Our Taxing Times

99% Refunds

Following links can be interesting.

This morning I received an IRS Quick Alert about the Earned Income Tax Credit (EITC) compliance actions the IRS is starting. Following a link for more info on the program, I found another link to an article about a lady who prepared over 1100 returns in 2009 and 99% of them resulted in refunds. Only 11 returns of 1100 owed money. No wonder she was caught. Please it you're going to cheat, cheat smart. But better yet, don't cheat, especially with Earned Income Credit because the IRS is working hard to catch and stop you.

Seriously, EITC is a good program and can help a lot of good working people but it is also the most abused IRS program (although the 1st Time Home Buyer credit is trying hard to catch up). The IRS estimates that there is an error on 25% (1 in 4) of all EITC claims and this costs the government $10 to $12 billion a year. Not good. Over the last few years, they have been ramping up attention on paid preparer EITC due diligence. (Over 70% of all EITC returns are prepared by paid preparers.) This new program will seek out both new and experienced preparers who's returns showed EITC errors. The idea is educate the preparer on their responsibility and requirements and if the problem continues to take legal actions. IRS contact could be by mail or in a office visit where due diligence records will be reviewed and the preparer's EITC errors are explained. If the problem continues, the IRS will then take stronger action. A preparer could be barred from preparing returns and face civil penalties. Besides having to face finding a new career, the preparer could be paying $100 for each EITC claim not documented by due diligence (that's just the start of the fines).

The IRS is serious about cutting Earned Income Credit fraud and this program will hopefully shut down the EITC mills. But for taxpayers, protect yourself by looking at the rules for EITC and if you have any questions about your return, ask the preparer. If that doesn't clear up your concerns, find a new preparer. Remember, you will be responsible for payback of the bogus refund plus interest and penalties not the preparer.

What Is a Name?

A little more housekeeping. I am slowly dropping the "income" from my business name. What made sense 7 years ago, turned out to be a non-issue. Legally, especially with the IRS, I am still McIntire Income Tax Center. Once tax season is over (the first one in April), I'll change it on my E-FIN and on e-services. This is not a good time to confuse them.

Still Tweeking But Done

In August, I changed the design on this blog and mentioned that I was planning on doing something to my website in the fall. Well, it's fall and the revision is done.

Actually, it was done last week but I didn't announce it since I had a little issue with a color. I wanted to pick up the colors of the blog. A little study of the CSS stylesheet gave me a bunch of yellows to choose. And I chose, over and over. The yellow, think almost crayon yellow, that was on last week's debut looked great standing alone and was workable on my MacBook but was a eyesearing yellow on the PC. The big issue is not the color but the display. Every display will show the same color a little differently. It has to do with the type of display, angle of viewing and lighting. Then there are  differences in browsers and how that handle the colors. Finally, the design comes into play. The yellow used last week was just perfect on a white background but a burgundy background intensified the yellow. So, for now, I'm going with a muted yellow, almost a cream. But who knows what I'll do after tax season.

I simplified the navigation of the website too. Short, one paragraph pages were merged into longer pages. Everything is still there just grouped together.

If you find a problem, please let me know.

McIntire Tax Center

I Couldn't Say This Better.

Thanks to Kelly at Tax Girl for sharing audit tips.

7 Audit Lessons

First Time Homebuyer's Credit On Paper

I don't know much more about this yet but returns to claim the First Time Home Buyer's Credit will need to use a revised Form 5405. A form that can't be e-file. It will have to be mailed. Because of the fraud in this program, the IRS is requesting a copy of the HUD statement to accompany the return. Once Modernized e-file is fully functional, attaching the HUD statement to the return won't be a problem. But right now it is forcing a mail in situation.

IR-2009-108

Wedding Bell Blues

As the Holiday season approaches, I always have clients who's thoughts of gifts, decorations and traditions turn to how to pay for it all. Too many of them, plan their holiday spending on what they expect on their tax refund. Not a good idea under the best of circumstances but dangerous if there have been life changes.

For this post, I want to focus on one change - getting married. A happy event in most taxpayers' lives but it can cause a couple of nasty surprises. The first is the lost of a refund or increase in a balance due. Many credits and deductions are based on the income reported on the return. When two taxpayers get married, their income combines and is now too high for that credit. A single mom who qualifies for the max EIC marries a man earning a good living. Now their income is too high for EIC. And her withholding, while fine before, is not enough to cover her share of the tax. Nor is filing separate returns an option since EIC and some other credits are not allowed on a Married filing Separate return. Problems can range from under withholding to income phaseouts surprises. When two working taxpayers get married, they need to check with their tax preparer to plan for their tax changes. 

There is an easy solution to the other nasty surprise I want to focus on, the solution is the Injured Spouse Allocation. You would be amazed at the number of times a new husband or wife doesn't learn about their spouse's debts until their joint return has been filed. Using the Injured Spouse Allocation, the debt free spouse can get their share of the refund. But it takes weeks to months to get the refund. And it will have to be done every time a joint return is filed and the debt is still on the books. The debt could be from child support, back taxes, student loan default. And some states have their own offset program. In Kansas, refunds can be taken for hospital bill and some utilities. But it is the nasty surprise of losing part of the refund and knowing they weren't warned about a problem before getting married that has caused a couple of heated scenes in my office. 

Like all life changes, getting married should mean a visit to a tax professional for some serious planning.  And it should trigger a quiet talk at home so both partners know what to expect when tax time comes.

Taxes and Education

It's almost Thanksgiving and that has always reminded me of Finals and Christmas break. So let's talk about education and how that can help your taxes. Warning, this is not an in depth treatment of the subject. That could be a book, seriously. This is an overview. There are too many specifics to each program (I will be using a lot of "coulds" and "cans"). See your tax professional with your situation.

The old standby for education is the education deduction on the Schedule A. Part of the misc. deductions, a taxpayer or spouse could deduct the cost of continuing ed that was required to maintain their job level. I see this with teachers and nurses. Not only is the class fee deductible but transportation and books could be included. It is important to note that this is only for classes to maintain a job not for a new job. Continuing education-yes; Master's degree-no.

The other deduction is the Tuition and Fees Deduction. This is for tuition and fees at an eligible education institution (college/trade school). The deduction isn't just for the taxpayer and spouse but any qualified dependent.The deduction reduces income up to $4000. The actual amount depends on the amount paid and the income claimed on the return.

Next come the credits. These are generally better to use since they reduce the tax. They all cover the taxpayer, spouse or dependent attending an eligible institution. But only one credit per person (not per return).

The Hope Credit is for the first two years of college and can be worth up to $1800 a year per qualified individual. A taxpayer could have 2 dependents qualify for the $1800 in one year if they both meet the restrictions. Major catch, while the first 2 years of college usually covers 3 calendar years, the Hope credit can only be used in 2 years by any one person. Then they become eligible for the Lifetime Credit. This is 20% of the qualified expenses up to $10,000 per taxpayer. That means $2000 credit max. But there are fewer restrictions on who qualifies and it is a credit against tax.

For 2009 and 2010, we have the American Opportunity Tax Credit which expands on the Hope Credit. It for the first 4 years of college and the maximum credit is $2500. It also covers course materials like books with tuition and fees. The other change is that the credit can be up to 40% refundable. With the Hope or Lifetime credit, once all the tax has been reduced to $0, the rest of the credit is lost. However with the AOTC, pat of the unused credit could be included in the refund. 

Which education program to use? First, which do you qualify for? This was just a highlight and it's up to a tax preparer (or you if you are doing your own return) to get all the facts and, if necessary, try several scenarios to get the most accurate and best treatment. Don't assume you have the best credit/deduction from the requirements. Try them. With phases outs, sometimes the Tuition and Fees deduction works better than the credits. I've seen education deductions on the Schedule A save more money than the Lifetime Credit. You don't know unless you know all you options and are open to trying them to see if they're better.

e-Collect

New program coming in January at McIntire Tax Center. A little over 6 weeks ago, I blogged about whether I would be offering the RALs for 2009 tax season. I was waiting to make my decision until I heard more details about the e-Collect program that Drake Software was going to offer. After I learned more I made the decision to use e-Collect in 2010 for 2009 returns.

Most people know about Refund Anticipation Loans(RALs) due to the controversy around them. But part of any of the banks' program has been an option that did not loan on the refund but provided a way for the tax preparation fees to come out of the refund. The RAC or RT cost much less and could be set up to be directly deposited in the taxpayer's account or a check was written at my office. For me, this was what kept me offering RALs. Cut the RAL program and I couldn't offer RAC/RT. Nor could I sign up and offer RACs and not RALs. It was part of the agreement with the bank that all options, including those that did not use the bank, had to offered to clients. All or none.

E-Collect is a RAC/RT only program. No money is advanced. My client will get their refund when the IRS releases it. They will have three ways to get their money. I can write them a check, they can get a direct deposit or they can have their refund loaded onto a Visa debit card. The best part is that the fees are much less than any I have seen with a RAL bank program. Last year, a client paid the bank $30.95 for the service. E-Collect's charges depends on how the client wants their money but run from $5 to 15. A much better deal. Clients don't have to worry about saving up the tax preparation fee and I don't have to be tough when clients if they can pay when they get their refund.

Smothered by Spam

First, to the lady that left a message on my answering machine and said she was going to send an e-mail, I have to apologize. I can't find your e-mail in the mess I have received since your call. I will be glad to answer your questions. Please call me again and leave a phone number or just call during business hours. 9 am to 5 pm CST, Monday, Wednesday, Thursday and Friday and 9 to 3:30pm on Tuesday. If I can't answer the phone right at that minute, please leave a message and I'll call back ASAP. Again, I'm sorry.

I have a lot of e-mail accounts. But the real problem comes from my main business account, the account I monitor for Wnfield Community Theatre and the DSL account. While the amount of spam fluctuates, I can count on coming into about 150 messages in the morning. Right now it's higher. Someone is trying to make some Christmas money. 

There has been much written on the cost to business of spam, the damage to computers from viruses and the general inconvenience of the problem. There have been some interesting solutions proposed. There has also been much finger pointing as to who is the blame. It dawned on me today that the real cause of the spam problem is the idiots that respond to the spam. I'm not  talking about the virus spam. Those senders are just nasty people. But would we have spam e-mails (or telemarketers for that matter) if no one was buying their products? I know spam is very cheap but you still have to have equipment and software and keep up on the "industry" just like a real business. Spammers are in it to make money and if no one is buying what they are selling, it is my opinion they will stop.

So, if you want to stop (or seriously decrease) spam, stop buying from them. Don't reward them for their bad behavior. Then, once we have the worse offenders looking for honest work, we can take on those who ignore the unsubscribe requests. And the ones who don't prune their lists. Let's take back our inboxes.

Buyer Education VII

If you've missed the earlier posts, this series is to make taxpayers aware of some preparer issues that don't make most people's lists of how to choose a tax preparer. Basically, they are preparer practices that are deceptive or/and illegal. This post is a little different but still falls into the topic.

Advice From Non-Preparers

I would suggest calling your tax professional if you are tempted to follow tax advice given by your:

• Barber/Hairdresser
• Real Estate Agent
• Car Sales Person
• Home Improvement Guy or Gal
• The Loudmouth at Work
• The Know-it-All Relative
• The Golf Cart Sales Person
• The Fund-raiser
• Anyone who will make money or benefit from you making the tax decision they are suggesting.

I am sure most of these people are good people. Some of them have heard the info they are sharing and are passing it on. The problem is that they may not understand it well enough to share, or didn't get all the restrictions, or they're wrong. Or, they are trying to sell you something and using tax savings/credit to get you interested or push the sale. I don't know how many times I have to tell someone that their house payment is not deductible no matter what the real estate agent said. Now the issue is not just the person delivering the tax advice but the  taxpayer who hears the advice and takes it as truth. That is why you have to check it out with a preparer. I'm going to give you the facts I know plus how it works in the real world.

For example - No, your whole payment is not deductible. It might be possible to deduct the mortgage interest and house taxes. The question is whether it will help you save tax money. That depends on your filing status and your other itemized deductions. Some people it helps, others can't use them. I've never been able to use my mortgage to save money.

We have a lot of special credits and deductions that have very specific qualifications. But those qualifications tend to get missed when a non-preparer is giving advice. I don't want you to disregard their advice (and risk missing a good tax saver), I want you to get a second opinion from someone who makes a living applying tax laws to individual circumstances.