Is Your Tax Software Getting You in Trouble?

By Kelly M. Walsh, Esq.

Tax returns can be confusing, especially if you are running a small business. However, many small business owners and taxpayers choose to prepare their returns themselves to avoid the price tag of a knowledgeable professional. Popular tax software providers advertise that they walk you through the process so you don’t have to know the law, and countless taxpayers trust that their software will do it correctly. That could be a mistake. For a number of taxpayers now facing audits, it was a mistake.

I have now had several clients and consults in a row who were audited over the same error on their 2017 income tax returns. An IRS agent confirmed to me that they flagged a large number of returns with the same issue, gathered them all into a big pile, and they have begun systematically working through the pile to audit each and every one of them. That issue is something the tax software was pushing taxpayers to do, not something a tax preparer who is knowledgeable of the law would have recommended.

When asked about the error, my clients had no idea they made it, or what it even means. They prepared their returns themselves using popular, widely available tax preparation software. When the software asked questions, they filled in answers. They had no idea why the questions were being asked, where the information was being used on their forms, or what benefit, if any, it was meant to provide to them. They simply answered the questions that were asked and submitted the resulting return. Little did they know that the software was setting them up to have their lives turned upside down by an audit.

An audit can be very stressful and expensive. It requires extensive preparation, gathering and providing of documents, and interaction with an IRS agent. The audit is often not limited to a restricted question, but rather examines the entire return in detail. The auditor is looking for anything that can be challenged to generate more tax dollars for the IRS. He or she will pour through bank records, demand more and more records, and come up with a figure for unexplained income that the taxpayer will likely find shockingly high. The burden is placed on the taxpayer and their representative to find the auditor’s mistakes, explain deposits, and argue that their income was accurately reported. Importantly, this is not recent financial data. It is hard enough to remember what each transaction was on a bank statement a few months old. It is even harder when the records are a few years old.

Then, if the auditor succeeds in generating even a small amount of additional tax revenue, the audit will be expanded to dig into other tax years. Current regulations allow an IRS agent to audit up to six years back, and they can go back even further if they find something they consider to be a fraud or omission. Once you have been audited in one tax year, it is more likely you will be flagged for audit again in future years.

You may be able to avoid this headache by making sure your return is prepared correctly the first time by someone who knows the applicable tax law and how to avoid the typical traps and red flags.

Scaringi Law does tax preparation at low flat rates comparable to many of the non-attorney tax preparation services. With Scaringi Law, though, you get the benefit of an attorney’s knowledge and experience in your tax preparation. Call today to ask about a free initial consultation for your tax preparation or audit needs.