Archive for the ‘Education’ Tag

Aren’t All Tax Returns Created Equal?

Originally published in the Cedar Street Times

February 7, 2014

There is a belief by many people that a tax return is a bit of a commodity – basically you are going to get the same results no matter if you or anybody else prepares the return.  If that were true, your only goal would be to find the absolute cheapest tax preparer in town (or do it yourself).

A number of years ago Money magazine used to annually send out the same hypothetical family’s tax return to be prepared by 45-50 tax preparers across the country.  The surprising result was that it was rare in any year to have even two tax returns prepared the same way.  The most recent one that I could find resulted in only 25 percent of the preparers coming within $1,000 of the theoretical correct answer.  That means 75 percent missed the mark by more than $1,000.  This certainly speaks to the complexity of the tax code, and why you really need to have someone with as much relevant experience, education, and training as possible to navigate the tax terrain.  You may think you are being savvy by saving $200-$300 by getting a deal on your tax preparation, but what did you get?  Maybe you overpaid your tax by a $1,000 in the process of saving $300.  And how would YOU ever know.

When it comes to hiring someone to prepare your returns, credentials are not everything, but they certainly are a measuring stick of the education, training, testing, and commitment required.  Here are your options:

Do-It-Yourself Software (i.e. TurboTax) – Tax software, whether for professionals or amateurs is certainly a requisite tool to bring any measure of accuracy or efficiency to preparing a tax return.  Computers are quick at math and very accurate at crunching numbers (that is the part that is “guaranteed” to be accurate by do-it-yourself software providers), but if you provide the wrong input, or your software is not even programmed to ask you or accept all the variables you might need, then you will get a wrong answer every time (that part they don’t guarantee).

In addition, without an understanding of the forms and tax law, you will have no idea if there is a glaring error staring you in the face when you are ready to submit the forms.  I have seen countless returns butchered through the use of tax preparation software over the years.  I am currently amending three years of tax returns for a family that overpaid their taxes by $1,000 a year for the past twelve years due to a simple mistake that the software was not able to point out to them.  Unfortunately the statute of limitations has run out on the first nine years and they cannot get a refund at this point.

RTRP -“Registered Tax Return Preparer” – This is the current basic credential required by the IRS to prepare tax returns for pay.  There is no formal high school or college education required, no professional class and exam process to become licensed, and no continuing education requirement.  You just pay $65 to the IRS and you can prepare tax returns professionally!  This designation was created in the last few years with the intent of having a basic exam and some continuing education, but the testing and education requirements have been put on hold pending legal challenges to the requirements. RTRPs have limited practice rights before the IRS.

CRTP – “CTEC Registered Tax Preparer”– (CTEC stands for CA Tax Education Council) – This is the current basic credential required by California to prepare tax returns for pay.  Again, there is no formal high school or college education required.  There is a 60 hour professional class (equivalent to three or four semester units in college – one class) that is offered by many providers in person, on the internet or by self-study with an exam on the material covered.  There is 20 hours of continuing education each year, and a $5,000 bond.  This is the license that the vast majority of preparers hold in California at chains such as H&R Block, Liberty Tax Service, and Jackson Hewitt.  CRTPs also have limited practice rights before the IRS.

EA – “Enrolled Agent” – This is the highest of the two designations offered by the IRS, and EAs can practice in any state.  Again there is no formal high school or college education required, and there is no required professional class (although an intensive prep course is generally taken).  There is a 10.5 hour proctored three-part exam with 100 question each – one on individual, one on business returns, and one on practice procedures and ethics with essentially 24 hours of continuing education each year.  EAs have unlimited practice rights before the IRS.

CPA – “Certified Public Accountant” – Licensed by each state (although there is reciprocity to practice with nearly every state now).  California requires a college degree with 150 semester units (five years) including 24 semester units of accounting and 24 semester units of business related courses in taxation, economics, finance, management, etc., 10 semester units of ethics, and another 20 semester units of accounting studies which a masters of taxation or masters of accountancy would satisfy.  You must then work for a year under the direct supervision of a CPA.  If you want to be able to sign audit reports, you have to have 500 supervised audit hours.  You must also pass a 14 hour proctored four-part national exam and then a CA ethics exam.  California also requires a LiveScan background check and fingerprinting of all applicants.  There is essentially 40 hours of continuing education required each year for California CPAs.  CPAs have unlimited practice rights before the IRS.  Although CPAs are trained in, and can do a lot more than just your tax returns, most small CPA firms focus on tax preparation.

Attorney – Licensed by each state. We won’t discuss the requirements to become an attorney, as attorneys rarely prepare tax returns.  Some attorneys that specialize in tax will prepare tax returns, although most of those are focused on estate tax returns.  Attorneys that do prepare tax returns will often have obtained a CPA license also.  Attorneys have unlimited practice rights before the IRS.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Your Future Tax Return: Romney Versus Obama

Originally published in the Cedar Street Times

November 2, 2012

If tax positions would sway your Tuesday vote, here is what Obama and Romney would like to see.  Keep in mind, however, you don’t always get what you want!

Tax brackets: Romney reduce to 80% of current levels. Obama keep the same as 2012 except allow top bracket to split into two higher brackets like pre-2001. (Romney, Current 2012 Rates, Obama, 2013 rates if no congressional action ) (8%, 10%, 10%, 15%), (12%, 15%, 15%, 15%), (20%, 25%, 25%, 28%), (22.4%, 28%, 28%, 31%), (26.4%, 33%, 33%, 36%), (28%, 35%, 36% and 39.6%, 39.6%)

Capital gains, interest, dividends: Romney reduce tax rate to zero for AGI below $200K.  15% max if AGI above $200K. Obama increase long-term capital gains rate to 20% max and up to 39.6% on dividends – leave interest taxed at ordinary bracket rates.

2013 3.8% Medicare surtax on net investment income and existing 0.9% medicare surtax for married filers over $250K AGI and others over $200K: Romney repeal.  Obama keep.

Itemized deductions: Romney cap itemized deductions (maybe $17,000-$50,000 cap) and maybe eliminate completely for high income.  Obama reduce your itemized deductions by 3% of your AGI in excess of $250K married, $225K HOH, $200K single, and $125K MFS (up to 80% reduction of itemized deductions) and limit the effective tax savings to 28% even if you are in a higher bracket.

Income exclusions: Romney keep as is. Obama cap the effective tax savings to 28% on exclusions from income for contributions to retirement plans,  health insurance premiums paid by employers, employees, or self-employed taxpayers, moving expenses, student loan interest and certain education expenses, contributions to HSAs and Archer MSAs, tax-exempt state and local bond interest, certain business deductions for employees, and domestic production activities deduction.

AMT: Romney repeal. Obama keep but set exclusion to current levels and index for inflation.

2009 expanded Child Tax Credit, increased Earned Income Credit, and American Opportunity Credit: Romney – Allow to expire as scheduled 12/31/12.  Obama – Make permanent.

Buffett Rule: Romney “Not gonna do it.” Obama households making over $1 million should not pay a smaller percentage of tax than middle income families.  This is accomplished by raising the rates on capital gains and dividends as discussed earlier.

Temporary two percent FICA cut you have been enjoying in 2011 and 2012: Both candidates favor allowing to expire at 12/31/12.

Estate tax: Romney repeal.  Obama set at $3.5 million and index for inflation with top rate of 45% on excess.

Top corporate tax rates: Romney 25%. Obama – keep at 35% for 2013 but maybe reduce to 28% in the future.

Corporate international tax: Romney don’t tax U.S. companies on income earned in foreign countries. Obama discourage income shifting to foreign countries.

Corporate tax preferences: Romney extend section 179 expensing another year, create temporary tax credit, expand research and experimentation credit. Obama increase domestic manufacturing incentives, impose additional fees on insurance and financial industries, reduce fossil fuel preferences.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.