I was thumbing through the 1040 instruction book the other day … Hey! I was researching a story. OK, so I also enjoyed perusing the material.
And just what are you snickering at? You’re here reading a tax blog, so can it!
Anyway, as I was saying, in researching a story I ran across a new and intriguing addition to the IRS tax return instruction booklets. Seems this year the agency is offering us “customers” an MSRP for professional tax services.
We’re all familiar with the acronym when it’s used at a car dealership. You know, the manufacturer's suggested retail price spelled out on the sticker affixed to the window of a showroom vehicle. It starts with the car’s base price, adds in any bells and whistles and “excludes tax, title, shipping and other costs that may be incurred. Actual dealer price may vary.”
Well, on page 79 of the 1040 instructions, there’s a nice table detailing what the IRS estimates it will take you to complete the form and associated schedules (data that’s been there in previous years) along with an actual dollar amount associated with the time spent. Similar, albeit smaller, tables are found in the 1040A and 1040EZ instructions, pages 59 and 23, respectively.
According to the IRS introduction to the 1040 table, “These estimates of average preparation times and out-of-pocket expenses are based on a new survey of taxpayers and a more accurate method of estimating taxpayer burden. They focus on taxpayer characteristics and activities, rather than forms, and replace the burden estimates shown in prior year tax form instructions.”
The bottom line? The IRS says the you, the average Form 1040 taxpayer, will spend 16.1 hours at a cost of $17 to complete the form yourself without using tax software. Invest in TurboTax, TaxCut, TaxAct or some other computer filing aid, and the bill comes to $42 for almost 22 hours of work. Turn everything over to a tax professional, and that’ll take just under 11 hours and cost you $172.
From these average taxpayer estimates, the table goes on to break down other filing process variables, such which commonly-filed 1040 schedules your individual situation might require.
The 1040 prices range from a low of $13 (self-prepared 1040 with some other forms but no Schedule A or D) to a high of $313 if you pay a pro to fill out your 1040, A, D and other forms. Add self-employment income to the mix, with its requisite Schedule C or C-EZ, SE and other relevant forms, and the price estimates, not surprisingly, go up.
The cost of filing for a 1040A taxpayer runs from $18 sans software to $39 with a computer program to $122 when you turn your taxes over to a professional. At the EZ level, it’ll cost you $5 via paper and pencil, $41 on the home PC and $81 for a third-party preparer.
As you might expect, a lot of tax professionals are not happy that the IRS took it upon itself to come up with these dollar amounts. Tom Herman, who writes the Tax Report column for the Wall Street Journal (subscription required), says that the IRS's price estimate effort has “sparked intense criticism from accounting groups and tax-software companies, who say that the numbers are confusing and misleading.”
Herman reports that the American Institute of Certified Public Accountants went as far as to write a letter to the IRS commissioner, charging that the cost estimates will prove "problematic and misleading" to taxpayers and tax professionals alike. Chief among AICPA complaints: no distinctions for complexity of returns or how well-organized a taxpayer’s records are.
Even more alarming from the accounting group’s perspective is that the IRS estimates didn’t consider the preparer’s level of expertise, reports Herman. The tables, says the AICPA, "will put tax professionals in the difficult and awkward position of trying to explain why he or she must charge substantially more" than the IRS's published estimates.
If, after looking at the filing time and dollar cost tables, you decide you’ll take the middle ground -- file your return yourself using computer software -- make sure you get the program that best suits your tax needs.
Today’s Tax Tip offers some suggestions on selecting the appropriate tax-filing software. Sure, a good price on the PC program is important, but you could be wasting even that bargain amount if the tax package doesn’t do the right job for your tax situation. Get the full details here.