Glenn Barr for Mountain-News.com writes: As the flipping of calendar pages progresses inexorably toward April 15, American taxpayers begin to feel that annual headache—the need to file their state and federal income-tax returns—settling in.
Experts offer a variety of tips on two important areas of concern when it comes time to give Uncle Sam his yearly due. They include advice on how to select an honest, competent and reliable professional preparer and how to reduce the chances of an audit, a process its victims are apt to compare to having a root canal without anesthetic.
“Finding the right tax accountant or preparer can be stressful, especially if you have a more complex tax situation,” said Jamie Zinn, owner of Triple Edge Financial Services in Lake Arrowhead.
KNOW THEIR BACKGROUND
Noting that tax professionals come from a wide variety of backgrounds and will have different attitudes about the U.S. tax system, Zinn says it’s important to understand their background and experience to ensure you’re getting good advice about your particular situation.
Paid preparers are required by law to sign completed returns and put their preparer tax identification number on them, Zinn said.
“Although the tax-return preparer signs the form, you are ultimately responsible for the accuracy of every item on your return, so it is important that you retain all the documentation to support the income and deductions reported,” she added.
Finding the right preparer is easier if certain factors are considered. Zinn recommends being wary of preparers who claim they can obtain larger refunds than other preparers, or who claim taxpayers can deduct everything.
“Do not be afraid to shop around or to change accounts if you are not comfortable,” she advises.
AVOID PERCENTAGE FEES
Preparers who base their fees on a percentage of the refund should also be avoided, Zinn said, and tax pros who you know will be around months or years after you’ve been filed, to answer questions about how they prepared your return, are the most desirable.
Questions to ask prospective tax preparers should include what licenses or designations they have, how long they’ve been in the tax business, what tax issues they specialize in, whether they have the knowledge to handle your particular tax situation, what they charge, whether they outsource any of their work or perform the work themselves, how long it will take to prepare your return, whether they will share your tax information with anyone else, if they will be there to help in case of an audit, are they available during the year to provide help or answer questions and whether they believe you’re paying too much, too little or just the right amount of tax.
“It is important that you find an experienced, competent tax accountant or preparer who specializes in the areas you need help with and someone who believes in helping you to minimize your taxes, not just someone who puts the numbers into the form and sends you on your way,” Zinn said.
AVOIDING AUDITS
When it comes to lessening the chances you’ll be ticketed for an audit, both Zinn and Peter Wesch, an enrolled agent and partner in the accounting firm Smith Marion & Company, which has an office in Lake Arrowhead Village, have helpful tips.
“The chances of being audited are relatively small, especially for run-of-the-mill filers,” Wesch said. “The likelihood is probably one in every four lifetimes.”
Wesch said the Internal Revenue Service is looking for anomalies on tax returns.
When it receives returns, he said, the IRS puts them through a computer system that determines whether claimed deductions fall within normal ranges for a particular kind of filer. Those who fall outside those ranges may be tagged for a closer look.
As examples, he said, someone with an adjusted gross income of $100,000 might be expected to have no more than $10,000 worth of charitable deductions and perhaps up to $20,000 worth of home-mortgage deductions.
BE CONSISTENT
Wesch stressed that consistency in tax returns is key; if, for example, a taxpayer has tithed to his church for several years, a major deduction for religious or charitable purposes won’t seem unusual. If such a deduction is not reflected by prior years’ filings, or if it’s especially large in one year, Wesch recommends making sure you retain your documentation supporting that item.
“The IRS is getting more sophisticated in data mining to find returns outside the norm,” he said. “The higher your income, the more likely your return will be looked at.” Wesch explained that it isn’t worth the IRS’s time to have its staff audit lower-income taxpayers just to get a couple hundred dollars more in revenue.
“Take all the deductions that are legally allowed and proper,” Wesch said. “But there are things that are on the borderline. Preparers with experience will have a good idea of what’s the norm for your type of business.”
Zinn also offered numerous suggestions for reducing the chances of an audit. They include avoiding inconsistencies, such as claiming a large mortgage deduction or large charitable deductions on a small income; not having missing or incorrect information like nonreported 1099 forms or incorrect student loan information; not deducting 100-percent usage of your vehicle, especially when it’s the only one you have for personal use as well; and failing to double check all information for accuracy.
MORE RED FLAGS
Added potential red flags include writing off a loss for a hobby activity (like a business that has lost money for more than three straight years), failing to report a foreign bank account, claiming unqualified rental losses and engaging in currency transactions of $10,000 or more.
One additional tip from experts is that taxpayers begin their filing process as early as possible so they have ample time to discover all the deductions to which they’re entitled.
One final issue Wesch mentioned is the IRS’s expanding role in enforcing the Affordable Care Act, otherwise known as Obamacare.
Though its role in that area will greatly expand for returns for the 2014 tax year, for 2013, taxpayers with adjusted gross incomes above $250,000 will be charged an extra 3.8 percent tax on earnings above that figure, he said.
Connie Bracher, who owns Acorn Bookkeeping & Tax Service in Crestline, had some additional tips for taxpayers who want to keep the IRS at bay.
“If you prepare an honest return you shouldn’t be afraid of an audit,” she said. Additional keys to that confidence include keeping supporting documentation and “having a preparer who knows what they’re doing.
“Never sign a blank tax return,” Bracher said. “A lot of people do that.”
When choosing a tax preparer, she said, “a question almost never asked is what kind of education do you get? We get 50 to 60 hours of continuing education a year.” That added schooling is needed because of continual changes in tax laws, she explained.
The kind of software a preparer uses is also important to know. As a preparer, she said, “you have to be on top of what you’re doing and you have to have good software.” Bracher said she uses Intuit’s ProSeries, a program she called “state of the art.”
Because taxpayers are responsible for every entry on the forms they submit, Bracher recommends to filers, “make sure your return looks sane.” Claiming to be raising 10 children on a low annual income is an example of what could lead straight to an audit, she said.
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