In addition to being an investment advisor, I am also a tax professional. People will sometimes jokingly accuse me of preferring complicated tax laws because complicated tax laws help my tax business grow. If ordinary citizens struggle to prepare their own tax returns, they are more likely to pay me to do it for them. I understand their logic, but it doesn’t apply to me. I don’t like complicated tax laws. I am appalled that our Congress has created a tax system so complicated most Americans don’t understand it and will penalize us if we fail to comply with it. I am waiting for a class action lawsuit about this, and I will jump on it with both feet!
Fortunately, most military families do not have a terribly complicated federal tax return. With the broad array of free (or low cost) resources available most military families can get their tax returns reliably prepared and filed each year without consulting a tax professional. There are some exceptions, of course. Some military families have complicated financial lives and their tax returns become more complicated as a result. More often than not, however, military families can use one of the free software options available, step through the questions the software program asks, and get the correct result. I encourage military families to explore this option for their tax preparation. Not only is it free, but I think self- preparing your tax return helps you understand your financial situation a little better.
There is one trap on the self-preparation trail that I want you to know about and avoid, though. The software is not a panacea. It does not know everything, and it will allow you to prepare and file an incorrect return. Do not believe that just because your tax prep software allowed you to claim certain deductions or credits that you have reasonable authority to do so. The tax software often does not know that you have entered incorrect information. The software company takes no responsibility for your incorrect return if you entered incorrect information. Likewise, the IRS will hold you responsible for the return. They do not accept, “My software let me do it, so I thought it was correct” as an excuse.
The US Tax Court recently reaffirmed this position when they issued TC Summary Opinion 2024-15 in the case of Pope vs Commissioner of Internal Revenue. The Popes self-prepared and filed their 2020 tax return using tax preparation software. On their 2020 tax return the Popes claimed a $14,000 adjustment on Schedule 1 for IRA contributions. This was done in error. The contributions were to Mr. Pope’s 401(k) retirement plan through his employer, and not to an IRA. The contributions to the employer-sponsored plan should not have been recorded as an adjustment on Schedule 1. The IRS recognized this error, disallowed the adjustment, and charged the Popes additional taxes and interest.
The Popes challenged the IRS decision in Tax Court. At trial Mrs. Pope testified that she entered the amount of the 401(k) contribution believing the tax preparation software would alert her if it was incorrect. Unfortunately, tax prep software does not work like that. User errors will often go unchecked. In the Pope’s case, the amount entered exceeded the legal limit for 2020 contributions to an IRA, yet the software did not alert the user. In the Summary Opinion, the Tax Court pointed out the IRS publishes instructions for form 1040 each year, and taxpayers are advised to consult those instructions even if they are using tax preparation software. The Tax Court ruled in favor of the IRS, and the Popes were required to pay the additional tax plus interest.
Do not avoid self-preparing your tax return just because things went poorly for the Popes but learn from their mistakes. If you feel confident you can prepare an accurate tax return, then you can definitely save time and money doing it yourself. If you are not sure about a question you are being asked by the software, don’t guess. Get clarification from the software company for the brand you are using or look it up yourself. You can usually find the answer using the current year instructions for form 1040. They are found online (IRS.gov) and give line by line instructions for filling out that form. Avoid relying on sources that are not authoritative. Thousands of bloggers and social media gurus are offering free tax advice. Much of it is inaccurate and even more of it is outdated and no longer applicable. Ony use sources that would hold up in court if you had to tell a judge where you got the information that you relied upon to prepare your tax return!
If you have a complicated situation, you might consider hiring a tax professional to prepare your return for you. If you are searching for a tax professional who understands military tax issues, check out the Military Tax Experts Alliance. You can submit a question or find a tax professional to work with. It’s a great organization, and I just happen to be a member!
No matter how you get your taxes prepared, just remember to get them submitted on time. The IRS is not very friendly to late filers!
If you’ve got financial questions that are (or aren’t) tax-related, the MFAA financial planners are a great source of help.