Tax preparers may start being tougher in asking you to prove your entitlement to certain deductions. This is because a law was recently passed that requires these professionals to help weed out tax dodgers. This may result in increased paperwork and greater fees to some taxpayers since a longer amount of time will be required for preparing many returns.

Tax preparers now rely on different standards thanks to the IRS. This change is supposed to encourage preparers to be more careful about agreeing to sign returns with shady or extreme income tax deductions without warning the IRS of such behaviors through a specialized communication form. 

Preparers may also face high penalties, especially if they are preparing returns involving estate or gift taxes, or employment or excise taxes. They also are scrutinized highly when preparing returns for organizations that claim tax-exempt status.

Taxpayers must understand the changes in the rules relating to these topics. Preparers now cannot offer advice without being very careful to ensure that they are aware of all details of the situation, or they can be penalized.

For this reason, preparers may decline to sign the tax return unless taxpayers provide better documentation than they have in past years. In some cases, preparers may decline to file the return at all.

Tax preparation fees could also increase in some situations. This is because preparers may need more time to research the complex tax requirements that are increasingly being imposed by the government.

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Predatory Lending

Overall, this predatory lending practice is estimated to cost Americans as a whole about 500 million dollars a year.  Unfortunately poor people tend to be affected the most because they have a greater need to get their money as fast as they can.  Those targeted most tend to be recipients of EITC, the Earned Income Tax Credit.  They recently accounted for 55% or refund anticipation loans. The program, formed in 1975 to help low wage workers is being undermined by tax preparation services that are eating away at these refunds.  Refunds that are being awarded based on the EITC cornerstone that qualifiers for EITC get most of the federal taxes refunded at an attempt to relieve poverty for hard working people.

It seems silly to many of us that someone would pay as much as $218 out of a $760 dollar tax refund to get their money in 1-2 days instead of only 10 days when filing electronically directly with the IRS.  But many of us don’t understand the desperation so many people feel when they are trying to make ends meet on a low income. 

Tax Education 

People need to be educated that they don’t have to be giving up their money in the first place.  Employers will let workers change their W-4 forms to adjust their withholding to more closely match their tax responsibility.  That way, people aren’t paying out their wages in taxes throughout the year unnecessarily in the first place.  People also need to be educated that electronic filing is free for many people now and with direct deposit it only takes about 10 days to get a refund. 

Tax Help

If your financial life is difficult its important to weigh the benefits and drawbacks of getting money fast vs. getting more money by waiting only 8-9 more days.  Free filing is available to those who qualify using the criteria that can be found at www.irs.gov.  Tax help from the Volunteer Income Tax Assistance program is available for people with incomes less than $35,000.  VITA can be reached at 800‑829‑1040 with sites around the country.  Keep what is yours – don’t let H&R Block or Jackson Hewitt keep part of your hard-earned income.  Explore your options and be patient – it might save you a couple hundred dollars or more.

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Anyone who files federal or state tax returns in the Commonwealth of Virginia is offered free tax help and tax advice through the Tax Resource Center part of their website: http://www.financialfitness.org/.

The tax questions hotline will be open from January 31st to April 8th.  Unlike the TurboTax folks, they have their answer desk open during the times that people are actually likely to file their taxes.

I wonder what percentage of people actually file their taxes before January 31st.  I mean, most people don’t even get their W-2’s until sometime in February.  So, Virginian’s – someone’s got your back, and they’re not pulling any punches.  Head on over and get yourself some free tax advice.

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Second, before we pick a tax attorney, take an internal audit and make sure that your not bring a tax attorney on board solely to have bragging rights of having a tax attorney, or that you have the extra cash to do so, but know that a tax attorney is not always a substitute for an accountant; sometime yes-most of the time both are necessary and many tax attorneys will have in-house bookkeepers and accountants to assist him.

Now, you’ve decided that you are going to hire a tax attorney. For fear of stating the obvious, check to make sure the person actually went to law school, sat before the bar and passed the exam and is a licensed attorney specializing in tax law. I cannot emphasize this enough. Somewhere in the fine print, you may see “Specialist” on their card or shingle outside the door and after hearing about their law experience, assumptions can be made, but you will be the one to take on the risks, not the “legal expert”.

Next, when choosing a tax attorney, once you have verified their licensure and status with the bar, remember, even though your tax attorney signs off on your IRS forms as having prepared your federal forms, you are still legally liable for all and any discrepancies that you’ve filed.   Discuss these expectations and exactly how these worst case scenarios will be handled, should such an unfortunate event occur.

Also, when interviewing possible tax attorneys, find out how services and time will be charged. Typically, the billing starts, literally, the moment your attorney says “Hello” when on the phone or in person (although in person visits will usually tack on driving time and preparation time if your attorney is meeting you at your specified location) You will also be charged for all postage, copies, secretarial time, etc. Any activity you can imagine, you will be billed for. The person you are interviewing will appreciate your asking for everything in writing, so make sure you leave with plenty of reading material.

Also, ask what the fees will be should there be a discrepancy from the IRS once taxes are filed. Your tax attorney will of course be there to handle all communications with the IRS on your behalf, but there could very likely be a different rate for these services, best to check before hand and not when you find yourself responding to the IRS after they’ve found a discrepancy and you need the help of your tax attorney.

All in all, weigh your decision to pick a tax attorney on what the tax attorney is bringing to you and/or your financial portfolio and the amount of risk you believe you are hedging against. Will there be a measurable benefit beyond simply using an accountant.  The Bottom line is that the larger and more varied your portfolio, the more the likelihood that a tax attorney will be able to help maintain your portfolio at filing time.

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Here’s the question sent in by the filife blogger:

Should I file individually (as opposed to my parents claiming me as an exemption)? I’m under 24 and a full-time college student who lives in student housing (but I’m thousands of miles from home), but my parents do not provide more than half of my support. I work and pay for school (tuition, books, housing, food, etc.) with scholarships, personal savings and money from work that is taxed, but not part of federal work study. I’m not legally emancipated. If I am eligible to file individually, would this maximize my own return? Or is the difference the same?

She indicated her preferred time window was between 2-4 p.m. for the people from TurboTax to respond.   However, they didn’t answer the first time.  They only sent an apology e-mail that they missed it (maybe they got a little busy).

So, she tried it again. Within the next two hours, she got the call! The enrolled agent not only answered the original question, but answered all of her follow-up questions for twenty minutes.

He covered the bases, answered all her questions, pointed out the right forms on the IRS site and offered some tax deduction tips for things to do which would maximize her refund, such as starting an IRA and investigating the Lifetime Learning Credit.

Her summary: 

Although it took me two stabs to get my tax question answered, the FreeTaxQuestion was ultimately worth it. They called me back, dealt with my tax angst and all of it was at no cost.

I feel much more confident about tackling my 1040 in the next couple of months. And if a tax prom comes up, I’ll know who to call.

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The tax formula is fairly straightforward: your small business must pay taxes on what’s left of your revenues after you have deducted all your expenses. With that said, it would seem to make sense to claim the maximum allowable number and amount of deductions in order to reduce your tax liability. Luckily, the IRS gives you lots of choices as to tax deductions that you can legally claim.

Here are some deductions that you don’t want to miss out on when doing your business tax planning.

Small Business Tax Deductions

1. Deductions for Business Start Up Costs

In your first year of business, you are allowed to write off as much as $5,000 in business start-up costs. In addition you can write off an additional $5,000 in organizational costs. Not only that: you also have the option of spread out expenses not deducted in the first year over a period of 15 years, beginning with when you opened your business. Eligible start up costs include things like market research, company advertising, employee training, travel for business, legal advice and other costs. Consult your tax professional for more details.

2. Deductions for Education

First stop: IRS Publication 970, Business Deductions for Work-Related Education. For the most part, you can write off expenses related to your employees’ education if the courses relate to their jobs.

In other words, if the course helps them keep pace with the marketplace demands (or improve their skills) or if they need the course to actually keep their existing jobs, then the expense may be a legitimate deduction. The bad news is that you can’t take a write-off on any expense related to professional training in a new, unrelated field. A couple of other things to remember: You can also claim a training or education write-off if you are self-employed. Deductions also include the cost of getting to and from the classes. Consult your tax professional for more details.

3. Deductions for Vehicles

Be careful here: the rules for deducting automobile expenses are pretty detailed and the Feds pay close attention to anyone claiming these deductions. So, for starters, keep clear and concise records. You can deduct expenses two ways:

The first option is to claim a deduction by counting how many miles you drove while on business. Currently, you can claim a deduction of 44.5 cents per mile. Check to make sure that is the current amount, as it does change occasionally. The other option is to track your total expenses incurred on things like gasoline, repairs and maintenance. Deducting commuting mileage is a different matter altogether.

Remember: keep good records. If you’re using your own personal vehicle for your small business, make sure you separate the times you use it for business from the times you do not. Include dates, destinations, purpose of the travel, etc. Read IRS Publication 463 for more info. And here’s an important point: if your employees use a business vehicle while running personal errands, for example, you have have to show this as income to them on their W-2.

A couple of other things to remember: If you bought a new (or previously owned) car, you can take a write-off. You’ll have to decide if it’s better to take it in one single deduction or spread out over a period of time through depreciation. And if that car is a hybrid, you might be eligible for a tax credit. Check IRS Form 8910 for more details. As always, consult your tax professional for more details.

4. Deductions for Equipment

You have the ability to take a write-off for small business equipment purchases. The write-off can be pretty large – in prior years, it amounted to over $100 thousand. And the equipment can be used; the only requirement is that you use it at least half the time for your company. Allowable equipment includes things like computer hardware, machinery, office furniture, automobiles and other related equipment.

Make sure you read a current copy of IRS Form 4562 before planning your tax strategy on this point. If you decide you are not going to claim this write-off immediately, you can spread it out over a period of years by claiming depreciation on that equipment. Consult your tax professional for more details.

5. Deductions for Entertainment

The IRS definition of entertainment is pretty flexible. Generally speaking, if you attend a business meeting, for example, and you are not reimbursed for the expenses, you’re allowed to write off up to half the entertainment expense. They do caution you that the “entertainment” must be in a business context. This means if you go to a seminar or conference, that’s OK. Also, the entertainment should come immediately before or after the meeting. You get a break if you are self-employed; then, the 50 percent deduction cut-off does not pertain to you. Consult your tax professional for more details.

In Conclusion

The Internal Revenue Service is pretty generous in offering your business a whole range of tax write-offs. Just make sure you talk to your tax attorney or CPA to get the most current rules and regulations before you begin planning.

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