March 15, 2010, 4:52 PM — Tax preparation software, particularly the online variety, has gotten much better in recent years. It's no longer just a fancy spreadsheet. But even the very best online tax tools lack something that only a professional can offer, and that's judgment, says Stephen Moskowitz, a San Francisco tax attorney and accountant who has been practicing for more than 30 years.
"I have a self-employed client with not much business income. But using one of those programs (the attorney declined to state which one,) he deducted a huge number of business expenses. And now he's in serious trouble with the IRS," Moskowitz says. Looked at individually, the business deductions for the client made sense, he says. But in the aggregate, the out-of-whack ratio of revenue to expenses raised a red flag for the IRS.
"For many people, tax prep software makes sense," says Moskowitz. But there are a lot of grey areas and close calls that require judgment."
Of course, there's no guarantee that a human tax preparer would have cautioned the client, and the vast majority of people who use online packages never have a serious problem.
But with this cautionary note in mind, I've taken a look at three of the most widely used programs: HR Block at Home, Turbo Tax and TaxACT Online, and explored three areas that you must consider carefully.
Examine Data Import Capabilities
Unless you're about 18 years old, you've paid taxes in the past, and probably have some investments; so it makes sense for a program to help you import a variety of financial data.
All three programs let you import data from previous returns-if you've used the same program in the past. H&R Block At Home (which used to be called Tax Cut) does let you import data from rival Turbo Tax, but that's it.
If you've used another program, you've got to enter the old data manually. Neither Tax Cut nor TaxAct import data directly from the competition, although if your old return is available as a PDF file, TaxAct will cull data from it. (In some cases, old tax returns prepared in a desktop version of the software can not be imported into the online version.)
For that reason alone, it makes sense to stick with the program you've been using, unless you have a real reason to switch.
H&R Block only works with 6 major payroll providers to import W-2s and does not import data from individual firms. But one very helpful feature allows you to import data from a brokerage account. In just a few seconds it imported the year-end summary of my Morgan Stanley account, including interest, dividends and stock sales with the basis price and the sale price.