Tax Planning

s 2003 ends, US taxpayers begin to think about filing their tax returns. By the end of January 2004, taxpayers will begin receiving their tax documents including, W-2 annual wage statements, Forms 1099 and Forms 1098. If someone, other than yourself, will prepare your tax return, you will begin to have communication with that firm soon. The quality and cost of service provided by your tax professional is impacted by a number of factors that are discussed in this article.

Communication

The tax professional will communicate with the taxpayer several times during the return process: First, at the beginning of the process the professional will request tax data for the tax return. Then, we may need to contact the taxpayer to clarify information during the return preparation process. Last, when the return is complete the taxpayer will be contacted about delivery of the return, whether a paper copy or e-file of the return.

The engagement letter that a taxpayer signs with the tax professional will specify the services that are agreed to be provided and the fee to be charged. It is critical for the taxpayer to know whether the fees include any correspondence with the IRS or other professionals. Normally, these fees are charged at actual hourly rates.

The tax preparer will indicate the deadline for the client to submit the data . It is critical that the taxpayer meets this date so that the tax return is prepared to meet the April 15 filing date. While there are always exceptions, and some returns need to be extended, missing this deadline often leads to increased preparation costs for the client.

Some employers provide tax preparation assistance to their employees, in which case, the taxpayer does not usually sign an engagement letter, and the employer is directly invoiced for the service. If the employer is not paying for the return preparation, then the taxpayer will be asked to provide method of payment at the time the engagement letter is signed.

Tax filing data tips

One of the most important steps in preparing an accurate tax return is the assembly of tax data to the tax preparer. Most tax professionals send a tax organizer, normally electronic, in which the taxpayer enters information required to prepare the tax return. It is essential that the taxpayer provide all information required, or the return cannot be efficiently and accurately prepared. Incomplete tax organizers result in a delay in the return preparation and additional fees.

According to the IRS, some of the top mistakes on tax returns are:

1. Taxpayer identification numbers or names for dependents do not match IRS or Social Security Administration records, which results in disallowance of exemptions and all or part of the child tax credit.

2. The primary Social Security number is incorrect or illegible.

3. Dependent’s last name has to be corrected.

Other common tax preparation errors, according to Kenneth G. Jarvis, CPA, include:

1. Poor record keeping. Incomplete or disorganized financial records can lengthen the time required to prepare the tax return and increase the cost of professional fees.

2. Overlooked charitable deductions, including mileage associated with doing charitable work.

3. Mathematical errors.

4. Not attaching all W-2 forms to the return.

5. Failing to sign your check payable to the IRS and including your taxpayer ID number on the check and the tax year.

6. Forgetting to sign and date your return and enter your occupation.

7. Not reviewing your prior year’s tax return to check for any items that carry over to this year, such as charitable contributions or capital losses that exceeded the amount you were previously able to deduct.

8. Claiming yourself as a dependent on your return if someone else is eligible to claim you.

9. Not keeping copies of documents sent to the IRS.

10. Determining an incorrect basis for assets that is essential to calculate gain or loss on assets.

Filing deadlines

Form 1040 tax returns are required to be filed by April 15 if the taxpayer has wages subject to federal withholding tax. Taxpayers may request an automatic extension until August 15 to file the tax return but this does not extend the time to pay. Taxpayers or their tax professionals should estimate the tax due and submit the payment with the extension. Many tax professionals make an additional charge for preparing an extension. If in doubt, ask your preparer!

Interest accrues on unpaid taxes from April 15 until the date the return is received by the IRS. Late filing and late paying penalties will also accrue if a timely extension with payment (if required) is not filed.

The IRS allows taxpayers to apply for the installment plan if they cannot pay tax when it is due. A special form must be submitted with the tax return requesting the payment plan. You can also pay your tax bill with your credit card. The credit card company will charge a convenience fee based on the amount charged.

IRS correspondence

Usually correspondence with the IRS on behalf of a taxpayer is not included in the tax preparation fees. In order for a tax preparer to communicate with the IRS concerning IRS notices, we must have the taxpayer give us a power of attorney to act on the taxpayer’s behalf.

Do not ignore IRS notices and hope they will go away. Many are valid requests for information or taxes due, and others are incorrect. If you receive any notice from the IRS, send a written response by certified mail within a reasonable timeframe. If you are stalling because you are short of cash, discuss your situation with the IRS agent who has the authority to permit installment payments.

If you are waiting a refund, you, the taxpayer, can check on the status using the IRS website, www.irs.gov. You will need the primary social security number and refund amount.

Conclusion

The tax preparation process will run efficiently and timely if both parties are committed to the basic guidelines of tax preparation. The taxpayer should understand what services are included in the return preparation and the information required from him. It is the tax preparer’s job to indicate the fees and time line for the return process.

Copyright © 2003 Decker Consulting. All rights reserved.

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