According to a 2003 article on the Iomega website, only 38% of people surveyed use a computer to prepare and file their taxes. I suspect that by 2005, that number is slightly higher—or maybe I’m confusing the ubiquitous tax software displays in grocery stores and everywhere else I seem to go with actual purchase and usage.
The higher your level of education and the higher your income, the more likely you are to use a computer to prepare your taxes. If you have an accountant prepare your taxes, your accountant is almost certainly using a computer to do it.
Prior to becoming self-employed, I’d never had to file anything but the 1040 EZ, so I didn’t have any need for tax preparation software. Once I was faced with my first Schedule C, I started using Intuit’s TurboTax. I’d been a Quicken user for years, and besides, TurboTax Web was free for those with a low Adjusted Gross Income, which was certainly me in my first year in business.
In addition to TurboTax, the major tax software programs are H&R Block’s TaxCut and TaxAct by 2nd Story Software. These programs can import information from personal finance or accounting software such as Quicken, QuickBooks, and Microsoft Money. They calculate tricky things like depreciation for you, save you from mistakes in adding and subtracting, and walk you through fiendishly complex tax forms in simple steps.
You already know that you have to keep copies of your tax return and supporting documents (like all those deductible receipts) for seven years, in case the unthinkable happens and you get audited. The same holds true for your electronic tax information, but according to that same survey by Iomega, only 43% of the people who prepared their returns on their computer backed up their tax data externally, and only 53% even kept a copy on their hard drive.
If you buy tax software and install it on your computer, your completed forms will be saved in a proprietary format: .TAX for TurboTax, T (where is replaced with the last two digits of the year) for TaxCut, and .ta (where is replaced with the last digit of the year) for TaxAct. This means that for a backup to be effective, you also need to keep a copy of the software itself.
With TurboTax Web and TaxAct Online you can download your completed returns in PDF format. This has several advantages. One, you can read the files without having the program installed, so you don’t have to keep several years’ worth of tax software installed. Two, PDF has been around long enough as a format that it’s probably going to last out the seven years you have to keep the return for tax purposes. Three, if you have Acrobat or other PDF-creating software, you can password-protect or otherwise encrypt the files so that no one else can open them.
Security is definitely important where tax returns are concerned. They contain all the information anyone needs for identity theft, and much more detail about your finances than you’d want just anyone to be able to know even if they weren’t planning to impersonate you in order to apply for a credit card.
This is why storing your completed tax return on your hard drive is not necessarily a good idea. A good firewall should keep you safe from hackers, but it’s still better not to have those files in reach of anyone who can get to your computer—which might be a great many people even if you have a home office.
I recommend password-protecting any tax backups—either by using PDF security or by putting your tax software files into an encrypted ZIP file. Then copy them onto two non-rewritable CDs or DVDs (so they can’t be erased). Store one copy with your other tax records, and keep one in your safe deposit box or at some other offsite location. As always, before making any form of backup, be sure that the files are not infected or corrupted.
If you use an accountant, ask him or her to make you a CD to put in your safe deposit box. And don’t let taxes keep you from backing up the rest of your data this week. Remember, 80% of data loss is due to human error.