Our Taxing Times

The RAL Question

It is that time of year. Leaves are changing, we no long try to save daylight, it's getting colder and tax preparers start to plan for the next season. That brings up lots of questions: do I increase prices, how can I bring in new clients, why can't Congress leave the tax code alone, do I have enough folders/receipts/paper clips, who has the least expensive paper...you get my drift. Usually, one of my questions is which RAL bank will I use but this year it's do I want to beat the rush and drop them now?

I know that RALs (Refund Anticipation Loans) are controversial. They have been abused by the banks offering them, some preparers and many taxpayers. But they are a key reason for the growth of e-filing and they have helped many taxpayers in a time and money crunch. I have always offered them, either as an employee or owner, since the program went national. But RALs have changed greatly in the last couple years and with the IRS introducing modernized e-file refund times are going to go down for everyone.

Bowing to public outcry about the APR and fees, the banks involved (there are just a handful) have reduced their charges. To keep their profits up, they have mostly dropped the incentives to preparers and tax software companies. Until recently, a preparer received a payment for each RAL or RAC (Refund Anticipation Check, no money is advanced but the fees come out of the refund) that was approved. Sometimes there were extra incentives for a particular volume or if it was a new preparer or for a low default rate. They also payed the software company for development of the bank applications and transmission of the completed loan apps. With the cut in loan rates, the banks have cut fees to the people doing the work. I will spend an extra 15 to 30 minutes on a tax return when there is a RAL/RAC involved making sure the taxpayer qualifies, getting IDs, completing the application. Then there is printing the check, contacting the client, explaining why they weren't approved, and keeping all the paperwork for years. Now, if I want to get paid for my extra time, I have to add a fee in myself. (There are restrictions on how I can add a fee. It can't increase the APR.) Until incentives were dropped, I didin't add a fee and I only add about $12 now. But the idea that the banks want to keep their profit while shafting the ones doing the actual work has left a sour taste in my mouth. They want to shift the "bad guy" from them to someone else.

I don't do a lot of RALs. While I offer them, I don't push them. The client has to ask about the program. But I know if I cut them, I will lose some good clients, good people. Ones who won't wait for a couple of weeks to get their refund. I don't like the idea of them paying lots more than I have been charging them to get their money. Not just extra fees for the RAL but a high tax prep fee too.

I've crunched my numbers and found a replacement for the RAC program. All I am waiting for is to talk to the banks at Drake's update school next week. I doubt that they will give me any reason to keep RALs but it's hard to change a 15+year habit.

Buyer Education VI

A couple more tips to protect you from the unscrupulous preparers out there.

Contingency Fees Are a No-No!

Actually, they aren't always but they are on an original return. Ok, let's look at the real world. You call a new preparer and of course you ask about fees. You probably won't get an exact quote but they should explain how they calculate fees. I charge by the forms required to prepare the return. (I'll add a time charge if I need to do bookkeeping first.) Some preparers just use time. Others based their fee on the level of complexity. But if you are told the fee is based on the refund, thank them and keep looking. This is a contingency based fee and the preparer now has a interest in the outcome of the return. The bigger the refund the bigger the fee.

Joe Taxpayer has his W-4 set to about break even. He usually gets a small refund (under $100). If he uses a  preparer charging a 10% contingency fee, he will pay $10 or less to get his return done. Not too many preparers will settle for that fee for even a W-2 only return. So if the preparer wants to make money, it is in his/her best interest to beef up the refund. Legally or not. Remember, if there is a problem with the return, you and not the preparer will have to pay the IRS. If you can find the preparer when the notice comes.

The restriction against contingency fees is on an original return. Jane Taxpayer's preparer has read about a new ruling that might benefit Jane if a back year is amended. That return, since it is not the original return, may be subject to a contingency fee. If the IRS approves the change and refunds Jane, she will pay her preparer. If the IRS doesn't approve the change, the preparer is not paid.

The idea behind contingency fees is why a taxpayer needs to be careful with all the car lot and pawn shop type businesses offering tax preparation. They have a vested interest in the size of refund and that can make it very tempting to create a few deductions.

Receive But Not Cash.

Some tax practitioners can receive your refund check. But, they have to be able to practice before the IRS. This means an Enrolled Agent, CPA or Attorney. They have to have a signed  Power of Attorney (Form 2848) filed with the proper box checked. But they can't cash the check even with your permission. And an un-enrolled preparer (anyone not specifically mentioned above) can't receive it at all. Do not have your refund sent to anyone but yourself. This is a good way to lose your refund. Besides your refund, this will be the address the IRS and state revenue office will send notices.

Buyer Education V

Just a reminder, this is an intermittent series highlighting what you need to know about  dealing with a tax professional. This is from my vantage point. The IRS has a page of tips for chosing a preparers.

Your W-2's Can't Be Held Hostage...

...but there's not much you can do about it if they are. You've had an interview with a new preparer and for some reason you are not satisfied or you are concerned about the return. You have the right to ask for your original documents back and the preparer can't charge you. Circular 230 mostly covers enrolled preparers (E.A., CPA, attorney) but does set forth a few rules for all preparers and this is one of those rules. If a client asks for his W-2s, 1099s and notes back, I have to give them back to them. I don't have to give them anything I have prepared with out payment but I have to give them their documents back.

The challenge is actually getting your papers back. If the preparer holds tough and refuses to release your documents back, there is no quick way to force them. You may be able to negotiate a lower price but you may be stuck ransoming your W-2 and other info. You can complain to the IRS Office of Professional Responsibility but any action will depend upon other complaints and the IRS workload. And it will take time. 

So, my advice is to take a minute and make a copy of whatever you give to the preparer. If there is a problem and you choose to try another preparer, ask for your papers back. If the preparer refuses, you have a backup.

Tax Season Is Over; CPE Season Begins

Tax season 2009 is over. Not all my extensions made it in so I will be doing a few returns the next month or so. I'll do some number crunching and special backing up this weekend but today is a half day since I have a show opening tonight. And I need a nap.

Monday starts the true quest for CPE. Continuing professional education is part of running a tax business. It starts with the required hours for keeping my Enrolled Agent designation but CPEs are my tax self improvement program. On my desk, are classes for this year's Ethics requirement, a course on Medical Savings Plans and a big class on small business taxes. The last was ordered to brush up on the area but mostly for the NOL coverage. The Ethics course has to be done by the end of the year but the other two I could procrastinate until March. Of course, then I wouldn't have time to do them. So I need to get them done by early January.

I also have 2 more workshops to attend. I picked up 6 hours last month at an IRS symposium. That has become an annual event. The Kansas Tax Institute is 16 hours of good info and butt numbing bad seats. The other event is the Drake Software update. Usually, I go to the dealer school in Wichita but this year I am going to one of the corporate schools in Chicago. This is where I learn about all the improvements in the program and, hopefully, get info about what the RAL banks are doing. I still haven't decided what I'm doing about them. The corporate school is a longer program and I will be taking a couple special workshops in Drake's client write up program. I use the program for payroll but I am not yet using it for bookkeeping.

Lots of education the next couple of months to balance the ordering and planning for January. The it starts all over again.

From W-2 to 1099Misc

I will get back to my education series after the 15th but just a quick reminder based on a phone call I received this morning.

With unemployment so high many people are at the point of taking the best job they can find not the the job they want. It has also forced many employers to make cuts in employee benefits and expenses. To save money, many employers have chosen to change wage jobs to contract labor jobs. Whether this is a legitimate change or not is not the discussion here, what I want to talk briefly about is the responsibility of the new contractors. 

If you do take a contract labor job, your taxes will change. The biggest change is you will not be able to rely on your employer to withhold for you. You will have to put aside money from each paycheck yourself. Making this harder is that you will have to hold back even more than disappeared from your employee check.  Let's say you are currently making $800 a week and at the end of the year break about even on your 1040. From your check, your employer will take Federal and State tax withholding of say $100 and your half of Social Security and Medicare of $49.60 and $11.60. This results in a take home of $638.80. But if you take a contract labor job with the same $800 a week payday, you will get a check for the full $800. So you put aside $161.20 a week and you think your taxes are covered. Nope. You could owe over $3000 at the end of the year. A contract laborer has to pay both sides of the the Medicare and Social Security on their 1040. Unless you add another $61.20 to the money you set aside, you haven't taken care of your "employer contribution". Remember you are now both the employer and employee. So, if you take a contract job, be aware that you may actually be taking a pay cut unless you factor in the added self-employment tax expense. 

Also, simply putting aside your tax money for the end of the year is not a good idea. You need to get in the habit of making estimate payments. First, it is too easy to "borrow" from the tax money and too hard to put it back. Then, at they end of the year, the money isn't there to pay your taxes. The second reason to prepay with estimates is that it could save you some money. There is an Underpayment of Estimate Taxes, Federal and most states, that can come into play if you owe too much at the end of the year. So, prepayment can save you some money. Your tax professional can help you set this up.

There are more tax issues when you make the change from employee to contract labor, and I'll cover them soon. But if you are aware of the self-employment tax issue and estimates, you have the knowledge to not get a nasty surprise at the end of the year.

October 15th Is Not April 15th

This is to all those people who have yet to file their 2008 tax return and are planning to get it done by October 15th; I would get it to your preparer today, tomorrow at the latest. This is not the time to procrastinate to the due date. October 15th is not a delayed April 15th. You might get a nasty surprise.

There are major similarities between the two days. First, they are a tax filing deadline for individual tax returns. They are also the due date for many payroll reports. The differences are in the details.

The first is available time. My (or any preparer's) time. From the first part of January through April 15th, I devote most of my time to taxes. I go home to sleep and clean up. Food is drive through and microwavable stuff at my desk. A trip to the grocery store is grab and go and hope I remember my lists. By October 15th, I have time back. I've cut office hours back and actually leave the building to run errands and take days off. No late appointments since I have rehearsals. I may do some office tasks on the weekend but only if it's for my convenience. Returns are done only during office hours and they compete with CPEs and running a business for time.

The next issue is attitude. Some of it is mine. I'm a little tired of this year's tax returns. I want to get to the new stuff. But, the attitude of the clients I see this late can be very off-putting. Too many are groveling or rude. October 15th has a little more finality to it than April 15th. You can't e-file individual returns after October 15th and there are no more extensions. When late filing clients find that I may not get their return back to them as quickly as they would like, in creeps attitude. I hear all kinds of sob stories as to why they were not in earlier as if that will make the return easier or faster to do. Or they try to impose what they think I should be doing on me. They get rude because I won't change my life around to accommodate them. They've had an extra 6 months to get this done yet they expect me to drop my life to clean up their mess. I'll clean away but on my schedule.

Numbers play a big part on time I allot to the office. The last couple of weeks before April 15th, I will take in about 30 returns. I will also field lots of calls about refunds, vouchers, taxes and payments. I don't have a problem working longer if I am going to be helping clients and making money. But I fail to see why some expect me to give up my life to see if they are going to show up. Today. the only phone call was someone wanting to sell me health insurance and the only tax work was payroll reports. But I bet one of the outstanding extensions will drop by while I am out this afternoon and be surprised I'm not here. (Not as surprised as they may be when I won't promise to have the return done in a couple of days.)

There are extreme circumstances a taxpayer can't control but those clients always seem the most willing to work with you. The bottom line is taxpayers have had plenty of time to get their records together and get in to see their preparer but they didn't. It is unreasonable to expect a preparer to drop everything when they didn't.

Dead Beat Clients

I was getting my car serviced this morning and had an unexpected contact with a client. I run into clients all the time at the grocery store, filling the tank, or social events. So chance meetings are nothing unexpected. The unexpected aspect was more on their part since they have been ignoring my attempts to contact them. They owe me for preparing their return.

I don't e-file too many returns without the payment. It is only good business sense since once the return is gone, I have no leverage to get paid. But occasionally, I file the return on a promise of payment when the refund arrives. And I have been lucky. Most clients don't need a reminder to stop by and pay me. If I do have to send a reminder, it usually only takes one. If there is a problem, all they have to do is call and work with me. I've had clients lose a job and were only able to pay me $5-10 out of their unemployment check. Show me some respect and I'll work with you. Ignore me and you become a dead beat.

I have had a my share of dead beats. Most are clients who tried to do a bank product which allows my fees to come out of the refund. Then their tax refund is taken by the IRS and I am stuck. I can't think of any of these clients who have made it good. They just slink off to another preparer. Which is their only option since I usually fire them when they don't work with me on payment. It's hard not to get paid for your work. In the final letter I send, I ask the client how they would feel if their boss wouldn't pay them for work they had done. I's not a fun feeling.

Today's client was someone I trusted enough to file their return and let them send me a check. Which they didn't. That was in April. In May, I e-mailed. In July, a letter and bill. August was a phone call where I left a message. Three weeks ago, another letter and that was followed by a call/message a week ago. Through all this, I was ignored. Losing the money won't kill me. I don't spend until the check clears. The big issue with dead beats like, especially the ones you trusted, is the implied lack of respect for you and the service you provided. Today's client acknowledged receipt of the last bill/letter when I coldly answered their questions. (No matter how much a client may owe me it doesn't get aired out of the office unless they bring it up first but I won't pretend all is well.) And they proceeded to BS me about not knowing there was a problem and they would get back with me to work something out. But, I am not holding my breath. And I won't go to their Facebook page and write Dead Beat--Thief on their wall. (As tempting as that sounds!)

The real problem with dead beats is they mess it up for others. One of the nice things about owning a business is that sometimes you can really help someone. Someone who is having a bad time and appreciates that you doing a little extra for them. Like filing before they can pay. They become part of your core supporters and recommenders . But after dealing with a dead beat, it's harder to trust and take a risk on someone.