A couple of years ago, I had to face reality and file my first post college tax return.
No longer privy to the substantial discounts major tax preparation companies offer to college students, I hunted for the cheapest way to file my taxes without jeopardizing my refund. An uncle suggested someone who would handle all of my forms for a $50 flat fee. The previous year, I had worked in four states, lived in three and graduated from college, so I knew my tax return wasn’t going to be simple. I hadn’t made too much money between my internships and part time job so I wanted to avoid the nearly $200 fee quoted to me over the phone for my complicated tax return.
The $50 price was right, but I should’ve known something was up right away. After waiting nearly two hours, the preparer ignored my questions, was insulted when I questioned her credentials and got me to sign forms without carefully reading them. My mistake, but she had come recommended.
My uncle later admitted he had some qualms. He was skeptical because she had never fully explained the deductions she was filing on his behalf, but he didn’t know how to check her credentials. He also couldn’t find someone offering such an attractive price. Unfortunately, in this case cheaper wasn’t better.
My uncle visited her office about three weeks after my appointment because she wouldn’t return calls. But her office was locked and someone at a neighboring business told my uncle our preparer had been arrested for allegedly funneling a client’s tax refund to her own account. She also ran a money wiring business on the side, and was allegedly wiring some of those funds into her personal accounts as well. When I heard the news, I immediately called the help line for the Internal Revenue Service. Fortunately, it had received my forms and sent me a copy.
There’s never a shortage of Justice Department news detailing indictments against tax-return preparers who make false claims on tax returns. Just this month the agency pointed to a long list of preparers who fraudulently claimed the home-buyer tax credit on taxpayers’ returns.
So, what do all these scams and frauds mean for the taxpayers involved? It’ll vary depending on the specific situation, but tax penalties and interest are likely — and a major headache is a certainty. To avoid that expensive headache, as I wrote at MarketWatch.com, the key is to vet your tax preparer, and check your return before you sign it. Yes, it’s drudgery, but you’re ultimately responsible in most cases.
While in certain situations a taxpayer may be able to convince the IRS and Justice Department that he wasn’t at fault – that the preparer committed the fraud without the taxpayer’s knowledge – it’s a tough case to make. And even if you’re successful, you’ll owe the back taxes. That’s never a fun surprise.
Unfortunately, it’s not always easy to vet preparers to find a trustworthy pro. When it comes to professional standards, the world of tax preparation is a work in progress. While certified public accountants and enrolled agents are subject to relatively high standards including competency tests and continuing-education requirements — CPAs are governed by state boards of accountancy and EAs by the IRS — there are a slew of people who, every tax season, simply hang out a shingle and get to work crunching the numbers on Forms 1040. And while it’s fairly easy to find out whether a CPA or EA has been censured (more on that below), that’s not the case for paid preparers who don’t have a designation.
You may think you don’t have to worry about the federal estate tax because you’re not “rich.” In fact, some unsuspecting upper middle-class folks are exposed to the tax, which hits at a painful 35% rate.
Although current law provides a generous $5 million federal estate tax exemption for estates of individuals who die in 2011 and 2012, the exemption can be exceeded if you have lots of life insurance coverage, a valuable home, healthy retirement account balances, and some other assets.
What Is Included in Your Taxable Estate?
The value of your estate for estate tax purposes includes all the following assets (minus liabilities): proceeds from life insurance policies; your primary residence and any vacation and/or rental properties; retirement accounts, investment accounts; cars, furniture, collectibles, and all the rest of your stuff. Don’t forget to count any private business ownership interests (such as shares in a family corporation or partnership).
Here’s an example: Stephanie is a divorced single parent. Since she earns a healthy salary, she has a $4 million term life policy to provide for her three teenagers. She also has $800,000 of equity in her home, $1 million in retirement plan accounts, and $500,000 worth of assorted personal assets (cars, clothes, furniture, jewelry, and so forth). Stephanie has no significant debts beyond her home mortgage. Since she has never considered herself to be anything close to “rich” she has never done any estate-tax-avoidance planning.
As part of his broader effort to bring down the deficit and win support from both parties for his budget proposal, President Barack Obama pledged not only to work to rein in entitlements like Medicare and Medicaid, but also, according to The Wall Street Journal, “overhaul the tax code to root out “spending embedded” in it—a reference to tax breaks.”
Meanwhile, Treasury Secretary Timothy Geithner “reiterated an administration call for corporate-tax changes that eliminates loopholes and reduces the overall rate companies pay.”
It’s partly a shot at the corporate tax rate–which on the surface seems to be quite high, but in reality is so full of loopholes that many corporations ultimately pay very little in taxes. US News & World Report blogger Susan Milligan–echoing Tax Guy Bill Bischoff–says lowering the corporate tax rate isn’t really the answer. It’s true that many U.S. companies pay significantly lower effective rates than the official top rate, but many tax experts say it’s still high enough to be a drag on domestic investment.
Still, Closing the loopholes is far more critical, argues Milligan who says, ” Lowering the corporate tax rate would cost jobs. Mind you, the job loss would not be among those sad grunts now pictured in newspapers, signing up for unemployment benefits. No, the new unemployed would be the well-paid tax attorneys who scour the tax code for loopholes. They would be followed in the unemployment line by the lobbyists who bustle around Capitol Hill fighting to keep those loopholes.”
This week, IRS released tax tips about the homebuyers credit, which also happens to be the subject of this week’s TaxWatch column. Just in time, the Justice Department also released their news about the homebuyers credit – a list of indictments issued and lawsuits filed against tax preparers who filed false or fraudulent claims for the homebuyers credits.
Considering the millions of dollars stolen by these people, at a time when the U.S. Treasury is already seriously depleted, it’s a relief to know that criminals are being caught (as detailed in the Tax Blog post about easy money in refundable tax-credit fraud).
Of course, I simply can’t see why these tax professionals engaged in this fraud. There simply isn’t enough profit in it for them to run the risk to their future livelihood.
In a way, I have to envy those preparers who took a short-cut in filing their homebuyers credit claims. Simply by knocking out tax returns and phony documents, you can complete those tax returns in no time at all.
My office filed over 1,000 claims for a national home community developer. We sweated over each and every tax return, meticulously gathering documents from the buyers and the seller, trying to ensure that IRS had enough proof of the purchase and residency. Sometimes, getting proof of prior home ownership, or lack of it, took creativity. Everyone has special or unusual issues.
Friends who were buying homes together are allowed to split the credit any way they choose. So we developed forms to help protect us, the developer and the buyers, in case anyone later changed their mind about the credit split. We dealt with divorce issues, family issues, bankruptcy and even someone who was absent from home– in prison– after buying the house. Each tax return took hours, instead of the hour or so we had anticipated. Reality is complicated.
I’ve been around long enough to see some incredibly dumb ideas come out of Washington, but the decision to stop mailing out tax forms may be the stupidest move of all time. Here’s the story.
To save $10 million a year in printing and mailing costs, the Feds have made it the taxpayers’ problem to figure out how to get their hands on IRS forms and instructions so they can file their legally-required returns. Until now, you received forms and instructions in the mail at the beginning of each year if you filed a paper return the year before. The idea was to make it easy to fill out your return and cough up any taxes you owed. That made sense, because the government needed your tax dollars to cover its expenses. Apparently the powers that be have decided that making things easier for taxpayers is no longer necessary since there’s no longer any relationship between tax collections and government spending.
Granted, only about 8% of returns are self-prepared on paper these days. The rest are prepared by professionals or filed electronically. Still, 11 million taxpayers left out in the cold is a big number. The IRS advises these folks to get their needed forms online at www.irs.gov. But what if you don’t have Internet access? The IRS suggests visiting your friendly local post office or public library. I tried both places, and they didn’t have any forms (much less the sometimes voluminous instructions). Apparently mine was not a unique experience.
The last resort is your friendly local IRS office. I live in a metro area of about 500,000, and we only have one office. It’s all the way across town, and it’s only open Monday through Friday between 8:30 and 4:30 (but closed for lunch between 1PM and 2PM).
Good news, moms. Finally that little bundle of joy will help you save, not spend. The IRS said today that breast pumps and other nursing supplies now qualify as tax-deductible medical expenses. The equipment can even be reimbursed under flexible-spending accounts or health-savings accounts.
The move reverses last year’s ruling that excluded breast pumps and other similar breastfeeding aids from favorable tax treatment.
Here’s what WSJ’s Juggle blog has to say:
“Until now … nursing mothers couldn’t use flexible-spending accounts to pay for breast pumps and other nursing supplies because the IRS said that breastfeeding didn’t have enough health benefits to qualify as medical or preventative care.
Now, though, the IRS says that like obstetric care, nursing supplies are ‘for the purpose of affecting a structure or function of the body of the lactating woman.’ … The new ruling means that families can use pretax funds from their flexible spending accounts and health savings accounts for pumps and other supplies. Medical expenses, meanwhile, are not deductible until they exceed 7.5% of adjusted gross income. Breast pumps typically cost more than $200 and, along with supplies, can run as high as $1,000 in the first year of a baby’s life, Reuters reports.”
The trial of filmmaker Wendy Weiner Runge has all the flair of a Hollywood drama: a tax scandal in the millions of dollars, the silver screen, the toppling of a pyramid of insiders. But the venue—Des Moines, Iowa—is about as far from Tinseltown a film can get.
Runge, charged with first-degree theft among other counts, faces the music this week as her trial unfolds and with it, the details of a scandal that prompted the state to suspend its film-incentive program until 2013. The filmmaker could be on the hook for $1.85 million in transferable tax credits applied to, what the prosecution argues to be, sham production expenses for science-fiction film “The Scientist.” The 45-year-old mother of four faces a maximum penalty of 25 years behind bars.
A number of states have paid billions of dollars in tax incentives to lure an industry formerly locked down by California studios. Governors of states like Michigan, Ohio and Texas—among many others—lobbied hard to encourage film production on their turf. Forty-four states offered movie-production incentives and 28 offered film tax credits in 2009, according to a Tax Foundation report. Last year saw the first dip in state participants over the past decade when four states suspended or terminated their programs completely.
The complex tax code and eleventh-hour changes don’t mean it’s too late to get good advice – but you might have to pay up.
In some ways, filing taxes has gotten a lot easier in recent years: free electronic filing, Turbo Tax, and now, even an iPhone app from the IRS. But here’s a warning before you start that download: Washington is mucking things up.
The eleventh-hour tax bill negotiated by Congress and President Obama includes some 500 changes—no fewer than 160 pages are now devoted to the estate and gift tax. Those last-minute adjustments mean anyone planning to itemize deductions, be it mortgage interest or charitable donations, must wait until mid- to late February to file this year. And these changes come on the heels of the IRS pushing back companies’ deadline for sending out so-called 1099 forms to Feb. 15 a few years ago. That means taxpayers have already had to wait a full two weeks longer to get the details they need for income like dividends, interest and sales of real estate.
The result is as predictable as, well, death and you know what: Everybody, it seems, is running late this year. Taxpayers and preparers are trying to decide whether to complete a return early and risk having to refile, or wait even longer to make sure they have all they need.“Everything is being shoved closer and closer to April 15,” says John Ams, executive vice president of the National Society of Accountants. (Even the IRS was tripped up—the agency won’t be able to start processing returns until mid-February, delaying refunds for those lucky enough to get them.)
For all but the simplest 1040-filers, the new wrinkles could lead to fee increases, particularly for those with preparers who charge by the hour.
New cost basis rules will make tax filing season a little easier for investors next year (when filing 2011 taxes) by shifting some reporting responsibilities to financial firms and away from investors.
But, investors aren’t off the hook. To avoid a huge tax headache at the end of this year, investors will need to be proactive by coordinating with their brokers, deciding earlier how they want to report trades and keeping more precise records.
Starting this year, financial institutions and brokers are required to track their customers’ cost basis — or the price they paid when they purchased shares, including commissions — and report that information to the Internal Revenue Service. Investment companies had to start tracking and reporting stocks and some exchange-trade funds this year but reporting requirements for other investments, such as mutual funds, bonds and options are being phased in during 2012 and 2013.
With many institutions setting default methods for how they want to report cost basis, the onus is on investors to check in early if they want to use a particular method when reporting trades—such as whether the oldest shares should be sold first, if an average cost for all the shares should be used or if specific shares should be sold. The default method for reporting stock trades, for instance, is “first in first out,” where the oldest shares are reported as being sold first. That might be bad if your shares have grown substantially in price since you first purchased them.
The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.