Should You File a Tax Return?
Do you ever wonder whether your income is high enough to warrant the filing of a tax return? Because the minimum income level varies depending on filing status, age, and the type of income you receive, it can be a bit complicated.
Use the following guide to determine whether you must file a federal income tax return for 2010.
Single Taxpayers
If you expect to file a single return, the IRS requires you to file a return for 2010 if your gross income for the year is at least $9,350 if you are under age 65 and $10,750 if you are 65 or older.
Married Filing Jointly
For married persons filing jointly, you are required to file a return if gross income for 2010 is at least $18,700 if both of you are under age 65. If one of you was at least age 65 in 2010, the limit is $19,850 – and if both of you were 65 or over, you must file if you made at least $20,900.
If you are not living with your spouse at the end of the year or you weren’t living with them on the day they passed away, the IRS requires you to file a return if your gross income is at least $3,650. Each personal exemption in 2010 is worth $3,650.
For married persons filing a separate return, no matter what age, you must file a return if gross income is at least $3,650.
Head of Household
For persons filing as head of household, you must file a return for 2010 if gross income is at least $12,000 if under age 65 and $13,400 if at least age 65.
Qualifying Widow or Widower
For persons filing as a qualifying widow or widower with a dependent child, you must file a return for 2010 if gross income is at least $15,050 if under age 65 and $16,150 if at least age 65.
Other Situations That Require Filing
Even if you don’t earn this much income, other situations necessitate filing a tax return. For example, a dependent has to file a return for 2010 if they received more than $950 in unearned income or more than $5,700 in earned income.
Other situations include:
You Owe Certain Taxes. If you owe FICA or Medicare taxes (also called payroll taxes) on unreported tips or other reported income that were not collected, you must file a return. You must also file a tax return if you are liable for any alternative minimum tax. Finally, you must file a return if you owe taxes on individual retirement accounts, Archer MSA accounts, or an employer-sponsored retirement plan.
Advance Earned Income Tax Credit Payments. The Earned Income Tax Credit is a federal income tax credit for eligible low-income workers. The credit reduces the amount of tax an individual owes, which may be returned in the form of a refund. If you receive advance payments for the earned income credit from your employer, you must file a return.
Self-Employment Earnings. If your net earnings from self-employment are $400 or more, you must file a return.
Church Income. If you earn employee income of at least $108.28 from either a church or a qualified church-controlled organization that is exempt from employer-paid FICA and Medicare taxes, you must file a return.
Questions?
Contact me for more information about filing requirements and your eligibility to receive any tax credits.
Five Filing Facts for Recently Married or Divorced Taxpayers
(Having your name on your SS Card match is a growing issue. This could help.)
If you were married or divorced recently, there are a couple of things you’ll want to do to ensure the name on your tax return matches the name registered with the Social Security Administration.
Here are five facts from the IRS for recently married or divorced taxpayers. Following these steps will help avoid problems when you file your tax return.
- If you took your spouse’s last name or if both spouses hyphenate their last names, you may run into complications if you don’t notify the SSA. When newlyweds file a tax return using their new last names, IRS computers can’t match the new name with their Social Security Number.
- If you were recently divorced and changed back to your previous last name, you’ll also need to notify the SSA of this name change.
- Informing the SSA of a name change is a snap; you’ll just need to file a Form SS-5, Application for a Social Security Card at your local SSA office.
- Form SS-5 is available on SSA’s Web site at www.socialsecurity.gov, by calling 800-772-1213 or at local offices. It usually takes about two weeks to have the change verified.
- If you adopted your spouse’s children after getting married, you’ll want to make sure the children have an SSN. Taxpayers must provide an SSN for each dependent claimed on a tax return. For adopted children without SSNs, the parents can apply for an Adoption Taxpayer Identification Number – or ATIN – by filing Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions with the IRS. The ATIN is a temporary number used in place of an SSN on the tax return. The W-7A is available on IRS.gov, or by calling 800-TAX-FORM (800-829-3676).
Links:
- Social Security Administration
- Form SS-5, Application for a Social Security Card (PDF)
- Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions (PDF 42K)
A brief overview of the alternative minimum tax (AMT).
The Alternative Minimum Tax (or AMT) is an extra tax some people have to pay on top of their regular income tax. Okay that sounds pretty messed up, doesn’t it?
In recent years, the AMT has been under increased attention. Why? Well, put simply, because the AMT is not cataloged or set up for inflation, thus because of recent tax cuts, an increasing number of middle-income taxpayers have been finding themselves subject to this tax. Until recently, the AMT affected less than 1% of all individual taxpayers. However, since the year 2000, the AMT has steadily grown, hitting roughly 3% of all taxpayers in 2005. Moreover, if left unchanged, the AMT will penalize nearly 20% of taxpayers by 2010. Almost 95% of all married filing joint couples.
The number of taxpayers affected by the Alternative Minimum Tax (AMT) is expected to exceed 30 million in 2010. Now that is really messed up.
So, lets back up a bit further. The original idea behind the AMT was to prevent people with very high incomes from using special tax benefits to pay little or no tax. The name comes from the way the tax works. The AMT provides an alternative set of rules for calculating your income tax. In theory, these rules determine a minimum amount of tax that someone with your income should be required to pay. If you’re already paying at least that much because of the “regular” income tax, you don’t have to bother with the AMT. Sadly on the other side of this issue, if your regular tax falls below this “minimum”, you have to make up the difference by paying an alternative minimum tax.
Okay, it is still messed up.
Some History
The AMT was introduced by the Tax Reform Act of 1969 and became operative in 1970. Why Was the AMT Enacted? Well, Congress enacted the AMT in 1969 following testimony by the Secretary of the Treasury that 155 people with adjusted gross income above $200,000 during tax year 1967 (In inflation-adjusted terms, their (the 155 people) 1967 incomes would be roughly $1.5 to 2 million in today’s dollars.), had paid zero federal income tax on their 1967 tax returns.
This tax avoidance by these “few” high-income taxpayers was widely perceived as unfair. Rather than directly addressing the problem by eliminating their deductions and credits in the tax code that were leading to the tax avoidance in the first place, Congress laid an additional layer of complexity over the regular income tax in the form of the AMT.
Again, It was intended to target 155 high-income households.
The Tax Equity and Fiscal Responsibility Act of 1982 holds the foundation for the present day individual alternative minimum tax, somewhat. Enough anyway for this article.
The alternative minimum tax operates in effect as a parallel tax system, with its own definition of taxable income, exemptions, and tax rates. Taxpayers compute tax owed under the “regular” and AMT systems and are liable for whichever is higher. The AMT system has in general a broader definition of taxable income, a larger exemption, and lower tax rates than the regular system.
In 1969 the minimum tax was a 10 percent flat rate. Over the years the AMT has evolved and increased in complexity. As of the latest revision, there is a two tier system: 26 percent and 28 percent for individuals.
There is an AMT for those who owe personal income tax, and another for corporations owing corporate income tax. Only the AMT for those owing personal income tax is described here.
History of the Alternative Minimum Tax
- Tax Reform Act of 1969 – Introduced the “add-on” minimum income tax of 10% in excess of an exemption of $30,000.
- Excise, Estate, and Gift Tax Adjustment Act of 1970 – Allowed deduction of the “unused regular tax carryover” from the base for the minimum tax.
- Revenue Act of 1971 – Imposed minor provisions regarding foreign income.
- Tax Reform Act of 1976 – Raised rate of minimum income tax to 15% and lowered exemption to $10,000 or half of regular taxes.
- Tax Reduction and Simplification Act of 1977 – Reduced minimum tax preference for intangible costs of drilling oil and gas wells.
- Revenue Act of 1978 – Introduced AMT alongside minimum income tax and moved certain itemized deductions and capital gains to AMT. AMT had graduated rates of 10%, 20%, and 25%, and an exemption of $20,000.
- Economic Recovery Tax Act of 1981 – Lowered AMT rates to correspond with reductions in rates of regular income tax.
- Tax Equity and Fiscal Responsibility Act of 1982 – Repealed “add-on” minimum tax. Made AMT rate a flat 20% of AMT income after exemptions of $30,000 for individuals and $40,000 for joint returns.
- Deficit Reduction Act of 1984 – Made minor changes concerning investment tax credit, intangible drilling costs, and other items.
- Tax Reform Act of 1986 – Raised AMT rate to 21%. Made high-income taxpayers subject to phase-out of exemptions. Increased number of tax preferences. Allowed an income tax credit for prior year AMT liability.
- Revenue Act of 1987 – Made technical corrections related to Tax Reform Act of 1986.
- Technical and Miscellaneous Revenue Act of 1988 – Made technical corrections related to Tax Reform Act of 1986.
- Omnibus Budget Reconciliation Act of 1989 – Made further technical amendments.
- Omnibus Budget Reconciliation Act of 1990 - Raised AMT rate to 24%.
- Energy Policy Act of 1992 – Changes regarding intangible costs of drilling oil and gas wells.
- Omnibus Reconciliation Act of 1993 – Introduced graduated AMT rates of 26% and 28%. Increased exemption to $33,750 for individuals and $45,000 for joint returns. Changed rules about gains on stock of small businesses.
- Taxpayer Relief Act of 1997 – Changes regarding depreciation and farmers’ installment sales.
- Tax Technical Corrections Act of 1998 – Adjusted AMT for new capital gains rates.
- Tax Relief Extension Act of 1999 – Changed rules about nonrefundable credits.
My next post, I hope to cover a bit more of, how to know if you need to bother with this AMT thing, and go over a little bit about how it works.
“See ya’”
Righteousness in Designation?
Friday I was interviewed and retained by a new client. This particular client has several issues that actually can fall in line with a great debate we have all been following.
First, a little background:
A young newly wedded (three years) couple has their tax return done by “pros” as they are not among those who follow the taxing world. We will call them Pat and Jody Taxpayer. Having just started their own Business they left HeRBert (the group who prepared their returns) for what to them was perceived as a tax professional. They retained a CPA to handle some general bookkeeping and complete tax returns.
Good choice?
Of course it is, “All but the militantly nefarious and hopelessly deluded concede that CPAs are experts at keeping books and records. There simply is no higher accounting “designation.” then CPA.
The CPA (Certified Public Accountant) maintained records by gaining access to Pat & Jody’s bank account using the online statements. The first tax season for this CPA came around and she completed the 2007 tax return. Another year passed, and she completed the 2008 return.
Several months ago, the IRS notified the Taxpayers that the 2007 return was under investigation. Seven lines on two different Schedule Cs were in Question.
Considering a CPA had prepared this return there should be no worries.
So how did I get this return?
When the time came for the audit with the “Tax Compliance Officer”, the CPA, had manufactured information to provide the IRS to validate two of the seven lines in question and did not show up to guide the Taxpayers through the 3 ½ hour long ordeal. Needless to say, the IRS found no substantial proof or validation for seven lines in question. P & J now are holding a bill from the IRS for over $10,000.00.
Not only are the taxpayers confused about what happened, but the “Compliance Officer” also looked at their 2008 return, they are about to undergo another audit.
“Because good accounting skills are a critical part of good tax preparation, CPAs are uniquely qualified to be tax preparers.”
So where is this CPA? Avoiding Pat and Jody.
This is a most uniquely “qualified” tax preparer?
I reviewed 2006 (again prepared by HeRBert – a fast food chain preparation service), 2007 and 2008 returns. (again, these two returns were prepared by the same “CPA”)
- 2006 had 6 errors resulting in a $213 refund to Pat and Judy (I can say this because I have already amended this return)
- 2007 has 21 errors - three missing forms (associated with errors) and if that wasn’t bad enough, 5 of the errors are mathematical.
“Good tax preparation is about numbers. It’s about keeping good books and records.
In short, it’s about good accounting.
In fact, what is a tax return if it’s not an accounting?”
Hummmmm
if anyone needs a definition to “accounting” I have a link to the right for Merriam-Webster Dictionary or you can click this.
Good thing it doesn’t suggest an ability to add or subtract.
Same for Accountant.
- 2008, well is just wrong. I say this because nothing changed from 2007 through 2008.
- 2007 consisted of
- 1040 Long Form
- 2 Schedule Cs
What the 2008 return consisted of was a 1040A – Short Form, nothing more.
My conclusion is this CPA stands proudly among those who are truly CPA tax professionals. You real CPAs who are tax pros, give her credibility she assuredly doesn’t need.
As for Jody and Pat, luckily they found a tax professional. I will help them through the amended returns, the audit up coming, and any and all IRS intervention that may come their way. If you wish to stay updated on their situation, I will create a blog page giving more detail information and will keep it updated.
However not all of you will see it this way. Why? Well, I am no longer a CPA. I am not an EA, nor am I an Attorney. What does this make me? I am an unenrolled preparer.
Unenrolled preparers, by definition, have no recognized credentials and are bound by no professional standards
And what are the unique qualifications of an unenrolled preparer?
Would someone please tell me?
Anyone?
The silence is deafening.
That’s because the answer is “none . . . nada . . . zero . . . zilch.”
The silence sir, is deafening because you are on your computer. But now, please, open your eyes fully, adjust your glasses, I want you to hear me plainly.
An unenrolled preparer is a unique person. Like a Lawyer, a CPA, or Doctor or any other profession, you are going to have unqualified hacks. My Credentials are useless in the taxing industry.
Or did you miss it?
The AICPA told a CPA/Tax Professional “We do not offer a credential in taxation. In general, our approach has been not to develop credential programs around areas for which the public already believes CPAs to ‘own’. In addition, we do not endorse a particular tax credential.”
An unenrolled preparer sees how others take advantage of the miss-conceptions of the designation and learns tax rules and regs to help people through what can be a very taxing time (no pun intended).
I question your thinking when you say a man with over 35 years in the tax preparation industry has no credibility. I only have 23 so I must not have any either?
Hummmm, let’s look at my background a bit:
a) A Masters in Accounting
b) Formally employed by this countries (at the time) Largest Accounting firms
c) Formally a CPA
d) 23 years preparing returns for taxpayers
Of the four listed in my mind, only qualifies me to call myself a tax professional. I can assure you it isn’t one of the top three.
“There simply is no higher accounting designation.”
Thus, if the Internal Revenue Code imposes an affirmative duty on taxpayers to maintain good books and records, doesn’t that alone explain why CPAs are uniquely qualified to prepare tax returns and why many CPAs are drawn to the field of tax preparation?
Of course it does.”
You Pompous arrogant ass. Is your head so high in the sky that you are not getting enough oxygen?
True enough, the IRC does affirm duty to taxpayers to maintain good and accurate records. Alone that tells me (a former CPA) should seek advice from a CPA on how to keep those records not how or where to put them on a tax return.
It is my opinion that a good majority of the CPAs that are drawn to taxation and preparation do so for the money.
(Not to get off subject, but are you actually a licensed Tax Attorney, and a CPA? I know a few Lawyers and I’ll have to ask, to be sure, but I think like the AICP, there is nothing out there for Lawyers to hold actual “tax” credentials. If I am wrong please correct me, do you have some designation that says you’re a Tax Lawyer? If so, what is it?
As for not being bound by professional standards, I find it hard to understand why I have to point out to a designated pro that we (The Unenrolled prepares) are bound by the same rules in Circular 230 as you are. Maybe you should read it some time.
A while back, I post Who is: a post that defines different titles. If you want to see the entire post please click on the link Who is: Below is a brief recap:
A Tax Attorney - Typically large and even small businesses will meet with a tax attorney once every quarter or once a year to ensure that they are making the best possible business choices with regards to investments and tax issues. Since the taxation, laws change constantly.
A Bookkeeper – is responsible for keeping accurate, up-to-date business records for proper cash flow management, balance sheet preparation, and developing expansion and investment plans.
Accountants – keep track of a company’s money.
Enrolled Agent – is a federally authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audits, collections, and appeals.
Tax Preparer – an individual who prepares tax returns.
Other post from the “taxguy” blog that may be related to the taxpayer issue mentioned in this post.
Choosing the Right Representative
5 Worst Things You Can Do if You Get an IRS Collection Notice a Guest post from Peter Pappas. . .
How to Avoid IRS Penalties and Interest
Picking A CPA With Too Much. . .
The Truth About Paying Fewer Taxes.
I read a lot about the taxing world. Often I am searchingto find books to recommend to my clients to give them a better understanding how a tax return works and what is needed to make it work best and what they can do to minimize their liability. The Truth About Paying Fewer Taxes is by far the best book I have ever come across to accomplish just that.
The Truth About Paying Fewer Taxes is a book with “52 Truths” about taxes. It plainly answers questions like ”do you have to file?”, to “when?”, to figuring out just what is taxable all the way through to retirement. Also covering Compliance, Audits, and Special Tax Situations The Truth About Paying Fewer Taxes will give you a better understanding of taxes, thus giving you what you need to cut your taxes.
The Truth About Paying Fewer Taxes, is a book written by Kay Bell. Kay is a fellow tax blogger (Don’t Mess With Taxes, Taxes: Eye on the IRS), She helped create Bankrate.com’s tax channel and continues to be a major contributor to Bankrate’s Tax Guide. I have had occasion to talk with Kay on the phone, and I communicate regularly with her via Twitter.
Kay’s writing is beautiful and gentile, like reading a great novel.
You can see a full list of the 52 truths just by looking at Barnes and Nobel’s Feature tab for The Truth About Paying Fewer Taxes Each one of the truths is explained in detail and in plain language, so you can save money and understand why you’re saving money.
I have been recommending this book to every one of my clients, and will continue to do so from now on.
I have a signed copy (yes, signed by Kay Bell the author) of The Truth About Paying Fewer Taxes and will be giving it away here.
How to enter:
Each of the following will count as one entry for a chance to win.
Please read the Contest Terms below.
ü Leave a comment on this post stating how you prepared or will prepare your taxe return. (self, fast-food chain, CPA, software, free-file, Other-please describe)
ü Subscribe to my RSS feed and leave a comment below to let me know you did so, or
ü Subscribe to my email feed leave a comment here using the same email address with which you subscribed. (this will gain you two entries for the drawing)
ü Blog about this contest and link back here from your blog. (Leave me a comment and link to your blog post here to let me know.)
ü Follow me on twitter – @bruce_taxguy. Leave a comment here with your twitter username.
ü Tweet about this contest and leave a comment to let me know you did so.
Bonus Entries: Leave comments on other posts on this blog. If you’re new to taxguy, visit earlier posts. The comment(s) must show some thought and not just “I agree” or “Great idea.” Come back to this post and let me know which post(s) you commented on. Each approved comment will gain you an additional entry.
Contest Terms
Ø The contest begins now and ends at 11:59PM EST on March 17th, 2009. Comments to this post will be closed at that time.
Ø 1 winner will be randomly selected using a random integer generator at random.org.
Ø I will contact the winner via the email address used to comment here.
Ø The winner will have 3 days to respond with necessary contact information for mailing prize. (I will send a 2nd notification email after 2 days if we have not heard back.)
Ø If the winner does not respond after 4 days, a new winner will be selected from remaining entrants.
Prize Terms
While I will do my best to ensure proper delivery of the winners autographed copy of The Truth About Paying Fewer Taxes, I am not liable for non-delivery due to:
v Incorrect mailing and contact information provided by the winner
v Loss or error on the part of the postal service or delivery personnel
v Any other matter beyond my control
Are You sure you are Having Enough Withheld?
How are you supposed to know? This is a re-post for your tax planning needs. A few easy steps and some light planning can help you figure this out.
What you need to know:
If you fail to estimate your federal income tax withholding properly, it may cost you in a variety of ways. If you receive an income tax refund, it essentially means that you provided the IRS with an interest-free loan during the year. By comparison, if you owe taxes when you file your return, you may have to scramble for cash at tax time–and possibly owe interest and penalties to the IRS as well.
When determining the correct withholding amount for your salary or wages, your objective should be to have just enough taxes withheld to prevent you from incurring penalties when your tax return is due. (You may owe some money at the time you file your return, but it shouldn’t be much.) You can accomplish this by reading and understanding IRS Publication 505 and IRS Publication 919, properly completing Form W-4 (and accompanying worksheets), and providing an updated Form W-4 to your employer when your circumstances change significantly.
Form W-4 helps you determine the proper withholding amount
Two factors determine the amount of income tax that your employer withholds from your regular pay:
1) the amount you earn
2) the information you provide on Form W-4.
This form asks you for three pieces of information:
1) The number of withholding allowances you want to claim: You can claim up to the maximum number you’re entitled to, claim less than you’re entitled to, or claim zero.
2) Whether you want taxes to be withheld at the single or married rate: The married status, which is associated with a lower withholding rate, should generally be selected only by those taxpayers who are married and file a joint return. Other people (including those who are married and file separately) should generally have taxes withheld at the higher, single rate.
3) The additional amount (if any) you want withheld from your paycheck: This is optional; you can specify any additional amount of money you want withheld.
When both spouses work and have taxes withheld at the married rate, they sometimes end up with insufficient taxes withheld. If this happens to you, remember that you can always choose to withhold at the single rate. In addition, you can determine the proper withholding amount by completing Form W-4’s two-earner/two-job worksheet.
Complete the worksheets to claim the correct number of allowances
To understand Form W-4, you must understand allowances.
Think of allowances as cash in your pocket at the time that you receive your paycheck. The more allowances you claim, the less taxes are taken from your paycheck (and the more cash ends up in your pocket on payday).
The following factors determine your number of allowances:
1. The number of personal and dependency exemptions that you claim on your federal income tax return
2. The number of jobs that you work
3. The deductions, adjustments to income, and credits that you expect to take during the year
4. Your filing status
5. Whether your spouse works
To claim the correct number of allowances, you should complete Form W-4’s worksheets. These include a personal allowances worksheet, a deductions and adjustments worksheet, and a two-earner/two-job worksheet. IRS Publication 505 (Tax Withholding and Estimated Tax) explains these worksheets.
Check your withholding
To avoid surprises at tax time, it’s a good idea to periodically check your withholding. If you accurately complete all Form W-4 worksheets and don’t have significant non-wage income (e.g., interest and dividends), it’s likely that your employer will withhold an amount close to the tax you’ll owe on your return. But in the following cases, accurate completion of the Form W-4 worksheets alone won’t guarantee that you’ll have the correct amount of tax withheld:
1) When you’re married and both spouses work,
2) If either of you start or stop working
3) When you or your spouse are working more than one job
4) When you have significant non-wage income, such as interest, dividends, alimony, unemployment compensation, or self-employment income, or the amount of your non-wage income changes
5) When you’ll owe other taxes on your return, such as self-employment tax or household employment tax
6) When you have a lifestyle change (e.g., marriage, divorce, birth or adoption of a child, new home, retirement) that affects the tax deductions or credits you may claim
7) When there are tax law changes that affect the amount of tax you’ll owe
In these cases, IRS Publication 919 (How Do I Adjust My Tax Withholding?) can help you compare the total tax that you’ll withhold for the year with the tax that you expect to owe on your return. It can also help you determine any additional amount you may need to withhold from each paycheck to avoid owing taxes when you file your return. Alternatively, it may help you identify if you’re having too much tax withheld. If you find that you need to make changes to your withholding, you can do so at any time simply by submitting a new Form W-4 to your employer.
Guest Post Robert D. Flach – the internet’s “Wandering Tax Pro”
This is another addition to the series “Mistakes made when choosing a paid tax preparer”.
MISTAKES MADE WHEN CHOOSING A PAID TAX PREPARER
by Robert D Flach – the internet’s “Wandering Tax Pro”
I have been professionally preparing 1040s for individuals in all walks of life since February of 1972. In my opinion the two biggest mistakes a taxpayer can make when choosing a tax preparer are –
· Assuming that because a person has the initials “CPA” after his name he is an expert when it comes to federal and state income taxes.
· Assuming that H+R Block (or other chains such as Jackson Hewitt or Liberty) will charge a reduced, or even reasonable, fee for preparing your tax return.
1) The CPA designation means that a person took a very difficult test at the beginning of his/her career, possibly many, many years ago, only a small part of which dealt with federal income tax. It is no guarantee that he/she is current on federal and state tax law.
Whenever I get a new client I ask to see the last three (3) years’ tax returns, to make sure I do not miss any carry-forwards and to see if there are any errors that I could correct on an amended return. In my 35+ years of preparing tax returns I have found more mistakes on 1040s prepared by CPAs than by any other class of preparer, including the taxpayer himself.
Many, many, many years ago I was a “para-professional” in the Small Business Services Department of one of the then “Big Eight” accounting firms. While reviewing the prior year’s federal and state tax returns of a client whose current returns I was preparing I found a very obvious error on the state tax return that caused the client to pay much more tax than necessary. Under the firm’s policy, the return, which had been originally prepared by a CPA, was reviewed by his “manager” (also a CPA), and signed-off on by the head of the department (a CPA) and a member of the Tax Department (a CPA). Not one of these CPAs picked up the obvious error!
A student in one of the tax planning/preparation courses I taught at local adult schools also many, many years ago asked me what was the difference between a tax return prepared by a CPA and one prepared by me (I am obviously not a CPA). My answer was “at least $100.00″ (that number needs to be adjusted for inflation!).
FYI – the only initials that have any meaning when it comes to tax preparation are “EA” – Enrolled Agent (I am also not an “EA”). The name is misleading. An EA is not an agent of the Internal Revenue Service, but a private tax professional who is “enrolled” to act as a taxpayer’s “agent” in proceedings with the IRS and in tax court. To become an Enrolled Agent one must pass a difficult test that is 100% federal tax law. In order to maintain their enrolled status, EAs must have a mandatory number of continuing education credits in taxation each year.
2) When my mentor and I got a hold of the H+R Block fee schedule back in the late 1980s we were in complete shock. Henry and Richard ain’t cheap! In my opinion they are very expensive, especially considering the value of the service provided. They charge gourmet restaurant prices for fast food service! Plus they will attempt to squeeze even more money out of you by trying to push you into a usurious “Refund Anticipation Loan” or to make your IRA contribution to a Block-sponsored high-fee, low-yield investment that is practically guaranteed to lose money.
It appears that H+R has to charge outrageous fees in order to pay the costs of the many legal settlements and court judgments they have been faced with over the years.
There are a multitude of reasons why you should not have your tax return prepared by representatives of Henry and Richard or other firms of their ilk. Their excessive fee is only one. Returns prepared by commercial chains, particularly H+R, are second to CPAs in terms of errors I have discovered on 1040s over the years. My mentor always said that he wished H+R Block would move next door to our office – we would make a fortune fixing their mistakes!
A couple of years ago the Government Accountability Office (GAO) conducted a study which resulted in a report to Congress titled “Paid Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors”. The GAO sent undercover agents with two different tax scenarios to a total of 19 offices of 5 “fast-food” commercial tax chains, including H+R Block, in a metropolitan area. In only 2 instances was the correct refund calculated, but all 19 returns contained errors. A similar undercover operation was conducted this past February and March by the office of the Treasury Inspector General for Tax Administration (TIGTA) with similar results.
To be perfectly fair, over the years I have come across CPAs who actually knew their “stuff” when it came to income taxes, and even some who charged somewhat reasonable fees. Several of my fellow tax bloggers have the initials CPA after their name, and, judging by their blogs, they certainly are knowledgeable, quite savvy in fact, in federal income taxes. But in my experience these are the exception that proves the rule. And I am sure that there are probably a couple of competent, ethical and professional H+R Block preparers out there somewhere, too – although you couldn’t prove it by me.
While it may actually be possible that the best tax preparer, at the best price, for your particular situation is either a CPA or an H+R Block employee, this is only because of the education, experience, ability, temperament, and other factors that are specific to that individual preparer.
Here are some other mistakes to avoid when choosing a tax preparer –
* Do not use a tax preparer who guarantees you a bigger refund, or who guarantees a refund period. No tax preparer anywhere can guarantee you a refund if your individual facts and circumstances – your actual numbers – do not warrant a refund unless he/she makes up deductions or exemptions or purposely does not report all your income. Either way that is tax fraud! The only claim or guarantee any legitimate tax preparer can make is that by using his/her services you will pay the absolute least amount of federal and state income taxes possible for your individual situation.
* Do not choose a preparer who charges as his/her fee a percentage of your refund or of the amount of tax he/she has saved you. Chances are the person will illegally inflate your refund or savings to increase his/her fee. The fee for preparing a tax return should be based solely on the amount of time involved and/or the number of forms and schedules required.
* Do not choose a tax preparer solely for the reason that he/she tells you that you can walk out of the office with a check in your hand. That person or firm is not selling competent and accurate tax preparation – they are selling usurious Refund Anticipation Loans, which you should avoid anyway (but that is the subject of another post). You want to use a tax preparer that is experienced and knowledgeable in tax law and not a loan shark.
* Do not choose a tax preparer who will not sign your finished returns. All tax preparers are required by the IRS to sign all tax returns which they have been paid to prepare. If a person prepares your return and refuses to sign it you should refuse to pay him/her and take your “stuff” elsewhere.
* Do not choose a “box” as your tax preparer. I cannot stress this strongly enough – no tax preparation software is a substitute for knowledge of the Tax Code. And no tax preparation software is a substitute for the services of a trained tax professional! As with any software program the rule is “garbage in – garbage out”. And when the IRS comes after you for errors on your tax return you can’t blame it on the software – the US Tax Court has on two separate occasions rejected the “Turbo-Tax Defense”. The IRS estimates that do-it-yourself software users spend an average of 10 to over 20 hours longer on a return than if they used a paid tax preparer, depending on complexity of the return. The bottom line is – if you don’t know what you are doing do not rely on a tax preparation software package to make up for your lack of tax knowledge. Using a real live tax professional will save you time, aggravation and money.
When looking for a tax professional, as with any other professional, it is best to get a referral from a trusted friend or relative.
TTFN
COPYRIGHT © 2008 BY ROBERT D FLACH
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Thanks Robert for the guest post. For more from THE WONDERING TAX PRO be sure to visit his blog daily. I do.
Again, I want to invite any and all guest post on this subject. I want to hear from all bloggers or just readers with their own input. Let’s see what you see I am missing. If you have some words of wisdom on this subject please let us share it with everyone, if it is something that has already been covered, so what, I am looking for others to tell what they know or have learned about finding a paid preparer. Repetition drives the point home.
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