From the January 2006 issue of Entrepreneur

Congratulations. You've survived another battery of holidays. Now for the most challenging season of the year--tax season. It's time for your annual game of Texas Hold 'Em with your Uncle Sam.

Before you sit down at the table this year, there's something you should know about your kind, old uncle--he cheats. Well, not technically. But what would you call it when the guy across the table owns the house, owns the cards, pays the dealer, writes the rules, and then rewrites the rules after just about every hand?

Tax "reform" legislation is intermittent, but the rules of play change every year. Tax increases are permanent, take effect immediately or, as with the 1993 tax act, retroactively, notes Pete Sepp, vice president for communications of the National Taxpayers Union. Highly publicized tax breaks phase in, "sunset" unless they are re-approved, and get offset by obscure "revenue-balancing" provisions. According to tax-consulting firm CCH Inc., the tax code has ballooned from 40,500 pages in 1995 to more than 61,000 today.

"These myriad changes decrease the stability, consistency and transparency of our current tax system," writes the President's Advisory Panel on Federal Tax Reform, "while making it drastically more complicated, unfair and economically wasteful."

Actually, Uncle Sam doesn't have to pass laws to change the rules. Whenever a deduction gains popularity, the IRS targets it for audit and adds new procedures, forms and calculations to wear you down or bluff you into folding. The home/office deduction, which affects so many entrepreneurs, has long been a target, as have entertainment and travel expenses. More recently, the use of contract employees and charitable donations of high-ticket assets have become audit candidates, says Ellen Katz, editor of the Washington, DC-based Tax Savings Report newsletter. All returns in certain industries are reviewed, and this year, all S corporations can expect special scrutiny, says Katz.

So should you hand over your chips? Heck no. Fight for every dime. How? By using tax software to prepare your own business return and having your return reviewed by a tax professional.

Sounds time-consuming, doesn't it? No doubt you have more profitable ways to spend your time. But you probably have a tidy sum on the table, and this hand's outcome determines what percentage of any additional revenue you get to keep. It also determines next year's quarterly tax payments, which could impact your cash flow considerably. Your tax situation is too intimate to be left entirely to a third party. At the same time, you don't want to take on your clever uncle alone.

Beat the Dealer
Unless you already have a close partnership with an accountant, the easiest way to learn the game while getting expert help is to complete your company's federal and state returns with software from H&R Block or Intuit.

Many software makers produce consumer software; Block and Intuit also have versions for every type of business entity. For entrepreneurs filing Schedule C returns, both H&R Block's $40 (all prices street) TaxCut Premium 2005 and Intuit's $70 TurboTax Premier 2005 provide all necessary forms and instructions wrapped in an easy-to-follow interview. Having reviewed both programs this year, and every year since their inception, I can attest to their clarity, completeness and ability to select just those 20,000 to 30,000 tax-code pages that apply to you.

If you have a C or S corporation, LLC or partnership, you'll need Block's $70 TaxCut Complete Home & Business 2005 or Intuit's $100 TurboTax Business 2005 instead. They work just like the Schedule C versions, but use different forms.

Block and Intuit also offer online tax preparation, but having the software on your hard drive guarantees you access to your returns should you be audited years hence. As with spreadsheets, you can use these programs to what-if different tax scenarios and immediately see the financial impact of changes in filing status, various depreciation approaches, security sale timing or deduction amounts.

Both programs are chock-full of ad hoc tax advice and explanations, and you can consult a live tax advisor from Block or Intuit any time for $20 or $30 per topic, respectively. Both programs also review your completed return for accuracy and audit red flags, suggest additional deductions and compare your deductions to median amounts for your income level. For another $30 or $50, respectively, you can go over your return with a live Block or Intuit tax professional.

If you used either program last year, you can save time by importing that return's data. Ditto for accounting data from Microsoft Money, Quicken or any program that creates TXF files. This takes about 60 seconds in TurboTax (which also imports from QuickBooks), while TaxCut requires a few extra steps. Generally, TurboTax is easier to use, although TaxCut isn't far behind.

If only a piece of software was all it took to snag a large refund. Certainly, TurboTax and TaxCut have helped millions learn the rules and win a hand or two. But this is a complicated game that could take a few seasons to get the hang of. In the meantime, as far as your bottom line goes, any dollar not lost to taxes is a dollar earned.

Get The Tax Facts

  • CCH Inc.: Consumer entrance to a web ring providing tax preparation, literature and counsel for both taxpayers and tax professionals.
  • H&R Block: Tax estimators, calculators and planners in addition to software, online tax preparation, and year-round access to financial and tax advisors and tax preparers
  • Intuit: The tax entrance to an omnibus collection of small-business financial resources
  • Small-Business Tax Center: Tips, terms and articles on taxes
  • Tax and Accounting Sites Directory: AccountantsWorld's comprehensive index of tax and accounting resources
  • Yahoo! Tax Center: A web page of tax rates, calculators and links to tax-preparation software and tax preparers
Mike Hogan is Entrepreneur's technology editor.