COMMENTING ON A COMMENT

Before leaving for the shore I received a comment from NY TAXPAYER on the following statement I made in my post on NYS Developments -   

"If a taxpayer wants to take a risky chance and prepare his/her own state tax return using software, I expect that the ability to submit the return electronically is included in the package at no additional cost. So why not submit the return electronically?"

Here is what NY TAXPAYER had to say -

“Here is one reason why a taxpayer might be willing to use software to prepare his tax return, but might NOT be willing to efile it.

He would like to file a neat typed return that is easy for the state to process, but would like to limit access to the information on his return so that ONLY federal and state tax authorities see it, and does not want his financial information passing through the hands of a commercial intermediary.

Not everyone has terrific handwriting like you do, RDF.

Using software creates a neatly typed tax return with OCR-readable characters in the proper boxes.

Furthermore, although tax software is flawed and capable of making mistakes, self-prepared returns are also full of mistakes. For many taxpayers, the best approach is a combination of the two--with careful manual cross-checking of the software, and/or using several different software programs to cross-check the calculations.

In addition, NYS used to provide tax software publishers with the ability to create 2-D barcoded version of tax returns which were very cheap to process via OCR-readers. I assume that capability will go the way of the dinosaur in the light of the new law.

However, the fact that a taxpayer is willing to use software to assist in preparing his return does not necessarily mean that he is willing to share his family's sensitive financial data with the software company.

Efiling a return does not mean sending it directly to the IRS. It has to go through an intermediary. That means that Intuit, H&R Block, or some other commercial intermediary gets access to a huge treasure-trove of sensitive financial information (names, SSNs, bank account and routing numbers, amounts of different types of income, etc.)

A taxpayer who purchases a downloaded version of tax software to use on his own machine to assist in preparing his tax return does not have to share any information with the software company UNLESS he efiles the return, in which case all information passes through the software company.

So the new NYS tax law forces taxpayers who would prefer not to share their information with a third-party software company to handwrite their own tax returns. This is likely to add transcription errors to the process for those taxpayers who decide to handwrite their tax returns.

I understand that filing a paper return does cost the state a little bit more to process (but probably not all that much, given the 2-D barcode) and I believe some taxpayers would be willing to pay a small fee to cover that cost in exchange for the privilege of keeping their financial information out of the hands of software companies. (Such taxpayers already pay a significant amount to the Post Office, which surely helps with their mounting deficit problems.)”

I agree with NY TAXPAYER when he says –

“. . . the fact that a taxpayer is willing to use software to assist in preparing his return does not necessarily mean that he is willing to share his family's sensitive financial data with the software company.”

And I certainly sympathize with a taxpayer, regardless of state of residence, who would “like to limit access to the information on his return so that ONLY federal and state tax authorities see it, and does not want his financial information passing through the hands of a commercial intermediary”.

I have never used commercial tax preparation software to either prepare a federal or state tax return or to “e-file” any such returns.  I have no first-hand experience or knowledge to verify that –

“E-filing a return does not mean sending it directly to the IRS. It has to go through an intermediary. That means that Intuit, H&R Block, or some other commercial intermediary gets access to a huge treasure-trove of sensitive financial information (names, SSNs, bank account and routing numbers, amounts of different types of income, etc.)

A taxpayer who purchases a downloaded version of tax software to use on his own machine to assist in preparing his tax return does not have to share any information with the software company UNLESS he e-files the return, in which case all information passes through the software company.”

However, I certainly would not want to benefit Henry and Richard or any other commercial entity by providing them with personal information that will be used for marketing or any other purpose.  If NY TAXPAYER is correct this is another reason not to use commercial tax preparation software.

As I have often publicly stated in the past, when possible, and when the client agrees, I will electronically submit NJ state income tax returns via the State’s NJWebFile system.  There is no additional “out of pocket” cost to use NJWebFile.  It is my assumption (hopefully I am not making an “ass” out of “u” and “me”) that because this is done through an extension of the NJ Division of Taxation website the data is going directly to Trenton and not filtered through any commercial software processor. 

I have also said I would submit federal returns electronically, again of the client agrees, if I could similarly transmit the information directly to “Sam” via the IRS website free of charge.

As an aside, one thing I have noticed with NJWebFile is that printing out the completed return wastes more than twice as much paper as photocopying a manual NJ-1040.  Copies of software generated federal returns show to me by clients also included a lot of wasted paper.

The bottom line – a New York taxpayer, or one from any other state for that matter, should not use a flawed and expensive tax preparation software package to self-prepare his/her federal or state tax returns.  No one can dispute that a “box” is a proper substitute for actual knowledge of the Tax Code. 

If a taxpayer wants to submit “a neat typed return that is easy for the state to process” (I agree not everyone has the flawless handwriting that I do - I have seen some horrible handwriting on tax returns in the past) he/she can first prepare the return manually with a pencil and then triple-check the return. The next step it to type in the numbers from the “penciled” return onto the appropriate lines on the blank forms available at the state tax agency website, and print-out the return.  The IRS and most states offer “fill-in” pdf-format version tax forms on their websites – and one could use these forms as a sort of a “word-processor”.

The best idea is to use a professional paid preparer who has registered with the IRS and received a PTIN.  If the taxpayer does not want to submit the return electronically because of concerns about potential abuse by commercial software companies, he/she can take the finished returns from the tax pro and mail them to Uncles “Sam” and “Andy” (or whoever).

If NY TAXPAYER is correct when he says that using tax preparation software to e-file returns provides the commercial software company with access to personal taxpayer information - then I will change my mind and strongly object to New York’s new e-file mandate for self-prepared returns where software is used.

So what do you have to say?  I look forward to receiving comments on my above comments on a comment.

TTFN