The Great Tax-Preparation Challenge

LAST YEAR, like the year before, you probably heard a nagging voice in the back of your head when you received your accountant's bill for doing your taxes. "Is this guy really worth this much?" the voice said. "Next year I'm doing my taxes myself."

Those parsimonious mutterings are made all the more plausible by the whizzy software out there that promises to make doing your taxes as fun and easy as playing a game of Donkey Kong. So with the clock ticking down to April 16 (this year's deadline, since April 15 falls on a Sunday), that's the big question: Should you pop a CD-ROM into the ol' Gateway and take the big 1040 trip yourself — or should you just FedEx that shoebox full of paper to your CPA?

Deciding whether you should shell out big bucks for a seasoned tax pro or roll up your sleeves and do it yourself, depends, of course, on the complexity of your taxes and your tolerance for — even with the help of the computer — tedious, confusing and problematical work. For some of us, it's a no-brainer: We'd be willing to pay nearly any price not to have to deal with our taxes. And certainly, if you have complicated taxes (if, say, you're self-employed or being eaten alive by the Alternative Minimum Tax) or if your tax situation has changed (if, for example, you had big securities transactions or got married last year), using a professional could be the unequivocal way to go.

But to help the rest of us decide, SmartMoney.com decided to pit the two most popular tax software programs, Intuit's TurboTax and Kiplinger's TaxCut (published by H&R; Block), against a respected CPA to see how different the results would be. For the purposes of our man vs. machine face-off, we created a mock tax scenario featuring Mr. and Mrs. Smith and their two children, Dennis and Jane. (For details, see right.) We also added a few stumbling blocks (like stock losses that can't be taken as a deduction because of the wash-sale rules) and a couple of mistakes (such as an excess Social Security contribution taken from Mr. Smith's paychecks) to see if the tax software and our accountant would catch the errors.

We used the basic Web-based versions of both TurboTax and TaxCut and also sprung for some aspirin from the local pharmacy. (We didn't use the state filing software, just the federal.) After crunching the numbers online, we then called our volunteer tax accountant and attorney, Walter LeVine, of the Florham Park, N.J.-based firm of the same name, and had him prepare the returns as well.

The results? We were surprised that our tax bills varied by a mere $120 — or just 2% or so of the total tax bill. But our experiences with the software and the CPA were obviously quite different. Shipping off our tax information to LeVine took a mere five minutes, and would have cost us $350. (LeVine kindly offered to perform this service free of charge.) Wrangling with the software programs, on the other hand, took hours and, in the end, set us back $14.95 for TurboTax and $39.90 for TaxCut. (We'll explain the added costs for TaxCut below.) And no option was perfect: We discovered errors and glitches in each.

We'll start with an overview of the tax software, followed by specific reviews of our three challengers.

The Software Programs

If you've never used tax-software programs before, you'll most likely be pleasantly surprised by how user-friendly these programs are. Both TaxCut and TurboTax begin with a plain-English interview process, asking you straightforward questions in order to fill in the necessary 1040 data. And if you don't understand a question or are unclear about how to answer, both TurboTax and TaxCut have help boxes that run with the questionnaire. For instance, TaxCut has a link that asks "Do I qualify for the student-loan interest deduction?" Click on it, and the link brings you to a pop-up box detailing the requirements. Both programs also evaluate your return and flag mistakes.

TurboTax and TaxCut are able to import financial information from past tax returns (assuming you've used that program in prior years), as well as programs like QuickBooks (an accounting program) and various Microsoft financial products, including Microsoft Money. In addition, TurboTax can import financial information from a select list of employers and financial institutions, which can be a handy timesaver.

Both TurboTax and TaxCut offer their software on CD-ROM, as well as over the Web (which, as we mentioned, is the format we selected). TurboTax charges $19.95 for its online federal-tax software plus $9.95 for state-tax software. (If you buy the federal program before April 1, however, it will only cost you $14.95.) H&R; Block offers a variety of services, ranging from the basic do-it-yourself version using Kiplinger's TaxCut (which costs $19.95 and comes with a free state return program) to a $99 service in which you plug in your tax information and a tax professional does the rest.

TurboTax

Our cost: $14.95

Tax bill: $6,082

The taxing truth: Doing your own taxes is never pleasant, but TurboTax's good organization and simple questions make the process not too painful. Still, the software wasn't perfect and failed to detect one of our errors.

What we liked: If you're ready for the do-it-yourself tax challenge, this is the software to use. TurboTax's layout is visually pleasing and easy to follow. At any time during the survey process, TurboTax allows you to go back and review the information you've already entered or skip ahead and tackle another section of your returns. (TaxCut allows you to review what you've already entered but doesn't allow you to jump forward.) We especially liked that the program keeps a running tax tab that adjusts your total as you input additional information.

What we disliked: The software failed to detect one of our stumbling blocks. Based on the questions asked, there was no way for the software to know that wash-sale rules prohibited us from taking a loss on our last sale of AOL Time Warner (AOL) stock.

Julie Miller, a spokeswoman for Intuit says, "The review process will take notice of what seems unusual and not on target with national averages." But without seeing the Smith's tax return, she said she wouldn't comment on the problem missed by the software.

So consider yourself warned: Even the best software is capable of mistakes. And, unfortunately, the only way to protect yourself from this is to have a working knowledge of the tax rules that pertain to your returns. A good resource is J.K. Lasser's, Your Income Tax 2001. Our tax guide also has loads of articles that can help.

TaxCut

Our cost: $39.90 ($19.95 for the Federal return, $19.95 for assistance)

Tax Bill: $6,195

The Taxing Truth: TaxCut has its strong points, but it's harder to navigate and less user-friendly than TurboTax. We also experienced some technical problems, which made our overall experience somewhat frustrating.

What we liked: As we inputted the Smith's financial information, TaxCut immediately flagged some of our errors, including a time when we accidentally inserted the figures relating to the Smith's Social Security contributions into the wrong boxes. In bright red letters, the software redirected us to the correct part of the page. (TurboTax allowed us to put the numbers in incorrectly.)

What we disliked: TaxCut's questionnaire contains a fair amount of technical jargon, and at times we found it difficult to understand exactly what information was needed. For example, when we filled out our charitable-contribution deduction, the instructions said, "You will need to enter the charitable organization's name and the amount contributed based on the 30% or 50% qualification of the organizations and the individuals who contributed this." Huh? Unfortunately, there was no information explaining what the 30% or 50% qualifications were.

Another problem cropped up when we were asked to input the Smith's taxable interest, which was $1,000. Despite entering the numbers, when we printed our tax return, the information wasn't there. Thinking that we may have made a mistake, we clicked on the "Live Advice" option, which puts you in touch with an "advisor" via email, phone or live-chat for the price of $19.95 "per solution." (TurboTax offers tax help through EXP.com, a site that connects users with various experts who charge a fee for their assistance. These accounting experts charge a per-minute fee, usually between $1 and $2.)

We chose the live-chat option. After painstakingly explaining our difficulty to "Advisor 3254," we were told that it sounded like a software problem and were given the phone number for Software Support. We quickly reached David, our software expert. He told us that our problem did indeed seem to be a software glitch and someone would contact us soon to help resolve the problem.

Two days later, we received a phone call back from the tech people at H&R; Block asking for our username and password so they could access our tax return to assess the problem. Giving a stranger access to our return (which normally would have an enormous amount of personal information) concerned us a bit. Still, a day later the problem was resolved (and our tax bill went up).

Neil Getzlow, a spokesman for H&R; block, says, "I haven't heard of any other problems associated with that line" and adds, "It could be an isolated incident." Getzlow says he doesn't believe there was a breach of privacy when the folks from technical assistance asked for our username and password. "These are H&R; Block employees. People trust us with their information."

Walter D. LeVine, P.A., Esq.

Cost of Service: $350

Tax Bill: $6,075

The Taxing Truth: When it comes to taxes, few things are easier than digging up your financial information, putting it in a neat folder and sending it off to your accountant. But it ain't cheap, and you still need to watch out for errors.

What we liked: Although many accountants use professional software similar to TurboTax and TaxCut, it's reassuring to know that someone with a pulse is evaluating your financial information. After all, should something go wrong with the IRS, it's nice to have someone you trust on your side.

LeVine was also able to use his expertise to amend the return in a way that the tax software wouldn't. For example, he detected our violation of the wash-sale rules, and accordingly didn't allow us to take the loss. He also attached a letter explaining his tax maneuvers — something that you don't get from the software programs.

What we disliked: We caught a pretty significant error. Levine said the Smiths could contribute to a Roth IRA. But given their income of $191,000, they couldn't. (To contribute to a Roth, you must have adjusted gross income below $95,000 if single, $160,000, if married filing jointly.) Granted, LeVine is busy this time of year, and it's possible that he didn't have the time to give the Smiths the careful attention he would his real clients. But the bottom line is that, even with a pro, you should review the tax rules pertaining to your returns, and check for errors.