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Electronic Filing
Why I Don't Advise E-Filing
The following are excerpted from earlier
articles I have written in both my old
paper-based newsletter &
new-style blog.
IRS has been very aggressively pushing its
electronic tax return filing program. I receive a lot of criticism for my
refusal to participate; so this is another explanation of my reasoning.
In the past, there have been attempts to
officially eliminate paper tax returns and require all of them to be filed
electronically. I, and my colleagues in the tax practitioner community
have fought those proposals back; and IRS has backed down from the mandatory
approach. With the growth in tax protestors refusing to file any income
tax returns, IRS should be glad to get anything from people, much less insist on
an electronic tax return.
Some people take my refusal to endorse E-filing as a Luddite position. That's
completely wrong because I use computers & the Internet more than most people.
However, for this particular task, the system isn't ready for prime time with
the clients I serve.
It has been my experience that we can avoid IRS audits and problems by breaking
items on tax returns out into much more detail than is shown on the preprinted
forms and also attaching additional explanations for anything out of the
ordinary. I prepare very complicated tax returns and have almost a zero
percentage audit selection rate due to this policy.
The electronically filed format requires too many things to be combined and has
no room for the extra explanations and exhibits I like to attach. If this is
ever expanded to allow more of a free form tax return, so that I can protect my
clients' best interest, I will be more likely to support the concept of
electronically filing returns. Until then, I see it as exposing them to too many
potential problems
You may be hearing all of the publicity about
how more and more people are filing their tax returns electronically either
through their own computers, special services, or through their touch tone
phones. Of course, the implication of any such report of a new trend is that
this is a good thing and that if you want to be hip, you’ll join the crowd.
Conformity with the majority is the goal nowadays, if we are to believe those oh
so smart folks in the national news media. Luckily, there is one naysayer still
among us, who takes a contrarian view of going along with the mob and doesn’t
believe that just because a lot of people agree on something that it is
automatically the best approach. (Remember that the Clintons were elected as
president twice.)
Basically, filing electronically is a crazy
way to file a tax return unless you have nothing but a W-2 and a few 1099s. If
you have a Schedule C, E or F, electronically filing your return will either
cost you more in taxes, invite an IRS audit, or both. Preparing a tax return
that minimizes your taxes plus minimizes your chances for being selected for
audit requires that you break your figures into much more detail, and include
more detailed explanations than is possible by using the format that is required
for electronic filing. A tax return is a self defense mechanism on which you
explain what happened during the last year in such a way that the IRS can’t
challenge you. For asset sales, as well as dozens of other common normal
events, it is important to include much more detail with the tax return than is
required or even has a pre-printed place on the forms. With electronic filing,
such attachments and explanations are impossible. This is why I continue to
refuse to file returns electronically and will continue to fight the ongoing
efforts by IRS to require that all returns be so prepared.
The reason most often given for wanting to
file electronically is to be able to get a refund a few weeks earlier. In fact,
preying on these desperate folks has become a very profitable business for
finance companies and H & R Block type firms who make refund anticipation loans
with fees and interest charges that equate to loan sharking (up to 225% APR per
a recent example by Jane Bryant Quinn). As I have long said, getting a big
refund from IRS is not something to brag about, but actually an admission of
financial stupidity. Estimated payments and withholdings should be adjusted
during the year to avoid a big overpayment. That will prevent you from becoming
a victim of loan sharks while waiting to get back your own money.
IRS has publicly announced its goal of having
70-80% of tax returns filed electronically and is mounting a huge PR campaign to
encourage its use. They are even planning on disparaging tax preparers who don’t
offer electronic filing services in an effort to incite client pressure on the
practitioner community. While I’m a big user of computers, and I even
acknowledge that the IRS system will slightly speed up refunds, I am still
holding firm in my belief that electronic filing could very well increase
chances for being selected for audit. A technique that I have long used to keep
tax returns below the IRS radar has been to attach a lot of detailed explanatory
information with the return. The electronic filing format doesn’t allow anything
but limited expense and income categorization.
KMK
This page was last updated:
Saturday, August 26, 2006 06:02 PM
Ozarks Time by KMK
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