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Does tax return software protect you from an audit?

Based on a recent press release from the Internal Revenue Service, tax return software seems to be the wave of the future. Specifically, the IRS announced the launch of a program called Free File, which will allow taxpayers with an adjusted gross income of $62,000 or less to use the software for free. The software includes a free e-filing of the user’s federal tax return with the IRS and can be accessed through the IRS’ website. For 2016, the software also provides free state tax return preparation for many states.

According to the IRS Commissioner, the software may help avoid inadvertent tax return errors because it walks users through all of the necessary steps. An estimated 70 percent of American taxpayers may benefit from this free option. For those concerned about the new health care requirements, in particular, the IRS is optimistic that the software will minimize reporting obligations. 

Yet will the software safeguard against the chance of a tax controversy? As a law firm that focuses on tax law, we know that tax disputes usually arise after an IRS audit. The audit, in turn, is usually in response to triggers that the IRS uses to screen tax returns. With tax return preparation software, an option may exist to warn taxpayers of potential red flags before they submit the return.

Although the IRS’ website states that a return selected for audit does not necessarily suggest an error, our law firm takes a more conservative approach. We know that an audit notification usually escalates into a written request for numerous tax records, which a taxpayer is generally expected to retain for three years from a tax return’s filing date under law. The temptation -- and danger -- with tax preparation software might be to take a more relaxed approach to the retention of records. 

If you receive an audit notification in the mail, contact a tax attorney to avoid making a misstep.

Source: Internal Revenue Service, “IRS Free File Launches Today; Offers More Free Federal and Free State Tax Software Options,” Jan. 15, 2016

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