Archive for the ‘Tax Preparation’ Category

That Was the Tax Season that Was

Sunday, April 23rd, 2017

April 15th, err, make that April 18th, has come and gone. Every Tax Season is different, and this one had its ups and downs. So let’s take a look at eight observations I have of the first part of the 2017 Tax Season:

1. The IRS did a good job with telephone service for tax professionals. My average wait time on hold with the Practitioner Priority Service was three minutes. That’s superb. I was told by several agents that the IRS added personnel to help tax professionals. That made my life easier, but…

2. The IRS didn’t do as good a job with taxpayers. I had a couple of clients who called the IRS note the hour-plus hold times.

3. The new law mandating interviews with taxpayers claiming the Earned Income Credit, the Child Tax Credit, and the American Opportunity Credit is annoying for tax professionals and will only stop the lowest of low hanging fruit of tax cheats. Most tax professionals know their clients, and simply aren’t committing tax fraud. My clients were more bemused than anything else with some of the questions I had to ask about their children.

4. More of my clients filed without extensions than in the past. This result appears to differ from the national average (the latest report I saw was that there were five million fewer returns filed year-to-date than last), and differs from the long-term trend that I’ve seen the last few years (that more returns were going on extension).

5. The new FBAR deadline will make my life far easier. Officially, the deadline coincides with the tax filing deadline, but there’s an automatic six-month extension. This will allow FBARs to generally be filed coincidentally with tax returns.

6. It would be impossible to run our tax practice without using tax software; however, tax software isn’t a panacea for thinking about the returns themselves. I’ve seen some self-prepared returns this Tax Season that were, to be kind, amusing. Tax software is great in automating the mundane but not so great in thinking for you.

7. We need tax reform, and soon. The Tax Code is far, far too complex. I’m now preparing returns that are close to “basic.” And I practice in a state where there’s no income tax. (Yes, I prepare returns for many states, but my local clients generally don’t have to deal with state income tax.) Yet these clients find the Code so complex that they can’t do their own returns.

8. Deadlines matter. Almost every tax professional I know sets deadlines for receiving paperwork from clients; ours was set at March 15th. We did get to many returns that came after that date, but for the client who wondered why I stifled a laugh when he dropped his paperwork off on April 17th and said he’d be in tomorrow to pick up his completed return. He’s on extension, of course. If you’re using a tax professional to prepare your returns, he almost certainly has also set a deadline for receiving paperwork prior to the October 16th extension deadline. You should pay attention to that, and get your paperwork in to your professional timely.

I’m hopeful my thoughts in October will be just as kind about the second half of the Tax Season; only time will tell.

Bozo Tax Tip #8: Lie to Your Tax Professional!

Tuesday, April 4th, 2017

Like almost all tax professionals, we use an Engagement Letter. The Engagement Letter has grown from one page to three pages. Some of this relates to items that my attorney wants on the document; some of the growth is from my insurance company. However, most of it is from IRS rules. One item that has been in every one of my Engagement Letters is the following:

You agree that you have provided us with and will provide us with all requested documents, that the information is and will be accurate and truthful, and that you will answer all of our questions fully so that we can properly prepare your returns.

Most tax professionals have similar language in their Engagement Letters. If we are to best prepare your tax returns, we have to know what’s going on. I’ve been told by my physician clients that their patients often don’t tell them the entire story. I can’t imagine doing that; how is my doctor going to do prescribe the best treatment if he only has half the picture? Tax professionals are no different; we can’t properly prepare your returns if we only have half the picture.

But if you want a tax return that’s inaccurate, and doesn’t have all the deductions and/or credits you’re entitled to, go ahead and deceive your tax professional. Don’t say I didn’t warn you!

Please Don’t Do This!

Tuesday, January 10th, 2017

Joe Kristan tweeted the following last weekend:

As I was going through my emails this morning, one of my clients (she shall remain nameless) sent me an email with her CP01A notice attached. The CP01A notice is the IRS notice giving a victim (or potential victim) of identity theft his or her Identity Theft PIN. I suspect Joe made that post on Twitter because one of his clients did the same thing as my client.

Meanwhile, another client of mine faxed me his CP01A notice. That’s a far, far safer method of sending the Identity Theft PIN to your tax professional. You can also hand it to your tax professional or upload it using their web portal (or file transfer system—the name isn’t as relevant as the method). Mail is considered a secure means of sending things, too.

Do not email anything containing personally identifiable information such as social security numbers or dates of birth. Of course, if you want to be a victim of identity theft, go right ahead and do so. But don’t say I didn’t warn you.

The Time for Procrastination Is Over

Tuesday, September 6th, 2016

Labor Day, the unofficial end of summer, has come and gone. It even felt like Autumn this morning here in Las Vegas (it was below 70). For those who filed an extension and have waited to prepare their tax returns, it’s time to get going.

But Russ, you say, the deadline isn’t for another 41 days. Very true. Still, it takes time for you to gather all the information and for your tax professional to prepare the return. It will take time for you to review the return. It’s better to start sooner than later. And if you wait too long, it will be too late.

But Russ, you say, I still haven’t received that last K-1. I understand; my mother’s still waiting for her last K-1. However, why can’t you get everything else ready? It’s easy to add that final K-1 into the return; it’s a lot harder to add in the myriad of other forms, income, deductions, and other information.

Most tax professionals have set deadlines for returns on extension. I can guarantee you that if you drop off your paperwork on October 14th, your tax professional will, at best, charge you an arm and a leg; at worst, your return won’t get done by the 17th. Make a tax professional happy: Get started now, and turn in your information soon.

Bozo Tax Tip #2: Use a Bozo Accountant!

Thursday, April 14th, 2016

Here’s another Bozo Tax Tip that keeps coming around. The problem is, the Bozos don’t change their stripes. In any case, here are some signs your accountant might be a Bozo:

– He’s never met a deduction that doesn’t fit everyone. There’s no reason why a renter can’t take a mortgage interest deduction, right? And everyone’s entitled to $20,000 of employee business expenses…even if their salary is just $40,000 a year. Ask the proprietors of Western Tax Service about that.

– He believes that the income tax is voluntary. After all, we live in a democracy, so we don’t have to pay taxes, right?

– Besides preparing tax returns, he sells courses on why the Income Tax is Unconstitutional or how by filing the magical $2,295 papers he sells you will be able to avoid the income tax.

– He wants you to sign over that tax refund to him. After all, he’ll make sure you get your share of it after he takes out his 50% of the refund.

– He believes every return needs at least three dependents, no matter whether you have any children or not.

If your tax professional exhibits any of these behaviors, it’s time to get a new tax professional.

What Part of “Permanent Injunction” Didn’t You Understand?

Sunday, March 6th, 2016

Last September, Gerardo Herrera found himself the target of the IRS and the US Department of Justice. Mr. Herrera owned a tax preparation business, El Lobo Multiservicios Professionales Inc. in Colorado. According to the indictment issued last September, Mr. Herrera and his business invented dependents, claimed personal expenses as business expenses, and added phony deductions. The DOJ press release notes that the IRS audited more than 200 of their returns and found misrepresentations on more than 99 percent of them.

It reads like “normal” return preparer fraud.

Come January, a federal court issued a permanent injunction:

A federal court has permanently barred a Colorado man and his tax preparation business from preparing federal tax returns, the Justice Department announced today. The United States filed a civil complaint against Gerardo Herrera and his business, El Lobo Multiservicios Professionales Inc., contending that they fraudulently reduced their customers’ tax liabilities by reporting extra dependents and claiming bogus deductions. After the defendants failed to respond to the complaint, on Jan. 7, 2016, Judge John L. Kane entered an order permanently banning Herrera from preparing returns.

Again, what you would expect. Mr. Herrera was told to stop preparing returns and to turn over his customer list (he had 45 days to do that).

He didn’t do either. He continued to prepare returns and he didn’t supply his customer list. If a federal court orders you to stop doing something, you don’t get a choice (other than the right to appeal that decision).

The injunction also directed Herrera to provide a list of his customers to the United States, notify his customers of the injunction and file a sworn statement attesting that he had complied within 45 days of the injunction. The United States asked the court to hold Herrera in contempt for his failure to comply with these provisions and alleged that he continued to operate two tax preparation offices and/or assist others in operating the offices. After hearing testimony from two Internal Revenue Service (IRS) witnesses who had visited Herrera’s offices, Judge Kane found Herrera in contempt and ordered that he be held in custody until he purges his contempt by, among other things, notifying all his prior customers of the permanent injunction, providing a list of his customers to the United States, surrendering his Preparer Tax Identification Number (PTIN) and posting a copy of the injunction in his place of business.

Mr. Herrera is being held at ClubFed until he closes his business and complies with the injunction. Mr. Herrera earned one other thing: He’s the first nominee for the 2016 Tax Offender of the Year Award! Congratulations!

Same as Last Year Doesn’t Work

Monday, January 18th, 2016

Robert Flach has a post today where he notes the information that’s needed to prepare a tax return. I don’t have much to add to his excellent list (though I do need to see your W-2Gs, too).

If you’re one of our clients you should have received your Tax Organizer (which asks for all the information Robert asked for) in the web portal and your Engagement Letter and Privacy Policy via email. We will need you to sign and return your Engagement Letter prior to our working on your return.

If you need to file an FBAR (Form 114, Report of Foreign Bank and Financial Accounts) we will need you to complete Form 114a prior to the filing of the FBAR.

Finally, I wanted to emphasize one thing that Robert wrote.

When I say “I only need numbers” I mean specific numbers for deductions you are claiming. “Claim the maximum” or “Whatever I am allowed” or “Same as last year” is not appropriate. The maximum is what you actually paid – and you are allowed what you actually paid! I need you to tell me “$1023.50” or “$20.00 per week for 50 weeks” or “4638 miles”!

There is no such thing as a maximum—tax professionals need to know what you did. You need to provide the data. So when you say, “Do what I did for last year” and I respond “I can’t do that,” please understand.

Monsters Under the Bed

Sunday, October 25th, 2015

Two Florida tax preparers (I hesitate to use the word “professionals” based on what they’re accused of) are facing a lawsuit from the Department of Justice seeking a civil injunction to prevent them from owning a tax preparation firm and preparing returns for others. This lawsuit is derived from other lawsuits against individuals related to LBS Tax Services.

It seems that Christopher Lawrence and Kenneth Aikens, proprietors of “Tax Mon$Ter” and “Tax Pros,” are accused of doing many of the practices that bad preparers use to get bad refunds: false earned income tax credit, incorrect filing status, phony businesses, fake unreimbursed business expenses, and one that we don’t see that often: unconscionable fees. From the DOJ press release:

According to the complaint, Lawrence and Aikens target primarily low-income customers with deceptive and misleading advertisements, prepare and file fraudulent tax returns to fraudulently increase their customers’ refunds and profit through unconscionable, exorbitant and often undisclosed fees—all at the expense of their customers and the U.S. Treasury.

There are two main points to realize from this story. First, if it sounds too good to be true it probably is. If your tax “professional” is promising you a huge refund but something doesn’t sound right, there likely is something wrong. Second, the IRS has methods today to go after bad tax professionals. Suppose I start inventing deductions and credits, adding phony dependents, and otherwise abuse the system, the IRS can come after me. Even unlicensed tax professionals can be gone after–and it appears that’s the case here.

That Was the Year that Was

Sunday, October 18th, 2015

Last November I wrote about “The Horrible, No Good, Very Bad Upcoming Tax Season.” This definitely wasn’t the best tax season but it also wasn’t the worst (but it was close to the bottom). The four issues that I identified as problems were tax extenders, the IRS budget, the Affordable Care Act (aka ObamaCare), and the IRS Property/Capitalization regulations.

Tax extenders were passed late, but there weren’t any surprises. Thus, the impact to the 2015 Tax Season was minimal.

The same can’t be true for the IRS budget cuts. This probably impacted me more than any of the other issues I faced. Calling the IRS was almost a joke. The “Practitioner Priority Service” hold times were so bad that I’d hate to think of what they were for regular numbers. Unfortunately, I see no improvement possible with the IRS budget until the IRS scandal is resolved. That’s not going to happen until we have a new President, so we have probably two more years of misery in dealing with the IRS.

(The Obama Administration promised to be the most transparent in history. Its record is one of obfuscation and deceit, not of being open and honest.)

For the most part ObamaCare did not impact many of my clients. Of course, for 2014 tax returns a client could self-certify they had health insurance. Coming for 2015 returns will be IRS Forms 1095-B and 1095-C. Almost everyone will need to provide tax professionals with a health insurance form.

The property regulations almost had a huge impact. A literal reading of the regulations was that everyone impacted needed to file a Form 3115. The IRS realized that they didn’t have the personnel to handle the incoming tsunami of paperwork and, at the last moment, issued procedures that basically mitigated the impact of the new regulations.

While I’ll post about the upcoming season in another month, it looks like deja vu all over again. Once more, tax extenders haven’t passed, we have another year of impacts of ObamaCare, and the IRS budget constraints will continue. Unfortunately, this year I’m not taking a vacation to New Zealand and Australia in December. In any case, tax professional will likely be grouchy next tax season, too.

It’s October 13th and I’m Still Not Ready to File my Taxes; What Should I Do?

Monday, October 12th, 2015

Somewhere, there’s a procrastinator wondering that exact question. He’s likely thinking, “I don’t have to do anything; I have until October 15th!” That’s not a good answer (with one exception [1]).

First, most tax professionals will not be able to fit you in. I took in one new client appointment this week—and he’s filling a cancellation. Determine your income, gather all your documents, and do your best. Tax forms are available online (the IRS website is actually quite good). Commercial tax software, though flawed [2], is a good choice at this point in time.

If possible, file electronically. If you must mail your tax return, use certified mail, return receipt requested. That means going to a post office or using an automated postal center (there’s one at the supermarket near my house).

Normally it’s better to extend than amend. If you’re a procrastinator, you can’t extend. Thus, if you file your return and you’re still a bit uncertain, consider meeting with a tax professional next week. He or she can review the return and determine if your return needs to be amended.

The clock is about to strike midnight.


[1] I have one client who is on extension who was impacted by the terrible flooding in South Carolina. That client has a lot more to deal with right now than filing taxes. The IRS and the South Carolina Department of Revenue extended the tax deadline for impacted South Carolinians until February 16, 2016.

[2] I disagree with fellow tax professional Robert Flach on his description that all tax software is fatally flawed. For individuals in simple situation it works perfectly. It doesn’t make math mistakes. And it usually allows for seamless electronic filing. I agree with Robert that the ability to look at a return and evaluate what’s on it (does it pass the smell test) is vital but when you’re up against a deadline, you don’t have a choice.