Switched Keys

Tax season in now over for the regular 2014 tax year. Yes, there are still extensions but for many the taxes are paid or the refund has been requested. This was my fourth year working as a volunteer preparing tax returns and I prepared about 180 returns and reviewed about 200 more this year. During that time I have seen many taxpayers confused about how to prepare their own tax returns, such as when they have some new income to report. Many did not know how to handle the ACA or Premium Tax Credit. Then there are others who have been taken advantage of by fast-tax establishments.  One piece of advise that I have for taxpayers after this year is that they should seek the help of someone with adequate training and experience.

Self preparation

I've prepared my personal taxes for 40 years, but the tax opportunities have expanded so much and so quickly that I would not recommend self-preparation if you don't follow the laws closely. For example, in 2009, I didn't know about Making Work Pay and had to amend my return to get it. In other years IRS changed my return to include EITC. In 2012, I amended returns to take advantage of education credits that I had overlooked in previous years. Some other possible missed benefits could include the Savers credit for contributions to an IRA, the  Child Tax Credit or Additional Child Tax Credit. Many people do not understand the process of calculating taxable social security. Although it is not common, it is possible that you missed some itemized deductions such as state Sales Tax, or Sales Tax on a major purchase such as a vehicle. I've seen taxpayers doing it themselves who have missed out on certain benefits in prior years, and only came in this year because of confusion about the ACA.

Personal income tax software does help; but it is only a tool. How well it works depends on the individual circumstances. It sounds simple with the questionnaires, but often the taxpayer does not know how to answer the questions, or doesn't take the time to analyze it, and guesses. Often the questions are designed to be simple and may omit some important considerations that a professional would ask about.

And of course, there are some strategies that taxpayers may not know about to maximize their itemized deductions such as paying their property tax January and December every other year. Others could benefit from using IRA conversions.

Fast-tax chains

Many people seek out the help of big-name tax companies like H&R Block. While a well respected name in tax, many of the preparers only understand some of the basics and are not knowledgeable about important tax laws. Some of them may only have a few weeks of training, and that training may be more about attracting and retaining customers than accurate tax preparation. One of the newer chains, Happy Tax, is addressing this deficiency by employing only CPAs and pricing return preparation at reasonable standardized pricing.

I often see clients because they can't afford H&R Block's high fees. One of the most memorable cases was a return with several tax documents that H&R Block would've charged $500, which took me less than an hour to complete. Unfortunately many of them come in with incorrectly filed returns for prior years. One of the most common errors is filing single when they should be MFS. It's understandable because H&R Block claims to provide the highest refund, and filing single will usually increase the refund (and the amount to repay if audited).

At this time, I do not recommend any of the fast-tax chains, although there are some, including some H&R Block operations, that provide good service. To both, self-preparers and fast-tax clients, my advice is to see someone with adequate tax training. That could be a paid professional or it could be a free tax service.

Free tax services

Although they are not professional, volunteers at the two main free tax programs (VITA and Tax-Aide) in Tyler are trained to handle individual tax returns for most low to middle income taxpayers. They have to pass tests to be certified to prepare returns. Those things that they are not trained to handle are out of scope, and taxpayers will be advised to seek a trained professional. They can also provide advice without preparing a tax return.

The VITA program is operated by non-profit organizations in association with the IRS. The expertise of preparers depends on the level of certification and experience. First year preparers with Basic certification would not be as knowledgeable as experienced Advanced volunteers. Of course, many aspects of tax preparation are out of scope for those with just Basic certification.

Tax-Aide is also operated in association with the IRS, but managed by AARP Foundation. All Tax-Aide volunteers must pass the Advanced exam and each Tax-Aide site is typically staffed with some volunteers that have prior experience. Volunteers are also provided with on-site training each year.

Tax professionals

When I mention tax professionals I usually mean those with credentials, such as an Enrolled Agent (EA) or Certified Public Accountant (CPA). Attorneys can also specialize in tax law, though they are less common. Tax professionals can handle more aspects of tax law, although their expertise will depend on their level of experience. While CPAs can be comparable to EAs in expertise, there are CPAs that know nothing about taxation. Typically, CPAs are required to have 40 hours of continuing education each year but none of it may be in tax law. EAs are required to have 24 hours of continuing education in tax law each year.

Also, unlike other tax practitioners, EAs, CPAs, and tax attorneys can represent clients before the IRS. Since people become EAs in order to provide this representation, and represention requires an astute knowledge of tax law, EAs may be more knowledgeable when it comes to tax preparation. But even though the specialized nature of an EA suggests that they would have more tax knowledge, it is more common for people to seek professional help from a CPA so they may actually have more varied experience.

In the end, it is up to the taxpayer to research the person preparing their return, and if possible know enough about tax law to discern if the preparer is knowledgeable or not. Keep in mind though, if a tax professional says he must research an issue, that doesn't necessarily mean he doesn't have the necessary expertise. Often accurate tax services will require research in those issues that are not common.

Responsibility

The taxpayer is always responsible for their tax return. Preparers never take on that responsibility. They are required to be diligent, but legal action would be required to enforce that and the taxpayer is still responsible to the IRS for their tax return and tax obligations.

Lessons learned

It may seem strange that this advice concerning tax professionals comes at the end of the tax season, but it is often during tax season that we learn what we should or could have done. This is a reminder to remember those problems you may have had this year and to keep better records, do better planning, and get suitable help in filing your tax return.

If it's wrong, amend.

By the way, if your tax return is wrong or you missed something that could benefit you, you can amend your tax return. For many things you can amend for up to three years after the due date. If you missed a credit, amend for a refund. But, if something else is wrong with your return you should amend it to get it right. If the IRS has to correct your return they will charge penalties and interest on any outstanding tax liability.

At VITA and Tax-aide, amending returns cost the same (free) as an original return so we've done a lot of them. But, you'll have to wait until tax season next year to get it done since free tax services are normally only available during filing season. So make plans for that.