If it’s any comfort to know someone is feeling your pain this tax season, look no further than Nina Olson, the National Taxpayer Advocate at the IRS. In her annual report to Congress, she told lawmakers that the tax system they’ve helped create requires almost 60 percent of us to hire professional tax preparers and another 30 percent to pay $50 or more for commercial software.
The average taxpayer will spend 18 hours filling out a personal return, which is not surprise since Congress has made nearly 5,000 changes to the tax code since 2001 -- an average of more than one a day. The code itself at more than 73,000 pages imposes a “significant, even unconscionable, burden on taxpayers,” Olson concluded.
And that was before the fiscal cliff deal, which piled on more complexity by creating another income tax bracket, new rules limiting personal exemptions, and a new 20-percent bracket on capital gains and qualified dividends. The additions are why Forbes columnist Allan Sloan thinks the deal should be called the “Accountant Full Employment Act” – the new legislation may push some who normally do their own taxes to get help from a tax pro this spring.
Because of the deal, for example, the IRS is delaying until late February or early March its issuance of a number of forms that affect more complex returns, like those used to claim business and residential energy credits. The time crunch created for those filers is one reason Andrew Schrage, co-owner of the personal finance site Money Crashers, says he’s hiring a professional this year instead of doing his company’s own taxes. He’s also not sure which business deductions and credits have been extended under the deal and doesn’t want to make a costly error.
PROFESSIONAL HELP AND FILING DELAYS
The people who should normally hire preparers are those with income from investments or other sources outside of their main job, says financial advisor Eric Rosenberg of Narrow Bridge Finance. They need professional help from someone who gets to know their situation, asks good questions, and files for the right deductions. “You hire a preparer to give you advice, not to fill out your return for you,” adds Jeff Schnepper, author of How to Pay Zero Taxes.
But for people with simpler returns (i.e. most taxpayers who take the standard deduction), the fiscal cliff deal shouldn’t change how they do their taxes. The only change for most people in that category is an increase in their payroll tax, which their employer adjusts on their W-2 form, says Rosenberg.
Still, the legislation is forcing a filing delay for all of us: The earliest filing date is now January 30 instead of the originally scheduled January 22. In addition to squeezing the filing window from 12 weeks to 11, that also will delay refund checks by at least a week.
There is, of course, a time-saving option for filers who do their own returns: using off-the-shelf tax software like TurboTax, TaxAct, or TaxSlayer. Those who go that route shouldn’t worry about whether the software reflects the changes in the law under the fiscal cliff deal — TurboTax’s Lisa Greene-Lewis, for example, says the company’s development team wrote two versions of the software during the fiscal cliff talks. When a deal was announced, all they had to do was “flip a switch,” she says: TurboTax was ready to use on January 3, the day after the deal became law.
Even though those tools make filing easier, many experts still recommend that people with complicated returns hire a pro instead of relying on software. “Using a software provider is fine if you have straight W-2 wages and a very simple return,” says Michael Rozbruch, certified public accountant and founder of Tax Resolution Services Co., which helps customers resolve tax debts. “But if you have a more complex return involving, for example, mortgage interest, stock or dividend income, or an IRA or 401(k) deduction, it pays to hire a licensed professional.”
For those who heed that advice but want to save money, there is an alternative: Do your return using the tax software and then have a professional check it, all for a much-reduced fee, says Julian Block, a tax attorney and former IRS agent in Larchmont, New York.
Another resource for those doing their own returns is the online tax advice that’s available either for free or a modest fee. On Pearl.com and justanswer.com, for example, customers can send a question to a tax expert – Pearl.com charges an average of $30 if customers get an answer that satisfies them, according to a spokesperson; justanswer.com’s service is free. TurboTax offers a similar free service to those who purchase its software.
One near-certainty going forward is that demand for help with tax preparation will only grow. Olson’s report notes that given the number of hours it consumes (an estimated 6.1 billion total), if tax compliance were an industry, it already would be among the largest in the country. The U.S. already employs some 1.2 million tax preparers – more than the number of firefighters and police in the country combined, according to Face the Facts, a non-partisan election research project at George Washington University.
With the fiscal cliff deal, says Nico Willis, CEO of financial services and software company Networth Services, the higher capital gains rate that was part of the deal will increase buying and selling among the 25 million households that have investment accounts, since they’ll be seeking more tax-efficient options. That will mean more complicated returns and even more people seeking out tax pros next spring.