When you use tax software to prepare your income tax return, you have good reason to feel confident about the results. After all, the software asks you a series of questions and guides you every step of the way. All the calculations are automatic. And today's software is sophisticated enough to handle almost any tax situation.
Unfortunately, using tax software does not guarantee that your return is free of mistakes -- mistakes that are more likely to be in the Internal Revenue Service's favor than in yours.
The most common problem is that the software didn't allow you a deduction or a credit because you failed to check a box or you didn't understand a question. You could, say, faithfully log your business mileage all year and enter the total in the program. If you miss one question in the vehicle expense section, you don't get the mileage deduction -- and unless you look for it on your return, you may not even notice.
Professional tax preparers use a number of procedures -- tricks of the trade -- to stay organized and make sure the returns they prepare are correct. By taking these tips from the pros, you can get the most out of your tax software and increase the accuracy of your return.
First, get organizedSort your financial documents before you start. This is advice MSN Money columnist Jeff Schnepper repeats again and again, and he's right. You can read more about his envelope system in his article "It will pay to prepare for your tax preparer."
For example, put all your W-2 forms together. Then do the same with all your dividend and interest statements. It's easier to go through the interview sequence without missing anything if you avoid skipping around too much. If you organize your information before you start, you may need to go through each section only once.
If you use personal-finance software, make sure your file is up to date and all transactions are properly categorized before you start to work on your return.
You may want to start a worksheet with relevant information, notes about how you determined amounts and so on. This not only helps you prepare your return, but it can be invaluable when you need to remember what you did.
Before you start, make sure the program has the latest updates. This is very important. Late in 2007, Congress enacted a number of provisions, the most important of which extended breaks for families affected by the alternative minimum tax.
Decide whether to use the interviews or the formsThe most popular tax programs, including TurboTax and H&R Block's TaxCut, let you go through a question-and-answer sequence or go straight to the worksheets and IRS forms. Unless you are confident working with tax forms and have kept current on the latest tax changes, go through the complete interview sequence.
Yes, the interview asks a lot of questions about things that have nothing to do with you, such as whether you received oil and gas income. But it also brings up things you might not have thought of or that you didn't know might apply to you, such as the sales tax deduction or the foreign tax credit. Using the interview takes full advantage of tax software.
If you fill out the forms and worksheets directly, you're basically using the program as a tax calculator. This is how most tax professionals use software. They don't have time to go through an interview sequence for every client's return. They know what they are looking for. They, and others who know what they are doing, find it much faster to enter information on worksheets or forms. It's also easier to skip from section to section that way if, for instance, all the information isn't available at once.