It's Tax Season (Sort of)

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So with the Super Bowl over, and pitchers and catchers reporting next week, these are the signs that tax season is in full swing, right? Wrong; depending on your situation. You still may not be able to file your 2012 tax return and get your refund, or resolve your tax debt.  Based on the last-minute shenanigans in Washington D.C. to avoid falling of the fiscal cliff, the Internal Revenue Service (IRS) is still preparing their systems to accept the remaining tax forms affected by the American Taxpayer Relief Act (ATRA) enacted by Congress on January 2, 2013.

The Internal Revenue Service announced today that taxpayers will be able to start filing two major tax forms next week covering education credits and depreciation. Beginning Sunday, February 10, 2013, the IRS will start processing tax returns that contain Form 4562, Depreciation and Amortization. Then, on Thursday, February 14, 2013, the IRS plans to start processing Form 8863, Education Credits. With these updates, almost all taxpayers may start filing their tax returns for 2012. These forms affected the largest groups of taxpayers who weren’t able to file following the abbreviated January 30, 2013, opening of the 2013 tax season.

However, more updates are still required to accommodate all taxpayers and tax forms. The remaining forms affected by the January 2013 legislation are anticipated to be accepted during the first week of March 2013.  A specific date will be announced later by the IRS. So, don’t delay, if you can help it, to get your taxes completed.

 

Before You Sign Your Tax Return

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Today the IRS released another installment in its “IRS Tax Tips” series, which is available in the Newsroom of the IRS website.  The IRS lists 10 things to keep in mind when selecting a tax preparer.  But perhaps the most important point is something that many may gloss over — the fact that the taxpayer, not the tax preparer, is legally responsible for what is on the return.  Failure to understand this can result in serious tax problems.

The signature on the return is more important than you might think.  The tax return is not considered complete, and will not be accepted, if it is not signed.  The IRS returns tax forms that are not signed or it sends a separate form that, if signed, has the same effect as a signed original form.  If you file electronically, then you also sign electronically by using a five-digit Personal Identification Number (PIN), which has the same force and effect as a signature made with paper and pen.

When you sign your tax return, you are attesting that the information contained in the return is complete and accurate whether you prepare it yourself or not.

If you have someone prepare your return, you are still responsible for the correctness of the return.

~ Form 1040 instructions

How many of us have carefully read the declaration in the signature box at the very bottom of the Form 1040?  This is what you’re promising when you sign:

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.

I can’t imagine many people review every single schedule and every page in any kind of detail, although they should.  It is self-evident that you should never sign a blank tax return (as the IRS points out in its Tax Tip) since you would be unable to truthfully declare that you have examined the return.

If you have a preparer who signs (or EA, CPA, tax attorney), the preparer’s attestation is normally based on what he/she has been given by the taxpayer (or by the IRS), whether it be verbal or documentary information.  The preparer is entitled to rely on that information in preparing the return.  However, as you can see, the preparer’s declaration is actually broader than that — the preparer is obligated to prepare an accurate return based on all information and any knowledge he/she might have.

Tax Accountant vs. Tax Attorney: Choosing a Professional Advisor

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How do you determine if your tax problem requires the skill and knowledge of an attorney, or whether the services of an accountant will suffice?

Both a tax accountant and a tax attorney can handle various tax issues with professional competence. However the skill sets and backgrounds of tax accountants and tax attorneys are different. It is important to consider this when choosing a tax professional to represent you before the Internal Revenue Service (IRS).

A “tax” accountant refers to an accountant whose specific focus is on the area of taxation. There are different types of accountants that can label themselves as a tax accountant. Accountants generally have a bachelor’s degree in accounting. Some accountants choose to pursue a master’s degree in either accounting or business administration. More advanced accountants have been certified by their state board of accountancy and are known as Certified Public Accountants (CPAs). This distinction is important because not all tax accountants are CPAs.

Accountants are numbers driven. Day-to-day, most accountants prepare and analyze accounting records, financial statements, and tax documents. Tax accountants primarily focus on preparing and maintaining the records needed to accurately complete a tax return, and then completing the tax return itself. The use of tax accountant usually ensures that your tax return has been prepared accurately and that you accurately claimed any credits and deductions that were available to you in a given tax period. The use of a tax accountant will also usually ensure that your internal accounting practices are valid and that the information contained therein is complete.

A “tax” attorney before and above all else is an attorney. Attorneys have specific negotiation, research, and advocacy training and experience that allow them to achieve maximum results for their clients. Background wise, attorneys generally have an advanced doctorate degree and have passed intensive moral and competency examinations. Attorneys may become “tax” attorneys through practice and/or education.

Tax law is a specialized and technical field of practice, as the body of tax laws and tax issues are extensive enough to require a dedicated law practice. Tax attorneys can assist taxpayers in various types of tax issues ranging from tax preparation and strategy, to representation of a taxpayer in complex civil and criminal tax disputes. Additionally, the privilege for confidential communications between a tax attorney and their client is broader than the communication privilege applicable to non-attorney tax practitioners. The use of a tax attorney will usually ensure that you achieve the best results with your tax problem and that any related legal issues are properly identified.

Now that you know the basic differences between an accountant and a tax attorney, you may be able to better identify which type of tax professional that you need given your specific circumstances. If still unclear, both usually offer free consultations to determine whether you actually need their services.

Offer in Compromise: Don't File Just Because You Can

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A tax attorney hears all kinds of stories about errors committed by tax preparers or injustices perpetrated by the IRS.  People often ask me (sometimes jokingly) “Can I sue them?”  My answer is usually, “No, you don’t have a cause of action;” or “No, you don’t have any real damages;” or “No, they are protected by the contract that you signed.”  But technically my response should be “Yes, you can, however…”

You can always file a lawsuit.  The question is how far is it going to get you?  If you file a frivilous lawsuit, chances are it won’t get you very far.  If an initial assessment is not done to determine the strength of your case and the likelihood of success, there is a higher likelihood that it will be dismissed.  Depending on the circumstances, filing a frivilious lawsuit could also result in you having to cough up money for sanctions and attorneys fees.

Although I have never seen anybody sanctioned or penalized for filing a frivilous Offer in Compromise (OIC), the same principle applies: you have to take a careful look at the strength of your case before you decide to file.  And I cannot overemphasize the value of having a trained set of eyes — preferably a tax attorney or an experienced CPA — to help you with this important step.  These are just some of the negative consequences of filing an OIC that is ultimately rejected:

  • Loss of $150 filing fee
  • Loss of 20% OIC deposit (applied to outstanding balance)
  • Loss of time involved in preparing and negotiating (typically no less than 6 months, and often closer to 12 months from start to finish)
  •  Lengthening of the Collection Statute Expiration Date / Statute of Limitations on collections (the time period is paused when the offer is filed/”pending” and does not start to run again until 30 days after it is returned or rejected)
  • Penalties and interest continue to accrue during the time your OIC is pending, and must be paid if the offer is not accepted

There are many disreputable tax resolution firms that will “sell you” an Offer in Compromise service without doing their due diligence on the front end.  First, they know you want to settle your case for less than what you owe.  Second, they really only care about closing the deal.  And third, they know that anyone can file an OIC by simply filling out the right forms and attaching the right fees.  When considering who you should hire for tax resolution services, look for somebody who offers a free and thorough consultation before any work is done on your case.  Find somebody with enough integrity to help you determine the best way to resolve your case, rather than just tell you what you want to hear.

So, the question should not be “Can I sue?” or “Can I file and OIC?”  The better question is “If I sue, what is the likelihood of success?” or “If I file an OIC, what is the chance the IRS will accept it?”

"Where’s My Refund?" v. 2.0

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Even with all the shenanigans this year* the IRS decided to upgrade the “Where’s My Refund?” tool that taxpayers often use to track the status of their federal income tax refund and promised that refund processing times will not be adversely affected.  In previous years Where’s My Refund? (“WMR?”) generated an estimated refund receipt date for you based on the fact that 90% of all refunds are processed and delivered within 21 days of the date that you file (assuming you file electronically, which almost everybody does these days).

This year, the IRS claims that “WMR?” will be able to ascertain an “actual personalized refund date.”  Now I’m not sure exactly what this means.  Is it personalized in the sense that it records the date that your return was processed and then adds 21 days, or is the tool more sophisticated than that?

The new version of “WMR?” breaks your refund progress down into three stages (available as soon as 24 hours after you e-file your return):

  1. Return Received
  2. Refund Approved
  3. Refund Sent

There is no information from the IRS about what happens when they encounter problems in the processing of a return.  For instance, if mistakes are found on the return and a refund is not approved, will “WMR?” inform the taxpayer of the hiccup, will it remain stuck on the “Return Received” stage, or will the tool simply stop working?

Here are some “WMR?” tips from the IRS:

  • Don’t try using it before January 30th, even if you’ve already filed.  It won’t work until the 30th.
  • Don’t call.  The IRS claims “WMR?” provides the most complete and up-to-date information about your refund claim and if you call to ask a customer service rep, they will be able to tell you no more than what you already know.  As a tax attorney who is on the phone with the IRS every day, I can certainly vouch for that!
  • Don’t check more than once a day.  Information in the “WMR?” tool is updated overnight and only once every 24 hours, so checking in every couple hours will only slow things down for everyone else.

*It is bold of the IRS to promise more precise refund tracking given the fact that (1) they have spent so much effort integrating the “fiscal cliff” legislation that recently passed and things could still be “buggy;” (2) they have been beefing up security filters that are meant to minimize refund fraud and admit that this will cause some refunds to be delayed; and (3) hundreds of thousands of taxpayers will potentially hire incompetent, unregistered (*Gasp*) return preparers this year due to their return preparer registration program being shot to pieces by a federal judge in D.C.

2012 Tax Changes, Part II

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Here are a couple more changes following up to yesterday’s blog entry:

Earned Income Tax Credit

Changes to the Earned Income Tax Credit (EITC) make the credit more available, and valuable in tax year 2012 than it was in tax year 2011. Credit eligibility is based on income and household size. Households with three or more qualifying children will receive a 2012 tax credit of $5,891 if their Adjusted Gross Income (AGI) is less than $45,060 when filing individually or $50,270 when married filing jointly. The equivalent tax relief in 2011 was $5,751 for individuals with an annual AGI less than $43,998 or $49,078 when married filing jointly.

On the other end of the EITC spectrum, for tax year 2012, households with no qualifying children will receive a $475 tax credit if their AGI is less than $13,980 when filing individually or $19,190 when filing married filing jointly. Similar middle tier credit adjustments are available for taxpayers claiming one or two qualifying children.

Retirement Contributions

For tax year 2012, the ceiling on elective deferrals without the need to pay upfront taxes for 401(k), 403(b), certain 457 accounts, and thrift savings plans increased $500 from $16,500 to $17,000 for tax year 2012. Additionally, the limit on annual additions to contribution plans increased for tax year 2012 from $49,000 to $50,000.

These are just the highlights of some of the changes that you’ll find when working on your tax returns come April. If some of these changes caught you off guard, learn your lesson and prepare a plan now for tax year 2013… due April 2014.

2012 Tax Changes

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I was recently asked what changes are looming for this year’s taxes. Seems like a simple enough question, right?  But the question wasn’t about 2013; they were asking me about tax year 2012 and any changes they should be aware of compared to tax year 2011. Technically, they were asking about last year’s changes that are now a concern given the looming tax day, April 15, 2013.  Here are just a couple:

Personal Exemptions

For tax year 2012, your line 42 exemption (if you file a Form 1040) has increased since tax year 2011. Most taxpayers will receive a $100.00 increase from $3,700 in tax year 2011 to 3,800 in tax year 2012 for their personal exemption amount for each qualifying person.

Standard Deductions

Taxpayers who take the standard deduction, instead of itemizing their deductions, will benefit from tax year 2012 increases from the 2011 standard deduction amounts. The 2012 standard deduction amount is $11,900 for married couples filing a joint return, up $300 from the standard deduction allowed in tax year 2011. The standard deduction for taxpayers filing single or married filing separately is $5,950, up $150 from tax year 2011. The standard deduction for taxpayers filing as head of household for tax year 2012 is $8,700, up $200 from tax year 2011.

Business Use of the Home: New Option for 2013

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Many self-employed taxpayers work from home.  But not all of them can deduct expenses for the “business use of their home.”  The tax worksheet (Form 8829) may be only one page long, but it’s 43 lines of mind-numbing detail (at least for one more year) that you are better off skipping if you see that you don’t meet the threshhold requirements.

In order to qualify for the “business use of the home” deduction, there must be a section (or sections) of your home which you use exclusively and regularly as your principle place of business.  The deduction amount is based on square footage dedicated to this purpose. Therefore, no matter how often you find yourself on your laptop in that 3′ x 3′ area of your mancave occupied by the Lazyboy, if you ocassionally flip on the TV from that same spot, or host superbowl parties or such, you cannot satisfy the “exclusivity” prong of the test.

The good news is the IRS recently announced a new simplified option for “business use of the home” that will apply to 2013 taxes (during the 2014 filing season).  Taxpayers will be able to opt for a straight $5.00 per square food deduction (capped at $1,500 per year) instead of stressing over dreaded Form 8829.  It is believed that more taxapayers will take advantage of the tax relief afforded by this deduction and will save taxpayers something like 1.6 million hours of work and recordkeeping annually.  However, the basic exclusivity requirments explained above will remain in place.

A New Year Resolution

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Here we are again at the dawn of another tax season.  It will begin gradually with the early filers accumulating their income documents in January in hopes of filing and obtaining a refund check sometime during the first half of February.  It will end in a flurry with millions of tax return procrastinators who will file just minutes before midnight on April 15th.

Those who wait are typically those who know they are going to owe.  And some inevitably wait too long.  Once April 15th passes, the rationale is “what’s another day?” — and many taxpayers find themselves letting months slip by and they just never get around to filing.  Of course, this rationale is faulty because penalties and interest accumulate with each passing day, so each day really does matter.

Some have let multiple tax seasons pass them by, and the more delinquencies that pile up, the more difficult it becomes to get back on track with the IRS.  But there is a way back, even if you have no way of paying your full tax debt.  There is a way to get back in the good graces of the government and move on with your life.  Resolve to clean things up this year.  Contact Montgomery & Wetenkamp, tax relief attorneys, for a free consultation.  Call (800) 454-7043.

End of Year Tax Tips – Part 3

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Capital gain tax rates are likely to increase in 2013.  Accepting your taxable gains now, instead of after January 1, 2013, may mean more profit and less taxes.

Capital Gain Tax Rates:

Depending on your tax bracket, some households may be able to seize the opportunity to earn capital gains tax free! However, the question of whether you should liquidate your investments now, instead of in the next year or two, in order to capitalize on lower tax rates, really depends on your short-term needs versus your long-term goals. In regards to investments, taxes should be a secondary consideration, not a primary consideration for investment strategies.

Paying attention to Washington D.C. will be important in these final days of 2012 to ensure that you have the right strategy in place for tax year 2013. These tax tips are very broad and you should consult with a tax attorney, certified public accountant, or other qualified tax professional that is familiar with your individual circumstances before making any tax planning decisions.