How to choose and use tax software. (Compute's Getting Started with Personal Money Management)
by Alfred C. Giovetti

As the tax-filing deadline approaches, what will the millions of U.S. taxpayers do in order to file in time? Each year the Congress passes bills which involve massive changes to the tax laws and require more forms, deeper understanding, and more computations. Even the state governments, which were bragging about their tax surpluses just a few years ago, are passing more complex tax laws as they hide tax hikes in the guise of simplification. Can a personal computer really make the tax-filing ordeal less painful, more efficient, more organized, and more sensible?

In spite of the computer's ability to add, subtract, multiply, and divide an overwhelming amount of numbers accurately in fractions of a second, the Internal Revenue Service has been forced to make corrections to income tax returns prepared by computer income tax preparation packages due to differences as simple as rounding conventions used in computations. Computer tax programs can't guarantee that you won't have problems with the IRS, but they can minimize the risk in a lot of areas. The vast majority of computer-prepared returns have few computational problems.

To Err Is Human

Most software packages prevent you from making simple mistakes in filling out tax returns. For example, TurboTax for Windows won't allow you to make an entry on page 2 of the form 1040 for itemized deductions without filling out the required information on Schedule A and transferring the information to the 1040. On many forms, MECA's TaxCut asks you detailed questions and won't allow you to claim the deduction or credit if you're not entitled to it.

Tax software audit features make errors less likely. TurboTax compares the data on the return to the prior year tax-return data (if TurboTax was used in the prior year) and to national averages for the same data, and points out any data which is significantly different. Significant changes from the national average, or your own figures for the same information, may unnecessarily flag your return for audit. Many times these differences point to a number that is on the wrong line or computed incorrectly, or to an error in transcribing a number from your receipts, checks, or books. Correcting these items before filing can alleviate problems when audited.

This doesn't mean that you shouldn't claim an item which is correct when it varies from prior years or from the national averages, but it does make you aware of the level of risk and may warn you that you need to look into the matter more carefully, something the IRS requires professional tax prepares to do.

Getting to Know You

Software for tax preparation should be selected with the same care you would use for any other software selection. Software features should conform to the needs of the user, not the other way around. Review all available software features and decide which are more important to you; then select the package that fulfills your requirements. Don't pay for features that you don't need, such as fancy printer output if you intend to file the 1040PC or file electronically. If convenient, go to a store that will let you try out the software, and see if it's easy to use and understandable.

The system requirements should be compatible with your system, especially in the areas of printer support, free RAM, free hard disk space, Windows version, and video requirements. The software package should support the preparation of all the forms, schedules, and worksheets in the multiples needed for all your returns. Make sure that the software supports the number of entries you need for interest income, reporting of multiple K-1s, and any other computations or summaries. Description fields should be large enough to accommodate your name and basic descriptions, or have notes to accommodate understandable descriptions.

The interview input method is the easiest for most people, unless you're very familiar with income tax forms, rules, and procedures. The interview asks a series of questions which lead you to make the correct decisions concerning the deductibility of items. Tax-Cut's Daniel Caine, who virtually invented the tax software interview in 1987, has a question tree that asks only the questions needed based on the answers to previous questions. In many situations, Daniel Caine's "expert advice" and interactive interview rivals the person-to-person interview techniques of the very best tax professionals. The interview method also helps the taxpayer give correct and complete answers to the tax form questions. TurboTax provides a pop-up list of appropriate answers for many tax form questions, making it easier to give the correct answer.

Instant Adviser

Software with IRS instructions and plain English explanations of IRS instructions can make your life easier in most cases. Many people prefer pop-up, on-line, context-sensitive IRS instructions and explanations relating directly to the location and line that the taxpayer is preparing. Instructions such as these save you the trouble of looking through volumes of paper information, forms, instructions, and publications, since the software company has collected all pertinent information in its online data files.

Some people prefer their IRS instructions and explanations on paper, as found in HowardSoft's 600-page manual. TaxCut gives you the best of both worlds by allowing you to print a permanent record of the context-sensitive, online instructions.

Check for specially needed features, such as passive activity calculations if you have rental properties subchapter S corporations, or partnerships. Make sure that the software accommodates alternative minimum tax calculations, which may be required where you have varying amounts of tax preference items in certain filing status situations.

Accountability, or the ability to justify tax return data when compared with receipts should there be a question or audit by the IRS, can be another area where computer tax preparation software shines. The best programs, such as Parson's Personal Tax Edge, have pop-up schedules that can be saved and printed to show the computations and tally of receipts that were added together to get the number that's shown on the screen. Pop-up calculators that can't be saved and printed have limited usefulness.

In some IRS inquiries, you can simply provide a print out or schedule that explains how the number which appears on the form was calculated. In other cases, the IRS wants to see the receipts in addition to the tally of the numbers to explain the number shown on the line of the return. So don't think the computer will eliminate the need to keep your paper records in an organized fashion, readily available for presentation to an IRS examiner.

You can enhance accountability with the proper use of a financial or money management record keeping package, such as Quicken, Microsoft Money, MoneyCounts, or Managing Your Money. These financial packages can be used to categorize, organize, and record payments and income items which can then be imported into the tax preparation packages compatible with these packages.

The two types of data transfer formats are the Tax Exchange Format (TXF) and ASCII file format. TXF is supported by Quicken, Microsoft Money, Money-Counts, Managing Your Money, and all the major tax software packages. An ASCII file format transfer can be made from any software that can create and manipulate ASCII files, including Lotus 1-2-3 and many other software packages.

As we said, using financial packages to keep track of records doesn't relieve you of the responsibility to keep paper records, which should be organized chronologically by category of expense, deduction, or income. Any system of record keeping is only as strong as the person who uses it. Record keeping requires understanding, consistency, accuracy, and, most of all, discipline. You should understand the differences between bookkeeping rules and tax rules, and all necessary adjustments should be made to the data prior to transferring it to the income tax return preparation software.

Avoiding an Audit

Print quality and printer support is, in many cases, an issue of added cost. There are three methods of printing for which programs may charge extra: soft fonts that are loaded into your computer's or laser printer's RAM prior to printing your forms, a tax font cartridge, or direct laser printer support.

The IRS approves both graphic and facsimile output. Facsimile is a confusing term because the IRS uses the term differently than you'll find it used when it refers to fax (facsimile) machines The IRS-approved facsimile format is similar to the actual IRS forms which you get from the post office, library, or bank, except that it doesn't have the shading, line drawing, and special fonts.

The graphic output approved IRS forms are virtually identical to the actual IRS forms. The appearance of the paper-filed tax returns can be important in determining whether a return looks sloopy, and therefore a good candidate for audit. A graphic output return printed on a laser printer appears neatly done and may be less likely to be selected for audit by an IRS agent.

Tax planning with both 1992 and 1993 rates and support for W-4 and 1040ES Forms gives you more choice, control, and flexibility over your witholding. Overwithholding is like giving the IRS an interest-free loan. Underwithholding results in penalties, interest, and the stigma of a sloppy return, which may lead to IRS audit. While tax planning may require more time and effort in record keeping, it may well be worth it.

Not everyone can file electronically or with Form 1040PC, but those who do qualify will benefit with faster direct deposit or mailed refunds, swift automatic IRS confirmation of filing, and a quick IRS error check of your return. Form 1040PC is a new scannable form, which also will give you a faster refund in the form of direct deposit or mailed checks and will allow you to file balance due returns. Tax payers who file balance due returns with Form 1040PC will have the option to file now and pay later (as late as April 15, 1993) with a special Form 9282 voucher. Choosing software with electronic filing and Form 1040PC support allows you to choose how to file if you qualify.

Select a program that supports those state forms you'll need to file. Some programs support the state electronic filing format for those states that allow electronic filing. It's much easier to prepare a state return if the data is transferred automatically from the federal return and last year's state return software. State software with an interview feature will guide you to make the correct adjustments to turn federal taxable income into state taxable income. State returns are where many software problems crop up. For example, this year's state tax module from MECA can't read data from last year's state tax module.

Technical support can be critical to the last-minute tax return preparer. Select a software company that has the type of support that you prefer, whether it be telephone, fax, bulletin board, or online database (such as GEnie, CompuServe, Prodigy, and America Online.) Some companies, such as HowardSoft, will refer you to the appropriate page number and IRS publication number to resolve an income tax question.

No Guarantees

Many companies guarantee results by promising to pay any penalties caused by incorrect computations or refund your purchase price. Keep your receipt, software, and packaging, since you can be audited up to three years after the filing deadline or date you file, whichever is later.

MECA's TaxCut and TurboTax promise to pay any negligence penalty caused by software-generated miscalculation. Understand that no company agrees to pay the interest on these underpayments; there are dozens of IRS penalties other than miscalculation negligence.

Some programs offer both professional versions and personal versions that use a compatible file format, or have one version that's used by both professionals and personal users. If you use tax preparation software for tax planning or to prepare your return prior to going to your professional tax preparer, things will go smoother if you work with the same software as your preparer.

ChipSoft will provide its users with a list of local professional tax preparers who use its TurboTax program and have requested to be part of this referral service. A competent tax professional, such as an enrolled agent, certified public accountant, attorney, licensed public accountant, or other professional tax preparer, can help you where the tax programs are limited, such as in the case of a sole proprietorship business that reports on schedule C of Form 1040.

Most tax software is designed to handle the vast majority of taxpayers who have fairly simple tax situations. Tax software won't prevent you from making errors in judgment or procedure that go beyond the scope of the software. For example, most tax packages are only able to handle the most simple computations relating to schedule C and a home office.

Even the best software available contains some oversimplification of the tax code, regulations, procedures, court cases, decisions, policy, and practice, all of which taken together comprise thousands of pages of information. If you feel you're out of your depth, you should turn to a tax professional for help. Software can't do your returns for you, but it can make it easier to cope with the process. last year 10.9 million re-turns