedly be less expensive than hiring an accountant. Of course, a CPA can be creative and intuitive about individual circumstances in a way that a computer program can not. But unless the finances for the year are extremely complicated, the best of these software programs should be sufficient to meet the requirements of most small enterprises. Of course, the old adage "garbage in, garbage out" applies here. A small business owner that is not comfortable with accounting and finance may choose to enlist the aid of an accountant even if the software option seems alluring. Some entrepreneurs prepare the taxes themselves and then have an accountant review and sign off on the results. Using an accountant may also be comforting for some because in the event of an audit, the small business owner will not have to face the IRS without the expert knowledge of the CPA that originally prepared the tax return.

COMPONENTS OF THE PACKAGES

Data Entry

All of the software packages have more than one option for entering data into the IRS-accepted forms. The user can always opt for the simple method of entering figures into the forms without assistance from the program, using the software mainly to double-check figures and calculate final amounts. All of the software packages also have an interview function, which asks easily understandable questions to which the user responds by clicking yes or no boxes. This function specifies which schedules are required by the IRS, and which sections of the basic 1040 and schedules can be bypassed. Depending on the program, there may be a third route—a "fast track" interview, through which the user can select specific parts of the interview to fill out, speeding up the process and avoiding the sections which are not pertinent to the case at hand.

Many of the programs also have importing features, which allow the user to pull data from other programs directly into the tax preparation. Generally, these work primarily with Quicken and QuickBooks. If the small business owner already uses one of these applications to calculate tax-related expenses, it is relatively quick and easy to transfer information, cutting down on duplicated work. Almost all of the packages also allow the user to import last year's tax information, provided it was prepared with the same package.

Filing

When it comes to methods of filing, most of the packages provide several options for the user to choose between. The forms can be filled out electronically and then printed and mailed to the IRS to be processed in a paper version. Some of the packages offer the abbreviated Form 1040PC, which is also submitted as a hard copy. And some of the packages allow the user to file electronically, although most charge an additional fee for this option (around $10).

Features and Help

All of the software packages automatically check for mathematical mistakes and warn of possible errors when questionable data is entered into a field. Most of the programs can offer advice—some from specific tax experts—about how to maximize the return and minimize taxes paid. Some of the programs offer complete IRS tax guides which can be directly accessed, and some offer only abbreviated versions of this information. Another feature often offered in these tax preparation software packages is one that can alert the user to potential audit flags resulting from data entered. Several packages offer a review option after the forms are completed; this option can provide advice on what to do differently to pay fewer taxes the next time around.

Most software packages include the option to do state tax preparation in addition to the federal forms. Since some packages do not cover all 50 states, it is important when buying the software to be sure that it includes the forms necessary for the state in which one is operating. The state return supplement may be included in the original price or may be priced separately. Prices for the packages range from around $20 to more than $75, plus state supplements and filing fees.

DECIDING WHICH PACKAGE TO USE

Choosing a package will depend on how complicated the company's tax return is likely to be. A few of the products can manage even very complicated scenarios, while the few at the bottom of the price range tend to be better for simple personal tax returns. For the small business owner, who may be dealing with self-employment taxes, home-work environments, and partnerships, it is probably worthwhile to purchase one of the more detailed programs. As of 2005, the two most popular tax software packages were Turbo Tax by Intuit, and Tax Cut by H&R Block.

With the advent of high-speed Internet connections and improved Internet security, more and more tax preparation is taking place online. Growing numbers of small businesses are contracting with application service providers (ASPs) that specialize in tax preparation. ASPs provide tax preparation applications on their Web sites and also maintain huge databases to store clients' data. Users connect to the ASP's remote computer over the Internet, access their files with a password, and use the software provided to prepare their taxes online.

see also Electronic Tax Filing