April 15th (April 17th): Just Another Day

Please, don’t stress about April 17th, the due date for this year’s Individual and Partnership Federal Income Tax Returns.  April 17th is NOT a hard deadline.  Just file an extension and if you think you might owe money make an estimated payment to avoid interest and penalties on the amount due.  Keep in mind, the point of filing an extension, if you owe money, is to avoid a late FILING penalty.

So, why all the hoopla surrounding the tax “deadline”?  We are programmed from an early age to fear the IRS.  Many people believe that if they don’t file their tax return by April 15th (April 17th) they might face serious fines or even go to jail.  Of course, that isn’t really true unless you owe a lot of money and don’t file at all.

Here are the facts:

1.  If you are due a refund, there are no penalties if you file late.  Yep, that’s correct (for Federal returns).  The IRS will even pay you interest on the amount they owe you!  (at .000000001% or something like that)

2. If you owe money, you can avoid late filing penalties by filing an extension.   For Individuals the extension is 6-months and for Partnerships it is 5-months.

So, relax, stop stressing and file an extension.

IRS Delays Tax Refunds: Congress to Hold Hearings

Before the 2012 tax filing season the IRS released the 2012 Refund Cycle Chart showing that taxpayers could receive their refunds in as fast as 5 business days this year.  Unfortunately, the IRS has not lived up to this schedule.   In fact, in almost every instance this year that I’m aware of, the IRS has deposited refunds late.  I’m not aware of a single instance where any taxpayer actually received their refund in 5 business days.

Why such delays this year?  Well, they haven’t really said for sure.  They’ve said things like new “anti-fraud techniques” or “computer glitch”.    They also came out with the standard statement “most taxpayers are receiving their refunds within 10-21 days, which is consistent with historical time frames”.  What?  People don’t care about historical time frames.  If you say you’re going to deposit the money on a certain day, do it!  If you don’t, provide a valid reason to the taxpayer why you didn’t!  And, what is it?  Is it a “computer glitch”, “anti-fraud techniques” or is it just okay because people are getting their refunds within 10-21 days?

But, now Congress has scheduled a hearing to investigate why refunds have been delayed this year.  Hopefully they will get to the bottom of this.  Unfortunately, many taxpayers blame tax preparers when their refunds don’t get deposited on time.  This has led to some tax preparers being threatened.  It is also especially frustrating to taxpayers when the IRS’ “Where’s My Refund” tool also produces errors.  This gives the impression that maybe the tax preparer didn’t even file the return at all, which is not usually the case.

So, if the IRS doesn’t give you your money back on time they just make excuses, but, pay your tax bill late or file a business return late and you get hit with penalties and interest.

Many Tax Credits Are Overrated

Many people will spend money in order to qualify for a tax credit, only to find that the tax credit is so small it isn’t worth mentioning or is not available at all.

Here are two examples that I’ve encountered this year:

1. Taxpayer spent $6,000+ on a certain residential appliance only to find that the residential energy tax credit was only $150.

2. Taxpayer purchased an alternative energy vehicle in 2011 partially because the sales person sold them on the huge tax credit that they would qualify for, only to find that most tax credits for alternative fuel vehicles expired on 12/31/10.

The takeaway? Don’t spend a bunch of money to qualify for a measly tax credit and be wary of tax advice from a car salesman.

The Flawed Earned Income Credit

A single mom, whom we’ll call “Mary”, works hard without support from her ex to provide for her child, and makes about $35,000 per year.  Unfortunately, she makes too much money to qualify for the so called “Earned Income Tax Credit.”  During 2011, she lost her job due to company downsizing.  But, since she lost her job in October, her earnings for 2011 were still close to $30,000 – still too high to qualify for the EITC (with one child).  If she had lost her job in July or maybe August, her earnings would have been low enough to qualify.

Unfortunately, qualifying for the EITC has a lot to do with timing.

Mary is still unemployed and looking for a job.  It could be March or April before she lands a good job.  In other words, she could start working “just in time” to NOT qualify for the EITC again in 2012.  Even though she will have been out of work for 6 months, since those 6 months are split between 2011 and 2012, she doesn’t get the EITC for either year.  This is what you call a “wacky” system that only someone in D.C. could have come up with.

A single parent, claiming 3 dependents, can hit the “sweet spot” of EITC by earning between $12,750 and $16,650 during the year.  They can get EITC of up to $5,751 added on to their Income Tax Refund.  For 2 dependents the EITC is $5,112.

Another single mom that I know has supported 2 children on only about $17,000 per year for the past few years.  Unfortunately, last year she got a second job at a gas station and made an extra $5,000.  This extra income significantly decreased her EITC this year.  Only someone in D.C. could devise such a system that punishes a single mom for getting a second job.

The third situation is about two divorced parents living together with each having children of their own.  They each are providing for their own “household” and paying for each of their children’s expenses.  Thus, they both claim Head of Household and the EITC.  They each get $3,000 – $5,000 per year from EITC.  Then they get married.  Suddenly they no longer qualify for the EITC at all because together they make “too much money” to qualify for EITC.  Again, only a bureaucrat in D.C. could devise a system that encourages co-habitation and punishes married people.

All three of these situations are actual situations and I know all of these people personally.  The EITC is one of the many flaws in our current tax system that needs to be fixed.

Here is how it could be fixed:

1. If you’re going to have EITC at all, allow people to apply for EITC any time during the year using the past 12 months of income.  This could be done on an amended Form 1040X.  They would need to wait 12 months before applying again.

2. In order to not “punish” someone for getting a second job, allow people to take an average income over the past 3 years to determine their EITC.  Putting this in place would help those people who didn’t realize that they were going to be “punished” for working a second job and would allow them to decide going forward, after meeting with their tax professional, if they want to keep working the second job.  When you consider child care, social security and medicare taxes and the decrease in EITC it is hardly worth it for someone to work a second job.

3.  Allow married couples to file as “Single” if they so choose with only one being allowed to file as “Head of Household”.  And, no longer allow people living together to each file as “Head of Household”.  There should only be one “Head of Household” filing per physical address.

IRS Direct Deposit Refunds Will Be Getting Faster

Image by 401K via Flickr

The IRS is working toward a real-time filing system.  They announced today that they are hosting a Second Real-Time Tax System Meeting.  This real-time system will allow instant matching on returns which should result in 24 hour refunds.

In my opinion this is long overdue, at least the refund part.  Under the current system you can receive your refund in 5-10 business days.  This is without any type of document matching.  Employers don’t have to file W-3′s  and W-2′s with the IRS and SSA until Feb. 28th so any matching that is done is way after-the-fact.  In fact, the IRS admits that “It is not uncommon for a taxpayer to receive a notice 12 to 18 months after a tax return is filed.  This after-the-fact compliance approach can create problems and frustrations for both taxpayers and the IRS.”  So, my question to the IRS now is, what happens in the 5-10 business days that people currently have to wait?  Why is there even a wait time at all if there is currently no matching done?

When I e-file a client’s return I get an almost immediate response from the IRS that the return has been accepted.  In a matter of minutes their computers have matched up the taxpayer’s name, SS#, spouses name, SS#, all W-2 company names with Tax ID#’s and some other various information.  Of course, they cannot match up any W-2 payroll information because they either haven’t received the information from the employer or they have and it hasn’t been processed (it will be 12-18 months later).  Then, they wait 5-10 business days before they directly deposit the money?  Why?  What happens in that 5-10 days?  It appears, nothing.  There should already be 24 hour refunds.  They don’t need a perfect matching system in order to implement that.

This real-time system should be done in two phases:

1) Start refunding taxpayers money immediately upon them filing.  This would be simple to implement under the current system.  Anything larger than $15,000 should require additional approval (or matching) to prevent extremely large fraudulent refunds.

2) Start improving the matching system.

A real-time system is great, but, the big question for me is, how much “matching” is going to be done up front?  All of it?  And, will it cause even greater delays for many taxpayers in getting their refunds?  Employers aren’t perfect either.  Many times the information that they file with the IRS is inaccurate.  Under the current system taxpayers receive letters 12-18 months later.  Then they have to either agree with the changes to the return or disagree and state the reasons why they disagree.  Sometimes it turns out the the employers filed inaccurate information.

I’m for a real-time system.  But, in what form?  I think it would be great if the IRS would match things up faster so that taxpayers aren’t accruing interest and penalties for 12-18 months before they find out that their return is wrong.  But, the IRS already receives the info by Feb. 28th, 30 days after the taxpayer’s receive their tax documents.  Why does it take so long to match things up?  If they can’t match things up within a few weeks after receiving the info how are they going to operate a “real-time” system?

Can You File Your Tax Return Using Your Last Pay Stub?

Image by kenteegardin via Flickr

One question tax preparers frequently get asked is “Can I file my return using my last pay stub?”

There are really two questions here:  1) Can an individual file their own return using a pay stub instead of a w-2?  And, 2) Can a paid tax preparer prepare and file a return based on a pay stub instead of a W-2?

First, let me deal with the issue of paid preparers.  The IRS states that it is “against e-file rules” for preparers to file with a pay stub instead of a W-2.  This is on their web-site here.  When they say “against e-file rules” I’m not sure exactly what rules they are talking about or if they are specifically referring to paid preparers or individuals filing their own return.  I’ve read through the entire Handbook for Authorized e-file Providers and the only mention of preparing returns from a pay stub is on page 48 where it talks about advertising.   But, on page 30 it states that paid preparers must retain “Copies of Form W-2, W-2G and 1099-R”.  How can you retain a copy of it if you never saw the W-2 in the first place?  Do you really think that the client is going to bring back the W-2 later just so that you can keep a copy?  I don’t think so.  Paid preparers need the W-2 up front in order to protect themselves.  In addition, one of the questions that must be answered in all professional tax software when e-filing is “Check if this is hand written, altered or appears not to be a true W-2″.  So, how would you know if you haven’t seen it?

Now, the issue of an individual filing their own return.  I cannot find any specific rules against this.  However, here are a couple of things to keep in mind:

1. Not all information is on the pay stub.  The Employer EIN, for example, isn’t.  Got it on last year’s W-2?  Not so fast.  Sometimes employers change their EIN.  Also, the categorization of retirement contributions isn’t clear on the last paystub.  For example on the W-2 in Box 12A, 12B, 12C or 12D it usually has the letters A,B,C,D, etc. denoting what kind of retirement contribution it is.  There are other items as well that might appear on the W-2 that are not on the last pay stub.

2. Your YTD info on your pay stub might be wrong.  This could be for a variety reasons, like your employer changing software or payroll services during the year.  Sure, they should have reconciled everything and made it accurate but they may not have done that yet when you got the last pay stub.  Some payroll preparers double check all the numbers before sending out W-2′s and if they find an error and then correct it on the W-2 it would be different from the last pay stub.

In summary, paid preparers definitely need to see the actual W-2 and taxpayers filing their own return would be best served to wait for it as well.

IRS Speeds Up Direct Deposit Refunds

Image via Wikipedia

Beginning in 2012, filers receiving a refund will be able to get it in as fast as 5 business days.  In prior years the fastest you could get a refund was 6 business days.

Direct Deposit refunds will also be deposited on Wednesdays instead of Fridays as it has been done in the past.  It is unclear why the IRS has chosen Wednesday instead of Friday.  But, of course, it is unclear why the IRS

Tax Reform, Much Ado About Nothing

Image by loonyhiker via Flickr

Tax Reform has now become the major topic of debate for this election cycle.  Of course, this happens every few years.  They will probably make a few small changes that are suppose to make the tax code simpler but it always has the opposite effect.

I’m not exactly sure why Republicans are pounding this drum so loudly.  Especially when focusing on government spending worked so well in 2010.  I thought the problem was spending?

9-9-9 Would Probably Double Your Taxes

Image by agrilifetoday via Flickr

Herman Cain’s 9-9-9 is certainly attracting a lot of attention and has given him a huge boost in popularity and poll numbers.  Proponents of the plan claim it’s simplicity will end the need for complicated tax returns, stimulate the economy and still raise the revenue necessary for the fed.  Opponents of the plan claim it will put a much larger tax burden on the poor and middle class while at the same time giving the government yet another way to tax us via a national sales tax (who says it will remain at 9%).

Since I prepare tax returns for a living, I have a lot of raw data to test this scenario out myself.  Here is what I did:

Tax Refunds….a Good Thing?

 

We all know how excited some people get when they get an income tax refund.  And, we’ve probably all heard accountants, tax preparers and others with good intentions say something like, “you know, that is your money that you let the government use interest free for the past year”.  Then, they proceed to tell the excited refund recipient that they should adjust their withholding so that their refund won’t be so big the next year.

In theory, this is good advice.  I mean, why should you let the government hold your money for you?  Surely it would be put to better use in your own pocket.  True.  But,