Over the past year I’ve noticed acceleration of a trend that is confirmed by other tax accountants. Most of the audit notices from IRS are based on errors in TurboTax returns. This is not to say that there is anything wrong with TurboTax or that IRS is targeting these returns but rather that it allows taxpayers to enter data and take positions that are not allowed by IRS. It appears likely that IRS screening algorithms have grown more sophisticated so that the service can detect a self-prepared return that it unlikely to sustain an audit. Some of the particularly vulnerable are unreimbursed employee business expenses, travel expenses, phone expenses, education expenses and charitable donations.
I also support TurboTax users who prepare their own tax returns and covered this topic last in a February blog post titled “Support for TurboTax Users“. This is not a common service offered by professional tax preparers. Most preparers say that it is easier to do the return themselves than explain how to do it to their client or to locate and fix errors made by the taxpayer. My main concern is that taxpayers object to learn that amending a return is as expensive or more expensive than preparing it correctly the first time. Yet it has become increasingly common for accountants to receive requests to fix errors caught by IRS, the state or local tax authorities. I am working on two of these TurboTax correction cases today.
Clients are often surprised that the cost of fixing a TurboTax return is often more than having the return correctly professionally prepared in the first place. The reason is simple: fixing a tax return is a three step process that involves more work, more know-how, and more technology that simply preparing an original tax return.
The first step is to import the TurboTax data into a professional tax software and check for errors. Past experience indicates a strong possibility that new errors will be detected.
The second step is to adjust the tax return. This involves a working knowledge of tax laws and the objection of the tax authority.
The third step is to resubmit and get an acceptance of an amended tax return. An open unresolved tax return can grown into a serious headache. The goal here is to get the matter closed.
New clients who haven’t used a tax professional often say that they are completely unaware of the fees charged for professional representation. Of course it depends on the issues, the complexity and the number of tax returns involved but I typically handle routine tax audit responses for $400 to $500 to fix TurboTax returns.
It make sense to combine this effort with some tax planning to reduce taxes next year. The savings from this combined effort can more than make up for the cost of the amended tax return.