Thursday, January 31, 2008


I couldn’t help it. Despite the fact that this question arrived after I had announced in several posts that I would not be answering any more ASK THE TAX PRO questions until after the tax season, I have decided to answer this “quickie”.

Q. Background info - I am a "Pizza Delivery Driver"
I have recorded 25,000+ miles worth of un-reimbursed mileage. If I file them with documentation on my tax return will I actually get a "Refund" or is it just a "Deduction"? From everything I've read, within the past 2 hours of searching online, I've read that it is just a deduction.
How do I get that back from my employer then?

A. Of course all you get is a deduction! Do you expect the United States Government to reimburse you for your business miles?

However, a deduction may lead to an increased refund. In your case 25,000+ business miles (that’s a lot of pizzas) at 48.5 cents per mile for 2007 would result in a deduction of over $12,000. Unfortunately as, I assume, a W-2 employee you must itemize in order to claim the deduction, and then reduce it by 2% of your Adjusted Gross Income. So you will not get a tax benefit for the full $12,125.

If your employer has an accountable plan for reimbursing employee business expenses, including business use of a personal car, then you would have to submit your mileage on a regular basis (i.e. weekly or monthly) to your employer on whatever form the plan calls for. If your employer does not reimburse for mileage then you are stuck.


As expected, the Senate Finance Committee approved an Economic Stimulus measure yesterday – which now goes to the full Senate.

The Senate bill reduces the rebates to $500 and $1,000, but includes senior citizens collecting Social Security and disabled veterans and doubles the income limitations to $150,000 for singles and $300,000 for joint filers. It also goes further than the House version by attempting to bar illegal immigrants from receiving rebates - recipients and their spouses and children must have valid Social Security numbers to qualify.

Wednesday, January 30, 2008


Here are my last ASK THE TAX PRO answers until I “return” at the end of April – after the end of the tax filing season. Any appropriate ATTP submissions that remain unanswered, as well as any that I receive during the season, will be held in a file until after April 15th.

I realize that there are a few appropriate submissions that I have not gotten to, including several very good questions, but I just don’t have the time right now to prepare a proper response.

Q. Your website is amazing and it is so nice of you to dedicate your time and energy toward helping confused tax payers in this confusing state that we live in. I do have one question for you that is annoying me this tax season.
I live in New Jersey, am married filing jointly, and received $881 in a Homestead Tax Rebate in August, 2007. 2007 was the first full year in my home, which I purchased in June, 2006. My question is: Do I have to report that Homestead Rebate as income on my federal taxes if I itemized deductions this year? Should it effect my state income taxes at all? If I do need to report it as federal income, which line should it end up on on the 1040 form?
A. First of all, the NJ Homestead Rebate is not taxed by the State of New Jersey. According to the NJ Division of Taxation website, “Homestead rebates, property tax reimbursement payments, FAIR rebates, and NJ SAVER rebates are not taxable for New Jersey gross income tax purposes, and should not be reported on the New Jersey income tax return.”
As for “Sam”, according to IRS News Release NJ-1001-15, "For taxpayers that claimed itemized deductions, including property taxes, on last year's [2006] Federal income tax return, it will be necessary to report the rebate as income.

Rebates of this type are called 'recoveries'. A recovery is a return of an amount you deducted or took credit for in an earlier tax year. Taxpayers who itemized last year enjoyed a benefit of taking a deduction for the entire amount of their property tax payment. However, since they received part of that deduction back in the form of a property tax rebate, after they filed their return, these taxpayers will have to report that rebate as income on this year's return

The rebate will be included on the 2007 Form 1040 to the extent of the "tax benefit" received from the 2006 deduction of real estate taxes, similar to the way a state income tax refund is treated. It is possible that only a portion of the rebate will be taxed. In your situation, if your 2006 itemized deductions exceeded the standard deduction for a joint return by only $600.00, then only $600.00 of your $881.00 rebate will be taxable on the 2007 return.

If you claimed the Standard Deduction in 2006, and did not itemize on Schedule A, the rebate does not have to be included on your 2007 return. The NJ Homestead Rebate received by a tenant also does not have to be reported.

The IRS release instructs taxpayers to report the taxable amount, if any, of the rebate(s) as "Other Income" on Line 21 of Form 1040.

Q. If my employer has a "formal" policy of reimbursement, but I have a few conferences that I went to they did not reimburse me for would they contact the conference sponsor and ask for proof of my attendance? Also, if I have lunches for business (much of which my company doesn’t reimburse but it helps build my customer base) would they then ask for verification from the person with whom I lunched? Finally they ask if our policy is accountable or non-accountable. What does that mean? I can get a letter from my employer that says they only reimburse for X, but not Y.
A. According to IRS Publication 463 (Travel, Entertainment, Gift, and Car Expenses) – “To be an accountable plan, your employer's reimbursement or allowance arrangement must include all of the following rules.
1. Your expenses must have a business connection — that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer.
2. You must adequately account to your employer for these expenses within a reasonable period of time.
3. You must return any excess reimbursement or allowance within a reasonable period of time.”
What this means is that you are reimbursed for actual business expenses which you have submitted to your employer, as opposed to getting a flat $500.00 per month expense allowance. From what you have described it appears that your employer has an “accountable plan”. If you provide the IRS with a copy of the employer’s reimbursment policy, which explains what expenses they do and do not reimburse, that should be sufficient.
As long as you can substantiate that your unreimbursed conferences and lunches were legitimate business expenses and that your employer does not reimburse those specific expenses that should be sufficient. If your employer would have reimbursed you for the expense, but you did not submit the expense to your employer for reimbursement, then it would not be deductible.
For the conference you would need to provide a credit card receipt or cancelled check indicating that you paid the registration fee, as well as receipts to indicate your travel to and from the conference (unless you drove), and copies of the conference workbook, agenda or hand-outs to show that you were there. Many conferences will provide you with a certificate at the completion. In my case when I attend a tax conference I get a certificate to verify the number of “Continuing Education” units I earned.
For your lunches you would need to show receipts and some additional specific information (see my THE FLACH REPORT posting on “Keeping Track of Business Expenses”).
As far as doing a “third-party” check – i.e. if you state that you had lunch with me on August 3rd the IRS would contact me to verify that we actually did have lunch and actually did discuss business – this is rare. I have never actually seen such a third-party check in my 26 years. As this is an involved process I expect that the IRS only does this if we are talking about lots of money and they are really after you.
Q. What is the percentage of tax one would have to pay to the IRS when selling real estate which would be viewed as an investment property? For California and the other states as well? Is there some kind of chart?
A. If the property were held for one year or less you would pay tax at the “normal” tax rates for “ordinary income”. It would depend on your total taxable income. If the property were held more than one year the gain would be taxed as a long-term capital gain at the reduced capital gain rates of 5% and/or 15% for 2007, and 0% and/or 15% for 2008, again depending on the extent of your total taxable income.
However, because the capital gain increases your Adjusted Gross Income (AGI) there may be some additional “back door” costs. Plus, the capital gain may increase your Adjusted Gross Income such that you fall victim to the dreaded Alternative Minimum Tax (assuming that it is still around for 2008 – fingers crossed). So one cannot truly say that the true total tax cost of the gain will be limited to the 0%, 5% or 15% rates. There is no easy answer without actual calculations.
As for the states - they usually do not have separate capital gain rates, so the gain would be taxed at the appropriate state tax rate applicable for your total taxable income. I am not aware of any specific chart, although there probably is one somewhere on the internet (readers – please let me know if you are aware of one). You can go link to the website of a State’s Tax or Finance Department here.
I hope my ASK THE TAX PRO postings have been helpful.

Tuesday, January 29, 2008


The House version of the Economic Stimulus Plan, previously discussed here and all over the blogosphere, was approved today (Tuesday) by a vote of 385-35 after little debate. It would send rebates to some 111 million families and give tax breaks to businesses, and cost $161 Billion over two years.

In the Senate, a version introduced by Senate Finance Committee Chairman Max Baucus that adds $35 Billion (total cost $196 Billion) for senior citizens and the unemployed, and shrinks the rebate to $500 for individuals and $1,000 for couples, is expected to be voted on by the SFC tomorrow. The Senate version would also deliver checks even to the richest taxpayers, who get nothing under the House-passed measure.


Since I won’t be posting this coming Saturday, below is the last “Buzz” until I return at the end of April, after the end of the tax season.
* An editorial in the Wall Street Journal provides proof of what I have known for years – a reduction in capital gains rates will generate income. A capital gains tax rate cut is truly a tax cut that more than pays for itself!

According to the WSJ, “The tax rate fell to 15% from 20%, yet revenue collections have climbed by 152% in four years. The nearby table shows that the response by investors has been much larger than even many advocates had hoped to see.”
* Mary Emma Allen of HOME BIZ NOTES asks some interesting questions about the upcoming rebates in her post “Will Your Business Be Affected By Tax Rebates?"
Is this handout being considered because it’s Presidential Election Year? Is this just another way for candidates to “buy” the votes? Will those who advocate the largest handout/rebate get the most votes? Then who will figure out whom to tax or what business to tax when it comes time to pay the piper?
* TAX PROF Paul Caron provides us with the “Tax Portions of President Bush's State of the Union Address Last Night”.
* The TAX HELP BLOG OF Roni Deutch identifies what she considers to be “
25 Most Ridiculous Tax Write-offs of All Time”. Some of them aren’t so ridiculous, as they have been allowed by the IRS or the Tax Courts.
Here is one that I have to look into further after the tax season is over – A woman volunteering for a large charitable cause was able to deduct the costs she paid to a babysitter while she was volunteering. Roni, if you are reading please give me the details on this deduction.


I am off to complete a variety of errands today to get ready for the upcoming deluge, including getting shorn, but I wanted to report that “Tax Carnival #29: State of the Tax Union” is up at DON’T MESS WITH TAXES before I left.
There are lots of entries from participants who are new to the Tax Carnival this go round.
While it won’t help you to save taxes, the entry from Laura of GREEN PANDA TREEHOUSE on “Tax Forms With Personality?” was interesting.
After 36 years I found a tax I had never heard of before in Praveen’s entry “Will U.S. Shoe Tax Be Repealed?” from MY SIMPLE TRADING SYSTEM. BTW, the correct website address for the End The Shoe Tax group is
And, oh yes, my post on choosing a tax preparer, Don’t Assume, is included.

Monday, January 28, 2008


It seems that the IRS likes me and my colleagues!

According to an article from Tax Analysts quoted in various tax blogs:

"The tax press has played an increasingly important role in the IRS's communications strategy as the number and form of media outlets have proliferated over the last 25 to 35 years, IRS Chief Counsel Donald Korb said at a January 18 session of the American Bar Association Section of Taxation midyear meeting in Lake Las Vegas, Nevada."
"Tax bloggers have gone a step beyond what traditional media can do and have 'democratized' the way tax news and other information reach people who may not have had access to such information before the Internet age, Korb said. People no longer have to have subscriptions to tax law publications or be in Washington to get that information, he said. Tax blogs such as TaxProf Blog, which is run by Paul Caron, a University of Cincinnati College of Law professor, 'are a great tool to get information out to a particular group,' he said."

I knew that staffers in Congress read THE WANDERING TAX PRO, as witnessed by a recent email from my Congressman (see “
Well I’ll Be Damned”) – and now the IRS. I better watch what I say!


Most of you should have received all of your 2007 Form W-2s by now – though employers still have three days to get them to you.

If you don’t have all your W-2s in your hand by “end of business” on Friday you should call the Payroll or “Human Resources” Department of the employer and ask for a duplicate.

If you do not receive a W-2 from an employer and you cannot contact the employer because it has gone out of business or disappeared all is not lost. You can use your paystubs or other records to reconstruct the various items of income and withholding and file Form 4852 “Substitute for Form W-2 Wage and Tax Statement” with your federal and state tax returns. In such a situation I recommend that you consult a tax professional.

You also should receive all 1099s for bank interest, stock dividends, and non-employee compensation by Friday. A word to the wise – just because you have not received a Form 1099 does not mean that you do not have to report the income. If income is taxable it is taxable whether or not you receive a Form 1099. And just because you have not received a Form 1099 does not mean that the “payee” has not issued one. The form could have gotten lost in the mails. But while your copy was lost chances are that the one sent to the IRS made it.


I often get an email from a client that basically says “I have some questions. Please call me at XXX-XXXX.” I got one such email over a week ago.

I am notoriously bad at returning phone calls. In the last weeks before the beginning of the “tax season” I am busy running around stocking up on food, office supplies and tax forms and getting shorn, and cleaning the apartment and finishing last minute work. Once the season begins, forget about it.

I will finally call the person who left the email later today. But if instead of telling me to call the email had said, “I have some questions. Here they are” and had listed the questions, the client would have gotten his answers almost immediately!

I am usually in the "office" between 6:00 and 7:00 AM in the morning – even earlier during the tax season. After posting my blog entries (not during the tax season) the first thing I do is check my email. If possible, I immediately respond to client emails – while it would be too early in the morning to make a phone call if I were so inclined.

So a word to the wise among my clients – if you have a question or questions to ask me, when you email me do not tell me to call you so you can ask them. Just ask them right there in the email!


Saturday, January 26, 2008


George W urged Congress yesterday to quickly pass the economic stimulus package negotiated Thursday between House leaders and himself without any further spending. "I strongly believe it would be a mistake to delay or derail this bill," Bush said.

However, Senate Democrats are refusing to rubber stamp the House measure.

Senate Democrats are thinking about including retirees living off Social Security, who wouldn’t be getting tax rebate checks under the package currently before the House, on the list of rebate recipients.

The Senate is also considering adding an extension of jobless benefits, boosting heating subsidies for the poor, and temporarily increasing food stamp payments the package.

The House is planning to pass its version as early as Tuesday. The Senate debate won't consider the issue until its Finance Committee drafts and votes on an alternative package, probably on Thursday.


* An article on once and for all answers the question “Did the Bush Tax Cuts Favor the Wealthy?”.

According to the article, “a new report from the National Center for Policy Analysis (NCPA) says the Bush tax cuts made the tax code more progressive, no matter how progressivity is measured. In fact, the report concludes that every major tax change (Republican or Democrat) over the past two decades has increased the share of taxes paid by the wealthiest Americans.”

Michael D. Stroup, a Stephen F. Austin University economist who authored the NCPA report, states, "It is politically popular to say that tax cuts benefit the wealthy" but, "The accusation does not match the reality."

I highly recommend that you click on the article to learn some interesting statistics.
* Another article from reports on an annual poll from Chief Executive magazine on ranking the best and worst states in which to do business.
For once New Jersey is not last on the list – it is 47th, behind Massachusetts, Michigan, New York and California. However, NJ is down one from its rank as #46 in the past two years’ polls.
* The Tax Foundation’s TAX POLICY BLOG makes an excellent point in its post “Remember: Tax Rebate Checks Are Coming Soon Anyway” - “There is one point that seems to have been overlooked: this spring, billions of dollars of tax rebate checks are already set to be sent out to people.” The Foundation is, of course, talking about 2007 federal income tax refunds!
The posting points out that, “Taxpayers with incomes below $100,000 typically have the greatest refunds (on net) while those who are above $100,000 are much more likely to owe the IRS money come April 15th. These large refunds are mostly due to credits that are available only to those whose incomes are below $110,000 such as the Child Tax Credit and EITC.” So lower income taxpayers will be receiving the biggest refunds.
To be fair, the Foundation notes, “Now it may be the case that those who are proposing a stimulus for this year have already taken the refunds that are set to be sent out this spring into account.” But between you and me – I doubt it very much. I frankly don’t think they gave that much thought to it. Congress is just looking for a way to make themselves look good to taxpayers who will be receiving the extra rebate check in an election year.

* Speaking of the Tax Foundation – the TAX POLICY BLOG also reports that the January-February 2008 issue of its TAX WATCH print newsletter is available to download. An article based on an analysis of the latest federal tax and spending data from 2005 discusses the “return on investment” of the states – the amount of federal monies returned for every dollar in taxes paid by residents. According to the article, like Oliver Twist, New Jersey is once again last on the list - “2005’s biggest loser was New Jersey, which received 61 cents in outlays per tax dollar.” This list is different from the one discussed above in the article.
* A recent posting by Joe Kristan at the ROTH AND COMPANY TAX UPDATE BLOG indicates that TurboTax is clairvoyance-enabled. Joe’s bottom line is “just because TurboTax defaults to something doesn't make it right” – another reason the tax-uninformed should not be using tax software as an alternative to a professional tax preparer.

* Trish at OUR TAXING TIMES reminds us that this year there will be “No More Floating”. The minute the IRS receives your check the money will be automatically withdrawn from your account.

* Nothing to do with taxes – but check out my review of Nathan Lane in David Mamet’s NOVEMBER in yesterday’s posting at ANYTHING BUT TAXES.


Friday, January 25, 2008


Q. Several years ago a tax rebate check was sent out - much like the ones planned for this year. I am married and my husband was not working at the time. I was making less than $20k per year. We had a 17 year old daughter living at home. We never received any rebate check and were wondering who we should contact about it. Everyone tells us we should have received a check. Thanks so much.

A. You have got to be kidding!

The last round of rebate checks was sent out in 2001 – almost 7 years ago! It is a bit too late to do anything now.

FYI, it is possible that the IRS withheld any rebate to which you would have been entitled to pay for an outstanding federal or state tax debt or any number of outstanding federal payments.

Just a reminder – please do not send me any more ASK THE TAX PRO questions until after April 15th. Any that I receive between now and then will not be read – but will just be stored in a file until after the tax season.


* The Social Security Administration has announced that due to a “programming error” an incorrect amount appears in the “Benefits for 2007” box on about 2.7 Million 2007 SSA-1099s. The SSA has corrected the problem and will be mailing out corrected SSA-1099s beginning today (January 25th). The revised SSA-1099 states in red typeface that it is a “Corrected Notice”. Click here for more information.

* The National Association of Tax Professionals reminds us of some items to keep in mind when filing your 2007 Form 1040:

· If you are eligible to claim a tax credit for child and dependent care expenses be sure to include the Social Security or Employee Identification number of your caregiver on the Form 2441.

· Remember to sign your return in the proper place. If you are filing a joint tax return with a spouse, both of you must sign.

· Attach Copy B of all Forms W-2 received during the year to the federal return. Also attach any Forms 1099 that report tax withholding. {make sure you attach Copy B - or else "Sam" will send the return back to you - rdf}

· Mail your return to the proper address. The IRS often changes the address for mailing returns. If the IRS sent you a tax booklet, use the enclosed envelope. If you have a balance due, you must use a payment voucher and mail your return to a lock box instead of the service center. If you electronically file your return, the chance of mailing your return to the wrong service center is virtually eliminated.

· Check the accuracy of all the Social Security numbers entered on your tax return. Each person for whom you claim a personal exemption is required to have a Social Security number or some other taxpayer identification number. Make sure the name and number appear just as they do on the officially-issued Social Security card. {this is very, very important - rdf}

· If you owe money this year, make your check payable to the “United States Treasury Service” not the “IRS. {I will explain why the checks are no longer payable to "IRS" in a future posting - rdf}

· Double check the tax from the tax tables, as well as all calculations.

· Make a copy of the return for your records.

· Be certain there is enough postage on the envelope. Include your full return address. If you owe, it’s a good idea to spend the extra dollars and use registered mail so there is a record that the IRS received your return.

* I have a final comment on what you should give your tax preparer. This year my annual January client mailing included the following:

The last word - I want to make sure you take advantage of all the deductions and credits to which you are entitled. In order to make sure that you pay the absolute least amount of federal and state income taxes possible I need complete and accurate information from you. This means I need specific numbers for deductions you are claiming. ‘Claim the maximum’ or ‘Whatever is allowed’ or ‘Same as last year’ won’t cut it. The maximum is what you actually paid – you are allowed what you actually paid - and it is rare that an expense or number of miles driven is exactly the same as it was the previous year (although, I will admit, not impossible). I cannot make up numbers for you– I need you to tell me $1023.50 or $20.00 per week for 50 weeks or 4638 miles!”


Thursday, January 24, 2008


The Democratic and Republican leaders in Congress leaders have completed a deal with George W on an economic stimulus package that would, damn it, provide for rebate checks that could be sent out as early as June.

It look like individuals who actually pay income taxes will be getting up to $600, working couples $1,200 and couples with children an additional $300 per child. Workers who make at least $3,000 but don't pay taxes would get $300 rebates. The rebates would be limited to individuals whose income is $75,000 or less and working couples with incomes $150,000 or less.

The cost of these damned rebate checks is estimated to be about $100 Million (plus, I expect, the costs the IRS incurs to actually issue and mail the checks).


Here are some quick answers to some quick questions:

Q. You own a property in another state as a 2nd home that you use for yourself, so you can not do a 1031 exchange. You sell the property for a profit. Of course, you pay capital gains on your federal return. Do you pay capital gains in NJ even though the property is not in NJ?

A. I am assuming that you are a resident of New Jersey.

A New Jersey resident is taxed on all income earned during the year from all sources (except statutorily tax-exempt income), regardless of where it is earned. As a general rule, your resident state pretty much taxes the same money that the federal government taxes, with a few minor adjustments depending on the state tax law.

If you are a NJ resident who owns vacation or investment property in another state and you sell that property at a gain, that gain is taxed by the State of New Jersey and it must be reported on the NJ-1040. If you pay tax on the gain to the state in which the property is located as a non-resident you can claim a credit for these non-resident taxes on the NJ-1040.

Q. I am organizing a client meeting where the subject will be stock market investing. I have read conflicting opinions on how much, if any of the cost incurred by the attendees will be tax deductible. The meeting will be aboard an Alaskan cruise ship. What are the parameters for someone to be able to write off some or all of the costs of an investment cruise?
A. According to IRS Publication 463 (Travel, Entertainment, Gift and Car Expenses) “You can deduct up to $2,000 per year of your expenses of attending conventions, seminars, or similar meetings held on cruise ships. All ships that sail are considered cruise ships.
You can deduct these expenses only if all of the following requirements are met -
1. The convention, seminar, or meeting is directly related to your trade or business.
2. The cruise ship is a vessel registered in the United States.
3. All of the cruise ship's ports of call are in the United States or in possessions of the United States.
4. You attach to your return a written statement signed by you that includes information about:
a. The total days of the trip (not including the days of transportation to and from the cruise ship port),
b. The number of hours each day that you devoted to scheduled business activities, and
c. A program of the scheduled business activities of the meeting.
5. You attach to your return a written statement signed by an officer of the organization or group sponsoring the meeting that includes:
a. A schedule of the business activities of each day of the meeting, and
b. The number of hours you attended the scheduled business activities.
Pub 463 also states, "If the convention is for investment, political, social, or other purposes unrelated to your trade or business, you cannot deduct the expenses.”
Q. I just read your article on donating vehicles. We are a charity organization, the Foundation for the college, and someone wants to donate a vehicle to the college. Do you know how long the charity has to hold onto the vehicle before they can sell it? Is there a holding period, or can the organization sell it right away?
A. It has been some time since I have been involved with non-profit organizations. My experience pre-dates the new rules for donating a car to charity.
I am not aware of any required “holding period”. As far as I know you can sell it the day after you receive it. I could not find anything on the subject in
Publication 526 (Charitable Contributions). The only rules I know are the requirements to provide the donor of the vehicle with a completed Form 1098-C that indicates the gross proceeds from the sale.
Q. Recently someone advised me of a NJ State tax: When you sell your primary residence and then move out of state, NJ residents must pay an Exit Tax of at least 2%. Is this true?

A. I think this is what you are talking about -

NJ Law requires that nonresident individuals who sell or transfer real property located in New Jersey make a NJ Gross Income Tax estimated tax payment on the gain as a condition of the recording of the deed.

The tax payment is determined by multiplying the gain on the sale by the top NJ tax rate of 8.97%. The payment cannot be less than 2% of the “consideration” received – or gross proceeds from the sale.

A resident taxpayer who will file a NJ-1040 for the year is exempt from making the estimated tax payment.

No payment is required if the property being sold or transferred was used exclusively as the seller’s personal residence and is exempt from federal taxes under Internal Revenue Code Section 121.

This is not an “exit tax”, but an estimated tax payment. The purpose is to make sure that the nonresident individual files a Form NR-1040 to report the sale and pay tax on the gain. Because the required estimated tax payment is made at the highest tax rate, the individual should receive be entitled to a refund on the NJ-1040.

BTW- I have decided how to deal with inappropriate ASK THE TAX PRO question submissions from now on – just ignore and delete them. I am not going to rant about them anymore.

One recent submission ended with the comment – “an email response would be great”. I am sure it would, but don’t hold your breath! I will answer the question, if appropriate, in an ASK THE TAX PRO posting, which is generally done only once a week, when I get to it. There may be a half a dozen questions in the “queue” in front of you. I will not drop everything and provide an immediate email response. I will email the submitter on the morning that the question is answered in an ASK THE TAX PRO posting.


Wednesday, January 23, 2008


Since my tax-season “hiatus” from blogging is fast approaching, I will be doubling up on ASK THE TAX PRO Wednesdays, and possibly adding extra days, to be sure I answer all the appropriate questions that have accumulated. Please do not submit any more questions now until mid-April.

Q. I am having a problem with the way my company pays my commission and I'm wondering if I can tell them it’s illegal. I work in advertising sales for a relatively small company. We get commission on sales plus a base salary. Since the company refuses to cut checks for less than $1,000, if a commission check is less than $1,000 net they just lump the commission money into our base salary paycheck.
I have pointed out to them that by doing so I get taxed more on the commission than I would if they just cut me a check for the commission only.
Here's the breaking point: Recently they miscalculated my commission by about 50% therefore making the check less than 1,000 so they lumped the commission into my salary check. I told them about their mistake and they said they would put the remaining commission on my next paycheck (again with the higher tax rate).
Can they keep doing this? I didn't think commission was allowed to just be rolled onto a salary paycheck as it messes up my tax bracket. Any advice you have is greatly appreciated as I would like to make a knowledgeable demand here.
A. You seem to be confusing tax withholding with tax liability.

You are not being taxed any differently on straight commission checks than you are on your “draw”. Both amounts are combined on your Form W-2. You pay tax on the total combined amount based on your particular federal and state tax brackets, determined after deductions and exemptions.

The FICA (Social Security and Medicare) tax is withheld at the same rate on a straight commission check, a straight base pay check, or a “combination” check – 7.65%. Any state unemployment and disability contributions are also withheld at the same rate from any payroll check. However, this type of withholding usually has a relatively low income threshold and you will have the maximum withheld during the first half of the year.

Where you see a difference is in the federal and state income tax withholding.

The amount of federal and state income tax withheld as a percentage of gross pay is based on tables published by the Internal Revenue Service and your individual state, your withholding status, and the number of exemptions you claimed on the Form W-4 you provided to your employer.

The problem arises when the amount of your check varies from pay period to pay period, as it would if commissions are added to base pay on a sporadic basis. The tax tables are based on the concept that you will receive the same amount of gross pay each pay period, and calculate withholdings accordingly.

Here’s a simplified example. If your base pay is, say, $500 per week the tables will assume that your gross income for the year is $500 x 52 or $26,000. If you claimed “Single-1” on your Form W-4 the tables will basically determine the annual tax liability for a single individual with $26,000 in income who is claiming one exemption for himself/herself and divide that amount by 52. This is the amount of income tax that is withheld.

If your employer includes $800 in commissions in with the normal $500 base pay one week, the tables will assume your gross income for the year is $67,600 ($1,300 x 52) and determine the amount of income tax to withhold accordingly. Because this calculation would push the assumed annual income into a higher tax bracket, a higher percentage of the income is withheld.

Your employer is doing nothing illegal or even wrong. Click here to see the IRS instructions for payments of “supplemental” income such as commissions. And you have not lost this money. The additional amount of federal and state income tax withheld on “combined” checks will either result in an increased refund or a reduced tax due when you file your tax returns next month.
If you feel that you are having too much federal and/or state income tax withheld you can always submit a new Form W-4 to your employer so that you have less tax withheld. The greater the number of exemptions you claim the less you will have withheld.

You can go to and use their paycheck calculators to see how a change in withholding exemptions will affect your take home pay.

Q. I have always used a Flexible Spending Account and been proud to say that I have never left any money "trapped" in the account at year end and have been good about estimating my costs each year to maximize the benefit. This year, I know that I will have a large medical expense, about $11K. So, when filling out the forms for 2008 benefits last month, I opted for the maximum $5000 FSA contribution, again, very proud of myself.

Then, last week, a friend of mine who recently had a large medical expense made the comment, "well, at least it was fully deductible." I read up, and lo and behold the $11K should be deductible, because it would be more than the 7.5% of my AGI. But, I was looking on the IRS's web site, and as far as I can tell, I may have actually shot myself in the foot here, since it seems I can't include the full $11K in calculating the 7.5%, only the $6K NOT in the FSA. Is that correct? $6K alone is not enough to meet the 7.5% test for me. If that is the case, it seems I am actually being penalized for having the FSA? I feel pretty stupid now, but no one has ever raised the idea to me that taking out an FSA would not be the best option in some cases. Any thoughts or advice?

I plan to call my benefits group to see if I can reverse the election, but they usually do not make changes. If this is true, I really feel that there should be a caveat about needing to make sure it's right for you if you have high medical expenses in all the benefit literature. I have been trying to research this online, and all I find is advice about how great these accounts are. Hopefully, I am wrong about this!

A. Don’t feel stupid. In your situation the $5,000 medical Flexible Spending Account (FSA) contribution was indeed your best option.
Do not, I repeat, do not reverse your election!

Contributions to a medical FSA automatically reduce your federal taxable wages, your FICA (Social Security and Medicare) wages, and possibly your state taxable wages. If your gross wages are $90,000 and you contribute $5,000 to a medical FSA you are only paying tax on $85,000. Click
here to view the appropriate IRS publication.

In addition your Adjusted Gross Income (AGI) is reduced by $5,000, which could increase a variety of deductions and credits and also reduce exclusions that are affected by AGI. See my posting on “The Most Important Number on Your Tax Return”.

By contributing $5,000 to your medical FSA you have received a $5,000 “above-the-line” tax deduction for your medical expenses. An "above the line" deduction is always better than a "below the line" (i.e. itemized) deduction.

Let’s say your gross wages are $90,000, FSA contributions are “pre-tax” for state income tax purposes, you are in the 25% federal and 5% state tax bracket, and you have no other taxable income. The $5,000 contribution to the FSA would save you 37.65% in total taxes (25% federal, 5% state and 7.65% FICA) or $1,883. You would not be able to deduct any of the remaining $6,000 in medical expenses because 7½% of your $85,000 AGI is more than $6,000.

If you did not made the $5,000 FSA contribution your AGI would be $90,000. You would be able to deduct $4,250 in medical expenses on Schedule A ($11,000 less $90,000 x 7.5%). At most you would save $1,275.00 in combined federal and state income taxes ($4,250 x 30%).

In the above example by contributing the $5,000 to your medical FSA you saved over $600 in taxes!

As you had indicated, medical expenses not paid or reimbursed through a medical FSA can be claimed as an itemized deduction on Schedule A, subject to the 7½% of AGI exclusion. You stated that the $6,000 remaining expenses in your situation would not exceed the exclusion. Be sure you include all your allowable medical expenses. My special report DEDUCTING MEDICAL EXPENSES ON YOUR 2007 FORM 1040 provides a detailed listing of all allowable expenses. Click here for more information.


Tuesday, January 22, 2008


You could have knocked me over with a feather. It seems that THE WANDERING TAX PRO is actually read somewhere in the halls of Congress!
I literally just received the following email, apparently a response to this morning’s post:
Dear Mr. Flach,
Thank you for contacting me with your concerns about the AMT and I do appreciate hearing your views on this issue.
You may be interested to know that the letter you received from me last week was a letter sent to over 7,000 individuals in the 13th District that have corresponded with me over the last year. I wanted to encourage my constituents to continue corresponding with me as it is helpful for me to know their concerns and understand their points of view.
Please know that I did receive your letter regarding the AMT and below is a copy of the letter that I sent to you in response on Friday, January 18, 2008. You should be receiving this letter in the mail shortly. Again, thank you for taking the time to share your views with me, and please continue to write me with any issues that may be of concern to you.
Albio Sires
Member of Congress
Dear Mr. Flach,
Thank you for contacting me regarding the Alternative Minimum Tax (AMT). I appreciate hearing from you on this important issue.
Please know that I understand your concerns about the Alternative Minimum Tax and its impact on the middle class. As you know, the AMT was enacted in 1969 after it was disclosed that approximately 155 wealthy families, some of whom were millionaires, did not pay any income taxes. The AMT was designed to ensure that the wealthiest families could not use exclusions, deductions or credits to avoid tax liability. Today, the AMT is beginning to reach middle income tax payers who were not originally intended to be subject to the tax.
You may be pleased to know that I have supported changing the AMT's negative impacts on the middle class by voting for H.R. 3996, the Temporary Tax Relief Act of 2007, introduced by Rep. Charles Rangel (D-NY). H.R. 3996 would renew the Alternative Minimum Tax (AMT) "patch" for the 2007 filing year. This bill would extend the "patch" for one year and set exemptions at $66,250 for joint filers and $44,350 for individuals, which would prevent 23 million families from being hit with a tax increase due to the AMT. H.R. 3996 was signed into law by the president on December 26, 2007.
Please know that I understand your concerns regarding our tax system and be assured I will keep your views in mind as Congress considers tax reforms in the upcoming year. Again, thank you for contacting me, and please let me know if you have any further questions or concerns. You may also wish to access my website at to learn more about my legislative activities in Congress, visiting Washington, D.C., and a special section on constituent services.
Please be advised that you may already be receiving my e-newsletter, however, it may be going into your email's spam box. If you are encountering this problem, you may need to remove this email from your spam box or you can view the e-newsletter by visiting my website.”
It looks like members of Congress, or at least members of their staff, actually do read the letters we constituents send them. This is indeed encouraging!
Thanks to Congressman Spires for his response.


Let’s see –

· My annual January mailing to 1040 clients went out on time, and I have heard from several clients already.

· I have completed all my 4th quarter and annual payroll tax returns and reports, except for a few 940s (I am still waiting for the IRS to send them out to clients). If they don’t arrive by week’s end I will download the forms from the IRS website.

· I have finished two of the four sets of calendar year corporate returns that I continue to do (my biggest business client of over 20 years has three corporations and I also do my mail drop’s corporation). I am waiting for tons of information for one (I expect it will be extended), and should complete the other one by week’s end. FYI – I no longer accept corporate clients.

· I have finished and mailed out the LM-3 (Dept of Labor report) and Form 990 for the local union that I do (a friend from grammar school and high school is the President).

The “widget” on your right indicates that it is 83+ days until April 15th (I think it is off by an hour). The official beginning of the season, February 1st, is fast approaching! I have a lot to do in the next 9 days – including a massive housecleaning and laundry effort, stocking up on food and office supplies for the season, and getting shorn (I get my hair cut every six months – whether I need it or not!).

I have an Innocent Spouse claim to do, a couple of 1040s still, a Form 990 for a client’s private foundation, and some research on client prior year and ongoing client issues. While I have not received any 1040 “stuff” yet I should be doing my first NJ tenant rebate claim of the season today.

And starting today I will begin my series of visits to post offices and the local IRS office to gather tax forms. They have not been out at the PO yet, but I am hoping that they will begin to appear this week. I remember during one of the first few years of my tenure with my mentor Jim Gill he sent me to a warehouse in Newark with a suitcase which I would fill up with federal forms.

And I have to write answers to a handful of ASK THE TAX PRO questions for the final two postings before my “hiatus” from blogging. I will be doubling up – offering two-for-one specials these last two weeks.

Each year I say that I will take a brief trip in mid-January to rest up for the deluge that begins on February 1st – maybe next year! On Thursday night I am off to NYC to see NOVEMBER with fellow Jersey City native Nathan Lane - at least that's something.

Enough rambling – off to the Post Office!


Back in December I wrote to my Congress-persons to chastise them for their irresponsibility in regards to the AMT fix issue. I posted the contents of my letter here at TWTP in “Dear Congress”.

On Sunday there was a letter at my “mail drop” from Congressman Albio Sires of the 13th Congressional District in “response” to my letter.

Of course it was a form letter that had nothing to do with the subject of my correspondence. The letter did not even mention the issue about which I had written.

Here is what Mr Sires, or rather one of his staff (although under Sires’ signature), wrote:

“Dear Mr. Flach,

I want to take this opportunity to thank you for your correspondence over the last year. I appreciate your taking the time to share your views with me.

Hearing from you is both important and helpful because it offers insight into your thoughts and concerns on the major issues we face today as a nation and especially as residents of the 13th District of New Jersey. I look forward to your continued input and will keep your views in mind as issues are considered in Congress.”

The letter went on to publicize his website and email newsletter. It ended, “Again, thank you for your correspondence. Please continue to contact me with any questions or concerns you may have.”

It makes you wonder if anyone in Congress actually reads their correspondence from constituents.

This was similar to a response I received to a letter I wrote to George W early in his first term to suggest a change to the tax law. I had suggested that investors be allowed to carryback as well as carryover net capital losses from Schedule D. The response was not even from himself, but from a flunky, and said pretty much the same as Sires does above – basically: “Thanks for your input. Your opinions are important.” There was absolutely no mention in the letter to the issue I had raised.

As for Sires, at least he responded. Nothing yet from Senators Lautenberg or Menendez!


Monday, January 21, 2008


As the beginning of the tax filing season, which in my opinion is February 1st, quickly approaches I thought I would remind you of some previously offered tax preparation advice from January 2007:


When preparing your tax return you are often given choices on how to treat a certain situation or item. You should review each option and do separate tax calculations to see which one will result in the lowest tax. You should also consider how the federal option will affect your resident and non-resident state and local tax returns. Your goal is to choose the options that will allow you to pay the absolute least amount of combined overall federal, state and local income taxes.

One of the options for a married couple to consider is whether to file joint or separate returns. You can check out my postings “Joint or Separate – That is the Question,
Part I and Part II” for some guidance.


You should not rush to be among the first taxpayers of the year to have your taxes done. Do not give or send your tax preparer your ‘stuff’, or attempt to prepare your own returns, until you have received all the forms and information needed to complete the returns! That means every W-2, every 1099, and every K-1 and all the cost basis information on the sale of investments. I have had many experiences where a client came in very early in the season and had his/her return prepared, only to receive another Form 1099 in the mail the day after he/she had sent the finished returns off to his/her “uncles”.

If you have a brokerage account there is an excellent chance that you will receive at least one, if not two, corrected “Consolidated 1099 Statements” to report taxable dividends, interest and gross proceeds after the initial statement arrives in late January. This is because of the rules concerning the taxation of “qualified” dividends, which became effective with tax year 2004. The final corrected 1099 may not arrive until mid-March.


Many taxpayers who expect to owe their “uncles” wait until the very last minute to get their “stuff” together to prepare their return. Even if you owe taxes on your 2007 return(s) you should have the return prepared early, once you have all the necessary information in hand. You don’t have to actually file the returns and pay the tax until April 15th. But by having your 1040 prepared early you will know exactly how much you will owe and have over a month to come up with the money, instead of running around trying to juggle funds days before the deadline. Hey, you might even be surprised to find that you will be getting a refund!

Also consider the workload of your tax preparer. I have a strict long-standing rule that all returns that are not literally in my hands, with all the necessary information, by March 31st will be automatically extended!


When making your IRA contribution by mail make sure you clearly identify the tax year to which you want the contribution applied. If making a contribution in early 2008 for tax year 2007 write “2007 IRA contribution” clearly in the memo section of the check. If you are enclosing a payment voucher or coupon provided by the trustee make sure that the correct tax year is marked. Follow up by checking your next IRA account statement to verify that the contribution was applied to the proper year. If you find that the contribution was applied to the wrong tax year contact the trustee immediately.

Now also seems like a good time to remind you of some advice if you have dependent children who will be working part-time after school or in the summer this year:


If a dependent student with an after-school or summer job does not expect to earn more than $5,450.00 (the standard deduction for Single) during 2008, including up to $300.00 in interest, dividends and capital gains, the child should claim “EXEMPT” on his/her Form W-4. This way he/she will not have to file a federal income tax return simply to get a refund of the income tax withheld.

Now here is some advice from someone else. Madison, a new “visitor” to THE WANDERING TAX PRO from the MyBlogLog community, has a good way of making sure she does not miss anything when getting ready to prepare her tax returns in the post “
Organize & Prepare: Do Your Taxes Quickly” at her blog MY DOLLAR PLAN. The only thing I do not agree with is “Once I know I have all the forms and all the data is correct, I can quickly enter the information in Tax Cut”.


Sunday, January 20, 2008


The blogosphere is abuzz with comments on the proposed plans for economic stimulus in general and those damned rebate checks in particular.

* As I have said here on many occasions Congress tends to take the easy way out in most situations – reacting to a problem with a quick temporary fix rather then responding to it by dealing with the causes. It’s a miracle that the country continues to run properly, or at least adequately. The Tax Policy Center’s TAX VOX blog agrees with me and so points out in its commentary “Stimulus: Treat the Disease, Not the Symptoms”. As posting author Howard Gleckman says, “whatever they do, it isn’t likely to help fix the underlying causes of the current slump.”
* Jim of BLUEPRINT FOR FINANCIAL PROSPERITY asks his readers for “Your Take: Would You Spend A Stimulus?”. He has had over 30 responses, and it appears that most would do exactly what I would if handed a tax-free $800.00 or $1,600.00 check – pay down debt and/or invest (in both current and retirement funds). In the minority was Tom, who would “fill up my gas tank about 4 times with the stimulus package and then buy myself a $0.99 double cheeseburger with the left over cash”.
* TAX GIRL Kelly Phillips Erb, who in an earlier post to her blog found that we tax professionals hate the idea of tax rebage checks, reports in her post “Bush Fix on the Economy Doesn’t Persuade the Dow” that the Dow isn’t biting either. Kelly states that, “After Bush’s announcement of the plan on Friday, stocks slipped, with the Dow ending at a 10-month low”.
* Trish McIntire of OUR TAXING TIMES joins me, and I would expect most other tax preparers, in declaring “I Hate These Things”, referring, of course, to the proposed tax rebate checks. She lists many excellent reasons why advance rebate checks are no good for anyone. Especially for tax preparers, because we “will have to deal with all the people who don't get a check or the amount they think they should have”.
She also points out a basic inequity in the way the rebate check works, at least historically – “If a taxpayer's rebate was less than their 2008 tax return entitles them to, they will get the additional money when they file their return. But, based on previous rebates, those who get a larger rebate than they deserve will get to keep that money. That is wrong.”
Her post ends with an excellent description of these checks – “tax rebates are for show and glory and not a good fiscal policy”.
* Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG has a better idea for economic stimulus:
Let's load our B-52 bombers with $20, $50 and $100 bills and conduct low level simulated bombing runs dropping the cash over areas affected by the mortgage crisis. Surely the sight and sound of the big birds skimming the treetops of Southern California will stimulate something, and it will be at least as effective as the rebate plan.”

By the way - Joe, thanks for the link!

* The Tax Foundation weighs in with two posts on the subject – “Economic Benefits of Fiscal Stimulus Likely to Be Small” and “Tax Revenue and Distributional Effects of Lowering 10% Bracket to Zero for 2008”.

* As usual, TAX PROF Paul Caron provides the ultimate round-up of commentary on the topic in his post “Do Tax Rebates Work?”. How come Paul never includes me in any of his round-ups?

So what do you think?


Saturday, January 19, 2008


* Just as I feared, George W wants to send out rebate checks, as per the CCH article “Bush Seeks Agreement with Congress on Stimulus Package as Early as Mid-February” – and Congress is apparently in agreement. I heard elsewhere that he wants to send out checks of $800.00 per person (double for couples) this time. Oi vey!
Politicians like rebate checks, especially in an election year, because when you get a check you think the government has actually given you something, and the politicians who voted for the check will continuously remind you that they gave it to you.
In the early days of the NJ homestead rebate the checks would come out around November 1st, so recipients would think “look what I got from Brendon Bryne (the then Democratic governor)” and run out and vote Democrat on Election Day.
* TAX GURU Kerry M. Kerstetter and Joe Kristan from the ROTH AND COMPANY TAX UPDATE BLOG report that PayPal, the electronic remittance services, is complying with IRS summonses for customer records.
* Ryan Ellis of the TAX INFO BLOG has “turned me on” to a good “rollover chart” created by McKay Hochman Co that outlines the rollover rules (from one pension plan to another) after the Pension Protection Act of 2008.

* TAX PROF Paul Caron quotes from the Wall Street Journal's “Washington Wire” to report that, if elected, Republican presidential candidate John McCain would create a tax reform commission headed by former Federal Reserve Chairman Alan Greenspan. The WSJ quotes McCain as saying, “We need a fairer, flatter tax”.

* Gina of GINA’S TAX ARTICLES gets on her soapbox and provides some excellent, dead on commentary on sacrificing your retirement savings to pay for your kids’ college education in her post “
Roth IRA for College Savings”. As I said in my comment – “Right on, sister!”

* Chuck McCabe at the TAX INDUSTRY TALK blog reports that the day after the IRS suggested that it may prevent tax preparers from providing RALs and similar products such as RACs and Audit Insurance to taxpayers, “Jackson Hewitt’s stock price dropped by more than 23 percent and Block’s stock dropped by nearly 5%.” Good for them!

* Tax law professor Linda Beale of A TAXING MATTER joins me in speaking out against the IRS use of private collection agencies in an excellent commentary on the program in light of the recent report by the National Taxpayer Advocate in her post “National Taxpayer Advocate: 2007 Annual Report to Congress 4”.

I do not always agree with Linda’s opinions on tax policy issues, but in this case we are both on the same page.

* At TAX VOX, the Tax Policy Center blog, Ben Harris discusses, and I disagree with and comment on, “A Simple Tax Reform”.

* It wouldn’t be a complete BUZZ without something from the yellow rose of taxes, Kay Bell of DON’T MESS WITH TAXES. She reports that “
Uh oh! Audits Are Up”!

Over at
THE FLACH REPORT, my blog for the self-employed, I discussed deducting the business use of your car, a possible home office “standard deduction”, and some New Jersey issues.

And later today at
ANYTHING BUT TAXES I will be posting about a new source of free online episodes of past and present classic and cult television shows – for when there is nothing to watch on cable!


Friday, January 18, 2008


An Associated Press article reports that George W “told congressional leaders privately on Thursday he favors personal income tax rebates and tax breaks for businesses to help avert a recession”.

Please, please, please – no more tax rebate checks like those sent out during Bush’s first year in office. They cost the IRS a fortune and resulted in mucho confusion and tons of errors on 2001 tax returns.

There have got to be better ways of getting money quickly into the hands of taxpayers.

Here’s an idea. Why not a “payroll tax holiday”? This concept was proposed a few years ago, but never acted upon. Here is how it could work –

Beginning with March 1st of 2008, the first $4,850 of wages earned by an employee over the age of 17 (or 18) would be exempt from at least the employee share of the 6.2% Social Security tax. This comes out to $300.70 per person. Over a period of time, in many cases one month or less, an employee would receive a total of $300.70 more in his/her paycheck. FYI The 2001 rebates were $300.00 per person.

Workers who earn more than the $102,000 Social Security earning threshold during calendar year 2008 will eventually pay the maximum Social Security tax – so they would in effect pay back the advance by the end of the year.

A special code for Box 12 of the 2008 Form W-2 would identify the amount of the payroll tax holiday savings, so this advance could be “paid back”, if Congress so desires, on the 2008 tax return in the form of a reduction of federal income taxes withheld.

Congress could also provide a payroll tax holiday on the employer’s share as well to put extra money in the hands of businesses. Or it could limit the employer payroll tax holiday to businesses with less than $X dollars of gross receipts in 2007, or with less than X number of employees, to direct the extra cash to only small businesses.

This is just a quick alternative suggestion off the top of my head – but it shows that there is more than one way to do it.

While I realize that I may be asking too much, what I would want Congress to do if they want to enact some kind of immediate rebate distribution is to put some serious thought into finding a way to do so that would generate the least amount of cost to the IRS, create the least amount of confusion, and reduce the potential for FUs on the 2008 Form 1040 or 1040A. Don’t just do the quickest and simplest thing and mail out checks now and damn the consequences.

Congress responding and not reacting – what a concept!


Thursday, January 17, 2008


It’s about that time of the year for my annual posting on Choosing A Tax Preparer. So here goes:

Do you remember the episode of the ODD COUPLE television series where Felix explains to Oscar what happens when you assume? What happens is you make an ass out of u and me!
Making false assumptions when choosing a tax preparer can be costly.
1) Don't assume that because a person has the initials "CPA" after his name he is an expert when it comes to federal and state income taxes!
The CPA designation means that a person took a very difficult test at the beginning of his/her career, possibly many, many years ago, only a small part of which dealt with federal income tax. It is no guarantee that he/she is current on federal and state tax law.
Whenever I get a new client I ask to see the last three (3) years’ tax returns, to make sure I do not miss any carry-forwards and to see if there are any errors that I could correct on an amended return. In my 35 years of preparing tax returns I have found more mistakes on 1040s prepared by CPAs than by any other class of preparer, including the taxpayer himself.
Many, many, many years ago I was a "para-professional" in the Small Business Services Department of one of the then "Big Eight" accounting firms. While reviewing the prior year's federal and state tax returns of a client whose current returns I was preparing I found a very obvious error on the state tax return that caused the client to pay more tax than necessary. Under the firm's policy, the return, which had been originally prepared by a CPA, was reviewed by his "manager" (also a CPA), and signed-off on by the head of the department (a CPA) and a member of the Tax Department (a CPA). Not one of these CPAs picked up the obvious error!
The only thing you can be sure of with a CPA is that you will be charged twice the price for half the service.
A student in one of the tax planning/preparation courses I taught at local adult schools many years ago asked me what was the difference between a tax return prepared by a CPA and one prepared by me (I am obviously not a CPA). My answer was "at least $100.00" (that number needs to be adjusted for inflation!).
There has been some concern in the past about the practice of CPA firms “outsourcing” the preparation of 1040s to India. This should not be a cause for concern. Between you and me - you are much more likely to have your 1040 prepared properly and accurately by a contracted preparer in India than by a CPA here in the United States!
CPA firms obviously outsource their 1040 preparation to save money. But you can be damned sure that a CPA will not charge you less for a return prepared in India that he would for one prepared here in the USA.
The only initials that have any meaning when it comes to tax preparation are "EA" - Enrolled Agent (I am also not an “EA”). The name is misleading. An EA is not an agent of the Internal Revenue Service, but a private tax professional who is "enrolled" to act as a taxpayer's "agent" in proceedings with the IRS and in tax court. To become an Enrolled Agent one must pass a difficult test that is 100% federal tax law. In order to maintain their enrolled status, EAs must have a mandatory number of continuing education credits in taxation each year. You can
find an EA in your area at the National Association of Enrolled Agents website.
2) Don't assume that H+R Block (or other chains such as Jackson Hewitt or Liberty) will charge a reduced, or even reasonable, fee for preparing your tax return!
When my mentor and I got a hold of the H+R Block fee schedule back in the late 1980s we were in complete shock. Henry and Richard ain't cheap! In my opinion they are very expensive, especially considering the value of the service provided. They charge fancy restaurant prices for fast food service! Plus they will attempt to squeeze even more money out of you by trying to push you into a usurious “Refund Anticipation Loan” or to make your IRA contribution to a Block-sponsored high-fee, low-yield investment that is practically guaranteed to lose money.
Returns prepared by the employees of Henry and Richard are second to CPAs in terms of errors I have discovered on 1040s over the years. My mentor always said that he wished H+R Block would move next door to our office - we would make a fortune fixing their mistakes!
A couple of years ago the Government Accountability Office (GAO) conducted a study which resulted in a report to Congress titled “Paid Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors”. The GAO sent undercover agents with two different tax scenarios to a total of 19 offices of 5 “fast-food” commercial tax chains, including H+R Block, in a metropolitan area. In only 2 instances was the correct refund calculated, but all 19 returns contained errors.
Some of the more serious errors included –

* not reporting self-employment income in 10 of the 19 cases,
* claiming an Earned Income Tax Credit on an ineligible child in 5 of the 10 applicable cases,
* not claiming the education benefit (credit or deduction) that resulted in the least tax in 3 of the 9 applicable cases, and
* not claiming all available itemized deductions, or not itemizing at all, in 7 out of the 9 applicable cases.
I was told by the GAO that not one of the 19 preparers in the study had asked to see the undercover taxpayer’s prior year’s return!
The GAO agents also discovered unethical sales practices related to Refund Anticipation Loans (RALs). The annualized interest rate for the RALs offered to the “taxpayers” ranged from 380% to 470%. Henry and Richard have been sued repeatedly throughout the US because of these RALs, and have paid millions of dollars in settlements (probably why they are so expensive – they need to cover their legal and settlement costs somehow). Even though H+R have promised that their RAL fees will be lower this year they are still usurious.
When looking for a tax professional, as with any other professional, it is best to get a referral from a trusted friend or relative.
To be perfectly fair, over the years I have come across CPAs who actually knew their “stuff” when it came to income taxes, and even some who charged somewhat reasonable fees. Several of my fellow tax bloggers have the initials CPA after their name, and, judging by their blogs, they certainly are knowledgeable, quite savvy in fact, in federal income taxes. But in my experience this is the exception and not the rule. And I am sure that there are probably a couple of competent, ethical and professional H+R Block preparers out there somewhere, too – although you couldn’t prove it by me.
While it may actually be possible that the best tax preparer, at the best price, for your particular situation is either a CPA or an H+R Block employee, this is only because of the education, experience, ability, temperament, and other factors that are specific to that individual preparer.

Wednesday, January 16, 2008


Q. I am a 26 yr old salesman for a large corporation. In 2006 I made about 75k and used a home tax program to file.
With a relatively high income plus a fair amount of deductions would it be of any concern to use a home tax program as opposed to hiring a tax professional to file? I have heard from no one in particular that with a higher income you should always use a tax professional. Is it possible to raise red flags just by filing yourself?
A. First of all, I do not believe that the IRS makes any pre-judgement of “taxpayer-prepared” returns. So, while not always the best way to go, there are not any “red flags” raised just because you prepare your own return, whether manually or via a “home tax program” (is that anything like a “home pregnancy test”?).

That being said, I certainly wholeheartedly agree that with a higher income, or rather with anything other than the simplest of returns, you should always use a tax professional instead of relying on tax software.

As I have written here and elsewhere many times in the past, no tax preparation software is a substitute for knowledge of the tax code. And no tax preparation software is a substitute for the services of a trained tax professional!
As with any software program the rule is "garbage in - garbage out". If you don't know how to enter the information, or what information to enter, you will not get the best, or even the correct, answer.

Forget about those tax-time television ads that tell you even a caveman can prepare his taxes correctly simply by using a particular tax software program. It just ain’t so!
When the IRS comes after you for errors on your tax return you can’t blame it on the software. The US Tax Court has on two separate occasions rejected the "Turbo-Tax Defense" when a taxpayer attempted to blame tax preparation software for a negligent tax return.
As a professional tax preparer I attend several tax preparation workshops, seminars, conferences and conventions during the year. I am constantly hearing instructors and participants alike discuss problems with their tax preparation software, the answer often being that one has to override the system and "force" the correct entry.
FYI, in 35+ years of preparing tax returns I have never used tax software to prepare a 1040. I prepare 400+ tax returns a year – all by hand. When I am asked what tax software I use I simply point to my head, indicating my brain.
IRS statistics indicate that taxpayers using do-it-yourself tax software spend an average of between 6 and 10+ hours longer preparing their tax returns (depending on the number of worksheets and schedules) than taxpayers who do manual calculations. Further, the IRS estimates that do-it-yourself software users spend an average of 10 to over 20 hours longer on the return than if they used a paid tax preparer, again depending on complexity.

The bottom line is – if you don’t know what you are doing do not rely on a tax preparation software package to make up for your lack of tax knowledge. Using a tax professional will save you time, aggravation and money.

You can click
here to find a tax professional in your area. FYI, I am not looking for any new 1040 clients.
While I am on the subject – I got the following ASK THE TAX PRO email submission at the tail end of December:
Q – “I've had a negative AGI the past two years and when I go to TurboTax to enter my info it doesn't ask if I want to carry it over like it did in years past. Is this still possible? And if so, where would I enter it?”
My email response to the submitter was as follows:
I have absolutely no idea!!! In 35 years of preparing tax returns I have never used any tax preparation software. ASK THE TAX PRO is not a forum for specific tax software questions! If you do not know anything about taxes you should not be relying on tax software.”

To repeat – ASK THE TAX PRO is not a forum for specific tax software questions! Even if I did use tax software I would not offer free “how to use your software” information online – that is what “technical support” is for.