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By Robert Thee, CPA, Mahoney Cohen & Co. P.C.

Taxpayers and tax advisers are always looking for ways to cut down the amount of time spent preparing tax returns. This is especially true when it comes to individual and fiduciary income tax returns, and returns for small businesses, where the quality of the data available may not be particularly high. Even large and medium-sized accounting firms, whose fee base is predominantly derived from larger, more sophisticated business clients, find it necessary to file returns for individuals and smaller entities. Unfortunately, this often entails the need to spend some extra time analyzing raw data and "writing up" checking and brokerage accounts.

With the ever-increasing number of people--including the formerly computer illiterate--buying personal computers, some overlooked relief may be available. User-friendly money management software packages such as Intuit's Quicken and Microsoft Money are frequently included in the pre-loaded software bundles that come with new home computers or can be purchased separately at a relatively low price. These programs are also gaining widespread popularity as a result of their integration with online banking services. Thus, many taxpayers are already keeping track of their personal checking, savings, and brokerage accounts electronically. This creates an excellent opportunity to get the leg up on tax return preparation.

The Individual Income Tax Return

One of the most useful features of these money management programs is the ability to categorize every receipt and expenditure. This makes it easy for taxpayers to prepare a neat, accurate schedule of medical expenses (net of reimbursements), charitable contributions, state and local income tax and property tax payments, and miscellaneous itemized deductions. Tax practitioners will be equally appreciative of organized data in lieu of sifting through and making sense of canceled checks and scrawled lists.

For sole proprietorships (or single-member limited liability companies) filing Schedule C, or requiring a rental real estate reporting (Schedule E), the advantages of using money management software to present an organized schedule of all receipts and disbursements for the activity are obvious.

Many taxpayers with significant securities trading activity can arrange for their stockbrokers to provide annual schedules of realized capital gains and losses. Where the taxpayer is using a discount broker, or this service is otherwise not available from the broker, money management programs can provide accurate capital gains schedules. These schedules can usually be attached directly to the client's return without the need to input the detail into a separate tax preparation software program, resulting in a significant time saving. Updated versions of the money management software packages will be required to take into account the expanded holding period rules under The Taxpayer Relief Act of 1997.

For taxpayers whose cash holdings are spread among a large number of banks and money market funds, it can be quite time consuming to enter the detail of payers on Schedule B from a batch of 1099 forms. Money management software allows the taxpayer to print a summary of the total interest earned from each account, which can be entered as one total on the tax return, with the schedules attached to the return for the supporting detail.

Beyond the 1040

Taxpayers often expect their CPAs to provide them with low-cost service for related cash-basis entities such as trusts, foundations, and small corporations and partnerships (including LLCs). Getting the taxpayer or his adviser to set up these entities' accounts on their money management programs will prove to be a tremendous time saver. For starters, the software will produce a categorized summary of receipts and disbursements; in most cases, the numbers can be transferred directly onto a tax return without the need for further analysis. An automatic account reconciliation feature is available so that the taxpayer or his advisor can determine if transactions have been categorized properly, as well as produce a detailed list of all cash transactions. As is the case with the individual tax return, proper tracking of investment accounts will generate usable capital gains schedules, as well as a portfolio summary that can support balance sheet information at both cost and market value.

Two types of entities for which this provides significant advantages are private foundations and charitable lead trusts. In addition to the aforementioned investment portfolio detail that these returns require, there are frequently a large number of charitable donees involved who must be provided with the return. Money management software programs can provide a list of all payees and the amounts paid in a given category (in this case, charitable donations) arranged in the order of choice (alphabetical, chronological, amount, etc.). This list can be attached to the return without the need for detailed input by the preparer.

Paper-Free Client Information

If the practitioner has the same software package as his or her client, it is not even necessary for the client to send hard copy to the practitioner. The data can be sent on a floppy disk or even downloaded over the Internet. This would allow an edit of the information and correction of errors, with the generation of only the reports needed for the tax returns.

Paul D. Warner, PhD, CPA
Hofstra University

L. Murphy Smith, DBA, CPA
Texas A&M University

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