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While human tax preparers continue to be preferred over software programs, the share of tax filings prepared by human tax professionals has slipped in recent years.
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More than 40 percent of individual tax returns are completed using tax preparation software, according to the IRS.* While human tax preparers continue to be preferred over software programs, the share of tax filings prepared by human tax professionals has slipped in recent years. The argument for completing yearly income tax returns using software is a simple and persuasive one—tax preparation is a rules- and math-based process that is precisely what software is best at performing, and it’s cheaper than a human professional.
However, before your clients fire their human advisors and replace them with a software program, it’s important to distinguish between tax compliance and tax planning. Tax compliance is the task of completing the right forms and including the information and transactions that make for an accurate and honest income tax filing. Tax planning, on the other hand, is the exercise of understanding the tax code and taking actions in advance to minimize the amount of taxes an individual or business will have to pay.
For simple tax situations—a W-2, some investment income, mortgage interest—a well-regarded tax preparation software tool may be quite sufficient. But, for more complicated individual financial circumstances and most businesses, a human tax advisor can become a valuable partner in limiting the drag taxes can have on wealth accumulation.
When to Hire a Professional Tax Advisor
There are many situations in which a human tax advisor may be the better choice, such as when a client:
- Is starting, or currently owns, a business
- Has unique circumstances (e.g., rental properties, farm income, a non-citizen spouse, etc.)
- Has been subject to AMT in past tax years
- Is a corporate executive with restricted stock and stock options or grants
- Wants to proactively find ways to minimize his or her tax bill
- Receives K-1s
- Has material foreign income
- Is anticipating a large capital gain
- Is planning to make a large gift
- Wants the most tax-efficient way to transfer assets to heirs
- Needs year-around tax planning advice
- Prefers to avoid the stress of completing his or her own taxes
The threat of technology to tax professionals is real, but as long as tax laws remain complex and nuanced, a human tax advisor will always occupy an important place in your clients’ financial lives.
See referenced disclosure (2) (3) (6) at http://blog.americanportfolios.com/disclosures/