Archive for the ‘Tax Preparation’ Category

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.

Fake Businesses, Phony Dependents: What Could Go Wrong?

Sunday, May 17th, 2015

I’ve seen reports of Bozo tax preparers inventing deductions and dependents. This is the first time I’ve heard of a tax preparer inventing a business from scratch on a tax return. The results were good…for a while.

Ramona Johnson was the manager of Tax Office One in Fort Worth, Texas; her daughter-in-law, Nekia Everson, was a tax preparer. From 2008 through 2011 the business earned in $1.9 million in fees, so it was producing a good amount of revenue. And they were probably getting good refunds for their clients. After all, they did the “normal” things for Bozo tax preparers; phony dependents and itemized deductions for personal expenses were the norm (so that taxpayers would qualify for the Earned Income Credit). But then:

On some returns, Johnson and Everson would completely fabricate a Schedule C business, including income and expense items. For some taxpayers, Johnson would create a false and fraudulent Schedule C reflecting the taxpayers had a profit from a nonexistent business. This false profit, together with claimed dependents (both fraudulent and actual), would be used to claim the taxpayer was entitled to an earned income tax credit.

Of course, while they had gross receipts of $1.9 million, somehow the gross receipts didn’t make it onto the personal tax returns. Ms. Johnson neglected to include tax preparation income on her 2009 and 2010 returns:

In addition, the government presented evidence that for calendar years 2009 and 2010, Johnson filed tax returns in which she reported total income of $2,850 and $16,906, respectively, when she well knew that the income amount was understated in that it did not include income she received for her work preparing tax returns.

Ms. Johnson and Ms. Everson will have plenty of time to think about whether preparing accurate tax returns would have been a better strategy. Ms. Johnson will be at ClubFed for 170 months (over 14 years); Ms. Everson will be there for 95 months (just under 8 years).

For taxpayers the usual rules apply: If it sounds too good to be true, it probably is.

There Is No Tax Fairy (Yet Again)

Sunday, April 27th, 2014

Joe Kristan has the story of two CPAs who told clients that there is a wonderful Tax Fairy, that mythical creature who turns income into deductions or credits through alchemy and magic. Unfortunately, the Tax Fairy doesn’t exist, and clients who used these CPAs had total tax adjustments (audit changes) of over $3.5 million. This particular scheme revolved around Section 419 (“Voluntary Employee Beneficiary Association” plans). The Tax Fairy worked…until the IRS audited the results.

As usual, if it sounds too good to be true, it probably is.

Bozo Tax Tip #10: Email Your Social Security Number

Sunday, March 23rd, 2014

It’s time for our annual rundown of Bozo Tax Tips, strategies that you really, really, really shouldn’t try. But somewhere, somehow, someone will try these. Don’t say I didn’t warn you!

We’re starting a week early because I want to highlight something that I think contributes to the huge issue of identity theft. We use a web portal for secure loading and unloading of documents and secure communications to our clients. As I tell my clients, email is fast but it’s not secure. It’s fine to email your tax professional things that are not confidential. That said, social security numbers and most income information is quite confidential. Don’t send those through email unless you want to be an identity theft victim or want others to know how much money you make!

If I send an email to my partner in Maryland, it might go in a straight line to him. It also might go via Anaheim, Azusa, and Cucamonga. At any one of these stops it could be intercepted and looked at by someone else. Would you post your social security number on a billboard in your community? If you wouldn’t, and I assume none of you would, why would you ever email anything with your social security number?

A friend told me, “Well, I’m not emailing my social, I’m just attaching my W-2 to the email.” An attachment is just as likely to be read as an email. Just say no to emailing your social security number.

If you’re not Internet savvy, hand the documents to your tax professional or use the postal service, FedEx, or UPS to deliver the documents, or fax the documents. (If you fax, make sure your tax professional has a secure fax machine.) If you like using the Internet to submit your tax documents, make sure your tax professional offers you a secure means to do so. It might be called a web portal, a file transfer service, or perhaps something else. The name isn’t as important as the concept.

Unfortunately, the IRS’s ability to handle identity theft is, according to the National Taxpayer Advocate, poor. So don’t add to the problem–communicate in a secure fashion to your tax professional.