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Last of the Mohicans

July 28, 2009

The Wandering Tax Pro, Robert Flach, posts about how he refuses to use computers to prepare tax returns. He wears this as a badge of honor.

With my penmanship, preparing returns by hand has never been an option. I was fortunate to start my tax career just as the PC revolution was taking hold in the accounting world in the mid-'80s. I understand his reasoning - by doing it by hand, he understands how the numbers flow and how the forms work. But he gets this wrong:

During the session on common mistakes made by preparers at the IRS Tax Forum I attended two years ago the instructor went so far as to say that those who use tax software to generate 1040s have basically become nothing more than glorified data entry clerks. I totally agree!

As complex as the tax law is, computers are a huge productivity benefit in a tax practice. I have 1040s that have passive loss carryforwards from dozens of activities. The carryforwards have to be computed and carried forward separately for regular tax and alternative minimum tax. The returns might also have investment interest carryforwards, capital loss carryforwards, and investment interest carryforwards - all computed separately for regular tax and AMT. Doing these computations manually would add countless labor hours to the return - hours either the preparer or the client has to pay for. And then every carryforward would have to be manually entered correctly the following year, adding still more time to the process. With intelligent review, the computer gets the right answer much faster.

The biggest benefit from using computers is the ease of fixing mistakes. I know, as I prepared my share of manual returns at the beginning of my career, including consolidated corporate returns and partnership returns. With a manual return, every mistake has to be walked through multiple forms to be corrected. If you have K-1s, they all have to be re-pencilled. And everybody makes mistakes, especially when tired during tax season. When you find a mistake on review using a computer, you can fix the one number and all of the changes will flow through all of the affected forms.

Sure, you can screw up with a computer-preparered return. No doubt the tax return is a "black box" to some preparers, who just enter numbers and accept what comes out the other end without question. And sure, there can be software errors. But you can screw up manual returns too - everyone makes mistakes - and those mistakes are much harder to fix . I'm willing to bet that software catches many more errors than it introduces. Say what you will about Turbotax (we use CCH Pro-System), the returns foot.

Mr. Flach does note that he's one of the few, the proud, the little band of manual preparers. While I respect his preferences, the rest of the world doesn't use computers to do returns because they're lazy and stupid. They use them because the improvements they bring in efficiency and computational accuracy far outweigh the drawbacks.

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Actually when I first discussed my preference for manual returns I titled my post “Last of the Dinosaurs”.

I am not against the use of tax preparation software, and do agree that its major benefit is that when an error is discovered it is easier to fix by simply entering the correct number. On a manual return if I find an error I often have to rewrite as much as the entire return.

Actually in many instances I understand, from hearing other practitioners speak at tax seminars, that one has to “force” a correct number into the application because the software cannot or does not generate the right number.

And I agree that when there are multiple complicated carryforwards that a software application is helpful.

Luckily my handwriting is impeccable. My handwritten returns have been called “a work of art” by both the IRS and other tax practitioners. Although I do admit I cheat a bit by using a ruler. Over the years I have seen quite a few preparers whose handwriting would suggest that they would make good doctors. Obviously if “Sam” can read the return there is less of a chance that it will be questioned.

I am certainly not advocating that all tax practitioners should prepare all of their returns manually. I am just saying that it has worked for me for 38 tax seasons and I see no need, in my particular situation, to change now. Why should I spend thousands of dollars upfront and hundreds more each year – and have to increase my fees accordingly without seeing any in pocket benefit from the increase – when the expense would not provide any benefit to me. If it ain’t broke why fix it.

I see a great benefit in tax software like TAX TOOLS – where I can instantly see how changing numbers, or choosing different options, would change the tax liability on a return.

Actually many, many, many years ago, during my days at DH+S, I actually worked with a friend and client on developing a software application tentatively titled “Tax Return Verification System”. One would enter certain numbers from a manually prepared return and the program would generate the correct tax liability under all calculation methods – including Minimum, Maximum and Income Averaging. We never did finish it.

The important points that I wanted to make with my post were –

1. Tax software is not a substitute for knowledge of the Tax Code - for either a taxpayer or a tax practitioner.

2. Even a computer-generated tax return needs to be carefully and thoroughly checked – in the same manner as one would check a manual return. One should not assume that just because a computer has generated a tax return that it is automatically legally or mathematically correct.

3. It is very important that a person training to be a tax preparer learn how to prepare tax returns by preparing them manually, as Chuck McCabe has agreed. It is when a person does not learn actual tax law or manual preparation of a 1040, but simply learns how to properly use a software application, that he/she is merely a glorified data entry clerk and not a real tax professional.

Now, Joe, I doubt that you can disagree with these points.

BTW, I never said, or meant to apply, that all preparers who use tax preparation software do so because they are lazy or stupid. There are certainly benefits to using tax software – but this does not negate the real need check all computer generated returns thoroughly or to learn how to actually prepare returns manually.

And, Joe, Mr Flach is my father. You can call me Bob.


Is Joe creating a bit of fuss?

Nah. Just being inciteful Joe.

I agree (with "Bob") that people who just learn where to put the numbers aren't tax professionals. My mother works in Iraq and I went to H&R Block to get my taxes done and they didn't even know which form to file for the Foreign Earned Income Exclusion (she didn't even know what that was).

I learned how to fill out a tax return on paper. I filled out at least 20 on paper before I moved on. It was months before I learned the software. It's more beneficial that way because when somebody can't take a deduction or credit you can explain why: "I'm sorry, Mrs. Jane Doe, but you're not going to be able to take the XYZ credit because of blah, blah, and blah" sounds a whole lot better than, "I put all of the information in the system and it didn't carryforward to the 1040 so that means you can't take this credit" or something similar.

Also, knowing what you can and can't do can save time and hassle up front because you can look over the information before wasting time with the computer system and tell if that person is even going to get a refund (at least with the very simple and basic returns). When you input something incorrectly into the system, you can catch it quicker because you kind of know how the numbers should fall. So you can go back and figure out what you did wrong and how it should be fixed.

It's completely fine for people like you, Joe, to use the software because you know the Code and you know what is or isn't possible (at least I would assume you do). But the people at H&R Block who don't know what they're doing and just know how to transfer the info from a W-2 onto the system... they're just the data entry clerks and they can't help past April 15.

I think that's all Robert was saying.

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