A young lady came into my office to have her 2008 taxes prepared. She had recently moved to California, and this was her first visit with us. Per our request, she brought in her 2007 return so we could transfer the necessary information. The return showed that she hadn't made much money that year. She also believed that she hadn't had enough expenses as a performer to beat the standard deduction. Because it appeared to be a very simple return, she'd decided to save a few dollars and file her taxes online, using a major company's "free" software. That software, seemingly very friendly, accepted her income information and created a final return, which said she owed the Internal Revenue Service $36. She dutifully e-filed (sent in her return through the Internet) and mailed in her payment.
But as I looked over her 2007 return, I immediately noticed a few problems. She had combined her income listed on W-2s (earned as an employee) with her income listed on 1099s (earned as an independent contractor) and entered it all on the same line. But you aren't supposed to do that. Had she entered the 1099-MISC income in the proper place, the software would have told her that she owed self-employment tax on it — another $340.
Undoubtedly she'd soon be receiving a letter from the IRS demanding that money. And, not knowing any better, she'd probably write a check and mail it back to stay off the IRS's naughty list. If she hadn't changed her address by moving to California, she might have already received the letter by now.
Fortunately, she had brought in all her tax information for 2007. No, she didn't have enough performer expenses to beat the standard deduction, but she did have enough to take against the 1099 income (earned as a performer) to substantially reduce her tax liability on it. Quickly throwing the data into our software, I showed her that she was actually owed a refund. She would never have to deal with the angst brought on by an IRS letter.
The moral of the story is that by trying to save a few bucks, you can end up losing hundreds, if not thousands. I have always been a proponent of every taxpayer knowing how to prepare his or her own return. But I still urge you to have a tax professional look it over to make certain you haven't missed deductions you're entitled to or, perhaps worse, done something that could earn you an IRS audit.
Each year, I remind people of that old computer adage "Garbage in, garbage out," meaning if you enter incorrect information into a program, you'll get incorrect information back. In the case of the client mentioned above, she sent in a payment she didn't owe, because the software couldn't stop her from putting the wrong figures in the wrong places. And she would probably have sent in even more money she didn't owe once the IRS demanded an additional payment. And finally, she would never have received the refund she was actually entitled to.