From the IRS:

The maximum credit is 35 percent of premiums paid by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations. The maximum credit goes to smaller employers –– those with 10 or fewer full-time equivalent (FTE) employees –– paying annual average wages of $25,000 or less. Because the eligibility rules are based in part on the number of FTEs, not the number of employees, businesses that use part-time help may qualify even if they employ more than 25 individuals. The credit is completely phased out for employers that have 25 FTEs or more or that pay average wages of $50,000 per year or more.

Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. For tax-exempt organizations, the IRS will provide further information on how to claim the credit.

Note for owners and 2% or more S corporations shareholders:  The credits will apply to your employees but will not apply to wages paid to you.

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Just electronically filed the first 2009 tax return of my tax season. All went swimmingly well considering I am studying a 5 dvd, 600 page tax update manual of all the law changes.  I am not complaining though.  It is the nonstop tinkering with the tax code that makes life interesting for practitioners.

Monday will spend all day attending tax court class and observing actual tax court cases in the Portland US Tax Court.

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Accounting Web has an article about the new duties the IRS will have regarding the new health care insurance reform bill:

Monitoring compliance. Taxpayers will have to provide proof of coverage with their annual federal tax returns. Failure to comply will result in a penalty, payable to the IRS.

Distributing new government subsidies to low-income individuals through newly created state exchanges.

Overseeing small business tax credits to help qualifying businesses provide insurance to employees.

Assessing a tax on insurers that provide insurance benefits that are high-cost, or “Cadillac” plans.

Enforcing penalties for improper distributions from Health Savings Accounts, which Kaiser says will increase under the new plan.

Overseeing the demand that not-for-profit hospitals live up to their “charitable missions” by doing a “charitable needs assessment” once every three years.

Regulating contributions to Flexible Spending Accounts, which Kaiser estimates will be limited.

Is the IRS up to the task?

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Image via Wikipedia

Brad Shannon of the Olympian outlines new taxes being contemplated for Washington State to help with the budget crisis:

• Closing the exemption for door-to-door sales of consumer products
• Add $1 to the state’s $2.025-a-pack tax on cigarettes
• Tax on bottled water
• Sales tax on candy and gum
• Closing a sales tax exemption for some out-of-state residents who buy products in Washington
• Temporary sales tax increase or expanding the sales tax to professional services
• Sales tax on services (lawyers, engineers, detectives, security brokers, credit agencies, insurers)
• Income tax on high-wage earners
• $1.50-per-barrel tax on oil (3.5 cents a gallon on fuel)

Unless a miracle happens and the economy picks up dramatically, you can be sure higher taxes are coming your way one way or another.

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2 Comments

• At January 13, 2010, Angie in WA State wrote:

  I am not surprised, nor, to my own amazement, unable to see the necessity for these increases. Better to spread the pain, than to simply add on to home property taxes (those have already increased, at least for me, over 300% since about 1995).

  The one that I am most surprised to see is Closing a sales tax exemption for some out-of-state residents who buy products in Washington. It's about time the State of WA quits trying to fool anyone that those border-state (Portland, OR) shoppers will fail to buy in our state if we stop letting them off the hook for the sales tax, most of them are over here shopping for food, anyway, and in our state, that comes tax free (for food for home cooking and consumption, anyway). WA workers have been paying (at least 9%) in income tax to the state of Oregon for decades now, it's past time we reciprocate.

• At March 8, 2010, Christina Theis wrote:

  Another $1 added to a pack of cigarettes is just ridiculous.There simply have to be other ways to generate revenue than yet another sin tax. It is vaugely remenicent of the way the marajuana was slowly criminalized, starting by creating miles of red tape with contradictory rules,making it absurdly expensive and then slowly backing flawed medical information declarying it "dangerous" and "addictive". While smoking cigarettes is certainly a health risk this unfair taxation is starting to feel punative instead of a legitamate tax.

  While there are smokers in all socio-econmic groups, the facts are this tax is placing the burden largely on the shoulders of those who can afford it the least. Add a dollar to your morning latte and THAT would be equitable.

www.youtube.com/watch?v=xtXvCX3Tn24

Issued by the IRS today.

Click to enlarge

Click to enlarge

Here is the entire 2009 IRS Pub 17.

Solar water heater on a rooftop in Jerusalem

The recent stimulus bill passed by Congress and signed by the President re-instituted home and business energy tax credits that expired at the end of 2007.  The new tax credit has a lifetime cap of $1,500 and on 30 percent of  the cost of qualifying improvements made to your home residence in 2009 and 2010.  Here is a list of smaller improvements that may qualify:

• Exterior Windows
• Storm Windows
• Skylights
• Exterior Doors
• Storm Doors
• Roofs (metal or asphalt)
• Insulation – Includes seals to limit air infiltration, such as caulk, weather stripping, and foam sealants
• Central A/C
• Air Source Heat Pumps
• Furnace (Natural Gas, Propane or Oil)
• Hot Water Boiler (Gas, Propane, or Oil)
• Advanced Main Air Circulating Fan
• Water Heater (Gas, Oil, Propane, or Electric Heat Pump)
• Biomass Stove

There is also bigger improvements that qualify like solar and wind energy improvements.  The property must be certified by the manufacturer in order to qualify and a certification statement must be included in the packaging.

WASHINGON — The Internal Revenue Service today reminded individual and business taxpayers that many energy-saving steps taken this year may result in bigger tax savings next year.
The recently enacted American Recovery and Reinvestment (ARRA) of 2009 contained a number of either new or expanded tax benefits on expenditures to reduce energy use or create new energy sources.

The IRS encouraged individuals and businesses to explore whether they are eligible for any of the new energy tax provisions. More information on the wide range of energy items is available on the special Recovery section of IRS.gov. For a larger listing of ARRA’s energy-related tax benefits, see Fact Sheet 2009-10.

Tax Credits for Home Energy Efficiency Improvements Increase

Homeowners can get bigger tax credits for making energy efficiency improvements or installing alternative energy equipment.

The IRS also announced homeowners seeking these tax credits can temporarily rely on existing manufacturer certifications or appropriate Energy Star labels for purchasing qualifying products until updated certification guidelines are announced later this spring.

“These new, expanded credits encourage homeowners to make improvements that will make their homes more energy efficient,” said IRS Commissioner Doug Shulman. “People can improve their homes and save money over the long run.”

ARRA provides for a uniform credit of 30 percent of the cost of qualifying improvements up to $1,500, such as adding insulation, energy-efficient exterior windows, and energy-efficient heating and air conditioning systems. The new law replaces the old law combination available in 2007 of a 10-percent credit for certain property and a credit equal to cost up to a specified amount for other property.

The new law also raised the limit on the amount that can be claimed for improvements placed in service during 2009 and 2010 to $1,500, instead of the $500 lifetime limit under the old law.

In addition, the new law has increased the energy efficiency standards for building insulation, exterior windows, doors, and skylights, certain central air conditioners, and natural gas, propane or oil water heaters placed in service after Feb. 17, 2009.

IRS guidance issued before the enactment of ARRA will be modified in the near future to reflect the new energy efficiency standards. In the meantime, homeowners may continue to rely on manufacturers’ certifications that were provided under the old guidance and on Energy Star labels for exterior windows and skylights in determining whether property purchased before June 1, 2009, qualifies for the credit. Manufacturers should not continue to provide certifications for property that fails to meet the new standards.

The new law also eliminates the cap on the 30 percent tax credit for alternative energy equipment, such as solar water heaters, geothermal heat pumps and small wind turbines, installed in a home. The cap generally has been eliminated for these improvements beginning in the 2009 tax year. The IRS today issued Notice 2009-41, which explains the effects of this change.

HAPPY EARTH DAY!

Below is from Energy Star.gov

SUMMARY OF TAX CREDITS FOR HOMEOWNERS

Product Category	Product Type	Tax Credit Specification	Tax Credit	Notes
Windows & Doors	Exterior Windows and Skylights	*Important Change: Before June 1, 2009: Must meet ENERGY STAR criteria After June 1, 2009: U factor <= 0.30 SHGC <= 0.30	30% of cost, up to $1,5002	Not all ENERGY STAR labeled windows and skylights qualify for tax credit. More information
	Storm Windows	Meets IECC1 in combination with the exterior window over which it is installed, for the applicable climate zone	30% of cost, up to $1,5002	Manufacturer Certification Statement3 will list classes of exterior window (single pane, clear glass, double pane, low-E coating, etc.)4 that a product may be combined with to be eligible in specific climate zones.
	Exterior Doors	U factor <= 0.30 SHGC <= 0.30	30% of cost, up to $1,5002	Not all ENERGY STAR doors will qualify. More information
	Storm Doors	In combination with a wood door assigned a default U-factor by the IECC1, and does not exceed the default U-factor requirement assigned to such combination by the IECC	30% of cost, up to $1,5002
Roofing	Metal Roofs, Asphalt Roofs	ENERGY STAR qualified	30% of cost, up to $1,5002	All ENERGY STAR metal and asphalt roofs qualify for the tax credit. Must be expected to last 5 years OR have a 2 year warranty.
Insulation	Insulation	Meets 2009 IECC & Amendments	30% of cost, up to $1,5002	For insulation to qualify, its primary purpose must be to insulate (example: insulated siding does not qualify). Must be expected to last 5 years OR have a 2 year warranty
HVAC	Central A/C	Split Systems: EER >=13 SEER >= 16 Package systems: EER >= 12 SEER >= 14	30% of cost, up to $1,5002	For a list of qualified products, go to the Consortium for Energy Efficiency product directory , click on Air Conditioners, then in the “CEE Tier” enter “Residential Advanced Tier 3” for CAC Split Systems, and “Residential Tier 2″ for CAC Package Systems and ASHPs. Note — not all ENERGY STAR products will qualify for the tax credit. View ENERGY STAR criteria.
	Air Source Heat Pumps	Split Systems: HSPF >= 8.5 EER >= 12.5 SEER >= 15 Package systems: HSPF >= 8 EER >= 12 SEER >= 14	30% of cost, up to $1,5002
	Natural Gas or Propane Furnace	AFUE >= 95	30% of cost, up to $1,5002	For a partial list of qualifying products go to: Air-Conditioning, Heating, Refrigeration Institute (AHRI) Not all ENERGY STAR products will qualify for the tax credit. View ENERGY STAR criteria for furnaces, boilers.
	Oil Furnace	AFUE >= 90	30% of cost, up to $1,5002
	Gas, Propane, or Oil Hot Water Boiler	AFUE >= 90	30% of cost, up to $1,5002
	Advanced Main Air Circulating Fan	No more than 2% of furnace total energy use. Read this FAQ if the fan qualifies, but the furnace does not.	30% of cost, up to $1,5002
Water Heaters	Gas, Oil, Propane Water Heater	Energy Factor >= 0.82 or a thermal efficiency of at least 90%.	30% of cost, up to $1,5002	All ENERGY STAR gas tankless water heaters will qualify. There are currently no ENERGY STAR qualified gas storage tank or gas condensing water heaters that qualify. View ENERGY STAR criteria for water heaters. For a partial list of qualifying products go to: Air-Conditioning, Heating, Refrigeration Institute (AHRI)
	Electric Heat Pump Water Heater	Same criteria as ENERGY STAR: Energy Factor >= 2.0	30% of cost, up to $1,5002	All ENERGY STAR electric heat pump water heaters qualify for the tax credit.
Biomass Stove	Biomass Stove	Stove which burns biomass fuel5 to heat a home or heat water. Thermal efficiency rating of at least 75% as measured using a lower heating value.	30% of cost, up to $1,5002
Geo-Thermal Heat Pump	Geo-Thermal Heat Pump	Same criteria as ENERGY STAR: Closed Loop: EER >= 14.1 COP >= 3.3 Open Loop: EER >= 16.2 COP >= 3.6 Direct Expansion: EER >= 15 COP >= 3.5	30% of the cost	All ENERGY STAR geo-thermal heat pumps qualify for the tax credit. Use IRS Form 5695 Must be “placed into service” before December 31, 2016.
Solar Energy Systems	Solar Water Heating	At least half of the energy generated by the “qualifying property” must come from the sun. Homeowners may only claim spending on the solar water heating system property, not the entire water heating system of the household. The credit is not available for expenses for swimming pools or hot tubs. The water must be used in the dwelling. The system must be certified by the Solar Rating and Certification Corporation (SRCC).	30% of cost	All ENERGY STAR solar water heaters qualify for the tax credit. Use IRS Form 5695 Must be placed in service before December 31, 2016.
	Photovoltaic Systems	Photovoltaic systems must provide electricity for the residence, and must meet applicable fire and electrical code requirement.	30% of cost	Use IRS Form 5695 Must be placed in service before December 31, 2016.
Small Wind Energy Systems	Residential Small Wind Turbines	Has nameplate capacity of not more than 100 kilowatts.	30% of cost	Use IRS Form 5695 Must be placed in service before December 31, 2016.
Fuel Cells	Residential Fuel Cell and microturbine system	Efficiency of at least 30% and must have a capacity of at least 0.5 kW.	30% of the cost, up to $500 per .5 kW of power capacity	Use IRS Form 5695 Must be placed in service before December 31, 2016.
Cars	Hybrid gasoline-electric, diesel, battery-electric, alternative fuel, and fuel cell vehicles		Based on a formula determined by vehicle weight, technology, and fuel economy compared to base year models	There is a 60,000 vehicle limit per manufacturer before a phase-out period begins. Toyota and Honda have already been phased out. Credit is still available for Ford, GM and Nissan. For more information visit: Fueleconomy.gov Use IRS Form 8910 for hybrid vehicles purchased for personal use. Use IRS Form 3800 for hybrid vehicles purchased for business purposes.
	Plug-in hybrid electric vehicles		$2,500–$7,500	The first 250,000 vehicles sold get the full tax credit (then it phases out like the hybrid vehicle tax credits). Effective January 1, 2009.

¹Either the 2001 Supplement of the 2000 International Energy Conservation Code or the 2004 Supplement of the 2003 International Energy Conservation Code.

²Subject to a $1,500 maximum per homeowner for all improvements combined.

³A Manufacturer’s Certification is a signed statement from the manufacturer certifying that the product or component qualifies for the tax credit. The IRS encourages manufacturers to provide these Certifications on their website to facilitate identification of qualified products. Taxpayers must keep a copy of the certification statement for their records, but do not have to submit a copy with their tax return.

⁴Additional information on exterior window features may be viewed at Anatomy of an Energy Efficient Window.

⁵Biomass Fuel means any plant-derived fuel available on a renewable or recurring basis, including agricultural crops and trees, wood and wood waste and residues (including wood pellets), plants (including aquatic plants), grasses, residues, and fibers.

The IRS defines “placed in service” as when the property is ready and available for use.

Efficient Cars

Starting January 1, 2009, there is a new tax credit for Plug-in hybrid electric vehicles, starting at $2,500 and capped at $7,500 for cars and trucks (the credit is based on the capacity of the battery system). The first 250,000 vehicles sold get the full tax credit (then it phases out like the hybrid vehicle tax credits).

Tax credits are available to buyers of hybrid gasoline-electric, diesel, battery-electric, alternative fuel, and fuel cell vehicles. The tax credit amount is based on a formula determined by vehicle weight, technology, and fuel economy compared to base year models. These credits are available for vehicles placed in service starting January 1, 2006. For hybrid and diesel vehicles made by each manufacturer, the credit will be phased out over 15 months starting after that manufacturer has sold 60,000 eligible vehicles. For vehicles made by manufacturers that have not reached the end of the phase-out, the credits will end for vehicles placed in service after December 31, 2010. See the IRS Website for updated information .

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Half million dollar house in Salinas, California

For those facing a foreclosure or a short sale on real estate,  here is a video from an IRS forum on the subject:

Debt Cancellation
Has your client received a 1099-C? Are you unsure how to handle it? Is your client in foreclosure? The tax treatment of cancelled debts is extremely complex and poses a significant challenge to affected taxpayers. A panel will discuss this pertinent topic and provide you with the tools you need to help your clients accurately report this item on their tax return.

This seminar was presented by the Taxpayer Advocate Service (TAS). It was filmed in July 2008, at the IRS Nationwide Tax Forums in Orlando, FL.

Please download Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals), to be able to follow the example in the seminar.

The seminar can be viewed here.

There is also more IRS information here.  If you are in this situation, my firm can assist you with the tax consequences.

Average salaries of faculty of California State University faculty 2007

There has been considerable controversy and misinformation regarding S corporations and wages paid to officers of the corporation.  The controversy arises from the fact that to the extent an officer/shareholder underpays his salary, the corporation’s net income may be higher, thereby reducing  social security and medicare taxes since the net income attributable to the shareholder of an S corporation is not subject  to these taxes.  I recently represented an S corporation shareholder (not a previous client of mine) before the IRS on this very issue and the end result was a disaster to the client.

The shareholder/officer was paid approximately $15,000 – $20,000 in annual salary and the net income of the S corporation was approximately $60,000 to $70,000 over a number of years.  Here is some IRS guidance on this issue:

FS-2008-25, August 2008

Corporate officers are specifically included within the definition of employee for FICA (Federal Insurance Contributions Act), FUTA (Federal Unemployment Tax Act) and federal income tax withholding under the Internal Revenue Code. When corporate officers perform services for the corporation, and receive or are entitled to receive payments, their compensation is generally considered wages. Subchapter S corporations should treat payments for services to officers as wages and not as distributions of cash and property or loans to shareholders.

S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.

The Internal Revenue Code establishes that any officer of a corporation, including S corporations, is an employee of the corporation for federal employment tax purposes. S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages.

This fact sheet clarifies information that small business taxpayers should understand regarding the tax law for corporate officers who perform services.

Who’s an employee of the corporation?

Generally, an officer of a corporation is an employee of the corporation. The fact that an officer is also a shareholder does not change the requirement that payments to the corporate officer be treated as wages. Courts have consistently held that S corporation officer/shareholders who provide more than minor services to their corporation and receive or are entitled to receive payment are employees whose compensation is subject to federal employment taxes.

The Treasury Regulations provide an exception for an officer of a corporation who does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration. Such an officer would not be considered an employee.

What’s a Reasonable Salary?

The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.”

The amount of the compensation will never exceed the amount received by the shareholder either directly or indirectly. However, if cash or property or the right to receive cash and property did go the shareholder, a salary amount must be determined and the level of salary must be reasonable and appropriate.

There are no specific guidelines for reasonable compensation in the Code or the Regulations. The various courts that have ruled on this issue have based their determinations on the facts and circumstances of each case.

Some factors considered by the courts in determining reasonable compensation:

• Training and experience
• Duties and responsibilities
• Time and effort devoted to the business
• Dividend history
• Payments to non-shareholder employees
• Timing and manner of paying bonuses to key people
• What comparable businesses pay for similar services
• Compensation agreements
• The use of a formula to determine compensation

Since there was really no evidence that could be found to support the low salary originally paid, the IRS recharacterized almost all of the net income of the corporation as wages for this shareholder/officer.  This resulted in penalties for failure to withhold and pay payroll taxes.  The end result is the client ended up paying about double in taxes, interest and penalties over what would have been owed had the income been classified as officer wages from the beginning.

The client consulted an attorney to consider going to court over the matter.  The attorney ironically had also been audited on the very same issue, had gone to court and lost.  So he advised the client to just bite the bullet and pay the assessment.

The IRS has been going after this issue in a big way.  If you are a shareholder/officer in an S corporation, careful consideration is required of the reasonableness of your compensation in order to avoid a possible nightmare like this down the road.

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3 Comments

• At December 12, 2009, Stuart Pumphrey wrote:

  Mr. Howes,

  I found this interested article of yours while researching self employment and S corporation tax options for a college paper I am writing. I am writing on a real life situation I know of and it approaches this employment tax issue from a different direction. My sister, her husband and a couple friends formed an S corporation to run a medical billing service for doctors. In the end it has come to my sister doing all the work and she owns 55% of the stock so she has essentially full control of the business. The issue with employment taxation is not that she underpays herself and tries to capture the rest as stick disbursement, quite the opposite. She gives herself almost all of any left over profit after paying the company bills to herself. She pays herself sporadically with no set amount over time. She pays herself anywhere between $90,000 to $120,000 a year. She also pays herself and reports her earnings on a 1099 as non-employee compensation. What are your views of a S corporation officer doing the full work of the company for over twenty years now treating herself as an independent contractor rather than an employee of the firm?

  I am interested in you opinion,

  Thank you

  Stuart Pumphrey

• At December 30, 2009, cpajohn wrote:

  @Stuart Pumphrey,

  The determination of independent contractor versus employee is a complex issue beyond the scope of this post.

  I would refer you to this case:

  http://ftp.resource.org/courts.gov/c/F2/918/918.F2d.90.89-35071.html

  And specifically this language contained within the case:

  Taxpayer also argues that Mr. Spicer could not be an employee because he was a common law independent contractor. In determining whether Mr. Spicer is an employee or an independent contractor, several factors we consider are whether the business furnishes the worker with tools and a place to work, and "whether the work is performed in the course of the individual's business rather than in some ancillary capacity." General Investment Corp. v. United States, 823 F.2d 337, 342 (9th Cir.1987). We also consider whether the services performed "constitute[ ] an integral part of taxpayer's business and [are] not incidental to the pursuit of a separately established trade or business." Westover v. Stockholder's Publishing Co., 237 F.2d 948, 952 (9th Cir.1956).

  18

  We find that Mr. Spicer is not a common law independent contractor, because Taxpayer provided him with supplies and a place to work, and he performed accounting services for no other accounting firm. Moreover, Mr. Spicer's services were integral to the operation of Taxpayer, as he was the only accountant in the accounting concern, the only one who signed customers' returns as preparer, the only one who performed financial planning for the firm, and the only one who audited clients' books.

  19

  Taxpayer also argues that in light of the Idaho Industrial Commission's determination that Mr. Spicer was an independent contractor, rather than an employee, for state employment tax purposes, the government is precluded from again raising the issue of Taxpayer's treatment of Mr. Spicer for federal employment tax purposes. Because the government was not a party, nor in privity with the State of Idaho, in the prior state administrative action, it is not bound by the Idaho State Industrial Commission's holding, and again could challenge Mr. Spicer's status for federal income tax purposes. See United States v. ITT Rayonier, Inc., 627 F.2d 996, 1000 (9th Cir.1980) (citing Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n. 5, 99 S.Ct. 645, 649 n. 5, 58 L.Ed.2d 552 (1979)). Accordingly, we affirm the district court as to this issue.

  The burden of proving independent contractor status based on the limited facts you have provided would appear to be difficult.

• At January 6, 2010, RJP wrote:

  My Partner and I have an S-Corp together. We pay ourselves a salary of $120K each. We had a profit this year of about $100K. Our current Tax person advised we just pay ourselves a bonus of $50K each. Looking at that paystub though we sent a large chunk out in Taxes. Is this a case where doing a "Distribution" would perhaps have been a better idea?

There is a lot of confusion about Limited Liability Companies (LLCs) versus other types of business entities.  From strictly a tax standpoint, a limited liability company is not recognized in the Federal tax code.  In other words, a LLC can be a sole proprietorship, a partnership or a corporation (S or C type) for tax purposes.

Generally speaking, a business entity forms a LLC to get the benefits of being protected from lawsuits against your personal assets without having to go through the hassle of forming and maintaining a corporation.

But there are still reasons to incorporate rather than or in addition to forming an LLC.  The circumstances unique to your situation need to be analyzed in order to determine the most beneficial way to operate your business.

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3 Comments

• At January 21, 2009, Orange County Estate Plan » Blog Archive » LLCs And Liability Protection wrote:

  [...] LLCs, Corporations, Partnerships, Sole Proprietorships and Taxes [...]

• At February 5, 2009, PuneTech » POCC meeting: What should I create: sole proprietorship, partnership, pvt. ltd., LLP? » Technology in Pune wrote:

  [...] LLCs, Corporations, Partnerships, Sole Proprietorships and Taxes (cpajohn.com) [...]

• At February 9, 2009, 5 reasons to incorporate online | Techno Blog wrote:

  [...] LLCs, Corporations, Partnerships, Sole Proprietorships and Taxes (cpajohn.com) Share and Enjoy: [...]

It has always been a bone of contention for me that people think tax preparers decide how much of a refund that you get on your individual returns. Folks, your refund is determined by how much you had deducted from your earnings during the year and how much your various deductions and credits reduce your tax liability. A good preparer can help you find missed deductions and credits you otherwise might miss but he or she cannot determine how much you obtain for a refund.

The Columbian has an article today about the importance of choosing a good preparer. I once represented, in an IRS audit, a very nice couple who went to a tax preparer because a friend told them that the preparer had a tax shelter that would substantially reduce their taxes. Well it turns out that the preparer was identified as someone who was getting people to sign up for a fraudulent tax shelter. The IRS not only went after the preparer, they also went after the clients of the preparer.

My new client ended up having to pay back all the taxes saved, plus interest, plus penalties. Since the IRS takes a couple years to sort out these kind of messes, the penalties and interest ending up doubling the actual amount that would have been owed had the nice couple never used this preparer.

Take the Columbian’s good advice and don’t fall for this:

Does the guy who does your income tax boast that he can get bigger refunds than anyone else?
Does your tax preparer say she’s so good that her fee is based on a percentage of how much she gets you?
If so, you may be cruisin’ for a bruisin’, says the Internal Revenue Service.

If it sounds too good to be true, it is.

By the way, people often go to the national preparer chains thinking their fees are more reasonable. This is not necessarily the case. I would be glad to quote your fee in advance once reviewing your tax materials and you can see for yourself if this is true. And with my services you are getting someone that has been doing this successfully for a very long time. Can you be sure that is the case when you go to a retail tax chain?