Why You Might Need A Tax Accountant

One of my favorite tax bloggers is William Perez, writer for About.com. He has a very detailed and comprehensive blog with links to some great information. Being in the tax resolution business, I found the following information from one of his blogs that I wanted to share with you. There are also some links to his blog that could provide with additional information. Enjoy!

You should take some time to focus on exactly what you need your tax accountant to do. Here are some common situations:

Preparing your own taxes is time-consuming, stressful, or confusing.
You want to make sure your tax returns are accurate.
Your tax situation is pretty complex, and you need specialized advice and tips.
You would like to pay as little taxes as possible, and need detailed planning and advice.
You are facing a tax problem, such as filing back taxes, paying off a tax debt, or fighting an IRS audit.
You run a business, invest in the stock market, own rental property, or live outside the United States.

You should find an experienced tax accountant who specializes in the areas you need help with.

Here are my tips for finding the right professional who has the specialized tax expertise you need:

Referrals are your best bet. Ask everyone you can think of: family, friends, business owners, financial advisors and attorneys. It will help to ask someone who has a similar tax situation to yours.

Be wary of an accountant who promises you big refunds or that says you can deduct everything.

You, not the accountant, are ultimately responsible for the information on your tax return.

Do not be afraid to shop around or to change accountants if you are not comfortable.

Retail tax franchises such as H&R Block, Jackson Hewitt, and Liberty Tax Service offer competent tax service for individuals who need to file relatively straight-forward tax returns. Some tax preparers will be more experienced than others, and you can sometimes find CPAs and Enrolled Agents working in these offices. Prices are often determined by how many tax forms need to be filled out. Here's a tip: ask if you can meet with a CPA, enrolled agent, or senior tax preparer. You'll pay the same, but you'll get to speak with a seasoned professional.

Local, independent tax firms often specialize in the tax needs of individuals and small businesses in their neighborhood. Again, some independent tax accountants will be more experienced than others. Ask if the firm has the expertise to handle your taxes.

Enrolled Agents (EAs) are tax professionals who have passed a rigorous test and background check administered by the IRS. Enrolled agents often specialize and are best for complex tax situations.

Certified Public Accountants (CPAs) are accountants who have passed the rigorous CPA Exam and are licensed by the state they work in. CPAs will specialize in a specific area, such as audits, tax, or business consulting. CPAs are best at complex accounting work, and not all CPAs handle tax issues.

Tax attorneys are lawyers who have chosen to specialize in tax law. Often, tax attorneys will have a master of laws degree in taxation (LL.M.) in addition to the required juris doctor (J.D.) degree. Attorneys are best at complex legal matters, such as preparing estate tax returns or taking your case before the US Tax Court. For more information, see When Do You Need a Tax Attorney?

The tax industry is constantly changing and tax professionals are subject to various federal and state regulations.

Here are some questions you can ask to help ensure you find an experienced, trustworthy tax accountant:

What licenses or designations do you have?
How long have you been in the tax business?
What tax issues do you specialize in?
Do you have the knowledge and experience to handle my tax situation?
What are your fees?
Do you outsource any of your work? Do you perform the work personally? If not, what is the review process? Who signs the returns?
How long, approximately, will it take to finish my taxes?
What's your privacy policy? Will you share my tax information with any third-parties?
Do you believe I'm paying too much, too little, or just the right amount of tax? Tax accountants come from a wide variety of backgrounds, and have different attitudes about the US tax system.

Your goal is that you should find an experienced, competent tax account who specializes in the areas you need help with, and someone who believes in helping you to minimize your taxes.
After your interview, you'll want to perform a quick background check. Contact your state's board of accountacy to check the status of a CPA's license, or to find out if any disciplinary action taken against the CPA. For enrolled agents, you can ask the IRS Office of Professional Responsibility if an EA has been censured, disbarred or subjected to other disciplinary action.

Finalizing Your Return

Finalizing Your Tax Return

What if You Owe. It is very important to file your tax return by April 15th, or get an automatic extension of time to file. Why? The penalty for failing to file a tax return is 5% per month – per month, not per year! – for every month that you have not filed your taxes. The maximum penalty is 25% of the taxes you owe.

By contrast, the penalty for failing to pay is half of one percent (0.5%) per month of the amount of taxes you owe. The IRS will also charge you interest on the amount of tax you owe.

Owing additional tax at the end of the year isn't fun. But here's how to get a handle on the situation.

File your taxes, or get an extension.

Pay as much as you can by April 15th.

Consider paying your taxes by credit card, or setting up a payment schedule where taxes are automatically withdrawn from your checking account.

If you will not be able to pay off your balance in a few months, ask the IRS for an installment agreement by calling their toll-free number at 800-829-1040. An installment agreement is a monthly payment plan.

To avoid having to owe the IRS next year, you should increase your income tax withholding. Fill out a new Form W-4. Use the worksheet on the Form W-4 to calculate a precise withholding amount.

Third Party Designee. If you want someone else to be able to discuss your tax return with the IRS, fill out the Third Party Designee section of your tax return.

This is helpful if you want your tax preparer to be able to talk to the IRS about any questions or concerns the IRS might have about your tax return. You can also use this area to designate a family member, caregiver, or other trusted person to deal with the IRS on your behalf.

Your 3rd Party Designation will expire one year from the due date of your tax return.

Signing. You are required to sign your tax return. By signing the return, you are declaring under penalty of perjury that your tax return is accurate. You must not cross out, put a line through, or white out the perjury statement just above the signature line. If you do so, the IRS will consider your tax return "frivolous" and assess a $500 civil penalty.

You are required to date your tax return. The date must be the day you actually signed the tax return.

Giving the IRS your occupation and telephone number is optional, but highly suggested.

Paid Preparer's Use Only. If you have paid a tax professional to prepare your return, the preparer must fill out this section of the tax return. He or she must sign and date the return, must write down their Social Security Number or Preparer's Tax ID Number, and provide other information about the tax firm. Do not let your preparer leave this area blank.

If someone is helping you to prepare your tax return, such as a friend, relative, or volunteer, they do not need to fill in this information if they are not being paid to help you.

Assembling Your Return. Staple one copy of each of your W-2 statements to the front of your tax return. If you have other schedules and statements to file, sort them from lowest to highest using their Attachment Sequence Number in the upper right-hand corner of the form. Staple everything together.

Mailing Your ReturnMail your tax return to the right IRS Service Center.

IRS Resources
Addresses for IRS Service Centers

How to Prepare Your Tax Return for Mailing

Pay Your Taxes on the Web

More Tax Filing Resources
File an Extension

IRS Payment Plan

Tax Debt Strategies

Does the IRS have a "Blind-Eye" for Federal Employees?

The Senate Finance Committee found in April that more than 450,000 federal employees and retirees owe back federal taxes (totaling about $3 billion), including almost 5 percent of the employees and retirees of the U. S. Tax Court. [U. S. Senate Committee on Finance (press release), 4-25-07].

Tax Advocate groups and Tax Protestors are having a field day with this issue. With the IRS cracking down on middle class American's tax debt, it appears to me that there is a double standard with the IRS.

Spreadsheets obtained by Washington, D.C., radio station WTOP under the Freedom of Information Act show that hundreds of thousands of government employees failed to file a tax return for the 2005 tax year. No federal agency was exempt, though "tax compliance" varied from one agency to another.

Seventy-one employees in the Executive Office of the President, which includes the White House, owe $664,527 in taxes for 2005. Approximately 20 of those employees have entered into an IRS payment plans, bringing the EOP balance down to $455,881 owed by 50 employees.

"In the past, IRS officials have been quick to compare the federal workers' rate of compliance with the general public's. But this year, the IRS is not able to track the compliance rate for the general public." - WTOP

Documents proved that one-third of the employees, or 149,500, entered into payment plans with the IRS. The United States Postal Service was the highest level of noncompliance, and the Treasury Department had the lowest level.

The IRS enters into a contract with new employees that make it a requirement to keep their 1040 filings and payments current or it is automatic grounds for discharge. If the IRS does not enforce the provisions of their own employment contracts, how can they expect and pressure taxpayers to enter into payment arrangements. Instead, they issue an IRS Levy, Garnishment and even attach personal property?

As a veteran Tax Advisor/Preparer, I have seen how the IRS deals with delinquent filers/payers.....smells like double standards and a "blind-eye" to me!

S. Raines

Senior Tax Preparer/Advisor

Effectur, Inc. (www.effectur.com)

Avoiding the 1099 Cancelled Debt Trapp

The rate of debt charge-off and mortgage forgiveness has increased dramatically in 2007. If a federal government agency, financial institution, or credit union cancels or forgives a debt you owe of $ 600 or more, you will receive a Form 1099-C, Cancellation of Debt. A debt includes any indebtedness for which you are liable or which attaches to property you hold. The IRS mandates that you must claim this amount as income on your taxes because you never paid it back- thus making it income. However if you "settle" this debt as "paid in full" (i.e., credit cards payoffs) with the creditor make sure you ask that they agree to the settled in full arrangement and not send the remainder as a loss to the IRS. If the creditor willingly accepts "less than" as "full payment" then make sure they agree not to report remainder. The creditor can refuse but usually does not.

If any interest is forgiven and included in the amount of canceled debt in box 2, the amount of interest will also be shown in box 3. Whether or not you must include the interest portion of the canceled debt in your income depends on whether the interest would be deductible if you paid it.

Certain student loans contain a provision that all or part of the debt incurred to attend the qualified educational institution will be canceled if you work for a certain period of time in certain professions for any of a broad class of employers. You do not have income if your student loan is canceled after you agreed to this provision and then performed the services required.

An example of excluded debt which is not considered as canceled debt in your gross income includes anydebt is canceled in a bankruptcy case under title 11 of the U.S. Code. See Publication 908, Bankruptcy Tax Guide or if you are deemed insolvent. However, you cannot exclude any amount of canceled debt that is more than the amount by which you are insolvent.

Credit card industry facts and personal debt statistics (2006-2007):

Market share ranked by major card type: 1. Visa - 54 percent; 2. MasterCard – 29 percent; 3. American Express – 13 percent; 4. Discover Card – 4 percent (Source: Cardweb)

Did you know………..

• The first widely accepted plastic charge card was issued in 1958 by American Express.
• The first general use credit card that allowed balances to be paid over time was the BankAmericard (which later changed its name to Visa in 1977), issued in 1959 (Source: PBS Frontline; American Express, Visa USA)
  
• The average interest rate across all existing credit card accounts was 13.46 percent as of May 2007 (Source: Federal Reserve)
  
• There were 984 million bank-issued Visa and MasterCard credit card and debit card accounts in the U.S in 2006 (Source: Visa USA, MasterCard International)

Now let’s look at another example of a cancellation of debt, the dreaded 1099-A (Acquisition or Abandonment of Secured Property). Let’s say the bank foreclosed on your home in 2007. The resulting debt-forgiveness income was not exempt because you were not “insolvent or bankrupt”, then you must report the forgiveness as taxable income on your 2007 Form 1040. As a result you have a balance due on your 2007 Form 1040.

In reading the various tax blog discussions on the subject of home foreclosures and resulting debt forgiveness, tax law professor, Jim Maule of MAULED AGAIN provides an excellent description of the situation in his post “Greed, Stupidity. Poor Judgment and Taxes”; “The recent downturn in the housing market, a predictable and predicted outcome of the rampant speculation in housing fueled by speculators and gamblers bored with the stock market and looking for something more exciting, more profitable, or more instantaneous, has created serious financial problems for homeowners who overreached when purchasing or investing in residential real estate. Those problems include not only loss of the home through foreclosure but higher federal and state income tax liabilities because the foreclosure can generate cancellation of indebtedness income.”In simpler terms - families who wanted to buy a home that they could not afford found lenders willing to give them a mortgage with a minimal down payment, a low interest rate, and small monthly payments for an initial limited period (i.e. Adjustable Rate Mortgage). When this initial limited period passed and it was time to refinance the mortgage housing prices had dropped – so that the principal balance on the loan was more than the market value of the home – and interest rates had gone up. The overextended families could not afford the new monthly payments and the lenders had to foreclose on the properties.In many situations the borrowers and lenders reached agreements so that portions of the mortgage debt were “forgiven” by the lenders. This debt forgiveness can result in taxable income to the borrower. Here’s a very simplified example. You borrow $20,000 and default on the loan after paying back $5,000. If the lender is unable to collect the remaining debt from you and writes off the loan, there is a cancellation of debt of $15,000, which generally is taxable income to you.The proposed Mortgage Cancellation Tax Relief Act of 2007 would amend the tax code to forgive debt cancellations on primary residences and is currently before the House Ways and Means Committee, the primary tax legislation body of Congress. The bill would permanently exclude from tax liability any mortgage debt on a principal residence that is forgiven following a foreclosure or renegotiation with lenders – providing homeowners affected by the nationwide sub-prime mortgage crisis with $2 billion in tax relief.

Jim Maule has wisely pointed out that “The bottom line is that the proposed tax relief doesn’t prevent the foreclosure, doesn’t put the people back into their homes, and doesn’t do much to help them straighten out the mess that their lives have or will become because of the misguided decision to bite off more financial responsibilities than their means would permit them to chew.”Relief already exists for most of the lower-income taxpayers. Debt cancellation on foreclosure is not taxable to the extent that you are insolvent. That is, to the extent that your liabilities (the money you owe) exceeds the value of your assets (the value of what you own). For tax purposes you are considered insolvent if after reducing your total original liabilities by the amount of debt cancelled your total outstanding debts still exceed the value of your assets. .
You claim this relief on IRS Form 982(Reduction of Tax Attributes Due to Discharge of Indebtedness). All you have to do is check the box at Line 1(b) in Part I and indicate the amount of debt forgiveness that is exempt from federal income tax on Line 2. You attach the Form 982 to your Form 1040 for the year in which the debt has been cancelled. Although most Americans seem to be avoiding the credit card trap, they are not dodging the adjustable mortgage traps; there are still plenty of people on the financial edge.Consider these statistics:

• More than a third -- 36% -- of those who owe more than $10,000 on their cards have household incomes under $50,000, according to the VIP Forum analysis.
• 13% who owe that much have household incomes under $30,000. The percentage of disposable income used to pay debts is still near record highs.
• The median value of total outstanding debt owed by households rose 9.6% between 1998 and 2001.
• Bankruptcies set another record in 2003, with 1.6 million personal filings, the American Bankruptcy Institutereports.

All of that is more than enough evidence to suggest that a large number of people are overdosing on debt. An excellent example of relief from the stress of such financial burdens is to contact InCharge Debt Solutions (http://www.incharge.org), a nonprofit organization who is devoted to personal financial health. They provide professional credit counseling, education and resources to help those burdened with too much debt regain financial health without a loan or bankruptcy.

If you are concerned about the tax implications of a 1099-A or 1099-C, you may also be interested in speaking with IRS Tax Resolution firms such as Effectur, Inc. (www.effectur.com). Firms like these generally offer free telephone tax consultations.

Educate yourself and get the facts before you sign for that high interest credit card or adjustable rate mortgage loan. If you bite off more than you can chew or default, Uncle Sam will be waiting just around the corner to get his fair share.

SHARON RAINES

SR. TAX ADVISOR/PREPARER