Tax Prep 2009

How Much Do You Owe Uncle Sam? Tax-Prep Sites May Disagree

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Stock Sales

The stock sale seemed like a simple transaction--until the questions started coming. Was the sale a "normal sale" or was it a "personal loss"? Was it a wash sale or a Section 1202 exclusion? For all five sites, just the act of classifying the sale involved questions that the Smiths would probably have no way of answering without at least a little strategic advice (or jargon-to-English translations). CompleteTax, for example, asked which one of nine categories the stock sale fell into but offered little explanation of each and no real method for determining which one fit. As if to rub salt in the wound, the site's vague, four-sentence help box on the subject included the phrase "You would usually know if another choice applies."

Likewise, TaxCut offered a mind-boggling 17 categories of dispositions to choose from--practically an invitation to err, especially considering the equally vague, four-sentence explanation it produced when I clicked "Learn More." It didn't bat an eye when I randomly chose "personal use property."

Of the five sites, TurboTax did the best job here because its process-of-elimination approach used more-specific questions to narrow down the choices. Perhaps because the Smiths held the stock for only a year, the classification issue didn't affect the bottom line. But picking a category, potentially the wrong one, without first getting sound advice is not a real-world gamble anyone would want to take.

Charitable Contributions

The five sites also gave the Smiths different advice on what they could deduct for their donation to Goodwill of a big box containing 20 shirts, 40 books, five pairs of shoes, five purses, and an Alf doll.

Three of the sites--CompleteTax, TaxBrain, and TaxCut--simply asked what the value of the donation was and did not provide any method to calculate it. So I entered $400. But two of the sites, TaxAct and TurboTax, include proprietary software to assign "real-world" values to items donated to charity, and their valuations were way higher than I would have guessed--which meant more money for the Smiths.

The tools did not agree on the valuations, however. For instance, ten women's long-sleeve dress shirts garnered a $145 deduction with TaxAct's Deduction Assistant, but only $60 with TurboTax's ItsDeductible module (for some items, however, TurboTax assigned higher values than TaxAct did).

The end result: The Smiths' box of donated items was worth $647 if they used TaxAct and $534 if they used TurboTax. The difference is significant considering that being in the 25 percent tax bracket effectively means taking 25 cents off the tax bill for every dollar's worth of items donated.

The IRS, according to its Publication 526 ("Charitable Contributions"), allows taxpayers to deduct the fair market value of donated clothes and household items in most circumstances. But it offers no guidance on where to find, or how to determine, those fair market values; in fact, page 10 of Publication 526 says, "There are no fixed formulas or methods for finding the value of items of clothing." For household goods, the IRS goes on to say that "formulas (such as using a percentage of the cost to buy a new replacement item) are not acceptable in determining value."

This different-answer-every-time problem is nothing new in the tax world. In a similar experiment back in the 1980s, Money Magazine found that human tax pros came up with different results for the same tax scenarios as well. And because the IRS has refused to evaluate the accuracy of tax-prep software in applying tax law (saying that would be "a monumental challenge"), the only way you'll probably ever know if your tax software steered you wrong is if the IRS decides to audit your return.

Tax-preparation software has indeed helped millions of Americans do their taxes more quickly and more cheaply, but these examples illustrate how the bottom line can be directly affected by the amount and quality of hand-holding provided. If you need an entire subset of specialized knowledge and calculations just to fill in one little white box, you might consider calling a CPA--and even then, be prepared to be second-guessed if you're audited.

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