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Pitfalls of DIY

Pitfalls of DIY

I’ve never been a fan of attempting complex things (or even some simple things) as “Do It Yourself” projects. In the 1970’s I changed my oil and sparkplugs and adjusted the timing and carburetor on my 1973 Pinto Wagon. These days, I take it to the dealer. Yes, I pay more, but I know all the hidden electronics aren’t going to be overlooked and create incorrect dashboard warnings or that I’m going to miss reconnecting something on the engine block and create a significant problem.

Similarly, I cringe whenever a client or prospect lets me know they set up their own LLC or corporation with the Secretary of State or Legal Zoom. Yes, you can file the paperwork, sometimes over the counter. But that is only one step in a complex legal and tax-related process. (This wasn’t a premeditated plug, but since I’m on the subject and the timing is good: ALL my business legal referrals go to my go-to legal expert, John Cantril at EntrepartnerLaw. Also, if you’re interested, I have a great referral courtesy of John for estate, wills, and trusts in North Carolina. Another area I don’t entrust to Legal Zoom or other on-line services.)

And, depending on the source, somewhere between 14-million and 50-million people use consumer tax software to file each year.

While it may be adequate for a W-2 or two, and a mortgage interest statement (though that part of tax law has become increasingly complex: was your mortgage over $750k? Were the proceeds of your refinance used to buy, build, or substantially improve your home? No? Jet skis? College? Sorry, the interest isn’t deductible), users of consumer tax software are entrusting the most complex part of their legal and financial lives to a $60 off-the-shelf computer program (now online app.) The ONLY guarantee the tax software companies make is that the MATH is right. They don’t guarantee that your TAXES are right. The $60 app is generating government-mandated tax forms that will be signed under penalties of perjury and assumption of full liability and risk and submitted to the world’s largest and most powerful collection agency that can go back three (and sometimes six, or even forever) years to say the information was incorrect and here’s your additional bill.

Sure, you can buy a scalpel on Amazon. But does that mean you should take out your own appendix?

Just last month a couple that used a consumer tax software app found themselves facing IRS in Tax Court (Busch v. Commissioner, score: IRS 1, taxpayer 0).

The issue? The MATH was right – neither the couple nor IRS were in conflict about that.

The RETURN was not right. An innocent data entry error turning $21,000 of mortgage interest into $2.1 million of mortgage interest on their tax return caught the eye of the IRS computers, and the IRS auditors.

And you may think, okay, an honest mistake. Correct the return, pay the extra tax, and move on.

But when taxable income is “substantially understated” IRS has the authority to impose a 20% additional penalty on the tax amount that should have been paid. This is in addition to the normal penalties and interest charged.

Moral of the story: don’t DIY. Use a pro. But whether you use the app or a tax pro, you are responsible for every entry on your tax return. Review the return before signing it. Ask questions. Make sure you understand what is on your tax return. If you are a tax client, enroll in our Audit Protection Client Care program. We can often get advance notice of any IRS “red flag” 6 to 12 months in advance of them sending an IRS Nastygram asking for more money. If we’re able to fix any problems before the IRS does, we can usually avoid those ugly 20% penalty surprises.

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