Taxes: Manual or software-assist?

Peacekeeper Pathogen: I’ve finished my second revision pass and the manuscript is now in the hands of my proofreader for grammatical review. In case you don’t know, my proofreader is my wife. While she does her review, I’ll be pursuing a cover for the new book and then possibly working on the next book (which I’ve already started).

This year, I decided to do my taxes the old-fashioned way—by hand. Honestly, I don’t think it took any longer. Doing them manually is much cheaper and when you're all done you know what it is you are putting your signature on. Today's tax preparation software is good, but people should be familiar with doing it manually as well. Even with a business (my writing), my taxes are fairly simple.

Filling out Schedule C is not difficult, but it is time-consuming. Since I have to fill out a Schedule C, the tax preparation software is no longer free. It took me about the same amount of time to do my Federal tax last year as it did to do it this year. The only thing that’s different is I filed electronically last year and I paid $40.00 more. This year was free except for the cost of postage. Ohio taxes are always done electronically so there’s no difference there. For me, it makes more sense to save the money and do things manually. But, there’s an even more important reason—accuracy and knowledge.

Being walked through a tax form by a computer program that asks you a series of questions makes things easy, but when it’s all said and done, do you really understand what it is you're signing? Are the final forms correct? What if you’re audited? Saying, “I’m sorry, I wasn’t sure how to answer that question when it popped up on the screen,” isn’t going to fly with the IRS. You are signing that you understand the entire contents of the tax form and that it is as accurate as possible. By actually sitting down, reading the instructions, and doing the forms manually, you understand exactly what it is you are signing for.

Errors on electronically generated forms are very hard to detect. If you do things manually, errors are more easily identified because doing them manually forces you to understand what is contained in the form. Sure, the tax software will do some basic checks, but it has no way of knowing if you completely understood the instructions. These days, people need to take the time to understand what they are signing for. Knowledge is power, read the instructions, read the IRS publications (they aren’t that difficult to understand), and learn about things.

I wrote the above few paragraphs at the bookstore the other day. When we got home, we allowed someone to use our computer to do their taxes. Last year, I walked this person through the process and did most of the work myself. This year, I decided to step back and let her learn on her own. Her taxes are about as simple as you can get: basic income and an HSA. Because the software just presents a series of questions, there were problems with the final forms. She didn't understand a few of the questions and (as I talked about above) made some assumptions. I had to show her how to fix the problems.

The first major problem occurred when the checks flagged her HSA as being taxed. She had entered her HSA contributions on the wrong line. When we went to correct this, the program said she would have to upgrade because of the form 8889. Remember, this started off as "Free". She desperately wanted the money as quickly as possible so she went ahead and did the upgrade. When it came time to submit, we discovered the financial institute that was handling the transaction now charges a fee for the service. None of this was identified in the software's home screen!

In the end, she found herself paying what she would have paid to have her taxes done by one of the tax preparers in the area. And that was just Federal! The program tried to get her to pay an additional fee to file the State taxes electronically. I stepped in and told her that in Ohio, you file your taxes electronically for free.

In my book, it's better to do things manually. It's cleaner, you learn something, and you know what you're signing.