Our Taxing Times

Turbo Tax - Use Responsibly

I am sure that Turbo Tax is a good program. Same for Tax Cut (or whatever they are calling it now). BUT...

Garbage in - Garbage out!

Just because you can get the program to do what you want it to does not mean it is right. I am hearing reports that the IRS is looking at self-prepared returns where commercial software has been used. It is catching honest mistakes but they are also finding examples of people manipulating their answers to the software's questions to get the result they want. If you answer a series of questions and the answer is no, chances are you didn't get it wrong. The answer is no.

If you run into problems, grab a IRS Publication 17 and look it up. You can download at the IRS web site.

Shame on You Jackson Hewitt

I understand that Jackson Hewitt is backed into a corner. At least half of their offices can't offer RALs because Santa Barbara Bank & Trust couldn't get their program past the regulators and JH couldn't find an alternative, but they need to be careful on how they spin the story. According to colleagues, clients are saying they are being told that "No one can do RALs," "RALs have been stopped," and "Obama stopped RALs". (RAL=refund anticipation loan)

I don't know what the powers that be at JH are telling their franchisees and staffs to say but this is getting to be a big game of gossip. I am sure that JH wants to spin this to keep as many clients as possible. And I know clients won't get the story perfectly right. But JH needs to make clear that they are the ones who can't do RALs. It's not an industry problem, it's theirs. They are the ones who built their business on the RAL clients. They are going to have a bad year. But if they make it to next year, JH will want these taxpayers back. And they could come back. From experience, I know they are the least loyal clients. Changing preparers each year if someone else can get them their money faster. But how many of the clients you are keeping by your blame game will you keep next year? The ones who find out, after their return is filed, that they could have gotten a RAL from someone else. They will no longer trust you and you will be the preparer of last choice.

Lies bite back. Jackson Hewitt is hurting their clients and competitors by their spin and outright lies. But they are running the risk of hurting the RAL industry by bringing more unwanted attention to the issue. People who will hear the stories and judge the industry by them. JH's behavior may keep them going to next year only to find that their base industry has been closed out from under them.

Jackson Hewitt needs to come up with a simple, truthful version of why some of their offices can't offer RALs. They need to get all their franchisees and staff on that story. It needs to be worded for easy understanding by clients and the people they tell. The gossip out now will hurt them, and much more importantly to me, the independents who offer RALs and are getting caught in JH's fallout.

Warning

I have and will have things to write about the next several weeks. But it's tax season and I'm a slow writer. So I ask your forgiveness in advance for sloppy and grammatically challenged posts. I will be writing between clients and other distractions. The last post saw two returns and a phone call before I could finish it. I'm sure I will miss some great topics to discuss or pick them up after they have stopped being news worthy. Thanks all!

Paper Filing Fee

The Kansas Department of Revenue (KDOR) is proposing to legislators a $25 fee to process returns which are not electronically filed. As most states, Kansas is dealing with some real financial issues and that effects all state departments and KDOR is no exception.

One path to saving money is to increase e-filing of tax returns. Kansas has been very active in e-filing and it is currently possible to e-file most everything the state processes. However there are still holdouts. E-filing mandates went into place last year and there were 215 preparers who didn't e-file at all. They were responsible for filing 25,000 returns. The problem is that the increase in e-filing has slowed down. The preparers not yet filing are a determined lot and the same can be said for the taxpayers who insist on mailing their return. KDOR has worked to make the system as easy as possible. You can file your state returns online through the KDOR web site for free. But they are still a large number of paper returns. So maybe the taxpayers and preparers need a little shock to the pocket book to get their attention. I can't see this going through, at least not at the $25 level. I know I will be using it as leverage with a couple of my holdouts.

The other leverage is the longer processing times for paper returns. In 2008, KDOR first mentioned longer return processing times for paper returns. Last fall they made it clear to practitioner at a tax seminar that this would be happening again with 2009 returns. It's not a punishment for paper filing but a need to cut expenses. Cut are most of the seasonal data entry people.

As exampled above, an option when dealing with revenue cutbacks is to decrease the services you provide. Kansas has cut free forms to preparers, banks, and grocery stores and they only sending forms and basic instructions to those who have been paper filing. KDOR did this years ago when they stopped sending tax form books to taxpayers who used a paid preparer. I'll miss the free envelopes but I wasn't using many.

Just like the last few pounds is the hardest part of a diet, the KDOR is finding the e-file holdouts are going to be harder to convince. But maybe these tactics will get people thinking about making the change to e-file and save a little money in the process.

Thanks to Kay Bell at Don't Mess With Taxes for a great perspective on the issue.

Pet Peeve

Pet Peeve sounds so much better than Rant.

I don't expect a taxpayer to truly understand how each form works. That's why they come to me. And I know that there are return preparers who don't try to explain the return to the client. But I really hate it when a preparer leads the client to believe that deductions are helping them when they aren't.

Case in point. Medical deductions are hard to use. They can be put on the return but for most of my clients they don't add to the itemize deductions total. Medical expenses are first limited by 7.5% of the adjusted gross income on the return (AGI). A single taxpayer with an AGI of $40,000 must pay, out of pocket, $3000 in medical expenses before they start to help her. And only what is over the $3000 can be added to state and local taxes, mortgage interest, charitable contributions and the misc deductions to get the total itemized deductions. Then the itemized deduction total has to be over $5700 before they start to save the taxpayer money. And the tax she saves is the tax on the itemized deductions over $5700 since she was entitled to $5700 just for filing single. A married filing joint return has to make $11,400 in deductions if under 65 years long (older than that, the amount is higher). Bottom line - unless the taxpayers are elderly, I seldom see someone clear the 7.5% floor. But I see new clients all the time who think they have been saving money by digging these expenses up. And worse, too often, they are paying extra for a form that doesn't help them.

Every where you look (or hear) people (many not tax experts) talking about deductions that can save you tax money. It would be nice if they stressed "possibility of saving" or "maybe save" money more but they don't. So taxpayers need to understand that a deduction, even if they qualify to use it, may not help them. Look at your return, ask questions and see what you are being charged and for what.

Domino RAL

I am sure this post will get some people dancing in their seats. But, as you celebrate the RAL problems, please remember that there are good people, taxpayers and preparers, who are getting hurt.

 

I like domino displays. I admire the skill and patience of the people who set them up only to have them knock themselves down in a few seconds. All it takes is a little push on one to start it. Its fall causes the second one’s fall and soon there is no stopping the cascade.

I don’t know what triggered the start of the RAL (Refund Anticipation Loan) domino cascade. I don’t think much can be done to stop it this year. I do know that the RAL industry is in crisis and good people are going to get hurt.

RAL are short term loans based on the refund you expect to receive. They are made after the return has been e-filed and usually approval is within a day –two at the most.. They have been a target of community organizations for years because of the high fees and they seem to target lower income clients. They have also attracted people to the industry who are more interested in the money to be made from fees than preparing a correct return.

Several years ago, the industry began to change. The Department of Defense banned RALs for Military personnel and their spouses. Pressure forced the banks which offered them to reduce the fees they charged. This caused the banks to cut the incentives they paid to the software companies and preparers. Then, just before Christmas, one of the banks (Santa Barbara Bank and Trust – SBBT) which fund RALs, announced that regulators would not approve their RAL program. Preparers scrambled to find a new bank to handle their RALs but there were not a lot of options. SBBT was finally able to sell their RAL division to the relief of their remaining preparer customers. But this was short lived relief when business as usual actually became business with no RALs.  SBBT clients could only offer the two week programs.

The shake up at SBBT affects everyone in the tax industry who offers RALs. The other RAL banks increased their client base but does that mean the same amount of loan money over more taxpayers and a higher decline rate?  How will the increased clients affect customer service and processing times? What about the taxpayers who want the RALs and change preparers? The original office will lose a client and the new office many not have the resources to handle a large client increase. Taxpayers many be waiting longer for appointments and receiving reduced services or increased fees with the new preparer. And it’s not just the independent offices which could be hurt. SBBT provided a major part of Jackson Hewitt’s RAL funding. The last estimate was that 50% of their offices would not be offering RALs.

Electronic filing opened last Friday, and over the weekend a major part of the discussions on my tax forum was about the RALs; who had approvals and how many were declined. Also, what reason is being given for the declines? That was nothing new but this year there seemed to be more urgency about the discussion. There is urgency on the part of the taxpayers too. News reports have been showing up about riots at tax office. Riots caused because taxpayers were not able to get their loan money when it was promised. This is money the taxpayer were counting on receiving. Money, I am sure, many had already spent. And just because there may not be a riot at the door does not mean that there are not angry taxpayers at other offices. Taxpayers who are waiting longer to learn they didn’t receive the loan or that the loan was for less than they expected.

Something needs to be done about the RAL industry. I don’t think much can be done this year. Also, I don’t think the banks involved can be counted on to fix the problems. I expect the IRS or Congress will step in with a patch. Maybe they’ll fix the problem but I doubt it. No matter what is done, there will be small business owners who will be hurt. And there are taxpayers who will get mad because they can’t get their refund when they want it. And that is why this mess has happened. A need was created and fed. It grew without supervision with everyone raking in the money. When supervision was proposed, it was for the wrong reason and wasn’t enacted. Now the system is falling apart one domino at a time.

Free File?

If I remember correctly, it was 10 years ago that the IRS started the Free File Alliance. The idea was to provide lower income taxpayers a way to e-file their return without paying a preparer. As someone who makes a living charging taxpayers to preparer their return, I was not a big fan. Free File Alliance is still going but free filing is popping up all over the place. My bank is offering it as part of their online banking. A internet search brings up countless free or low cost ways to file your return. I provide access to low cost service through my tax software provider.

When you are choosing a free-file source there are a few issues you have to think about. First are the forms you need available to free file? If you have a rental, does that free-file site handle rentals? Next, is the interface one that will help you or confuse you? Some sites use fill-able forms and you fill in the blanks. Think - doing it on paper then transferring it to the scree. Other programs walk you through every step with questions and examples. One option you need to think about is does it allow you to print or save a copy of the return you file? If you ever have a question arise about that return, you will want a copy of what you filed. I see this mistake often. The taxpayer receives a, IRS notice but never printed the return. Before I can help solve the problem, I have to get a transcript of the return from the IRS. It adds time and cost to fixing the problem.

The biggest issue I have with any of the free file sources is the word "free". Is it free? This is what triggered this post. I saw a commercial yesterday for a free file site. It made me wonder were was the advertising money coming from if the return is free. If you chose free file, please be aware you may be asked to pay for something. Some charge to save/print the return. Some will file the federal for free but hit you for a state. Others will push a refund loan or special program and charge for those. It is up to you to understand that you many still pay something for free-file. Make finding out about the fees part of your due diligence before you start your return.

Need Not Apply

I just hired my receptionist for the season. I only need help for 5 or 6 weeks during the busiest part of the season. I hate hiring. It's more than disappointing most all of the people who apply. It is also the fear I will make a mistake. While I have gotten good employees, I have also been stuck with a few "challenges". They make my life harder instead of easier and I can't get rid of them because they are better than nothing, I don't have time to train a new person and it's only for a few weeks.

Sometimes someone jumps out at you and you know this is the right one. But that seldom happens. I actually narrow down the stack of applications by exclusion. Things like their hours don't fit what I need, or they couldn't handle the scheduling test I give. But there is still a stack of possibilities. Since this is a small office, I need someone who can work with me (not the other way around). So I thought I would share some of my personal dis-qualifiers. Maybe this will make someone think and change how they approach an interview. 

• Perfume - don't marinate in it  If it is there after you leave, you are wearing too much.
• Kids - leave them at home. Besides being a distraction, your inability to handle them makes me doubt you can handle my clients. Even if they are an angel while they are in the office, it raises the question of dealing with sick kids, phone calls and other emergencies.
• Glasses - bring them in. When I hand you an application to fill out, don't run out to your car to get them. Please don't tell me that reading the application was a surprise. Be prepared for the interview. This goes for references and job history too. 
• Life Story - I don't want it. I don't need it. No matter how promising you look otherwise, it's a deal breaker. I don't want to hear it every time a client comes in to see me. And, all that talking makes me wonder if you can listen. 
• Bribes - won't work. Assuring me that you will tell all your friends, and you have lots, to come get their return done by me will actually have the opposite effect on me. Even if I thought you could bring in lots of new clients, are they the clients I want and what happens when your job is over?
• Leave - when the interview is over. Don't keep stopping your exit to sell yourself. 10 minutes to cover 20 feet is not impressing me.
• Play cute - I don't believe it. Little girl voice and overly sweet demeanor makes me wonder what you are covering up.
• Phone - ignore it for 10 minutes. I don't want to hear your lunch plans.
• Hounding - don't even think about it. Calling me with more info, to see if I have a question for you, or to see if I have made the decision yet before I told you I would make it, irritates me. And it does not impress me with your ability to take directions.

Job hunting is hard even under the best of circumstances. But are you making it harder for yourself because of your behavior? Actions do speak lounder than words. And an employer has to use every bit of info you give them to make a decision. What are your actions saying about you?

Let the Games Begin

Today officially opens tax season. While I've already prepared a few returns, this is the first day that we can actually e-file the returns. 

The first day we can e-file is my target date for getting the office ready. I'll never have everything completely done but right now, 95% is done. Just a little cleaning and organizing and training to go.

Over the next couple of weeks, I'll post even less than usual even though there is actually more to post about. And I may disappear completely by the end of the month. But by the middle of February, I should be coming back more often and I hope to catch up a little.

Be Nice to Your Tax Preparer

To all the taxpayers who received Social Security, Railroad Retirement or any other group which was scheduled to receive the $250 per taxpayer stimulus, check your records. I know most of you receive your benefits through direct deposit and you didn't hold a check in your hand so please look at your bank statements for the late spring and see if you received a $250 deposit.

A tax preparer's job is hard enough but this year the Making Work Pay Credit is twice as hard as it should be because of the way the administration of the credit was split between the IRS and SS and the RR board. Last year, the stimulus payment was handled through the IRS for everyone. Since they had the records, they were able to provide us with a way to check how much the client's stimulus payment was. This year working taxpayers will get the credit on their tax return to offset the reduction in their Federal withholding. Most retirees received a payment of $250 by check or direct deposit. Neither of those are a problem in itself. The issue are clients who received the $250 and still work. They don't get both payments. The $400 credit must be reduced by the $250 advance payment. This is calculated on Schedule M and carries to the 1040.

Since the administration of the credit was split between agencies, there is no one database to check if a client did receive the $250. My hope, and shared by many colleagues, was that  Social Security would include the info on the SSA-1099 sent to all Social Security recipients. Today I saw one for 2009 and it is not on there. Luckily the client doesn't direct deposit and remembers receiving the check. But I know from experience that many won't remember that they received the payment. This was a lesson learned from last year's stimulus payments. So as you prepare to meet with your tax professional, please check your bank records for April and May and see if you received the payment and how much it was for. They will thank you.