This week I was reminded once again how easy it is to fall into the trap of relying solely on technology and software to come up with the right answer. I’m not terribly old but I do remember having to do long division and multiplication by hand. When I first started in accounting I used multiple ledgers of varying column widths to track accounts and prepare financial statements instead of computers.
Today, it is easy to place too much trust in the tools we have at our disposal. I say this because it is far easier than many might realize to miskey and assume that our software will properly calculate, store and report on the information we put in.
What does this have to do with anything you say? Well, I find that many times people don’t realize a mistake has been made because they don’t have a clue of what the expected outcome should look like.
The Point
I know, I know. Get to the point. The point is income tax law can be quite complicated. Hear me out, I know you might be looking for Captain Obvious as the BawldGuy likes to say. Captain Obvious is close by, but I find that our reliance on software can lead to mistakes big and small.
It is easy for tax preparers and others to think that inputting all of your financial data into a program like TurboTax and carefully answering all of the questions will lead to a tax return that is correctly stated and report the least that should be paid to the IRS.
When returns get complicated
When taxpayers are strictly employees and have but a few deductions, then tax returns are pretty straight forward. It is when individuals get into businesses and investing activities that returns can become complicated. Real estate investors can have some very complicated returns.
One aspect far more complicated than some might realize is how gains and losses in real estate are netted and interact with gains and losses of other investment activities. There can be loss carry forwards, lookback rules, at risk limitations and differing treatments for similar property classed under different IRS code sections.
Tax software can make some of these things seem deceptively easy. Knowing that the various transactions have been treated properly is often the real problem. It is all about recognizing that the answer given resembles something that makes sense and recognizing when something is clearly not right.
While I hear some of you saying to yourself “Garbage in, garbage out,” it really isn’t that simple. You can have good information that is incomplete or mislabeled. Recognizing what the outcome should look like helps.
I was reminded about the complexities of the tax code as I helped a student this week review capital gains rules. It is not that most investors can’t find the answers. Instead, it is much like BawldGuy often laments — you can’t find answers to questions you do not even know to ask. For example, re: capital gains, what’s the adjusted basis? Is there any loan over basis? (A very important question when executing a tax deferred exchange.) Are there any losses you might be able to use in offsetting any gain? What schedule/strategy was used for depreciation? And on and on and on.
Knowing what your answer(s) should look like gives you an incredible edge over most who’re using software to get the job done. Garbage in, garbage out is bad enough. But when the taxpayer is literally unaware of data/answers they should be inputting, but can’t, therein lies the real reason so many out there aren’t getting what they think they paid for.
Related posts:
- Retirement Is Simply Far Too Important NOT To Call The Guy
- What Should Ralph and Liz Do? Answer Lies In Their Primary Agenda
- Driving Down Pothole Boulevard — The Cost of Not Knowing What You Don’t Know
- Understanding What’s Important About Retirement Income — Besides Actually Having It
- The Answer To the ‘Drive-By’ Real Estate Investors
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