Mayan Doomsday Has Nothing on Tax Season

You thought the Mayan Doomsday was coming*, but this year is going to be one of unprecedented frustration for taxpayers.  A slew of regulatory and political factors are going to create a perfect storm over the next two years.  Of course, we have the economy and strained family budgets from years of unemployment, cut hours and underemployment (not enough hours, cuts in pay).  So a lot of people qualify for the Earned Income Credit and various other credits resulting in big refunds.  The bump in cash is taking on added meaning for many.  Adding to this, the ill-advised drop in Social Security and Medicare taxes (the long term solvency is questionable at best, so we will reduce revenue) will create a smaller paycheck in 2013.

*BTW, a friend from Central America pointed out to me that the Mayan’s are amused at the rest of us…the notation relied on as the end of time basically means “end of calendar”, or chisel out a new one.

Then I get to explain to you all the delays in actually getting your refund.  The first part that you may have spotted in the headlines is the delay in the IRS starting to process returns.  That date typically is around January 15^th.  This year, it was scheduled for January 22^nd but is now going to be January 30^th.  Now, if you have your W2 and other documents.  Fireside will then hold your return until it can be processed.  A further caveat, is that a long list of forms may delay your ability to file even further.  There was some talk of delaying the deadline to file because of all of this but that was before the new year and I haven’t seen anything further on that.

Then you also have to face something that has gotten little media attention at all.  That is the IRS fraud and identity theft programs.  There has always been a hefty fraud rate, especially with the earned income credit.  There has been an explosion in identity theft.  This is estimated to be in the neighborhood of 4-5 billion a year.  With the explosion of online, do-it yourself sites, fraudsters don’t even have to show up to a preparer and risk being exposed anymore.  They can go online and do it.  There have also been fake websites set up that lure you in to doing your return through their site, often for “free”.  They then submit your return through a legitimate e-filing site with the slight adjustment of the refund going to THEIR bank account.  Rather than shut down or hinder these sites, the IRS has decided the solution is to further delay your refund to protect you from this.  Annually, the IRS publishes a Refund Cycle Chart where I can tell you if I submit your return by a certain date, you will get your refund on a certain date, usually 1-2 weeks by direct deposit.  Now it is no guarantee but it will usually be there by 26 days.

This is following the IRS and banking regulators virtually banning rapid refunds to protect the poor.  Not that I ever said it was a good deal but when it was legal to offer, I offered the lowest rates and on checks from a local bank so you could cash them for free.  As a matter of fact, my office at the time was in the same mall next to the bank.  But those are gone now.  Again, the government protecting you.

Those reasons for each problem are valid in themselves but there is an unstated reason.  It is very basic and obvious once it is pointed out.  Our government runs an annual deficit over a trillion dollars.  It has been downgraded as a credit risk.  As any seasoned preparer knows, the people who are owed a refund, especially large ones, come in as soon as they have their documents.  Think if you are the IRS.  You now have to write all of those checks.  Now, revenue comes in year round through a system of withholding and requirements for estimated payments.  But there are a substantial number of people that owe and owe big every year.  Those folks do not come in until April.  See the problem?  You have the surge of refunds to pay out but have to wait to get the surge in payouts.  Couple that with Republicans trying to get actual spending cuts to bring spending back in line with receipts using the debt ceiling and you have a problem.  For that reason, if there is an extension of the FILING deadline, don’t expect a delay in the PAYMENT deadline which are typically both April 15.

Finally, the IRS is regulating tax preparers.  It used to be that if you were over the age of 18, had a high school diploma and no felonies involving financial dishonesty, you could prepare taxes.  As a matter of fact, nobody was really checking so even those were not really required.  Now, it is required that a preparer have a PTIN (Preparer Tax Identification Number) which must be renewed annually with background checks and continuing education.  They are also tracking problems on those preparer’s returns and literally walking into the offices to inspect.  Local preparers in Stark County have been suspended and fined tens of thousands of dollars.  In addition, if you are not a licensed attorney or CPA, you have to take a competency exam to be a Registered Tax Return Preparer (RTRP).  Had enough alphabet soup yet?  In addition, preparers are REQUIRED to provide e-filing.  This is another regulatory process that I won’t get into, but it doesn’t bother me because I have always done it anyway. 

I have already passed the competency exam.  You will find a sudden dearth of preparer’s next year since there are 350,000 non-attorney/CPA preparers in the US and the last I heard less than 10,000 had passed the test.  Next season (starting January 2014), all preparers must have taken the test.

Finally, another nightmare awaits in 2014.  That will be the first year that the Obamacare health insurance provisions will be enforced through the income tax returns.  I will put out more on that later.

Tuition, Education Credits and the 1098T Trap

Great idea, credits and deductions for that huge tuition bill your paying for your kid or for yourself. It is a little confusing what with the Hope Credit becoming the American Opportunity Credit, the Lifetime Learning Credit and the Tuition and Fees Deduction. Which can you take and which can get you the most benefit (ie money). Many other questions abound with these education tax benefits and a trained professional can help you. But on top of these confusing rules, would you believe the educational institution that you are paying all that money to is taking form intended to give you the basic information you need and not bothering to fill it out accurately?

The 1098T, Tuition Statement. Now the concept of what you are able to claim for education expenses, generally speaking, are allowable tuition and fees at an eligible institution minus scholarships, grants and refunded tuition (for classes withdrawn). Not hard for the institution endeavoring to teach you physics and quantum mechanics, right?

Let’s look at the form, which can be found in pdf form at this link:
http://www.irs.gov/pub/irs-pdf/f1098t_11.pdf

OK, box 1 is “Payments received for qualified tuition and related expenses”. Almost none of the colleges choose to use this box, for that would make it too easy. Even those that do are surprising likely to not get it right. Well, if they put an accurate figure in this box, you should be able to simply subtract Box 5 “Scholarships and Grants” (which is the only figure that usually proves accurate) from Box 1 and use that to figure your credits and deductions.

But no, they must, for some reason, use Box 2, “Amounts billed for qualified tuition and related expenses”. This means nothing, literally. Just because you were billed does not mean you paid it. What is completely inexcuseable is when institutions regularly under report this figure. One student at a local private college gave me a 1098T reflected $873 in Box 2 and $4,500 in Box 5 for scholarships. Logging onto her account, we verified that the scholarships were accurate and yet was billed for and paid nearly $15,000 in tuition, including with the scholarships. She had well more than what was needed to claim the full American Opportunity Credit. Wow, 15 grand and you don’t even get an accurate receipt!

One poor gentleman had three kids and a wife going to college. Enough expenses to cause anyone to consider jumping off a bridge. Instead, for some strange reason this gentleman decided instead to do his own taxes using Turbo Tax. Using the “easy question and answer” method, he filled out his forms and got his refund. Great! Except one summer day, he got a letter from the IRS demanding he repay about $11,000. The IRS claimed that there was no proof that the amounts shown in Box 2 had ever been paid.

At that point he decided to come see me. After using “enhanced interrogation techniques” we got everybody’s username and passwords to log on to all of the college accounts involved and after almost 15 pages of account summary pages, we determined that the 1098T’s were more dangerous than good. After thoroughly documenting what he was able to claim, I found that in believing the 1098T’s my client had claimed about $1,700 too much. Much better than $11k but had the forms been accurate my client would never have had to suffer that problem. After a few weeks of angst, the IRS accepted my figures. We were not talking only one institution screwing up the forms, all five of the colleges messed them up (one went to summer classes at another school).

Lessons learned: I know I sound like I am trashing the competition but I recommend using a professional to deal with the credits. Of course, for any professional, garbage in garbage out. We need the forms and information to do a return properly. I suggest you bring in the 1098Ts so that the trained professional can shred them (OK, review them and put them in the file). Also, and most importantly, bring the username, password and website of each college institution. I would describe to you what to look for in the accounts, but the pitfalls in reading these things are many. After you leave your tax professional’s office, you will likely discover your 1098T was inaccurate. You might want to call the financial aid office or drop a note in the envelope with your next check to let them know what you think of the 1098T Trap.

Mileage rate increased to 55.5 cents per mile for 2nd half of 2011

Because of recent increases in gas rates, the amount you can deduct for business use of your car per mile will increase from 51 cents per mile, which it was from January 1, 2011 through June 30, to 55.5 cents per mile starting July 1, 2011 through the end of the year. This is why it is important to keep a daily mileage log on your driving for business use. This is a relatively simple habit to get into and it makes your paperwork at tax time so much easier.

How do I keep a mileage log?

For a mileage log, simply put a notebook in your vehicle. Keep columns for date, odometer reading to start the day and end the day of business driving. Keep a total mileage column also which you can use to add it all up at the end of the year. This also allows for when the IRS allows different amounts for different times of the year. It is nice for keeping track of the total mileage on the car which the IRS also wants to know.

What mileage counts?

The easiest way I can explain it is any mileage that you are driving for your business that is not reimbursed or driven in a company provided vehicle. However, remember that commuting is NOT deductible mileage. If you live in Canton and drive to Akron, that is commuting and not deductible. If you then drive from Akron to the Youngstown office every day and back, this mileage IS deductible. Another common example is someone who is a visiting nurse. A wise nurse will, if possible schedule her 2 nearest visits (if she doesn't report to an office first and at the end of the day) first and last for the day. This is because the drive from her home to the first location is considered commuting mileage while the driving to all of the stops during the day are business miles. Then when she makes her last visit and drives home, that mileage is commuting and not deductible.

What about insurance and repairs, can't I claim those?

Yes, in certain circumstances you can claim insurance and repairs INSTEAD of mileage. Most preparers and taxpayers that have done the math have generally found that it is easier to prove and they generally get more deduction by claiming mileage. Assuming even $4 per gallon, your per mile cost for gas is 16 cents. Taking this out of the equation, that leaves 39.5 cents per mile to cover insurance and repairs. For every 1,000 miles, this leaves $395 of deduction to compare against all of the other costs such as repairs, tires and insurance. Assuming $600 for insurance, repairs of $2,000 and $500 for a new set of tires EVERY year, this comes to $3,100 of what most people could claim. This would come to 7,800 miles to cover those expenses. While there are years that you may make out on that, you are not permitted to switch back and forth on the methods of deducting your vehicle. If your vehicle requires that much cost every year, you should think about a different vehicle.

By the way, mileage for business use is different than mileage for charity which is 14 cents a mile and mileage for medical treatment or moving which is going up to 23.5 cents per mile starting July 1st from 19 cents per mile.

Where did the rapid refunds go, long time passing…

Where did the rapid refunds go, long time passing…

H&R Block Press Release dated December 24, 2010:
H&R Block says HSBC Terminates RAL Funding Pact. As a result of a regulatory directive by the Office of the Comptroller of the Currency (“OCC”), HSBC has given notice to H&R Block that it is immediately terminating the parties’ long-term contract under which HSBC provided all of H&R Block’s refund anticipation loans (“RALs”) and some of its refund anticipation checks (“RACs”). As a result, HSBC will no longer provide RALs or RACs to H&R Block clients.

Yes, rapid refunds are becoming a thing of the past. The Christmas Eve massacre cut off one of the big three at the last moment. But this is simply the latest blow in a year long campaign by the Obama administration through various agencies and a host of state attorneys general.


The biggest single blow came this off-season when the IRS announced it would not be providing the debt code indicator with its acknowledgements. The debt wachacallit, what is that? In the past, rapid refunds are actually bank loans that a tax customer paying a tax preparer would receive within 24 hours of filing a return. The loan would then be repaid when the IRS direct deposits the refund to the bank in 8 to 15 days. The tax preparer would do the return, get it signed by the taxpayer, then send it electronically to the IRS with a code sent to the bank. The IRS would then do an initial electronic evaluation of the return and send an acknowledgement that the return was accepted. Part of this acknowledgement was the debt code indicator. What this told the bank was whether a claim (ie, child support, student loans, unpaid taxes, etc) was filed against the tax refund of the taxpayer. This was obviously important information to the bank since it told the bank if this taxpayer was actually getting their refund. If not, 95% of the taxpayers applying for these loans can’t pay it back out of their own income.


The stated reason for this is that many of the providers in the industry would charge outrageous rates with APRs (annualized percentage rate) of 100-300%. I took severe issue with a local paper that printed this as gospel when “covering” the IRS funded “free clinics”. They really did a softball on them, accepted everything they said about the “bad, predator” professional tax return preparer. For my own business, I used Chase Bank. Chase capped its loans to an APR of 33%. Not bad considering a short loan period balloons the APR and many credit cards are in the 20-25% range. Also, since they were on Chase Bank checks, my clients could cash the checks for free instead of paying the real loan sharks, the payday advance places.


Ironically, I never made a lot off of the Rapid Refunds. Yes, truth be told my “take” was usually about 15-20 bucks. Considering my average return fee is about $100, not really a big deal. I only offered them because a threshold question is, “Do you offer Rapid Refunds?” A no answer and you get hung up on. But like it or not, they are a thing of the past. I will move on to other clients and survive. Darn, and I was just looking at that one house up in the Akron area built by that basketball player who moved to South Beach, what’s his name?

Another article regarding another Rapid Refund or Refund Anticipation Loan provider:


http://banktalk.org/2011/02/16/river-city-bank-drops-ral-program/

Did you really file your tax returns?

I was recently confronted with a frightening scenario. I did not prepare the original return but the client came to me because they couldn't find the original preparer. It was a letter from the state that she did not file her return. The preparer had taken a position that the state does not like to see. In essence, the state said she owed $15,000 on this return. The return was from 2002 and wisdom says that they can't go back past 3 years. Well, at the state it is four years. Now I immediately sent a letter stating that she had filed and a copy of the return. The state simply stated they had no record of it. A quick check of the state statute showed that the STATE'S definition of filed is that they received it. We can have her attest to the fact that she mailed it but this does not even touch (if you think about it) on whether the state actually did receive it.

This is a real problem that you should consider. How do you prove that the state or the federal government actually received it. This is extremely important because you can never close out the liability unless you did file it, and as I discovered, you can prove it. That means that 10 years later, when you and everyone involved has destroyed their records, the government can simply claim they didn't receive your return and claims all kinds of things that may or may not be accurate, leaving you with the bill.

There are two real ways of dealing with this. One way is to send each return by certified mail and keep the green card you receive back. Expensive but it would have saved this poor lady $15,000. Another easier way is to electronically file. That way there is a record of the filing and more important that the taxing agency actually RECEIVED the return.

Now is the time to buy your first home

If you are a first time buyer who bought your home this year, you can get 10% of the purchase price up to $8,000 as a credit. You can either amend this last year's return (8-12 weeks) or claim it on next year's taxes. The important thing to know hear is the definition of first time homebuyer may still include you even if you have owned a home before. Essentially, if you haven't owned a home (trailerhome, houseboat, cottage, house. Basically anything you live in and own) in the past 3 years, you are considered a first-time homebuyer and you qualify for this. You must then also live in the home for three years.

Considering the pricing and inventory in the market, now is the time to start looking. Also, you need to complete the sale by November 30, not the end of the year. This is a one-time deal that any apartment dweller should not pass up. One caveat, PAY ATTENTION to your documents at the closing. Don't be afraid to question the terms of the mortgage as to what you were promised. They will try to rush you to sign the mountain of documents but READ the mortgage. As with any deal, if you sit down to sign, you must be willing to get up and walk away if necessary. That is another reason to start the hunt now rather than wait until the deadline is hovering.


First-Time Homebuyer Credit:

For home purchases made after December 31, 2008, the new law raises the first-time homebuyer tax credit to $8,000 (from $7,500) and extends that credit to November 30, 2009. Any required repayments to IRS are eliminated after 36 months in the home. Phase-outs begin for individuals with AGI greater than $75,000 ($150,000 for MFJ) for the year of purchase. (Phase-outs apply for both 2008 and 2009.) A taxpayer who bought a home on or after April 9, 2008, and before January 1, 2009, will not qualify for the new homebuyer credit; the purchase will continue to be governed by the original 2008 first-time homebuyer credit.

What is in it for the Car Buyer

I am going to be highlighting separate parts of the new tax breaks and who can use them. I recently got a call from a car salesman. Every car salesman needs to know this credit. The complete synopsis is at the end of this post. If you have any questions, please feel free to post a comment and I will respond as soon as I can.

Bottom line, if you are looking to head to one of these dealerships that is closing and closing its inventory, keep your receipt. IF you are buying a new car, you can deduct the sales tax. Unlike a lot of tax breaks, this is above the line. OK, so what does "above-the-line" mean and why is that good. Above the line simply refers to being above the line for "Adjusted Grose Income" which means you don't have to itemize to take it. As a tax payer, you have the choice to either add up all of your deductions (ie, itemize) or take the standard deduction (last year it was 5,250 for a person or 10,500 for a married couple). So if you get a $2,000 deduction that brings your total "itemized deductions" to $4,500, you obviously are better off with the standard and that $2,000 deduction is really worthless to you. By taking it above-the-line, you essentially deduct it before you get to the itemized or standard comparison. In other words, everyone actually gets it that isn't rich (Adjusted Gross Income too high, see below).

Temporary Tax Deduction on Car PurchasesPurchasers of new vehicles will get an above-the-line deduction for the state sales taxes, local sales taxes, and excise taxes paid. To qualify, a vehicle must be newly purchased for first use by the taxpayer and must (1) be a passenger vehicle, light truck, or motorcycle with a gross weight of no more than 8,500 pounds, or (2) be a motor home.Deductible taxes cannot exceed the portion attributable to the first $49,500 of the price paid for any single vehicle.Phase-outs start for individuals with AGI greater than $125,000 ($250,000 for MFJ).