Notes From the IRS

Posted by Bruce Mc on Feb 1, 2009 in Choosing a preparer, Deductions, Exemptions, Filling Status, Form 1040 Information, News Flash, Opinions, Preparer, Tax Preparation, Things forgotten | 2 comments

How to Avoid IRS Penalties and Interest

Posted by Bruce Mc on Jan 5, 2009 in Form 1040 Information, Tax Preparation, Taxes, Things forgotten | 4 comments

If you really do owe unpaid taxes, there’s generally not much you can do about the taxes or interest – you’ll have to pay up. However, you can likely get some, if not all, of the penalty and interest decreased. IRS penalties often do not apply when you acted in good faith, based on a reasonable cause for your actions. Penalties apply only if you deliberately attempted to cheat, deceive or mis-lead the IRS.

Immediately pay the tax and interest you owe and fill out IRS Form 843. Above the word “Claim” on this form, enter in “Demand for Abatement of Penalties under Code Section 6404(a).” When you return Form 843, include a detailed explanation of why your penalty should be canceled.

Your letter should lay out the facts so the IRS will evaluate that you acted in good faith and based on reasonable cause for your actions. You should spell out in black and white that you never deliberately set out to break the law.

This form is used a lot these days since a growing number of tax preparers are emerging with limited training—and these folks can and do make mistakes when calculating tax returns. Luckily, as long as you acted in good faith and didn’t deliberately try to violate the IRS’ rules, the penalties should get waived.

Sometimes the most crushing aspect of a tax bill can be the added interest charge. If you could earn that kind of return on your investments you’d never have to work again! If any of us charged those kinds of rates, we might end up behind bars!

A Straight Tip

• When the interest is due to an error made by the IRS;
• When the interest is due to delay caused exclusively by the IRS; or
• When the interest is demanded on money which the IRS sent in error.

To cancel interest, write a letter that states, “Interest should be canceled because” and list which condition the cancellation of interest meets. Be specific and demand cancellation. Mail your letter to the Service Center which issued the bill.

A Smart Money Move: Send all correspondence with the IRS, including your tax return, via certified mail, with return receipt requested. This way you have tangible proof that your letter or return was both mailed by you and received by the IRS.

Here are two common penalty triggers – and some advice on how to avoid paying any penalties:

1. Underpayment of Your Estimated Taxes. When you are self-employed, or your employer does not withhold your taxes (and send them to the IRS for you), you must pay estimated taxes each quarter. How much tax should you pay? Either 90% of what you think you owe, or 100% of what you paid last year. If you get to the end of the year (or, more likely, April 15th of the following year) and realize you didn’t pay enough, the IRS slaps you with a penalty!

A Smart Money Move: You can avoid penalties if your income came in unevenly during the year (use Form 2210), or if underpayment was due to some disaster, casualty or other unusual circumstance.

2. Late Filing. Your tax return is due by April 15. And if you file late (without an approved extension), the IRS will hit you with a 5% penalty for every month you are late, up to a maximum of 25%. The penalty for paying your taxes late is 0.5% per month, also capped at 25%. During any month in which you incur both penalties, you only get charged 5% per month.

You can avoid these penalties altogether, with one of these reasons:

1. You filed by April 15th, but sent your return to the wrong IRS office.
2. You got your return to the post office in time (by midnight on the 15th) and have a certified mail receipt to prove it.
3. You filed late because of serous illness or a death in the family.
4. You filed late because you were out of the country unavoidably.
5. You went to an IRS office for help (before April 15), but no one could meet with you.
6. Your professional tax advisor incorrectly advised you.
7. Your records were destroyed by flood or fire in your home or in your office.
8. For reasons beyond your control, you were unable to obtain the necessary records to determine how much you owed.
9. You applied for necessary IRS forms in advance, but did not receive them in time.

   10.  You relied on wrong information provided by an IRS worker or in an IRS publication. 

Ready for some good news? File your simple return for FREE with TurboTax® Federal Free Edition. Start now – It’s easy!

TurboTax Giveaway

Re post – Avoid a Tax Audit with these tips

Posted by Bruce Mc on Dec 15, 2008 in Form 1040 Information, Opinions, Tax Preparation, Taxes | 0 comments

Being audited really isn’t the worst thing in the world if you are totally honest when filing your taxes. Should you be audited and it is found that you have made an honest mistake, don’t panic. You might be penalized with affordable fines or merely told to correct the mistake. The IRS rarely burns those who practice honesty and caution when filing their taxes. By following the below advice, however, you may never have to find out for yourself.

1-Hire a Trusted professional

Some of us prefer to do our taxes without help and that is fine when things are uncomplicated. Services like TurboTax allow many of us to file taxes in under an hour without a problem. However, those who are self-employed often have a lot of paperwork to deal with. Hiring an accountant, bookkeeper or tax preparer can help you to prevent any mistakes.

2-File Every Year, No Matter What

Can’t pay your taxes in full this year? That is okay! The IRS will work with you through an extension plan. One of the biggest mistakes made by the self-employed when April rolls around is not filing because they can’t pay what they owe. Always file, no matter what. Contact the IRS about your money situation and they will let you pay out the taxes. This results in some penalties, but that is far better than the alternative.

3-Report Your Full Income

One of the reasons why the IRS watches entrepreneurs so closely is because it is easier for them to underreport their income. If you are a freelancer who occasionally takes small gigs with no paper trail, don’t think you can neglect this income when filing your taxes. Finding inconsistencies is what the IRS does best and they will eventually catch up to you.

4-Don’t Get Too Creative With Deductions

There are usually two types of income tax filers who are self-employed:

1) those who are too scared to make deductions because they don’t want to be audited
2) and those who deduct everything under the sun with reckless abandon.

Don’t be either person! You should be able to make deductions, as they are there for your benefit. However, you need to make sure you legitimately qualify for each one.

5-Document Everything

One of the best ways to prevent mistakes is by having all necessary paperwork handy when you file. This is also your best defense against penalties should the IRS ever come knocking on your door. You see, a lot of deductions really can be a red flag to the IRS. If you can back up each one, however, you are perfectly within your right to claim those tax breaks. Back up everything and keep those documents in a safe, organized place.

 If this wasn’t any help then look for my post Wednesday July 9th, “Audit Insurance”

Filing Status

Posted by Bruce Mc on Nov 26, 2008 in Divorce, Filling Status, Form 1040 Information, Re post | 0 comments

This is of course could be the greatest misunderstood of filing statuses. Or at least one would think considering how many misuse the claim. Let’s examine so you don’t make this mistake.

            The IRS defines this as:

                        Head of Household

1.      You are unmarried or “considered unmarried” on the last day of the year.

2.      You paid more than half the cost of keeping up a home for the year.

3.      A “qualifying person” lived with you in the home for more than half the year (except for temporary absences, such as school). However, if the “qualifying person” is your dependent parent, he or she does not have to live with you.

Head of household is a status held by the person in a household who is running the household and looking after a qualified dependent. In order to qualify as head of household, the designated household must be located at the person’s home and the person must pay more than 50% of the costs involved in running the household. The benefit of having the head-of-household status is that it can result in lower tax rates.

Typically, the head of a household must also be unmarried. However, in certain situations, a married person can be the head of household. In addition to the requirements listed above, the married person must also file an individual tax return and the spouse of the married person must not have lived with the person for the last six months of the calendar year.

1.      Considered unmarried means on the last day of the year if you are divorced under a final decree, you are considered unmarried for the whole year. So on December 31^st of whatever year, if your divorce is finial, you are considered unmarried in the eyes if the IRS.

2.      More than half the cost means just that. If you paid 50.1% to maintain the home then, you paid more. If you were divorced in October, the divorce finalized December 30^th, make sure that for the year your spouse who is no longer in the home (?) paid more than one half of the cost for the total year. This is a case often misused.

An example: A husband, wife, two children home, and only one spouse worked. In mid July the working spouse filed for divorce and left the home to the other spouse and the children. The spouse with the children would not be able to claim Head of Household because they did not pay for more than half the cost of keeping up the home. 

3.      A qualifying person living in the home is another highly misused aspect of this status. A qualifying person as described by the IRS is:

If you still have questions about whether or not you can claim Head of Household, please contact me or your personal tax preparer.

            This is a re-post from 08/25/08

The joy of budgets

Posted by Bruce Mc on Nov 17, 2008 in Form 1040 Information, Opinions | 3 comments

     Most people avoid creating a budget and fewer still stick to one. in these times you need one, but it doesn’t have to be painful.

     If you’re the type of person who always has plenty of cash, knows exactly where every penny goes, and never has trouble paying bills, you need read no further. You’re either too rich or too smart to need this information.

     For the rest of us,

     Unfortunately, making – and sticking to – a budget is the essential tool for ensuring that our money gets used the way we need it to. Even if you’re in the happy situation of having plenty of income, the homework involved in drawing up a budget can be instructive, since you may find that you are spending more than you wish on items like DVD’s, electronic gadgetry, or restaurant meals.

     Drawing up a budget is usually pure labor enlivened only by the reality of staring foolish spending habits in the face. Why do you have a luxury sound system if neither you nor your spouse listen to it? In fact, one of the chief impediments to budgeting is that most people would rather not know how they really use their money.

     It’s bad enough to learn this kind of information on your own. It’s even worse when a spouse or significant other finds out, since it usually confirms his or her worst fears – and provides new ammunition for future arguments “discussions.”

     Take heart. Any spending mistakes you’re making are probably common and not impossible to cure. Moreover, the bulk of budgeting’s pains are at the beginning.

     After you have a budget in place – and you’ve fine-tuned it with a couple of months of actual spending – tracking, your expenditures becomes almost automatic.

Listing expenses

To build a realistic budget, start by figuring out where your money goes now. There are three steps to creating a budget:

1.  Identify how your money is currently being spent.
2. Evaluate that spending to see if it meets your financial priorities.
3. Track your ongoing spending to make sure it stays within those guidelines (or to understand how your budget needs to be revised).

     If you happen to use Quicken (recomended), Microsoft Money, Mint.com or other such software, you’re in luck. These programs generally make it easy to draw up a budget.

     In Quicken, for example, every time you make a deposit, write a check, pay a credit card bill, or dispatch an electronic payment you are asked to assign it to a particular category, such as “salary,” “clothing,” “groceries,” “child care,” or “health insurance.”

     You can also create subcategories, dividing “auto” expenses into “fuel,” “insurance,” and “service.” The program comes with a set of categories that handle most of the basics. You can edit the list to create categories that make better sense for your particular household. And if you’re away from home, you can track expenses at the Quicken Web site and then download the transactions later.

     The drawback, of course, is that entering and categorizing all of your income and outflow is a tedious chore.

     You can reduce the tedium by judiciously selecting categories. Let’s say you are only worried about tracking your spending for recreation and leisure pursuits. You could create categories that cover those types of expenses, and let everything else accumulate under “miscellaneous revenue” or “miscellaneous expense.”

     The problem with that approach is that you forgo the opportunity to spot problems in other spending areas that you may not even be aware of.

     A better solution is to track expenses using electronic banking. That way, you can download your payments and deposits directly from the bank, rather than having to enter them by hand.

     The downloaded banking transactions generally show up without any categorization – meaning you’ll have to add the categories by hand. But if you use a credit card that is issued by a bank that permits electronic access, then the downloaded charges from your card sometimes do come with categories attached (they aren’t always right, so check them).

     Either way, once you’ve got your spending tracked by category, drawing up a report requires only a few clicks of the mouse. Even better, such programs often have an automatic budget-creation feature that scans your spending in the past in order to estimate how much you’ll spend going forward.

     If your finances aren’t wired, you can still get a good handle on your spending the old-fashioned way. Start by getting all your records together from the past 12 months, including pay stubs, loan proceeds, withdrawal slips, canceled checks, and itemized credit-card statements. Then go through them and compile totals for your income and expenses in a set of categories that makes sense for you.

     At the end of this, you may still have a sizable lump of spending that’s undocumented – typically, the money you withdraw in cash and then spend on day-to-day “needs“. If this portion of your budget seems to be getting out of hand, keep a journal for the next four weeks in which you record every nickel you spend. You can use those results to calculate how your cash is being spent throughout the year.

     Now that you’ve got a good picture of where your money is going, you can proceed to evaluate which parts of that spending should be raised or lowered. You might start with a Budget calculator, which compares your spending with recommended levels. Found in most software as above or found on the web. I like looking for free such stuff at ww.tucows.com.

     If your boss at work were to ask you for an analysis of the department’s spending, you’d figure it out quickly enough. Budgeting your household should be approached in the same businesslike fashion. A variety of electronic tools can make the process easier.

Setting goals

     Analyze your spending habits to see where you need to make changes. Once you have a budget, it’s time to go through your spending and figure out where you need to cut back.

     This is especially urgent, obviously, if you spend more than you make – a scary position, for sure, but not uncommon. In fact, Labor Department numbers show that many families making $50,000 or less are spending at least a few percentage points more money each year than they actually bring in.

    That doesn’t mean that they, or you, are headed for bankruptcy. But it does show that Americans are in the habit of borrowing to cover both short-term expenses, like those on credit cards, and long-term ones, such as buying cars and homes.

     Let’s just say that if your spending exceeds your income, then your top priority in constructing a budget should be to slash your spending, now.

     If your household runs in the black, you may still want to reallocate some of your spending. The calculator helps identify trouble spots by highlighting categories where your annual expenses are sharply higher or lower than average for households with similar demographics.

     In some cases, a divergence will be perfectly reasonable. The average family spends only a few percent of its income on education, for example. But if you have a child in college or private school, or are taking some courses yourself, your education spending will be a lot higher — and more power to you. I am big on continuing education.

     On the other hand, if the calculator shows that you’re spending twice as much as the average family on meals away from home, and there’s no obvious reason why that should be so, you may want to consider eating in more often.

     When projecting your income, don’t include money that you can’t be sure to receive, such as highly variable year-end bonuses, tax refunds, or gains on investments. Instead, wait until the extra cash arrives, then save or invest it to produce more revenue for the future. Your goal should be to reduce your spending to about 90 percent of your income, with the aim of plowing the rest of that money into the financial objectives you deem most important.

      Once you’ve set your budget goals, you need to develop the habit of tracking your expenses on an ongoing basis – something that’s most easily accomplished using personal-finance software. The aim here is to make sure the spending stays within the limits you’ve set. However there’s a second aim:

     Very likely you will discover that some of the goals you set were unrealistic. If so, ease them, slightly. No point in giving yourself an unreachable hurdle, but neither should it be too easy.

     Often it takes two or three revisions before you achieve a budget that you can really stick to. If juggling the numbers leaves you wishing you could free up some extra cash, push on for suggestions. 

Cutting costs How to reduce spending to free up money for use elsewhere:

     The most common spending problems are caused by a house that’s too large, a car that’s too luxurious, or a credit-card lifestyle that’s too lavish for your income. Those who see a virtue in moderation may have had budgeting in mind.

Whatever your situation, here are some common ways that people can reduce monthly bills.

Eliminate trivial / needless costs

     Look first for small savings – not because they’ll end your budget problems, but simply because they’re easy to find and take advantage of. For example, swear off that mid-afternoon doughnut or expensive premium latte. Shop for clothes and household furnishings only during sales. Higher gasoline prices make it a good idea to “bundle” one’s various shopping trips. Keep your house warmer in summer and cooler in winter. Take on chores that you usually pay someone else to perform, such as mowing the lawn or shoveling snow.

Seemingly insignificant savings do, in fact, add up.

Reduce larger expenses

     These recommendations are decidedly more painful. If you smoke, for instance, take steps to quit. Don’t buy season tickets to anything. Trade in your luxury car or sport utility vehicle for something a lot cheaper to buy, fuel, and maintain (I did say this was painful).

    On the assumption that those kinds of changes may be too wrenching, here are some other specific areas where many people can find savings:

Refinance your mortgage

     If new mortgages are costing at least two percentage points less than the rate you’re paying, refinancing may save you significant dollars.

Cut your taxes

     Usually this means taking better advantage of itemized deductions, and it’s a lot easier to do if you are either self-employed or have some income from work you do outside of a regular job. That opens up a range of new deductions — from expenses for work-related items to a home office — that are much harder to claim if you’re an ordinary working stiff.

     On the investment side, you can save some money by selling, and then writing off, investments that have lost money. You can use such losses to offset any gains you may have in a given year. If your losses outweigh your gains, you can deduct as much as $3,000 of investment losses from your ordinary income each year. Those with higher incomes may also be able to save some money by shifting money out of taxable bonds into tax-free municipal bonds. Check with your tax adviser for exact numbers in your situation.

Appeal your home assessment

     If you’re a homeowner, you may even be able to cut your real estate taxes by challenging the value that the local assessor puts on your property. You have to have good evidence, of course. You should call the assessor’s office first to make sure you understand the formula for determining the house’s value (the assessment listed on tax bills is often only a fraction of the real value that determines your tax).

     If recent home sales in your neighborhood lead you to believe that your house is worth less than its assessment and a qualified real estate agent writes an appraisal in support of your claim, then you can file a grievance with the assessor’s office and possibly get your bill reduced. The cost: $200 to $300 for the written appraisal. If an attorney handles the appeal for you, he or she will typically charge 50 percent of the first year’s tax savings.

Last words of caution

    The above suggestions won’t work for everyone, and you may have considered them already. But since you alone are privy to the numbers in your budget, you alone know how radically you need to cut. If these suggestions don’t appeal, find your own alternatives.

     Over time, your income should rise as your career progresses and you manage to save money for investing. Also over time, inflation will raise the cost of living. A mere 3 percent annual rise in prices will double the cost of everything within 24 years. At that time, you’ll need twice as much money as you do today to live as well as you do now. So don’t start spending your rising income on luxuries you’ve been denying yourself until you’re sure that you’re staying ahead of inflation. 

Audit Advodance

Posted by Bruce Mc on Nov 14, 2008 in Form 1040 Information, Re post | 0 comments

Being audited really isn’t the worst thing in the world if you are totally honest when filing your taxes. Should you be audited and it is found that you have made an honest mistake, don’t panic. You might be penalized with affordable fines or merely told to correct the mistake. The IRS rarely burns those who practice honesty and caution when filing their taxes. By following the below advice, however, you may never have to find out for yourself.

1-Hire a Trusted professional

Some of us prefer to do our taxes without help and that is fine when things are uncomplicated. Services like TurboTax allow many of us to file taxes in under an hour without a problem. However, those who are self-employed often have a lot of paperwork to deal with. Hiring an accountant, bookkeeper or tax preparer can help you to prevent any mistakes.

2-File Every Year, No Matter What

Can’t pay your taxes in full this year? That is okay! The IRS will work with you through an extension plan. One of the biggest mistakes made by the self-employed when April rolls around is not filing because they can’t pay what they owe. Always file, no matter what. Contact the IRS about your money situation and they will let you pay out the taxes. This results in some penalties, but that is far better than the alternative.

3-Report Your Full Income

One of the reasons why the IRS watches entrepreneurs so closely is because it is easier for them to under report their income. If you are a freelancer who occasionally takes small gigs with no paper trail, don’t think you can neglect this income when filing your taxes. Finding inconsistencies is what the IRS does best and they will eventually catch up to you. 

4-Don’t Get Too Creative With Deductions

There are usually two types of income tax filers who are self-employed:

1)      those who are too scared to make deductions because they don’t want to be audited and

2)       those who deduct everything under the sun with reckless abandon.

Don’t be either person! You should be able to make deductions, as they are there for your benefit. However, you need to make sure you legitimately qualify for each one.

 5-Document Everything

One of the best ways to prevent mistakes is by having all necessary paperwork handy when you file. This is also your best defense against penalties should the IRS ever come knocking on your door. You see, a lot of deductions really can be a red flag to the IRS. If you can back up each one, however, you are perfectly within your right to claim those tax breaks. Back up everything and keep those documents in a safe, organized place.

If this wasn’t any help then look for my post Wednesday July 9th,  ”Audit Insurance”  

This is a re-post from 07/07/08

Things your tax pro may not tell you

Posted by Bruce Mc on Oct 17, 2008 in Choosing a preparer, Opinions, Preparer, Tax Preparation | 7 comments

This is another addition to the series “Mistakes made when choosing a paid tax preparer”. The author is anonymous.

Things your tax preparer may not tell you

“The big name doesn’t mean superior service.”

Roughly 135 million Americans file tax returns, and of those, two-thirds pay for help. Though solo acts like CPAs and so-called enrolled agents have plenty of clients, almost 20% of taxpayers go through a big franchise like H&R Block, Jackson Hewitt or Liberty Tax Service to get their refunds — last year an average $2,255 per return.

The problem is, tax preparation and advice depend on the preparer, and in a system of franchises, that means thousands of seasonal employees and limited quality control. The results can be dangerous. When staffers from the Government Accountability Office (GAO) went undercover to get returns done by the big chains, they found “nearly all of the returns prepared for us were incorrect to some degree,” according to the report.

Worse yet, lawsuits allege that the owners of 125 Jackson Hewitt franchises cost the government $70 million in tax fraud and created an environment “in which fraudulent tax-return preparation is encouraged and flourishes,” according to the Department of Justice. Jackson Hewitt says it stands behind its compliance procedures as well as its nationally standardized educational curriculum.

“You wouldn’t believe it.”

Complaints about tax preparers, including allegations of inaccuracies and returns that weren’t filed on time, are up 80% in the past five years, says the Council of Better Business Bureaus. But when it comes to the Internal Revenue Service policing problem preparers, “the lifeguard is asleep,” complains Sen. Chuck Grassley, R-Iowa, who took the agency to task for inaction last April.

Less than 1.5% of returns get audited, and while that may pacify nervous taxpayers, audits are the primary way to catch bad tax pros. The GAO found that a year after it reported poor preparers by name to the IRS, the agency had failed to audit a single one. Professional organizations, such as the American Institute of Certified Public Accountants and the National Association of Enrolled Agents, pack even less of a wallop because they often wait for the IRS to act. Then the institute will strip membership and report bad accountants to the relevant state-licensing group. How to find out if your CPA’s been disciplined? Visit the agency’s Web site.

“You’d be better off.”

Maybe you’re hiring a tax preparer because you’ve got better things to do with your weekend or numbers make you dizzy — more power to you. But if you’re hiring a pro because you think he’s smarter than you, think again. On average, tax preparers make more mistakes, and costlier ones, than John Q. Taxpayer does.

According to a study of IRS data, 56% of professionally prepared returns showed significant errors, compared with 47% of those done by the taxpayer. And audited taxpayers who used preparers owed an average of $363, while those who filed themselves owed $185.

Of course, tax preparers often see more-difficult returns, which could lead to more errors.

For a family with one W-2, mortgage interest and a couple of kids, TurboTax is just fine. If, on the other hand, you’re attaching a schedule for self-employment income or capital losses, consider getting help. And even then, if a return is made complicated by a one-time event — say, the birth of a child or the acquisition of a rental property — you might need only one year’s worth of advice. If nothing changes, you should be able to copy it from year to year, so long as you keep up with tax law changes to your situation.

“What are your qualifications?”

Every April, Grassley calls IRS officials before the Finance Committee to grill them on taxpayer protection. He’s increasingly concerned about unethical, unlicensed tax preparers and what he calls “sharks in the water.” “Anyone can call himself a tax preparer,” Grassley laments. Many do. There’s no mandatory national licensing, and Oregon and California are the only states that require tax pros to take a test. That means as many as 600,000 tax preparers are unregulated, according to the National Taxpayer Advocate, the taxpayer assistance wing of the IRS. Some may set up shop in a local real-estate office, but many work for the big chains.

Translation: There’s no universal standard for qualification. Licensed preparers, who are usually CPAs or enrolled agents, are tested and must meet ongoing education requirements. Unlicensed preparers do neither.

“If it’s February, you’re late.”

A savvy tax pro may be able to cut your tax bill or juice your refund. But don’t expect to find one come Feb. 1. From that point through April, tax pros are generally too busy to talk to new clients. So if you don’t already have a preparer lined up, by the time you actually have your W-2s in hand, you’re probably not going to get good service.

That means you should be talking to tax preparers in October and November. They’ll have time to answer questions, look over your old returns and suggest changes. Not only that, but talking to a tax pro in the fall means you still have time to plan. If you wait until you have all your W-2s, you’ve locked in all your income for the year. But in the fall a good preparer can help you figure out ways to manipulate your income by increasing your 401(k) contributions, deferring a bonus until the new year or taking taxable losses.

Wait until spring and a professional can help you make small decisions, like whether to itemize or think about different deductions, but you’ve lost most of your flexibility.

“You hired me, but your return is being done by someone else.”

Some accounting firms have begun outsourcing return preparation. That means your data might be sent as far away as India — or as close as a local H&R Block, since the chain contracts with CPA firms to do returns. Either way, your accountant isn’t obliged to tell you. Your most sensitive information may have gone halfway around the world, and you have no idea.

Indeed, sending Social Security numbers, names, addresses, birth dates and account numbers overseas electronically makes some people uneasy. For while the origins of identity theft are often hard to pinpoint, returns contain so much in one bright, package — that’s a great gift to the identity thief.

The number of outsourced returns is still small, but they’re becoming increasingly common. An overseas company can process a return overnight for as little as $50, much less than a CPA’s hourly rate.

“Taxes, whatever — let me see what else I can sell you.”

The real money in tax prep has nothing to do with 1040 forms and W-2s. For the big-chain preparers, as well as your local accountant, the register really lights up only when they persuade you to take a loan, open a retirement account or buy insurance. Chances are you don’t need what they’re selling, but the sales pitch may blur the issue. GAO staffers reported that when they visited the big-chain tax preparers, loans were described as “options” or “bank products”; on one visit a customer was asked to sign a loan application without being told what it was. RAL means Refund Anticipation Loan.

Worse, these extras can do you more harm than good: More than 80% of those who opened an “Express IRA” at H&R Block, for example, paid more in fees than they earned in interest, according to a lawsuit filed by the New York attorney general. (H&R Block says most Express IRA accounts opened between 2001 and 2005 have yielded “positive net tax savings benefits and interest earnings,” even as the company “has lost money operating this program.”)

CPAs, too, are in the sales game, ever since the AICPA allowed members to sell insurance products. When commissions can be $20,000, it’s easy to get greedy.

“If I screw up, I’ll pay up.”

Worried about an audit? H&R Block and Jackson Hewitt are happy to ease your mind — for a price. Both offer the option of buying a geared-up guarantee that promises to cover any back taxes you owe, plus interest, fees and penalties.

Here’s what they don’t say: You don’t need the extra protection. If it turns out you owe back taxes, the big chains’ basic (read: free) guarantee already covers fines, penalties and interest. Many CPAs and enrolled agents will do the same; they often have insurance for that very purpose. Just be sure to ask about it before one does your return. But what about the back taxes?

True, they could amount to a bigger expense than the fines and penalties, which may be why some chains can sell that extra guarantee. But H&R Block and Jackson Hewitt will cover you only up to $5,000 and exclude the most complicated returns. If you’re tempted, know there may be an unintended consequence: If someone pays your taxes, the IRS considers that taxable income.

In other words if you buy the guarantee, and H&R Block ends up paying your back taxes, expect to get a 1099 next January.

“Tax preparation is an art, not a science.”

A recent law tightened penalties for tax preparers who play fast and loose with the tax code, taking far-fetched positions because they know 99% of returns never get audited. That said, for anyone with a complicated or unusual financial life, there’s still lots of wiggle room, I’ve ever heard “It’s about 10% black, 10% white, and everything else is in the middle.”

Chances are good you have room to maneuver if you have income in a category the tax code treats flexibly — you’re self-employed, for example, or own rental property. Ditto if you’ve earned big capital gains or incurred high or unusual medical expenses. In short, if you’re attaching a schedule to your return, a good tax preparer will pay for himself.

Now, that may mean raising a red flag with the IRS, and a good preparer should explain if he’s taking risky positions. If you can’t stomach the specter of an audit, you’ll want a pro to travel on the side of caution.

Think twice before paying someone to look for loopholes if your income picture is relatively simple. If you’ve got one W-2, you don’t need someone fancy, there’s not a lot we can do for you.

“You should shop around.”

There’s no standard price for doing taxes. Some preparers charge by the hour, others by the form; either way the cost depends on where you live, the complexity of your situation and the qualifications of your tax pro. Consider: The average H&R Block customer pays about $150; a CPA may charge 15 times that.

People rely too much on word of mouth; they don’t shop prices. If they did, they might be surprised. A licensed local pro may not cost much more than a national chain. (I charge by the form, and a simple return could cost just under $150.00 – not much more than what you might pay at a big chain.)

Even among franchises, prices vary. The return that cost $90 to prepare at one big store cost more than three times that at another, according to the GAO study. To be fair, it may be hard to know what your return will cost before the preparer actually spends time on it. Ask for estimates using last year’s return — that’ll give you a point of comparison to find the best price.

 Shop around.

In red comments are my own injections.