FIVE NOT-SO-OBVIOUS TAX SEASON TIPS
by Mark Scheinbaum
American Reporter Correspondent
February 23, 2004
LAKE WORTH, Fla., Feb. 23, 2004 -- The dining room table is covered with receipts; the bedroom floor has stacks of canceled checks, and my wife is pulling scraps of old receipts out of pockets. Tah-Daaaah! It can mean just one thing: Tax time is here.
I'm not a CPA, and I don't play one on tv, so shower down those complaints about my humble recommendations, but here are my five top recommendations to save you tax season heartache"
1. Do not file early: if you think you are confused by new tax rules, you should see the dummies at your bank or brokerage firm. Sure, they have a clue, but it's usually wrong. Your first 1099 form could be wrong. One accounting firm estimates 20 percent of all 1099 forms are wrong this year. Wait for 1099-R, where "R" stands for the revised form. If you are a more active or sophisticated investor, you might see two or three corrected forms before the end of March. By filing early you are creating more corrections and work. File at the end of March or early April.
2. Don't be an idiot. if you think you understand the revised tax code you are an idiot. If you think the 2,000 pages of revised rules from 1986, yes, I said 1986, are fully interpreted by now, you're also an idiot. Hire a Certified Public Accountant. I know, there are indeed some nice and knowledgeable folks called "Enrolled Agents" who do a great job, without the CPA certification.
If you have one of these folks working for you, kiss them and buy them a lobster dinner. Otherwise, stay away from tax services in store fronts, free advise from IRS (65% wrong in one study), bookkeepers, and "tax accountants" with a small "a," and pay the extra bucks for a CPA. Use a small firm, small partnership, or sole practitioner recommended by friends. If you are smart the money you spend will give you a year-round friend and source of financial information, as part of a total financial planning team. You almost always save or get refunded far more money than the professional fee.
3. Take the extension. If by April 10th or 11th you are still rushing around to make the deadline for filing, take a break. Mistakes are made by rushing. Deductions are missed, and your CPA is a wreck. Don't be afraid to take an extension, regroup, let your accountant take a week off to rest, and then sit down and rework things a few weeks later.
4. Investigate Incorporation. take the time to see what your life would be like as a C or S corporation. This goes for people who are self-employed, or who have part-time businesses, retirement businesses, or hobbies that are becoming businesses. Ask your accountant to do a sample calculation. You might be one of the people who can benefit from moving a number of your transportation, insurance, office, computer, and other expenses into a corporate, or partial corporate format.
5. Never go to an audit. Unless they haul you away in handcuffs, or have a court order for your physical presence, never, ever, ever, ever, under no circumstances, appear in person for an audit. Send your CPA or board certified tax attorney, or hire one.
I have a list of horror stories of taxpayers "with nothing to hide" who showed up with a shoe box of receipts, a clean shirt, and a smile, and left IRS in dismay, distress, and distempered as a sick hound dog. When you sit across from a tax examiner it is difficult not to answer a question. Unfortunately, that question is often a "fishing expedition" which has nothing to do with the reason for the audit.
If you refuse to answer, it looks as if you are hiding some fraud or scam. If you answer honestly, you have just opened up a new area of investigation, with your implied consent. A skilled CPA will come prepared for the specific issue raised in the IRS audit letter, say, child care expenses. If the examiner suddenly drops a question about your travel expenses, the best CPA I ever knew would quietly gather up his papers and briefcase, and start rising from his chair. "What's the matter? Where are you going?" the IRS auditor would ask.
"I have to leave now," the CPA would say.
"Why? What's the matter"" IRS pressed.
CPA: "I have to leave, I have to go call my client, I have to prepare my files and get ready for our next meeting, which I'll have to schedule in four or five weeks."
"What are you talking about?" the IRS asks again.
CPA: "What do YOU mean? You called me in here because you had questions about Mr. and Mrs. Smith's child care costs. I prepared the information, I am charging my clients by the hour for something which never should have been questioned in the first place, and as soon as I get here you ask me questions about travel expenses. Obviously, I have to answer honestly so I need to go through all their travel expense files, so I am leaving and will wait for a detailed letter from your supervisor, explaining why you did not have issues with my clients' travel expenses until today, and I'll get the supporting material and reschedule."
More often than not the IRS told the CPA to forget the whole thing, understood they were dealing with a pro, went back to the child care issue, and could not wait to get rid of the CPA with no additional payments or actions by the taxpayer. If you really think that as an untrained taxpayer you can be as professional, knowledgeable, and detached as your CPA, you're wrong.
Mark Scheinbaum, veteran business editor and journalist, is heard nationally with business commentary of Doug Stephan's Good Day radio program on 300 stations, and is chief investment strategist for Kaplan & Co. Securities, www.kaplansecurities.com