TAX STRATEGIES: Watch your step - electronic filing and tax preparation software - Brief Article

Black Enterprise, March, 1999 by Donald Jay Korn

How to avoid common pitfalls when filing your taxes online

For as little as $15 and a simple click of a computer mouse, you can file your tax return. By using the Internet, you'll probably get your money back faster if the Internal Revenue Service owes you a refund.

So what's the catch?

Experts says that tax-preparation software and electronic filing may be fine if you have a relatively straightforward return, which may include W-2 income from your employer, investment income and some basic itemized deductions, such as medical outlays and mortgage interest. But don't expect electronic support systems to fully substitute for the personal touch. If you have "unusual items" like casualty losses or huge capital gains, or are trying to figure out what to do after a divorce or death of a spouse, consult a tax professional. Of course, you could end up paying hundreds or thousands of dollars to a tax preparer vs. $40 for tax software.

Mitchell Freedman, a CPA in Sherman Oaks, California, says clients who are financially sophisticated and computer literate often overestimate their ability to master the tax code with software programs. "One of my clients had passive losses of about $40,000 from old commercial real estate property that he had not been able to deduct. One year, he had income from another passive investment. He should have used the old losses to offset the taxable income. However, he didn't know what questions to ask and the software program didn't provide the right support. As a result, he made a tax overpayment that year that was well over $100,000."

There's another reason for using a professional. "Sometimes the information you're reporting on your return can be presented in a manner that's legitimate but also reduces your audit exposure," explains Freedman.

One approach is to prepare your return using the software package, and then bring it to a tax pro before sending it to the IRS. "Generally, I'll find deductions [my clients have] overlooked," says Randy Bruce Blaustein of Blaustein & Greenberg, a New York accounting firm. "They might not know they can deduct employee business expenses, for example, or medical costs incurred for a dependent parent."

To get the best of both worlds, use a software package for data entry and number-crunching. This way, you still save money because the fewer hours a tax preparer works on your return, the lower the fee--although some charge a flat rate. As Freedman puts it: "Clients do better when they pay me for using my brain rather than for using my pencil." Among several Internet sites that you can use to file taxes online, one of the most popular is www.turbotax. com, offered by Intuit, the same company that produces the retail version of the Turbo-Tax software.

When you vsit the TurboTax site, you can pick from a range of options, including the tax center, which provides individuals and small business owners with updated information, IRS publications and a section that provides answers from experts to the most frequently asked tax questions.

Or you can find links to other tax-related sites at www.el.com/elinks/taxes/, and gain additional online resources on income tax preparation, tax codes and forms. The site includes: the IRS; Armchair Millionaire's Tax Center, which gives information to investors; H&R Block, which provides an office locator service; TaxWeb, a source of consumer news on federal, state and local tax-related developments; MSNMoneyCentral, which offers workshops and a deduction finder that reveals tax savings; and SecureTax, a service that helps you prepare your taxes online by using such tools as a tax return organizer and a refund estimator.

To get a better grasp of electronic filing, call the IRS at 800-829-4477 and select topic 252.