Bungling tax preparation and mindless application of tax software:
How we got off-track
Bungled tax preparation and mindless application of tax software are leading causes for 85%+1 of entrepreneurs paying too much in tax and having sub-optimal cash flow.
Perhaps this article is based on urban legends, perhaps the true story has been lost over time, and perhaps it is more complicated than I think, but this article is based on my opinions, my experience, my observations, and my conclusions.
I started working for the largest CPA firm in the world (Peat, Marwick, Mitchell & Co.) in 1975. In 1979, I formed my CPA and was heavily involved in all aspects of tax accounting.
In those days, tax returns were prepared by hand and then typed before delivery to the client. The tax return process was very labor intensive but with meaningful strategic thinking time.
By the early to mid-1980s, various companies offered tax preparation software to reduce intensive labor costs. I remember my excitement in meeting with the various company’s representative to adopt the newest and greatest technical advancement in tax accounting.
In theory, the idea of tax software was great. In practice, there was much to be desired.
The labor time for typing was greatly reduced. This was good as typing did not improve the quality of the return.
The various software platforms processed the same information differently and produced widely differing tax returns. This was not good.
WHY? The programs were built by programmers not tax accountants.
When faced with the great number of options under the tax code, different programmers chose different options as defaults. It was the difference between default options which caused the material differences in the returns and stopped me, like many other CPAs, from buying the software.
Caution: This might be where the urban legend comes in. As I remember, the major software developers at the time built “typical” scenarios (maybe in excess of 250) and worked with the IRS to find a common path for default programing.
These were the results of this “collaboration”.
- The differences in tax returns between software companies dramatically decreased.
- User-ease dominated the software selection process.
- Strategic thinking time by the CPA significantly decreased and became very insignificant.
- The focus shifted from unique thought and lowering taxes to a tax return that could stand audit by the IRS.
- With the IRS “collaborating” on the software defaults, it is reasonable to assume they would like the results.
- The software of today is built on the chassis of this mid-1980s “collaboration”.
- Today, the vast, vast majority of tax firms’ revenue is from tax preparation and not from strategic thinking.
- Tax preparation today is mostly data entry.
Being programmers, they did allow for non-default options, but it required you to change a multitude of options for each tax return. Given the economic pressure to lower fees caused by the market (and ease of entry into the market with software that did not require an extensive understanding of the tax code) and the short season when tax returns are prepared, it became very impractical to change the default settings for each client.
The tax code brings you HOPE. Bungled tax preparation through mindless application of software causes 85%+ of entrepreneurs to pay too much in tax.
I would like to meet you and bring you this HOPE you so richly deserve.
Please contact me at 801.417.3260 or firstname.lastname@example.org with your comments, questions, or requests for additional information.
1This statistic is from proprietary research designed and maintained by John C. Brooke since the mid-1980s. John started his CPA firm on 1 July 1979 after starting in 1975 with Peat, Marwick, Mitchell & Co., one of the Big-8 accounting firms of the time.
Over time and using the clients of his CPA firm, John developed a large data base to answer three key questions: (1) Is the general assumption of entrepreneurs they pay too much in tax correct?, (2) If so, what is an approximate percent of entrepreneurs paying too much in tax, and (3) For that percentage overpaying, are there broad-scale, common indicators to indicate why they are overpaying?
The answers to these questions took time and effort. By the mid-1980’s, John’s research developed these very supportable and defensible answers : (1) Yes, their general assumption is correct and correct on a large scale, (2) 85%+ of all entrepreneurs pay too much in tax, and (3) There are common indicators consistent across this 85%+ overpayment population. The 85%+ overpayment conclusion has remained constant since the mid-1980s through today.
Out of these answers, John built a mathematical-based Assessment that gathers information based on these broad-scale common indicators which can predictively estimate the amount of overpayment of tax. This free Assessment can be taken by going to www.johncbrooke.com
Opinions expressed in this article are those of John C. Brooke and are his opinions based on working in the accounting and tax field since mid-1975.
Representations: Nothing in this article rises to the level of a representation.
Circular 230 Disclosure. The IRS requires me to advise you that any federal tax advice contained in this article is not intended to be used and cannot be used for the purpose of avoiding penalties under the Internal Revenue Code, or for promoting, marketing or recommending to another party any transaction or matter addressed herein.
This article may contain numeric, graphic or narrative presentations that are theoretical in nature and are provided only for educational and exploratory purposes. Only third parties to J.C. Brooke, Inc. provide non-theoretical presentations and representations.
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