Our Taxing Times

Low Cost Tax Preparation Options

Don’t want or can’t pay a tax pro to do your tax return? You have some options.

There are a stack of commercial programs and online sites to choose from that will help you prepare your income taxes. Most walk you through the process with questions to get the info needed to file your return. And if your income is under $57,000 for 2012 you might be able to use the IRS Free File. The Free File Alliance was started years ago to help lower income taxpayers prepare and file their federal taxes. The IRS has convinced a bunch of tax software companies and online tax service companies to offer free tax preparation and return filing for Federal returns for households under $57,000 in income. You access Free File through the IRS website. The free part of free file actually only applies to the Federal return. You could be charged for any state returns you need completed. Check the fine print.

If you are a tax do-it-yourselfer and want to electronically file your return, the IRS has fillable tax forms. These forms act like a paper form and you fill in the blanks. They will do limited mathematical calculations and can be e-filed when you have the return finished. There are also complete instructions for the program. As for state returns, check on your state’s website for online filing options. Many states, like Kansas, give taxpayers the ability to file their state return online for free.

If the idea of preparing your own taxes causes you to panic but you really can’t afford to pay a preparer, there is volunteer tax help available to you. The IRS certified programs are VITA (Volunteer Income Tax Assistance) and TCE (Tax Counseling for the Elderly).  Vita will help households with less than $51,000 in income and TCE is for taxpayers who are 60 or older. Besides tax preparation, the programs can e-file your returns. There are also specialized services for the military and their family. To find a location near you, the IRS has a search program and more info about the program.

There are a bunch of options available for taxpayers who need some help preparing their tax returns but don’t want to pay a tax pro. Check what options they offer and what hours they are open. One of these programs might work for you.

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Happy EITC Awareness Day!

Who said; “The Earned Income Tax Credit is the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.”?

Today (1/25/13) is Earned Income Credit Awareness Day. So in honor of the program, here is a little information. The Earned Income Tax Credit (EITC) is a refundable credit targeted at low income families. It was enacted in 1975 to offset the social security taxes taxpayers with children paid through withholding. At that time, the credit was 10% of wages up to $4000. But in 1986, the credit was seriously expanded. There have been several more expansions of the credit. Today, EITC is available to taxpayers with and without children and on 2012 returns the maximum credit is $5891. In 2009, the IRS processed 27.4 million tax returns and paid $60.4 billion in claims. 23 states have their own variations of the credit.

EITC is based on earned income. This is moneys from wages and self-employment income. If you charted EITC benefits vs. earned income, it would look like a flat top pyramid. As income increases, the amount of the credit also rises until the top refund amount is reach. Then here is a plateau before the refund begins back down to no credit. Actually, there are 8 charts. Two are for taxpayers without children; one for married and one for unmarried taxpayers. Three more charts are for married taxpayers with one, two or three (or more) children. The final three charts are for unmarried taxpayers with one, two or three (or more) children. Besides having to decide which chart to use, qualified taxpayer also need to look up both their earned income and their Adjusted Gross Income (AGI) on that chart. Their EITC is the lower of the two numbers. One of the disadvantages of EITC is the complexity.

Complexity is a big issue with EITC. Before deciding which chart to use, the taxpayer needs to decide if they qualify to take the credit. That is daunting. As a tax pro, I have to do Due Diligence on potential EITC clients to make sure they qualify. I have to check age, residence, relationship, foreign income, investment income, and potential conflicts with other taxpayers. This has to be documented on Form 8867 and sent in with the tax return. I also have to keep copies on any documentation the taxpayer brings in with them. The new due diligence requirements have forced many tax pro to stop doing returns with EITC.

There is also a real belief that the IRS should not be handling the credit. That it’s a social program and the tax code should be for tax administration. A social service agency would do better at screening EITC beneficiaries than relying on tax pros or taxpayers to do that. The IRS estimates about 25% of the claims it sees are incorrect or fraudulent. On the other hand is concern that it would reduce the number of taxpayers who would take advantage of a social service program out of pride. Let’s face it, for many people “welfare” is a dirty work.

But is the credit worth the problems with it? According to Alice Lieberman, of The University of Kansas School of Social Welfare as quoted in the Topeka Capital Journal.

"The Earned Income Tax Credit is the most effective anti-poverty program in the United States," Lieberman said. "It both encourages and rewards work by allowing low-income workers to recoup money that otherwise would have gone to taxes. And since low-income people are more likely to spend their income than to save it out of necessity, it is also an economic stimulus."

Also from the Capital Journal, a 2005 National Bureau of Economic Research study found the federal program raises employment by making low-wage jobs more attractive.

“(The EITC) successfully meets its explicit goal of encouraging low-income parents to go to work by, in effect, lowering their tax rate and providing a financial bonus for that work effort,” the study found. “It has been especially effective in encouraging single parents, particularly women, to obtain employment.”

As a tax practitioner, I like the EITC (and I know many preparers who don’t). The due diligence is time consuming and it can be difficult to explain why a taxpayer doesn’t qualify or why their credit is less than a prior year. But I’ve seen the benefits. My client base included many hard working people who have low paying jobs. The EITC they receive is used to pay for unexpected expenses and as a cushion right before payday. It keeps them in their homes. I think it’s one of the better things Congress has done. So I don’t mind the extra work if helps reduce fraud and keep the credit for the good people who need it.

The quote that started this post was from Ronald Reagan.

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Farmer (and Fisherman) Relief

With the delay in filing some IRS forms, most notably Form 4562 for depreciation, many tax pros and taxpayers have been concerned about how this will affect qualified farmers and fishermen. These taxpayers have the option to make estimated payment like any self-employed taxpayers. However, they also have the option to file their tax return and pay all of the balance due by March 1^st and avoid the underpayment of estimate tax penalty. But since some forms will not be available before the middle of February at the earliest, the IRS will allow farmers and fisherman to file when the forms become available and not face the penalty.

Because of the delays, farmers and fishermen who had at least 2/3rds of their income from farming and fishing in 2011 or 2012 will have until April 15^th to file their return and pay any balance due. Form 2210-F must be completed and attached to the return (paper or electronic). Besides their name and SSN, the taxpayer only needs to check the waiver box (Part 1, Box A). The rest of the form is left blank.

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Red Forms

Okay, IRS, I’ve worked very hard to get all my clients who should issue 1099’s to do that. Now I want something from you. I want the red forms to go away. Please get your systems set up to accept laser printed 1096s and your copy of 1099s.

Every January, I have a bunch of clients who bring in their 1099s for me to do. Most just need one or two 1099s and the cover 1096. And in preparation, I order blank forms from you in the fall. But I still spend a lot of time and waste a lot of forms to get those silly red forms to print correctly. And it doesn’t help that the forms you send are only 8 inches wide. It seems that if you want the red forms used you could at least make them fit a printer tray for 8.5 in. paper.

So how about it? Start taking laser printed 1099s and 1096s like Social Security does with W-2s. It might save you time too. I know how hard to read some of those forms are now when the taxpayer or preparer doesn’t take the time to adjust the forms properly. I have a bunch in my shredder right now.

Down with Red Forms.

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New Office in Home Rate

Under the guise of tax simplification, the IRS has provided an alternative to the current office in home deduction available to qualified employees and self-employed taxpayers. The Office in Home (OIH) deduction requires the taxpayer to have a dedicated space which is used only for the business. This rule hasn’t changed. You can read all the requirements on the IRS’s Office in Home page.

The new rules announced in Revenue Procedure 2013-13 will allow taxpayers to choose between a flat $5 a square foot deduction, capped at 300 square feet ($1500) and the traditional calculation starting on 2013 returns. Currently, the taxpayer is allowed to take a percentage, based on the ratio of office space to the total home space, of the expenses of maintaining the home. These expenses could include mortgage interest, taxes, insurance, utilities, rent, and repairs. If the home is owned, the taxpayer also takes a depreciation deduction for the space. Any expenses which are also deductible on the Schedule A (Itemized deductions) are pro-rated between the forms. It’s a complicated calculation and a set rate could be a good thing.

But the taxpayer or their tax pro needs to check both ways at least for the first year. It might not be advantages for someone with higher expenses or larger business areas. I could see where the traditional calculation would be better for a day care provider which uses a larger space. I also want to see the actual instructions for calculation the deduction because I have some questions?

First, what happens to the carry forward? Currently the OIH deduction is limited to the business income. It can’t put the business into a loss so once the business is at $0 income/loss any OIH deduction which is left over is carried forward to the next year. Will the new rate be allowed to carry forward?  I hope so but that cuts down on the simplified record keeping of the new rate.

Next, how will day care hours affect the use of the flat rate? In-home day cares not only use the square footage of the home used for business in their OIH calculation but they also modify that percentage based on their hours of operation. It’s not unusual for a day care to use 90% of the home. If they’re open 12 hours a day seven days a week, they will be able to take 45% of their home expenses for OIH. Will the new flat rate also have to be modified?

My other concern is the double dipping for some taxpayers who use the new flat rate. As mentioned earlier, the OIH deduction includes some of the same deductions as on the Schedule A. However, under the current system, the OIH percentage of those deductions is allocated first and the remainder is carried to the Schedule A. But under the flat rate, the taxpayer can use the OIH rate and take all their personal deductions on the Schedule A. Since the flat rate theoretically includes the mortgage interest, home taxes, and casualty losses in the $5 a square foot, the taxpayer would be using more than what they paid for those expenses. It might not be a big problem but it makes it important to check both rates to see which is better for the taxpayer.

The new Office in Home flat rate starts for 2013. That gives the IRS a chance for feedback and to create the actual procedures for implementing the optional method. If you are interested in commenting, the Revenue Procedure 2013-13 notice has all the info you need to do that.

Anthony answers some of my questions in the comments. Thank you Anthony!

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More ITIN Info

Back on November 29^th, I wrote about the new ITIN requirements. The IRS now requires the original supporting document (like passports) to accompany the ITIN application. Because of the hardship to the applicant this could cause, the IRS will allow Certified Acceptance Agents to verify those documents in some cases so that the taxpayer can hold on to them. But CAAs are now required to get forensic document training to help weed out bogus documents. This has raised some questions.

I heard from Gary Booth and Ronald Nieves about the new forensic training. I didn’t have the answers. But Mr. Booth was able to get some clarification from the Tonya White, a tax analyst at the ITIN Policy Office and shared it with me.

“More information will be posted to the website on forensic training at later date.  In the interim, if you use an internet search engine and put in “forensic training”, multiple vendors will be listed. Use the language from the news release to determine what specific documents need to be covered in the training. The training is at your own expense and must be completed by March 31, 2013.  There are various vendors who provide from 5 hours online training and others that provide up to two weeks of classroom training.  You should evaluate the training based on your business needs. You can access the Department of Homeland Security digital web library for information on how to read the Mexican voter's registration card at http://www.hsdl.org/?view&did=29606.”

Another question I was asked was if CAAs had to pass the RTRP exam. I haven’t been able to find anything definitive but the ITIN FAQ’s now state that ACC’s have to be subject to Circular 230 rules. That makes me think they will have to be if they aren't an EA, CPA or attorney.

That’s all I know. As I learn anything more I’ll share.

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CAF Down

The IRS has announced that the Centralized Authorization File (CAF) computers will be down for maintenance from Dec 26^th through Jan 2, 2013. CAF is where the IRS keeps the records of Power of Attorneys (Form 2824) and Tax Information Authorizations (Form 8821).

Because of the shutdown, the IRS will not be adding Forms 2848 and 8821 submitted during that time until they are back on line. But it also means that e-services can’t be used to submit the forms or to get information from the transcript delivery system. Tax pros needing to contact the IRS for a client during this time will need to have a signed copy of the Form 2848 or 8821 to fax to the agent since they will not have access to CAF to verify authorization.

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It's Official - No Refund Chart

A few weeks ago, I wrote that it looked like the IRS would not be publishing a refund chart this year. This chart gave tax pros a tentative date when a client could expect that their refund would be direct deposited or a check mailed.

Well it's official. The IRS has posted this year's Pub 2043 and there is no chart. Pub 2043, IRS Refund Information Guidelines for the Tax Preparation Community, seems more geared to the taxpayer than the tax pro this year. The one page flyer discusses using Where's My Refund, gives taxpayers tips on filing an accurate return, and warns about spending the refund before you actually receive it.

Bottom line message is that last year 90% of all refunds were processed in less than 21 days and the IRS expects that happen this filing season. But that it can take longer if there is a question about the return or certain forms are involved. Where's My Refund will not provide an estimate refund date this year. Once a definitive date has been set, then the IRS will add a date.

Clients are not going to like this at all.

Thanks to Cindy Galford for letting me know the new chart had posted.

Education Credits Form Changes

A couple of weeks ago, I discussed the changes to the EITC checklist (Form 8867). The changes were made in order to fight the fraud in that program. The IRS has also changed Form 8863 for Education Credits in hopes to reduce the fraud in the educational credits especially the American Opportunity Credit (AOC).

The first thing you’ll notice on the new Form 8863  (download) is that the second page has become the first page. Page one is now where the taxpayer calculates the credits to be taken to the 1040 or 1040A. Part I is for the refundable American Opportunity Credit and Part II calculates the non- refundable credits. The second page (Part III) documents the student and school information and the qualified educational expenses. School information, including the EIN and address will have to be listed. This page also has a checklist to make sure that the student does qualify for the credit. A separate page 2 is completed for each student.

I have a concern about the wording of line 23. I can see taxpayers who would qualify for the American Opportunity Credit but read this question as asking if the Hope or AOC had be taken in the last 4 years, checking “Yes” and denying themselves the credit. The question might be better worded, “Has the Hope or AOC been taken for this student 4 times on any taxpayer’s return?”

The changes to Form 8863 aren’t surprising considering the fraud with refundable credits.  But if someone is really trying to rip off the system, they’ll know how to lie on the form. The changes look to remind tax pros and taxpayers of the rules and to provide some info to match to the 1098T’s supplied by the school. This is scary considering how often those forms can be incorrect. Maybe the next step should be to teach the schools how to properly fill out the 1098T?

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Finalized ITIN Rules

Earlier this year, the IRS announced interim rules for issuing ITINs (Individual Taxpayer Identification Numbers). This is the number used on tax return for people who can’t qualify for a Social Security numbers. For example, the spouse and children of a taxpayers who has a work only SSN. The temporary rules made it harder to get an ITIN by requiring that the original documentation or copies certified by the issuing agency be submitted with the application. Until then, the applicant could use notarized copies of the original documents.

This rule has been made permanent with IR-2012-98. However; understanding that being without the original documents while an application is being processed can be an issue, the IRS will be allowing Certified Acceptance Agents (CAA) to certify they have authenticated the documents so that papers such as passports don’t have to be mailed to the IRS. One exception to these rules concerns the documentation for dependent children. These documents will still have to accompany the application. CAAs will now have to be someone who is also covered by Circular 230 (EA, CPA, RTRP…) and they will be required to take formal forensic training to help identify legitimate documents. The IRS will also step up their oversight and compliance activities with CAAs.

Beside submitting ITIN applications directly to the IRS or using a CAA, the IRS is planning on using some Taxpayer Assistance Centers, the US Tax Attaches in several countries, and VITA and Low-Income Taxpayer Clinics which have CAAs to validate supporting documentation. The policy put into place last month for foreign students to be certified through the Student Exchange Visitors Program will continue.

The new program will go into effect January 1, 2013 to meet the high demand of the tax filing season. Documentation changes will not apply to spouses and dependents of US military personal and nonresident aliens who need an ITIN to claim tax treaty benefits.

The biggest change to the program will be that ITINs will now expire after 5 years. The Taxpayer will be able to renew their ITIN before it expires. The IRS is also looking at a way to keep the information on the ITIN holder updated or to deactivate the number as necessary. The IRS sees this program as an ongoing process and they invite taxpayers to submit comments and suggestion by e-mail to ITINprogramoffice@irs.gov.

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