Every year, as tax season rolls around, millions of people turn to do-it-yourself (DIY) tax software in hopes of saving money and time. It’s time to avoid costly mistakes and hire a tax professional.

It’s easy to see the appeal: the software is generally user-friendly, affordable, and allows you to file from the comfort of wherever you might be.

However, as convenient as it is, there are hidden risks associated with using DIY tax software. Errors can occur when users misunderstand questions, misinterpret available options, or inadvertently skip deductions for which they’re eligible. Now’s the time to hire a tax professional and not miss out on important tax saving opportunities.

1. Misinterpreting Software Prompts

One of the most frequent pitfalls of DIY tax software is misunderstanding the questions or prompts. Tax terminology can be confusing, and unless you have a background in tax law, it’s easy to misinterpret what the software is asking.

For example, the software might prompt you to enter “other income.” Without a clear understanding of what qualifies as other income, you might overlook certain earnings that need to be reported. Conversely, you might enter something incorrectly, leading to over-reporting or under-reporting your income. This can result in penalties, interest charges, or a delay in processing your refund.

Moreover, certain prompts may be vague or require specific knowledge about your financial situation. For example, a question about qualifying for tax credits or deductions might not include enough context or examples, leaving you to guess the right answer. If you misunderstand the prompt, you could accidentally disqualify yourself from credits and deductions to which you’re entitled.

2. Overlooking Deductions Due to Lack of Guidance

DIY tax software often provides step-by-step guidance, but it can still fall short of providing a thorough, personalized assessment of your tax situation. While tax professionals are trained to ask questions and seek out deductions, software relies on preprogrammed questions that might not capture all the nuances of your life.

Consequently, you might miss out on valuable deductions and credits simply because the software didn’t prompt you to claim them. See why it’s helpful to hire a tax professional?

For example, here are several deductions that people commonly struggle with:

Home Office Deduction:

If you work from home, you may qualify for a home office deduction. However, the software might not thoroughly explain the eligibility requirements, and you might not realize that you actually don’t qualify because you live the digital nomad or RV life.

Education Credits:

Tax software may ask general questions about educational expenses, but without a clear understanding of which credits you’re eligible for, you might either skip this deduction or take it when you’re not eligible.

Medical Expenses:

Tax software might not ask about specific medical expenses you’ve incurred, especially if they aren’t itemized on your regular medical bills. However, some of these expenses can be deductible if they exceed a certain threshold of your adjusted gross income (AGI).

Without specific prompts tailored to your situation, you might end up paying more in taxes than necessary.

3. Incorrectly Qualifying for Section 179 Depreciation

One of the most intricate areas where DIY tax software can lead you astray is in business expenses, particularly with Section 179 depreciation. This section of the tax code allows businesses to deduct the full cost of qualifying assets, such as equipment, in the year they were placed in service rather than depreciating them over several years. While this deduction can be advantageous, it is not always the best option for every business or asset.

DIY tax software may automatically assume you qualify for Section 179 depreciation based on the type of asset you enter, but it doesn’t always take into account specific circumstances, such as:

– The nature of your business and whether you’re actively engaged in it

– Whether you have sufficient taxable income to benefit from Section 179

– If it’s more tax-efficient to spread the depreciation over several years rather than deduct it all at once

When you hire a tax professional, you get personalized guidance. This could mean the DIY route ends up selecting Section 179 depreciation and you miss out on a better tax strategy for your situation. In some cases, claiming this deduction incorrectly could even trigger an IRS audit, which can be time-consuming and stressful.

4. Missing Out on Tax Planning Opportunities

DIY tax software is primarily designed for one-time filing, and it doesn’t typically offer tax planning for the year ahead. Tax strategy is so important especially if you have a complicated situation with many moving parts including a business, W-2 income, rentals, etc.

Not being proactive about tax strategy can lead to missed opportunities for future tax savings. When you hire a tax professional who is also a tax advisor or tax coach, they can provide valuable advice on retirement contributions, business expenses, and other tax savings strategies that can reduce your taxable income for future years. By relying solely on DIY software, you may miss out on these planning opportunities and pay more in taxes over the long term.

Tax strategy is an often overlooked part of tax filing and tax preparation. Reviewing your situation today and in the future is so important to offer you thousands in tax savings. That’s why you hire a tax professional who can work with you on your unique situation to find the best tax savings.

5. Limitations of AI-Powered Tax Software

Many modern DIY tax platforms use artificial intelligence (AI) to streamline the tax filing process. I’ve seen them popping up at a low cost. While that might be enticing and AI can be impressive, it is not infallible.

AI can sometimes misinterpret your data, especially if it encounters complex or unusual financial information. For instance, AI might misclassify certain expenses for your business or apply inappropriate deductions if it doesn’t fully understand the context of your numbers.

For example, I had a client try to use AI software to file a past return. She was ready to catch up with her filings and thought it would be simple and easy-to-use AI software.

Well, I’m here to tell you it’s not so simple. The AI software filed a $0 return for her!

Yes. You read that right.

She then had to come to me, a tax professional, to correct that very glaring mistake.

I have no idea why it didn’t catch any income or expenses for her or why she didn’t notice but alas, it happened. It was a costly mistake because she did owe taxes and had to pay penalties and interest.

Why not get it right the first time?

If AI takes expenses that aren’t allowed or a credit that isn’t correct, this can lead to filing errors that not only jeopardize the accuracy of your return but can also result in penalties or missed opportunities for legitimate savings. While AI can be a powerful tool, it lacks the judgment and analytical skills of a human tax professional, which is essential for navigating the unique aspects of many tax situations.

Conclusion

While DIY tax software can be a convenient and affordable option, it’s essential to understand its limitations. Misinterpreting questions, overlooking deductions, selecting the wrong depreciation methods, and missing tax planning opportunities are all risks that could lead to costly mistakes.

If you have a simple tax return, DIY software might be a perfect fit. However, if your tax situation is more complex, it might be worth it to hire a tax professional to ensure you’re maximizing your deductions, staying compliant, and setting yourself up for a better tax future.