Choose your tax preparer wisely

February 8, 2010

In a recent press release issued by the IRS, a Certified Public Accountant (CPA) was recently suspended from practicing before the IRS for 12 months. The Office of Professional Responsibility found the practitioner had provided false and misleading information in connection with the preparation of some of his client’s returns.

Robert A. Loeser, a CPA from Houston, Texas claimed false business expenses on his client’s returns in an effort to help inflate their tax refunds or to help lower their tax bills. In an elaborate scheme, the clients were forwarding funds from their businesses to two corporations Loeser controlled. The corporations then refunded money to the clients. The scheme made it appear the payments to Loeser’s corporations were normal business expenses, which they were not.

This scenario is just another example of “if it sounds too good to be true, it probably is.” Choosing a tax preparer you can trust is an important decision you must make for your own peace of mind. You need someone honest and trustworthy who has your best interests at heart. If a preparer tells you he or she can get you a larger refund than anyone else can, that should immediately raise a red flag in your mind.

You are ultimately responsible for your tax return as the taxpayer signing the 1040 and that is why it is important to have a knowledgeable tax preparer you trust.

The most important things to remember are to ask questions about their level of experience or ask if they have any credentials. Certified Public Accountants (CPAs) and Enrolled Agents (EAs) are required to take ongoing tax education credits. You might also ask friends or family who they use to prepare their income tax returns.

Check to see how long a preparer has been in their current location. Longevity at a location shows the preparer will be there for you if something should arise on your return and you need their assistance. You want to be comfortable in the knowledge they will be there for you, in the event you should ever need them.

Most importantly, avoid any tax preparer who bases the fee they charge on a percentage of the refund they are getting you. This and the promise of a large refund itself are two things that should raise red flags in your mind.

The IRS does not currently require any licensing or training for tax preparers. This will change next year, when preparers will be required to register with the government, pass a competency test and take continuing course to keep up on changing tax laws.

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Save on your 2009 income taxes – use Publication 17

February 5, 2010

Tax season is here, as you probably already know by the arrival of W-2s or 1099s at your home or office. It is that time of year to gather all of your documents and prepare for filing your state and/or federal returns. While many of you may be dreading this annual event, there have been some recent changes, which might improve your outlook for your tax return this year.

Make sure you take advantage of the new recovery tax breaks made available in the American Recovery and Reinvestment Act of 2009. The IRS recently revised Publication 17, Your Federal Income Tax, which details some of the new tax saving opportunities. All taxpayers should look into: the Making Work Pay credit, the American Opportunity credit for parents and college students, energy credits available to certain homeowners who “went green” last year, the First Time Homebuyer Credit, sales or excise tax deduction for new car buyers and the expanded child tax credit and Earned Income Tax Credit for low and moderate income workers. Although the First Time Homebuyer credit was well publicized, there are other credits and deductions available you might not be aware of.

The IRS recently listed these five facts about Publication 17 and how it will help you prepare your income taxes:

1. The online version of Publication 17 contains electronic links that make finding your answer simple. Both the downloadable PDF and online 2009 Publication 17 have more than 6,000 hyperlinks.

2. Publication 17 features details on recent tax law changes and legislation that can help you save money at tax time. You’ll find lots of helpful information about the American Recovery and Reinvestment Act of 2009, including the Making Work Pay Credit and the First-time Homebuyer Credit.

3. This publication is packed with basic tax-filing information and tips on what income to report and how to report it. Publication 17 also includes information on figuring capital gains and losses, claiming dependents, choosing the standard deduction versus itemizing deductions, and using IRAs to save for retirement.

4. Publication 17 is also available in Spanish.

5. You can get a hard copy of Publication 17 for free. To get a copy, check out IRS Publication 17 at www.irs.gov/publications/p17/index or call 800-TAX-FORM (800-829-3676).

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Obama’s new budget: How does it affect taxes?

February 3, 2010

Many Americans are asking whether their taxes will be impacted by the new budget set forth by the Obama administration. This article by CNN Money goes over the groups and individuals who will see their tax rates go up or down.

NEW YORK (CNNMoney.com) — President Obama, in his proposed 2011 budget, is calling on Congress to make a number of tax changes for individuals.

Some ideas are new. Many others were made last year, but not enacted by Congress. So the estimates of the revenue that may be raised by his proposals may be overly optimistic.

Across the universe of individual and corporate taxes, “what’s most striking is how little new ground [the president's budget] ploughs,” said Clint Stretch, managing principal of tax policy at Deloitte Tax LLC.

Here’s a breakdown of some of Obama’s key proposals for 2011 and beyond that would affect individuals:

High-income households

Let tax cuts expire: The 2001 and 2003 Bush tax cuts are scheduled to expire by 2011. Obama is sticking to his call to let those tax cuts expire for high-income households ($200,000 for individuals; $250,000 for families). The White House estimates close to $700 billion would be raised over 10 years.

This provision would raise the top two individual income tax rates to where they were in 2001, before passage of the Bush tax cuts. The 33% bracket would become 36%. And the 35% bracket would rise to 39.6%.

In addition, the long-term capital gains tax rate would increase to 20%, up from 15% currently.

The provision would also reinstate so-called phaseouts for high-income households, which would essentially reduce their eligibility for a host of personal exemptions.

The House may be amenable to letting the tax cuts expire in 2011 for wealthier Americans. But Stretch said it may be a tougher vote in the Senate, where there may be more of an inclination to wait until 2012 when the economy is expected to be on firmer footing.

Limit itemized deductions: The president proposes to cap at 28% the rate at which high-income households can itemize their deductions. Currently the value of a deduction is equal to the deductible amount multipled by one’s top income tax rate, which can range well above 28%. So deductions will be worth less to a high-income tax filer under the president’s proposal.

Capping itemized deductions is a proposal he made last year and it went nowhere. That’s in part because many in Congress said it would seriously curb charitable giving, even though that is not a foregone conclusion. If the measure gains any traction this year, it’s likely Congress would limit the cap to only certain types of deductions, thereby muting its revenue-raising effect.

The White House estimates that capping the rate on deductions could raise $291 billion over 10 years.

Click here to go to the article for the remaining groups impacted.

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Late tax payment may be deductible

February 1, 2010

This Q&A session by Karin Price Mueller at the Star Ledger analyzes when tax deductions can be made, even for payments on back taxes to the IRS.

Q. In 2009, I discovered that I had underpaid my state income tax that was due in 2008. Upon that discovery, I made the appropriate payment. Can I deduct the payment that I made to the state in 2009 for that 2008 underpayment from my federal income tax for the 2009 tax year?

— SR

A. Maybe the additional deduction will help make up for the penalties and interest you probably owed for the late payment. Yes, you can take the deduction.

All individual taxpayers are on the “cash basis” of accounting, said Gail Rosen, a Martinsville-based certified public accountant. This means that a taxpayer deducts taxes paid in the year that they pay them.

‘‘It does not matter what year it relates to,’’ Rosen said. ‘‘What controls it is the date the check is paid.’’

Rosen said you can only take the deduction on your federal return for the amounts paid for the actual tax bill owed. You can’t deduct any interest or penalties you had to pay.

Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown, explains the “date on the check” issue further. He said, for example, if you pay estimated taxes, your 2009 fourth-quarter estimated state tax payment was due Jan. 15, 2010. Paying on Jan. 15 was exactly on time, but because the payment was made in 2010, you can’t take it as an itemized deduction on your 2009 federal income tax return.

Don’t forget to keep the Alternative Minimum Tax (AMT) in mind, Rosen said. State taxes are an “addback” for AMT, so if you fall into AMT, Rosen said any additional state taxes you pay will not lower your federal tax bill.

‘‘Don’t rule out the deduction. Include it in your calculations to see if it is a benefit,’’ she said.

While you can take the deduction, Kiely said, you may need to make a choice. You can deduct state and local taxes as an itemized deduction, or you can elect to deduct sales taxes paid, but not both.

To learn more about the deductibility of state tax payments on your federal return, read IRS Publication 17 (2009) Your Federal Income Tax, at irs.gov. Also check out the IRS’ Sales Tax Deduction Calculator at (apps.irs.gov/app/stdc).

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JK Harris turns tax representation industry on its ear

January 25, 2010

On Friday, we formally announced we have ceased doing business as usual.

We have made groundbreaking changes to the way our company provides its tax representation services. Our goal of providing superior services to assist taxpayers with back tax debt remains the same. Our new approach however, will improve those services, enhance advocacy on behalf of our clients, and streamline our operations.

With our new sales model, we have begun offering our services in phases, starting with basic tax services. For a reduced fee, we will begin in Phase 1 by addressing any delinquent tax returns, any other simple pending issues and we will create a plan to show the client’s options for tax resolution. The client can then take that prepared plan, the Professional Staff Report (PSR for short) and use it themselves, with another tax professional, or they can choose to move on to Phase 2 with JK Harris.

Phase 2 of JK Harris’ new sales model is the tax resolution part of the contract. In Phase 2, JK Harris represents the client before the IRS for the given tax issues at hand. Clients may be recommended for an Offer in Compromise, Installment Agreement or Currently Not Collectible status in this phase. The JK Harris tax team will then work to resolve your back tax issues. Should it be necessary, JK Harris also offers an Appellate Phase, should the IRS turn a client’s resolution down.

Unlike other tax firms, our consultants will meet with clients in person for the initial contracting stage, again when the Professional Staff Report has been prepared and upon request when needed. Having a dedicated consultant assigned to the client’s case means that the client will now have a partner to meet face-to-face with at all times of the process. Other tax representation firms can only work cases via telephone and electronic communications after the initial meeting.

Contact JK Harris today. Our consultants are available to meet with our clients in 325 locations. Let our tax team get to work on your back tax debt so you can get on with your life.

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IRS Announces Qualified Disaster Treatment for Haiti

January 25, 2010

A new designation of the earthquake in Haiti by the IRS aims to increase charitable contributions to those suffering by adding tax incentives. Below is the press release from the IRS’ website.

Washington — The Internal Revenue Service today issued guidance that designates the earthquake in Haiti in January 2010 as a qualified disaster for federal tax purposes. The guidance allows recipients of qualified disaster relief payments to exclude those payments from income on their tax returns. Also, the guidance allows employer-sponsored private foundations to assist victims in areas affected by the January 2010 earthquake in Haiti without affecting their tax-exempt status.

Charities usually fall into one of two categories — public charities or private foundations. Under the tax law, a private foundation that is employer-sponsored may make qualified disaster relief payments to employees affected by a qualified disaster. These payments generally include amounts to cover necessary personal, family, living or funeral expenses that were not covered by insurance. They also include expenses to repair or rehabilitate personal residences or repair or replace the contents to the extent that they were not covered by insurance. Again, these payments would not be included in the individual recipient’s gross income.

Qualified disasters include Presidentially declared disasters and any other event that the Secretary of the Treasury determines to be catastrophic. The IRS has determined that the earthquake in Haiti that occurred this month is an event of catastrophic nature for purposes of the federal tax law.

The IRS will presume that qualified disaster relief payments made by a private foundation to employees and their family members in areas affected by the earthquake in Haiti to be consistent with the foundation’s charitable purposes.

Click here to go to the press release.

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Extension of First-Time Homebuyer Credit

January 20, 2010

Charles Infinger, Enrolled Agent for JK Harris

A new law went into effect 11/6/2009 extending the first-time homebuyer credit 5 months and expanding the requirements to be eligible for the credit. This is a refundable credit, which means it is treated as a payment of tax.

To qualify for the credit, the buyer must enter into a binding agreement to purchase a home by April 30, 2010. The buyer then has until June 30,2010 to close on the home. The maximum credit for a first-time home buyer (someone who has not owned a home during the 3-year period prior to the purchase) remains at $8,000.

The new law also provides a $6,500 credit for others who do not qualify as a first-time homebuyer. To qualify in this way, the buyer must have owned a home that was used as his/her primary residence for at least 5 consecutive years of the 8-year period prior to the new purchase.

For all qualifying purchases made in 2010, taxpayers have the option to claim the credit on their 2009 or 2010 tax returns. The correct form to use for this credit is IRS Form 5405.

The new law raises the income limits for people who purchase homes after 11/6/2009.No credit is available if the purchase price of the home exceeds $800,000.

For more details on this credit, visit the First-Time Homebuyer Credit page on the IRS website, www.irs.gov.

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Contributions to Relief for Haitian Earthquake Victims

January 20, 2010

This article below by the IRS makes clear exactly what kinds of contributions qualify as “tax deductible”. Major organizations such the Red Cross will fall into the group of companies by which the contribution is deductible.

Many people may wish to contribute to relief funds for the victims of Haiti’s recent earthquake.

Contributions to domestic, tax-exempt, charitable organizations that provide assistance to individuals in foreign lands qualify as tax-deductible contributions for federal income tax purposes, provided that the U.S. organization has full control and discretion over the uses of such funds. Contributions to foreign organizations generally are not deductible. Contributions to benefit specific individuals or families are also not deductible.

Contributions are deductible in the year made. To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions.

IRS Publication 526, Charitable Contributions, provides information on making contributions to charities. Pub. 3833, Disaster Relief: Providing Assistance through Charitable Organizations, explains how the public can use charitable organizations to help victims of disasters

Donors should ensure that their contributions go to qualified charities. Taxpayers who have a specific charity in mind can make sure it’s a qualified charity by doing a search on IRS.gov. Some organizations, such as churches or governments, may be qualified even though they are not listed on IRS.gov.

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6 Red Flags that Lead to an IRS Audit

January 18, 2010

Receiving an IRS audit notice is typically a troubling time for a taxpayer. Largely, this is due to the belief an audit will show you owe the IRS. If you receive an IRS audit notice or you are sent a tax bill from the IRS, you may need to prove that you don’t owe back taxes. Dealing with an audit can mean gathering up the proof and showing the IRS that you were 100% honest on your tax return. As for what triggered the audit, there are certain red flags that can appear on a tax return that makes the IRS take another look. The red flags say, “This person may owe more money than what their return says.”

What are the red flags that trigger an audit?

• Math errors – Math errors happen. Errors are actually the most common mistakes the IRS finds on a tax return. It is true the IRS will correct math mistakes in order to ensure the proper amount is paid or refunded, but math errors can trigger an audit. The good news, however, is that math errors don’t always lead to an audit. Sometimes, it is possible an IRS employee who looked at your return looked at a number wrong. Be sure to double check your numbers if you receive a letter from the IRS that says you owe.

• Dividends and interest don’t match – If the amount of dividends and interest on your tax return do not match the supporting documents, then you can just about count on getting a audit notice. One way to rectify this issue is to get a letter from the bank or mail a copy of the 1099 form that was sent by the payer. Sometimes the IRS may enter the information for the wrong taxpayer and this can cause the amounts to be off.

• Talking too much – There are some taxpayers who do a little bit of bragging about how they pulled a fast one on the IRS. If you are turned into the IRS for cheating on your taxes, the IRS rewards whistleblowers with 15% to 30% of the amount of additional tax that is collected. This is great motivation to someone who hear you bragging about not paying or underpaying on your income taxes.

• Your income is mostly cash – The IRS tends to put small business owners and the self-employed on their hit list. The IRS is looking for the almost $350 billion in uncollected taxes each year. They are looking for unreported and under-reported income and these two groups are typically the source.

• Your deductions – The IRS uses a computer program that compares your deductions to other taxpayers within your income bracket. This system will select tax returns that show a potential to collect more tax. If you fall at or under the average deductions for your bracket, then you do not have to worry about a red flag being raised.

• A crooked preparer – If you have someone prepare your taxes for you, don’t let them promise you a refund before going over all of your paperwork. This is because they are going to blow your deductions out of proportion to create that refund and to possibly even put some money in their own pockets. These individuals cause many red flags to be raised on tax returns.

This article is not meant to scare you. There are plenty of taxpayers who honestly file their tax returns but get flagged for one of these things or for something else. Just remember that the IRS does make mistakes too. If you can provide proof of your deductions, income, dividends and interest, you will be able to successfully navigate your IRS audit.

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Haiti Earthquake Relief – how can you help?

January 15, 2010

Like many Americans, we have been following the story of the earthquake this week in Haiti. Our hearts go out to the survivors and to those who have family in Haiti. Early reports indicate the death toll could be in the tens to hundreds of thousands from some sources although currently, the International Red Cross has estimated the toll to be between 45,000 to 50,000 people.

Rescue and aid has started to trickle into the country, but with the ports damaged and the airport limited, the process will be slow and arduous. While some charitable organizations are already working inside of Haiti, others are still working on getting there. The cost of rescue, aid and support operations will be enormous.

Our decision in 2009 to hold quarterly blood drives for the American Red Cross has made all of us more aware of the needs of the Red Cross, even beyond blood donation. It is at times like this, our employees know it is one worthy organization they can contribute to since it helps out those who are facing disaster.

If you are looking to make a contribution to help in the recovery and rescue operations, the Network for Good offers a list of qualified 501(c)3 charities providing earthquake relief to Haiti. Remember, when you donate to a 501(c)3 charity, your deduction will be tax deductible on your 2010 federal tax return.

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