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Help Me Prepare My Taxes

Nothing leads to more gnashing of teeth than the thought of preparing your own taxes. Fortunately, there are people out there that do it for a living.

tax, taxes, irs, cpa, prepare, preparation, enrolled agent, attorneys, tax return

Nothing leads to more gnashing of teeth than the thought of preparing your own taxes. Fortunately, there are people out there that do it for a living.

Here Are My Receipts

If the thought of preparing your own taxes makes you queasy, don’t worry. Preparing your taxes is a job that can be shipped out to others. These individuals, known loosely as tax preparers, prepare tax returns year around. Here’s a breakdown of the different types of preparers.

Basic preparers are the least trained, but the cheapest to hire. They tend to be part time workers who are individually employed our work at large out fits like the one with the letters H and R in its name. If you have a simple tax situation, like basic W2 wages and no homeownership, this can be a good choice.

Enrolled agents are a step up from basic preparers. These individuals are licensed by the IRS and must take continuing education courses to maintain their license. That being said, they are not formally educated in the field of finance or tax. Enrolled agents are typically more competent than basic preparers, but much less so than a CPA. If you have a tax situation requiring a basic 1040 filing with one or two schedules, a good enrolled agent should be able to take care of it. If you are looking for more sophisticated tax planning to cut your tax bill, a CPA is probably your best choice.

A CPA [Certified Public Accountant] is a highly trained and licensed individual. Passing the boards to become a CPA is extremely difficult. Once a person becomes a CPA, they also are required to pursue up to 40 hours of continuing education. The downside of using a CPA, of course, is the higher competency translates to higher costs. Still, you get what you pay for, so a CPA may be the answer if you are doing well financially and are looking for guidance on tax planning.

Tax attorneys are a beast unto themselves. If you’re bringing in the big bucks, tax attorneys can save you a bundle with sophisticated plans. Tax attorneys are also the people to see if the IRS decides to have a go at you. While CPAs can handle the tax issues raised by the IRS, CPAs tend to know next to nothing about evidentiary law. A good tax attorney will be able to throttle the IRS on legal issues.

So, who should you use to prepare your taxes? It really depends on what you are looking for and your finances. Generally, the more complex your finances, the more competency you should look for. If you have the money, go with a CPA. A good one should be able to save you far more than their fee.

 

How To Audit-Proof Your Tax Return Forever: A Recent Close Encounter Of The IRS-Kind

Congress has passed legislation that is supposed to result in a more "sensitive" Internal Revenue Service. You know, not such a lean, mean, tax-collecting machine.

Hmmm . . . . What do you think?

A few months ago, one of my clients (let's call him Mr. Jones) got one of those IRS "love letters" requesting more information about his return, and the IRS wanted to meet with Mr. Jones in person to discuss the situation.

Mr. Jones (a local small business owner) was requi...

tax, deductions, audit, IRS

Congress has passed legislation that is supposed to result in a more "sensitive" Internal Revenue Service. You know, not such a lean, mean, tax-collecting machine.

Hmmm . . . . What do you think?

A few months ago, one of my clients (let's call him Mr. Jones) got one of those IRS "love letters" requesting more information about his return, and the IRS wanted to meet with Mr. Jones in person to discuss the situation.

Mr. Jones (a local small business owner) was required to show up at the local IRS office with all his records. The IRS was questioning the legitimacy of several business deductions -- and so the IRS was doing what it is allowed by law to do -- demand that the taxpayer prove that those deductions were valid.

Turns out that Mr. Jones lost the audit and ended up owing the IRS a significant amount of money -- the additional tax, plus penalty and interest for late payment of that tax. Why did Mr. Jones' lose the audit? Mr. Jones made two "classic" taxpayer mistakes:

MISTAKE #1: "NO RECEIPT, NO DEDUCTION"

Mr. Jones lost several deductions simply because he didn't have the proper documentation to prove the deductions.

What do I mean by "documentation"?

Well, if the IRS requires you to substantiate a deduction on your tax return, you must be able to provide written proof that the deduction really happened. The easiest way to prove a deduction is to hang on to:

a) The receipt or invoice, and

b) Proof of payment, which can be a canceled check, cash receipt, or credit card statement.

Mr. Jones reported numerous deductions for which he simply didn't have the documentation. No receipts, no canceled checks, no nothing. Turns out that Mr. Jones was one of those "cash guys". Maybe you know what kind of guy I'm talking about -- he never wrote a check in his life, just carried a wad of cash around in his pocket. He paid for everything with cash, and never kept any of his receipts.

Every year he'd sit down with his wife and "remember" how much he spent on different things. No way to prove any of this, of course. He just had a "feel" for how much cash he had spent, and he had run his business for so many years that he just "knew" how much it cost to purchase certain things.

Well, this is the kind of taxpayer that the IRS loves! It really is true -- if you can't prove that you paid for something (with receipts, invoices, canceled checks, etc.), then you run the risk of losing that deduction in the event of an audit.

One of the most common questions I am asked by clients is this: "I know I paid for something, but I don't have a receipt. Should I still report the deduction."

My response is usually this: "You only need a receipt if you get audited."

At first, people don't know if I am joking or not. Well, I do make that comment with my tongue planted firmly in cheek, but there really is a lot of truth to it. If you don't have the documentation to prove a deduction, you can still report the deduction (if you want), because you only have to prove the deduction if you get audited.

But if you do get audited, knowing that there are undocumented deductions on the return, be prepared to lose the deduction. Fair enough?

And here's the other major mistake that Mr. Jones made:

MISTAKE #2: BOGUS DEDUCTIONS

It turns out that Mr. Jones wasn't completely honest with me about some of his deductions. He reported deductions that simply were not real deductions. Here's one example: Mr. Jones owned several rental houses. These rental houses, of course, required maintenance and repair work. Many times Mr. Jones would do the work himself rather than pay someone else to do the work.

Well, Mr. Jones would estimate what he would have had to pay someone else to do the work that he did himself, and then he would report that amount as a deduction, even though he didn't actually pay anybody to do the work.

In other words, Mr. Jones deducted the value of his time -- which is non-deductible.

This is an important point -- you can never legitimately deduct the value of your time for work you did. You have to actually pay someone else to do the labor.

If you ever get a letter from the IRS demanding additional information, you'll have nothing to worry about if you do exactly the opposite of what Mr. Jones did. If you can properly document your deductions and assuming you have no bogus information, you'll pass the audit with flying colors.

 

Taxpayer Advocate – Customer Service at the IRS

Every business has a department that deals with complaints from customers. At the IRS, this department is known as the taxpayer advocate office.

tax, taxes, irs, taxpayer advocate, customer service, tax complaints, customer service

Every business has a department that deals with complaints from customers. At the IRS, this department is known as the taxpayer advocate office.

Advocating for You

The purpose of the taxpayer advocate office is to provide taxpayers with a friendly source to handle customer service issues. The office is run independent of the IRS and has offices at every IRS center in the nation. The taxpayer advocate has a stated goal of resolving your problem with the IRS in seven short days. It doesn’t always happen, but it is a nice goal.

The taxpayer advocate has a surprising amount of power. The advocate agents can rifle through the IRS computers at will, which makes them great at locating filings the IRS claims never occurred. The advocate can also stop collection efforts by the IRS and even release tax liens on your bank account or property. Basically, the advocate office is the place to go when you think you are getting a raw deal from the IRS.

The taxpayer advocate agents do not take any old case. In general, you have to show the IRS is unresponsive to your problem or causing you a major hardship. For instance, if your correspondence to the IRS is not being responded to, the advocate can crack the whip on your behalf. If the IRS puts a lien on your bank account, but you’re in the hospital, the advocated can release it. The advocate, however, does not give tax advice or fight audits for you.

If you wish to get the taxpayer advocate involved in your IRS situation, you should write the office in your area. Just search for taxpayer advocate online to get the location. Your letter should include a concise description of the problem, copies of your supporting documents, copies of what the IRS has sent you and a telephone number where you can be reached. In an emergency situation, you can call the taxpayer advocate by contacting the local IRS office. This should only be done in an emergency.

The IRS is undoubtedly a dysfunctional government agency. The taxpayer advocate can help you get things straightened out when dealing with the IRS.

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