Professional Tax Preparation

What are the goals for good tax preparation?  Why is it to your advantage to use professional tax preparation services?

• The first and obvious goal is to fill out and file all of the returns required by law on time and in a complete manner.
• The second goal is to minimize the taxes due by taking advantage of all credits and deductions to which you are entitled.
• The third goal is to not draw increased agency attention to the tax return that might increase the chance of an audit.

Getting the Paperwork Filed On Time

While the first goal of filling out and filing seems obvious it is actually NOT so obvious.  Many tax preparers (both licensed professionals and unlicensed) routinely file an extension for tax return filing if the firm cannot conveniently and easily complete the tax return by the due date, namely March 15 and April 15; the due dates for corporate tax returns and individual tax returns respectively.  The common misconception with extensions is that they give the taxpayer extra time to pay the tax.  While a six month extension is routinely granted (Federal Form 4868 for individuals), an extension extends the time to file, not the time to pay.  Therefore, estimated tax thresholds to avoid underpayment penalties still need to be met by the regular due dates whether an extension is filed or not.

Our firm believes that extensions should only be filed in certain limited circumstances.

An example is the case of a business tax return which has a pension plan; filing an extension extends the time the business has to contribute to the pension plan and still quality to take the pension plan deduction for the year of the return.  If a corporation deducts a pension contribution on Form 1120 of $30,000.00, filing a federal extension extends the time to put the $30,000.00 into the plan from March 15 to September 15.  This could be necessary if the corporation is short of cash during the first quarter of the subsequent year.  Read more about business tax planning.

Another example for filing an extension is the case of an individual who has an investment in a partnership and does not receive his partnership K-1 form in time to file his individual tax return by April 15.

Filing extensions in less compelling circumstances draws extra attention to your tax return and increases the chances of an audit.

Tax Minimization: Taking the deductions you deserve.

The goal of minimizing your taxes by taking maximum advantage of available tax credits and deductions is closely related to tax planning.  Read more about the advantages of using a professional tax accountant.

Professional tax preparation begins with education, training and experience.  The large national tax preparation services you know by name with high annual staff turnover combined with the increasing requirements for continuing professional training cannot compete with us on this basis.

For example. good tax preparation may involve advising a taxpayer to forego taking his son or daughter as a dependent because he cannot qualify for federal and state education credits because his income exceeds the allowable income for these credits.  In order to take the credits he must also take the child/student as a dependent.  It may be advantageous for the child/student to take him or herself as a dependent because his or her income is low enough to quality for education credits.

In another example, did your unlicensed tax preparer ask you if you installed new windows, a new oil or gas burner or new insulation this year?  If not, you may have unwittingly given up a $1,500.00 federal energy tax credit and additional state energy credits as well.

If you are subject to the Alternative Minimum Tax (AMT) the interest on your private activity municipal bonds that you thought were tax free may indeed be taxable.  The AMT applies if it exceeds your regular tax liability.  Interest on private activity bonds is taxable for AMT purposes even though they are municipal bonds.  Has your unlicensed tax preparer suggested that you invest instead in bonds issued by your state of residence for public purposes, or in a municipal bond mutual fund which does not invest in private activity?

If you are self employed, has your unlicensed tax preparer allocated a portion of his fee to preparing your Schedule C (proprietor's schedule of income and expenses) so that deducting that portion of his fee will not be disallowed because it needs to exceed 2% of adjusted gross income on your Schedule A itemized deductions, and will also save your self employment taxes in addition to income taxes to the extent it can be deducted on Schedule C?  These are the kinds of things that the large national tax firms and unlicensed tax preparers tend to miss.

Minimizing the Chance of Audit

While we don't pretend to know exactly how the Internal Revenue Service selects returns for audit (and no other tax preparer knows either even if they tell you otherwise), we do know some things that increase the odds against you. 

Read our tax audit tips which will help you appreciate minimizing the chances of an audit.

A simple thing you can do is to make sure that all of your 1099 forms reporting interest, dividends and self employment income (1099 Misc), or stock transactions (1099 B) have been fully reflected in your income tax return.

If you make a charitable contribution deduction for a non cash contribution, i.e. you donate your old car to charity, it is important to attach to your tax return the appraisal or other evidence upon which you based your deduction amount.

If you tithe 10% of your income to your church, we advise that you attach to your return the giving statement you receive annually from your church.

It is of vital importance that the income you report on your tax return is sufficient to support your lifestyle.  For example, if you live in a neighborhood where the average home sells for $1 million and you own an electrical contracting business, it is not reasonable to show a total income of $30,000 on your tax return unless you have a large amount of nontaxable income, such as municipal bond interest, or money you received from a sizeable inheritance.  Failure to declare 25% or more of your income in any one year is a tax fraud crime.

Professional Tax Preparation

It is interesting that an IRS study of tax returns prepared by tax professionals has found a much higher percentage of tax returns that the agency regards as problematic prepared by unlicensed professionals as opposed to licensed tax professionals.  The Internal Revenue Service has proposed to Congress that unlicensed professionals be required to take an annual exam administered by it, pay an annual fee and complete a number of continuing education credits to maintain their right to prepare tax returns.

David Kass is both an experienced tax attorney and a CPA.  Esta Kass has been a practicing CPA since 1977 and is extremely innovative, creative, and ingenious in adopting tax law to the situations in which her clients find themselves.  Please contact Kass & Kass to schedule a consultation. A brief introductory consultation is available for a nominal charge.