Less Taxing

A look at some programs that make April 15 a bit easier to bear

REVIEWED by Theresa W. Carey

Edited By Howard R. Gold

Table: Doing Your Taxes Electronically

Over the past decade, more and more computer-literate Americans have used software to fill out and send their federal income-tax forms to Uncle Sam. The Electronic Investor hasn't reviewed this software before, because we focus on programs and online information generally not covered elsewhere. But with tax time rapidly approaching, we decided to look at how the two major software packages -- Turbo Tax (published by Intuit) and TaxCut (published by H&R Block in partnership with Kiplinger) --handle some key issues for investors. We'll also take a close look at TaxChecker, a program that provides a dry run of a dreaded Internal Revenue Service audit.

(In this column, we'll unveil our new point system for rating software, similar to the one we introduced for World Wide Web sites in our October 27, 1997, cover story, "Seeing the Sites." We will use these point systems to rate all sites and software programs from now on. This column also marks another transition for The Electronic Investor, which we'll tell you about later.)

The best thing about using tax software is that you can, with the investment of a few hours, transform that messy box of receipts and canceled checks into a neatly prepared return. The IRS has even stated that it prefers returns on the concise 1040ES produced by the programs. The new CD-ROM versions of Turbo Tax and TaxCut streamline the process of doing your taxes, are full of audio and video help in plain English and use a detailed interview to guide you through your return. Both programs make sure you enter numbers that make sense, and they are quick to catch mistakes and prompt you to make corrections. (They also allow you to file returns electronically.)

A key issue for higher-end taxpayers is form K-1, which details profits and losses for partnerships, S corporations and trusts. Though TaxCut finally upgraded its K-1 form entry so that you can just copy the numbers from your form into the one on the screen, some lines from the K-1 have to be entered elsewhere; TaxCut tells you where to manually enter figures that detail gains or losses from asset dispositions. Turbo Tax, however, does a much better job. It has three separate interviews to go through, depending on which type of K-1 you've received (partnership, S corporation or estate), and you're not required to make sure you enter a number on the right line on another form. Turbo Tax also covers home-office deductions better than TaxCut does, especially indirect mortgage interest.

Both programs handle 1099s issued by mutual funds and banks with aplomb, and deliver the entries to the correct forms. Turbo Tax is a little easier to get around; if you have to jump from one part of the program to another, you can click on the "Take Me To ..." folder tab and scroll through the various interview possibilities. TaxCut and Turbo Tax both install easily and do a reasonable job of preparing a neat, arithmetically correct return; and both contain the full text of just about every IRS publication on the planet. You won't feel like you're alone with the task of preparing your return. Turbo Tax's design, depth of features, ease of use and detailed interview are excellent for busy investors.

For people who want to use an in-your-face tax-avoidance strategy or who think their return could be like a red flag waved before a snorting IRS bull, it might make sense to run it through TaxChecker, published by Tax Defenders. Created by a former IRS auditor, Gary Kuwada, the program actually will put your return through the IRS audit process. TaxChecker is still a little rough around the edges, and it isn't a full-fledged return-preparation program, but it reads data files prepared by Turbo Tax and TaxCut.

One of the most powerful features of TaxChecker is its Tax Projector feature, which analyzes your spending patterns and bank records to determine whether you may have understated your income on your return. However, getting the correct data to run the Tax Projector report is a little clumsy. You need to input more information manually from your own check register or from Quicken to run all the reports; users of other personal-finance programs will have to re-enter all the numbers. And the program occasionally misses items that it should have imported from Turbo Tax or TaxCut (we tested with files from both programs), requiring the user to look up those figures and then enter them again. TaxChecker also has an unfortunate propensity to spout tax jargon in its help screens and reports; plain English would be a great improvement. However, and this is a big however, it runs your data through a very vigorous audit. If you need to know how the IRS looks at your income and spending patterns, TaxChecker is worth getting.

As far as our ratings go, Turbo Tax ranks highest in ease of use and setup, depth of features (including data) and value for the money. It also gets a slightly higher connectivity rating because of the quality of the links available from its Web site. Based on our point system, Turbo Tax gets *** 1/2 and TaxCut ***, but TaxChecker gets only * 1/2, although it's more specialized. This program has the right idea, but it needs a little polish to become an indispensable tool.

Turbo Tax and TaxCut both can take you online to their host Web sites (Turbo Tax at www.intuit.com/turbotax, TaxCut at www.taxcut.com), where you can even download a copy of the programs themselves (though some retail chains are discounting the software so heavily -- through rebates -- that they're nearly giving them away). Plus, if your return isn't too complicated -- fewer than 10 stock transactions, no rental income, and with a few other caveats -- you can even prepare it online with Turbo Tax at www.intuit.com/ttonline (available beginning February 14). TaxChecker's Web site (www.taxchecker.com) mainly exists to plug the program; what help is available there is smothered in jargon.

Incidentally, one terrific tax-related resource that you should check out is, of all things, the IRS's Web page called The Digital Daily (www.irs.ustreas.gov). It's well-designed and written with the authors' virtual tongues plugged firmly in cheek. Can the Evil IRS Empire be getting a sense of humor in its old age?