Our income tax code is a source of great frustration for millions of Americans. The complexities can be
mind-boggling even to experts and are rarely understood by the average taxpayer. However, for the tax system to be fair to all taxpayers, complexity may be a necessary evil. To help taxpayers understand and cope with the frustration caused by our tax system, I’ve compiled the following “Top Ten Causes of Taxpayer Pain” and my thoughts on how to alleviate the pain.
10. Understanding the Tax Laws
The first Form 1040 introduced in 1913 consisted of 4 pages including 1 page of instructions. According to a report on October 8, 2015, “Federal Tax Laws and Regulations are Now Over 10 Million Words Long”. [http://taxfoundation.org/blog/federal-tax-laws-and-regulations-are-now-over-10-million-words-long] Even the smartest tax expert cannot fully comprehend and understand all of these laws and regulations without conducting research; even then, there are “gray areas” subject to interpretation. Fortunately, we have access to technical writers and publishers who can explain the IRS code in layman’s terms. The Internet is a great source of free tax information, tax calculators and other resources. For taxpayers without the time or ability to utilize these resources, tax professionals are available to help.
9. Preparing Your Tax Returns
This task is certainly unpleasant for most taxpayers, although some people, such as engineers, seem to enjoy the challenge and take pride in figuring out how to apply tax laws to minimize their taxes. Tax preparation software has made this tedious task easier for many people, especially those with relatively routine tax situations. However, for people with complexities, software is no substitute for tax knowledge since it can only produce the correct result if the correct information is entered. Lower-income taxpayers, especially those without the ability to prepare their own taxes even using tax software or IRS Free File, are often served by volunteer tax preparers. More than half of all US taxpayers pay a professional to prepare their tax returns. Some use preparers because they don’t have the ability, some because they don’t have the time and many because they simply want the peace-of mind of knowing that their return is prepared correctly and they have a professional to help them to communicate with the IRS if necessary.
8. Finding a Competent Tax Professional
The IRS currently has no educational or testing requirements for tax preparers. Only California and Oregon have education requirements and Maryland requires a test. IRS does require tax preparers who charge a fee to obtain a Preparer Tax Identification Number (PTIN) which includes a background check. The IRS also offers a voluntary program for “unenrolled” tax preparers (those who are not an Enrolled Agent (EA), CPA or attorney) to participate in their Annual Filing Season Program (AFSP) requiring completion of 18 hours of annual Continuing Education (CE) from an IRS approved CE provider such as The Income Tax School www.TheIncomeTaxSchool.com. Preparers who have obtained the AFSP “Record of Completion” have limited representation rights. They may represent their clients before revenue agents, customer service representatives and other similar IRS personnel regarding a return they actually prepared and signed. After 2015 unenrolled preparers who do not have the AFSP Record of Completion will not have any representation rights. Other factors in choosing a tax preparer include: (1) professional credentials such as EA or CTP (Chartered Tax Professional), (2) tax preparation experience, (3) policies and procedures to ensure accuracy, confidentiality and security of taxpayer information, (4) fees and how they are based, (5) guarantee, and (6) availability of year-round service, preferably at no extra charge.
7. Paying High Tax Preparation Fees
Tax preparers are prohibited by the IRS code from basing fees on the amount of a taxpayer’s refund except for amended returns and taxpayer representation services to recover past taxes. Some preparers charge by the hour and some charge by the tax forms necessary to prepare the tax return. I believe it is more equitable for a tax firm to base fees on the complexity of the tax return rather than an hourly rate. Before choosing, you should compare the fees of at least two qualified tax preparers. As in any purchasing decision, you should not decide solely based on price. Price matters, but what is most important is the value to be realized considering the factors listed in the previous section.
6. Receiving Poor Tax Preparation Service
What can you do if you’ve had your tax return prepared and you are not satisfied with the result? Or, you lack confidence in the tax knowledge of your preparer? You’ve already invested your time, so you might ask for a supervisor to review the return to determine if it is correct and explain why the result does not meet your expectation. There might be differences in income, deductions, taxes withheld or estimated payments that could make your refund different than the prior year. If after taking these measures you’re still not satisfied, you should not accept the tax return and you should ask for your tax documents to be returned. Some tax preparers may still expect to be paid for their time. Peoples Income Tax guarantees satisfaction or you pay no fee, as do most national tax firms.
5. Preparing Dependent Children’s’ Tax Returns
If you prepare your own taxes using a tax software package you should be able to easily prepare a dependent child’s return with the same software, without an additional fee. Peoples Income Tax prepares dependent returns for its clients at a 50% discount and prepares Form 1040EZ Federal & full-year resident state returns for only $25. For such a nominal fee, it may be worth not going through the hassle of preparing a dependent child’s returns yourself. Of course, you will want to make sure your dependent child does not claim his or her own exemption, thereby preventing you from doing so. The dependency exemption is most likely worth much more to you than to your child.
4. Negative Tax Consequences of Financial Decisions
Most financial decisions result in a tax consequence and sometimes that result can be costly. Before making any financial decision, you would be wise to seek the advice of a tax professional. Once the decision is made and the tax year has ended, the tax consequence cannot be changed. It is then just a matter of reporting the information and paying any taxes that may have resulted, which could be substantial. Many reputable tax firms, such as Peoples Tax, answer tax questions for clients year-round at no extra charge. Year-round tax help is one of the key benefits of using a tax preparer.
3. Uncertainty as to Whether Your Return was Prepared Correctly
Whether you’ve prepared your own tax return or have had it prepared by a tax professional, you may not be certain that it was prepared correctly. At Peoples Income Tax our policy is that every tax return must be checked by a tax preparer other than the one who prepared the return before it is e-filed. Even the most knowledgeable and experienced preparer can make a mistake. If you have any doubt about the accuracy of your return, a reputable tax preparer should be willing to review your return without charge, as we do at Peoples Tax. When in doubt, it’s always a good idea to get a second opinion.
2. Getting a letter from the IRS
Receiving a letter from the IRS (unless it’s a refund check) can be scary for anyone, even me. If you get a letter from the IRS or state taxation department claiming that you owe more tax, you should not ignore it. Unless you completely understand and agree with the findings, you should not accept them without consulting with a tax professional. The IRS or other tax agency is not always correct. Such notices are typically generated by a computer and often the computer is lacking information or has wrong information. Most tax issues can be resolved by mail or phone, by you or your tax professional. At Peoples Income Tax we help our clients deal with the IRS without additional charge.
1. Paying Taxes
U.S. Supreme Court Justice Learned Hand said, “Over and over again courts have said that there is nothing sinister in so arranging one’s affairs so as to make taxes as low as possible. Everybody does so, rich or poor, and do right, for nobody owes any public duty to pay more taxes than the law demands. Taxes are enforced exactions, not voluntary contributions.” Based on Justice Hand’s comment, it is actually your patriotic duty to ensure that you pay no more than your fair share of tax. If every taxpayer pays his or her fair share, the tax system will work as intended. When taxpayers evade taxes, honest taxpayers end up paying more than they should. A competent tax preparer will ensure that you will pay no more than your fair share of income tax!