32 Things Your Tax Accountant Won’t Tell You
With April 15 looming, we reached out to CPAs to give us their honest insight on filing taxes, audits, extensions, preparers and more!
We see many disastrous returns prepared by ill-trained preparers
When selecting a preparer, many people shop price and not experience. We don’t like to knock the competition—however, the old axiom, ‘you get what you pay for’ is often true. There are some companies that put their newly hired preparers through a six-week, evenings-only tax course, and then turn them loose to prepare returns with very little oversight. In other words, the person preparing your return might have been styling hair or selling appliances six weeks ago. Just because someone claims they are a CPA doesn’t necessarily mean they know taxes. Ask about their background, what kind of practice they have, and if they’re familiar with your state’s tax laws. (This is everything you need to know about filing your taxes after a big life change.)
Get organized before your appointment
Nothing is more frustrating than when clients show up with a box full of receipts and forms and say ‘prepare my tax return.’ Take the time to organize your tax items into something we can use—like a spreadsheet. At the very least, write everything down so we know what is included. This is the smartest way to spend your tax refund (according to science).
Keep a close record of all donations
Many taxpayers forget to track their non-cash donations. Those garbage bags of stuff you give to Goodwill can add up at tax time. Make sure you get a receipt and note exactly what you donated: “five pairs of women’s pants, three button-down men’s shirts, one child’s puzzle.” An excellent iPhone app, iDonatedIt (created by a CPA firm) can help you determine the value of your donated items.
If you do get audited (gulp!), never go it alone
Hire an accountant, enrolled agent, or tax attorney who has experience dealing with the IRS. Sometimes it can be as simple as providing additional documents or filing an amended return, but it’s best to work with a professional who knows what they’re doing. This is what IRS agents won’t tell you about tax planning.
When in doubt, ask
When in doubt, throw the receipt in the tax file, and we can discuss it. “I tell my clients, ‘If I don’t know you spent money for a tax deductible item, I won’t claim it on your return,'” said Dennis Coomes, CPA. Tax filers need to talk with their tax preparers. We ask questions to try to get the information we need to file an accurate return, and to legally minimize the taxes our clients pay. However, we can’t ask every question. Never assume something can’t be deducted as a business expense. Bodybuilders have written off baby oil, a junkyard owner deducted the cost of cat food for the felines she counted on to keep rats away, and an exotic dancer won a case against the IRS that allowed her to write off her breast implants. Your weekend side projects might count as self-employment, which means you’ll have to make quarterly estimated tax payments in addition to filing your annual return. Don’t forget that you can write off expenses for a home office, though the rules are very specific. For more information, go here.
Set aside money if you are self-employed
For those of you who are self-employed, it’s critical to set money aside for taxes so you’re not slapped with a massive tax liability at the end of the year. We see it happen all the time. If you’re an independent contractor, you should be setting aside money for taxes equal to 35% to 45% of your gross pay, and you should be paying quarterly estimated tax payments for federal and state taxes. The self-employment tax is computed at 15.3% of your net income.
Don’t complain about our fees
Please don’t complain about and/or negotiate our fees based on the fact that you or your business had a bad year. You’ll be surprised at how many clients try to do it. What most people don’t understand is that the time and effort that it takes to complete a tax return does not change in relation to your annual income or loss. Please don’t call and ask what I’ll charge to do your taxes. The answer is always going to be, “It depends.” Do you have a home-based business? Children? Retirement income? Sales of stock? A second home? A Roth conversion? These really affect how complicated your return will be. Also, don’t assume that chains like Jackson Hewitt and H&R Block have the best prices. For preparing simple returns, independents often charge lower fees, and they’ll do some tax planning with you, too.
Don’t spend the money on a CPA if your return is simple
You don’t need to spend $200 on a CPA if your return isn’t complex. By ‘isn’t complex’ I mean you receive a W-2, you receive a couple of 1099s, you don’t work in multiple states, you have no partnership income or other flow-through income, and maybe you itemize. If you have just a few issues, those can be easily researched on the web. If you earn less than $64,000 annually, many major tax-prep companies will give you their online filing guides. (For information, go here.) Also, H&R Block offers free online support for people ages 17 to 50 who earn less than $62,000.And if you’re expecting a refund but need extra time, file an extension. There’s no harm in filing after April 15th if you’re expecting a refund. Sure you might want your refund now but if you take the extra time to learn how to prepare your tax return, you’re likely to save money long-term.
Spend the money if your returns are complex
Don’t be pound wise and penny foolish. If you have complex returns, trying to save money doing the return yourself may cost you more in the long run, through missed deductions or dealing with subsequent IRS tax notices about missed income or misapplied deductions. Also, remember that with free online programs, while the federal return is free, there are charges to prepare and electronically file state returns.
Don’t always trust what you hear on TV
One of the most challenging issues we battle is the word of mouth shared by ‘experts.’ Just because they say it is deductible on TV or radio doesn’t make it so. Nearly every deduction or tax credit has limitations, exemptions, and exceptions. “Clients will come in and say ‘You know, I heard that I can deduct (insert here) from my taxes. I know this is true, because my brother’s barber’s sister’s husband owns a business, and he has deducted it for years,'” said Coomes. Quite often the information is flat out wrong. Also know how to avoid these major online scams.
Keep organized records
Make it a priority to keep good personal financial records. Use Mint.com or Quicken to track everything you spend and you’ll maximize your eligible deductions, thus reducing your taxable income, which will lead to less tax due.
Extensions! Many tax filers are confused about this. If you cannot file your return by the April 15 tax filing deadline, you can file for an automatic six-month extension. However, the extension only extends the time to file your returns—not to pay your taxes! If you properly file the extension, you will avoid being assessed ‘late filing penalties’ of 5 percent per month, up to a total of 25 percent. However, if you file the extension and pay the balance owed on your prior year taxes after April 15, you will still be assessed a minimum of 1/2 percent per month plus interest at the federal established rate. If you owe taxes and file your return and pay your taxes after April 15, you will incur late filing and late payment penalties, plus interest. Therefore, if you need to file an extension, you must send in a payment for the taxes owed to avoid penalties and interest. This is true for state and local income tax returns as well. If you pay too much with your extension payment, you can have the excess refunded, or applied to the following tax year.
If you’re afraid of e-filing, consider this:
Not only will you get your refund faster, but paper returns have a 20 percent error rate, compared with 1 percent for electronic returns. That’s partly because IRS personnel tend to make mistakes when they have to enter your information manually. The holy trinity of quick refunds: File early, file online, and opt to receive your money through direct deposit. Some e-filing companies report getting refunds to customers in less than three weeks.
Want to avoid an audit?
Then be careful when you list your business expenses on the Schedule C form. If your itemized deductions are larger than most people’s at your income level, your return may get a second look. To prevent IRS scrutiny, be modest with your home-office deduction and rental property expenses.
Don’t pretend you forgot about that extra money you made on the side
The IRS is probably going to find out about it and send both of us a notice. And then I may choose not to take you on as a client next year.
How long should you keep your old tax returns?
At least three years, since the IRS has the right to go back that far when it’s auditing past returns. To play it safe, you may want to hang on to them for six years, the amount of time the IRS has if you don’t correctly report all the income that you were supposed to and it’s more than 25% of the gross income shown on your return.
New regulations this year require all paid preparers to have a PTIN
When I finish your return and I give you an e-File authorization form to sign, make sure my name, signature and Preparer Tax Identification Number (PTIN) are on it.
Most of us are professional, honest and are trying to provide the best service possible to our clients…
but if you suspect fraud or that your preparer is acting unethically, you can report him or her to the IRS using Form 14157. CPAs can also be reported to their state board of accountancy or state licensing board.
There’s plenty of free human help out there for low- to moderate-income taxpayers
The IRS runs the Volunteer Income Tax Assistance Program and the Tax Counseling for the Elderly Program, the AARP offers its Tax-Aide program and many colleges offer help as well. You can even call the IRS if you have questions.
The most common mistake on paper returns?
Forgetting to sign it. Yet another reason to e-File.
Did you get a sign-up bonus for, say, opening a bank account or a credit card?
You may have to pay taxes on that. While the IRS treats some rewards as nontaxable discounts (such as most frequent-flier rewards), other payouts are considered income. A rule of thumb: If a company sends you a 1099 form for a reward, you should report it.
File even if you can’t pay
While both failure-to-file and failure-to-pay penalties exist, the first is generally harsher. And don’t panic if you can’t pay what you owe the IRS. You’ll have to fill out some forms and provide documentation, but you may be able to compromise on a lower amount if you meet certain requirements. (In 2014, the IRS settled with about 40 percent of the people who applied for reductions, with an average decrease of about $6,600.)
Itemizing can yield a bigger return, but be careful
Too many deductions may increase your chances of being audited. One red flag: charitable donations that seem disproportionate to your income. Intuit’s ItsDeductible can help you keep an exact record.
Another common red flag is excessive business deductions
The best defense: accurate records. If you travel for work, the MileIQ app will track your mileage. Meanwhile, apps such as shoeboxed allow you to take photos of your receipts or scan your e-mail inbox to instantly log business expenses throughout the year. (Their services start at $9.95 a month, but free alternatives are available.) Shoeboxed even provides prepaid envelopes if you prefer sending receipts by snail mail.
Even if you didn’t put pretax money into a flexible spending account (FSA), you can still recoup some child-care expenses
Depending on your income, the government will refund up to 35 percent of the cost of day care, with a cap of $3,000 per child or $6,000 per family. The catch: You must be employed or actively looking for a job to qualify.
Want to avoid an audit? Don’t use round numbers
When you use round numbers the IRS may assume you’re guessing on expenditures. The government audited 1.2 million people at random in 2015, so there’s no guarantee, but you can cut down on your chances by being precise. That said, don’t freak out if you realize you forgot to sign your return—that alone almost certainly won’t trigger an audit.