Practice Scenario 6 Concepts In this exercise, you will be applying the following concepts: IRS and Industry Procedures Electronic Signatures Recordkeeping Requirements Form 8453 ProFiler Expertise Apartment Numbers Occupational Diagnostics (Deductions@Work ) Due Diligence and the Earned Income Tax Credit Lessons Learned Dependents, Child Tax Credit, and Earned Income Tax Credit Additional Child Tax Credit Filing Status: Head of Household Schedule M Information Education Credits or Benefi ts Tax Updates and Expiring Provisions Electronic Signature and Storage (ESS) Products and Services Refer to your Jackson Hewitt Products and Services Overview Guide if you need assistance with any product or service in this exercise. As a reminder, the guide contains the following information for each product and service: Recap Client Benefi ts Fees ProFiler Practice Scenarios 6-1
IRS and Industry Procedures This section provides information you need to know to apply the following IRS industry procedures. Electronic Signatures Taxpayers who wish to e-fi le must sign their return electronically using a fi ve-digit personal identifi cation number (PIN). ProFiler uses only the Practitioner PIN Program method. Under this method, taxpayers can choose either of the following: ProFiler-generated PIN - Taxpayers authorize Jackson Hewitt to generate a PIN on their behalf Taxpayer-selected PIN - Taxpayers choose a fi ve-digit number and either enter it in ProFiler or authorize you to enter it for them The appropriate box is checked on Form 8879 to indicate which method was chosen by the taxpayer. Once it is signed by all taxpayers and the preparer, the return is ready for processing. On Married Filing Jointly (MFJ) returns, if one of the taxpayers is absent, leave the absent individual s PIN blank and put the return on hold. Absent taxpayers may complete Form 8879 by choosing their PIN and authorizing you to enter it. Once they complete this step, the form can be mailed, faxed, or returned to the tax preparation offi ce. When received in the offi ce, open the previously saved return, enter YES for question 10112, Preparer Is the taxpayer present? or question 9965, Preparer Are both taxpayer and spouse present? and then enter the missing PIN. This completes the return and allows the offi ce to process it. In either case, the completed Form 8879 must be retained in the taxpayer s fi le at the Jackson Hewitt Tax offi ce. Recordkeeping Requirements The IRS requires that you keep a copy of each W-2 in a client s fi le. When a W-2 has been successfully downloaded into ProFiler using the CIC Plus, TALX, or ADP methods, no paper copies are necessary. You must also keep copies of any Forms W-2G and Forms 1099-R, as well as any supporting documents that are not included in the electronic return data. An example of such a document is a depreciation worksheet. Remind the taxpayer to keep their client packet and any supporting documentation for items on their tax return for at least three years. They can request a copy of their tax return from any Jackson Hewitt offi ce with appropriate identifi cation. When a completed return is presented for electronic fi ling only, you must keep a copy of the completed return and Forms W-2, W-2G, and 1099-R in the client fi le. If a taxpayer gives you a return already completed by a paid preparer, it must contain the paid preparer s signature. 6-2 ProFiler Practice Scenarios
Form 8453 If a taxpayer s return requires that specifi c documentation be sent to the IRS, then the taxpayer s electronically fi led return will use both Form 8879, IRS Signature, and Form 8453, U.S. Individual Income Tax Transmittal for an IRS e-file Return. The Form 8453 must be mailed within three business days of the return s acceptance by the IRS. See Form 8453 for a complete list of items that are permitted to accompany the document to the IRS. ProFiler Expertise This section describes how ProFiler helps you handle the following situations. Apartment Numbers If the client s address includes an apartment number, enter it in the Personal Information section when ProFiler asks question 575, Enter your mailing address (Example: 123 MAIN ST APT 4A). As shown in the example, enter the street address followed by APT and the apartment number, if applicable. Occupational Diagnostics (Deductions@Work) Some occupations are likely to have specifi c deductions. For example, teachers may be able to deduct expenses for classroom supplies, and mechanics may have expenses for work tools. Whether you use the normal or accelerated interview, a reminder diagnostic message appears in sections that include related occupational deductions if a corresponding deduction has not been entered. Due Diligence and the Earned Income Tax Credit When you prepare a return, you must make a declaration that the return is true, correct, and complete. You need to be confi dent in the accuracy of the information the client has provided. ProFiler provides various cautionary and advisory messages throughout the interview. You can use the Notes feature in ProFiler to record additional information the taxpayer has provided. There are two types of notes: Customer notes, which print with the client s documents; and Preparer notes, which print on office copies only. Both notes become a permanent part of the ProFiler return file and can be retrieved using Last Year s System (LYS) for returning clients. For the Earned Income Tax Credit (EITC), the IRS has established specifi c questions that must be asked of each EITC-eligible person in order for the preparer to meet their due diligence obligation. Questions concerning income are calculated based on your entry of all income the taxpayer received. The answers to other questions are determined automatically by ProFiler based on entries made throughout the interview process, including those in the Dependents section concerning relationship, age, support, and how long the taxpayer and the individual have lived together during the year. You must ask the taxpayer these questions and faithfully record the answers. Never assume that you know the answers without asking. ProFiler Practice Scenarios 6-3
Practice Tax Return Scenario Use the Client Information provided in the following section to prepare a tax return. After you complete the return, review the Lessons Learned section to see how you did. Client Information Chantel L. Farver (05-05-1980, 435-00-4001 ) is single and rents a residence at 1976 West Lake Avenue, Apartment #2174, Your City, YS and ZIP Code, with her son, Tyree X. Farver (06-14-2007, 402-00-4006), and her daughter, Nikole M. Farver (born during the tax year on 09-05-2010, 403-00-4006). Chantel s other son, Hanson B. Farver (04-28-1995, 401-00-4006), lives with Chantel s mother, Beatrice Williams. Chantel provided more than half of the support for all three children, and all of the cost of keeping up her home. No one else lives in the home. Chantel provided Nikole s father, Brandon Houten (04-15-1974, 410-00-4006), with Form 8332 so that he can claim Nikole as a dependent. Chantel s daytime (work) phone number is 417-000-2345 and her evening (home) phone number is 417-000-3456. Chantel completed her own tax return last year. This year, though, she has decided to have your local offi ce complete the return because she gave Form 8332 to Nikole s father. When you ask Chantel for her email address and explain the benefi ts of the Jackson Hewitt Discount Shopping site and document storage capabilities she decides to give you her email address. The email address for Chantel is clfarver21@nomail.com. She is a full-time teacher (W-2 is shown) and does not have any other income. Chantel is taking courses at a university to specialize in gifted child education. She paid her tuition by using the money her student loan provided (Form 1098-T is shown). She received no fi nancial aid or educational assistance. Chantel has received the EITC in prior years; however, she has not received any letters about fi ling Form 8862. Later in the interview, when you explain the kinds of expenses that qualify as educator expenses, she says that she spent $400 on science materials for her fi fth grade classroom. When you ask whether the school district reimbursed her, she tells you she was not reimbursed for the classroom supplies. You explain to Chantel that the $250 deduction for teachers has expired for tax year 2010, however, she can include the expenses as an unreimbursed employee business expense if she itemizes on her return. When you remind Chantel that she needs to have receipts to prove these expenses, she tells you she keeps a special fi le in her classroom containing receipts for all of her classroom purchases. Chantel authorizes Jackson Hewitt to discuss her return with the IRS, and she authorizes Jackson Hewitt to generate a PIN number for her electronic signature. After you explain the costs of the various options for receiving funds, Chantel decides to apply for a Refund Anticipation Loan and have the proceeds disbursed via an smartcard/ipower Card. She confi rms that she is neither the spouse nor the dependent of anyone who is on active military duty. Chantel gives you permission to disclose information about her to a bank and to mail promotional material to her based on her tax return information. Her employer s telephone number is 417-000-2546. 6-4 ProFiler Practice Scenarios
Chantel has a valid driver s license with a picture (license number 400004006, issue date 05-31-2006, expiration date 05-31-2012). She has never had a Refund Anticipation Loan (RAL) discharged in bankruptcy and has not fi led a petition under federal bankruptcy laws. When you ask about her interest in taking the Jackson Hewitt Tax School she tells you, No thank you. Chantel has both a savings and a checking account. Chantel s mother s maiden name is Bower, and the smartcard/ipower Card number as shown on the package envelope is 4356789990. Chantel chooses to purchase the Gold Guarantee product instread of the Accuracy Guarantee and is interested in taking a Jackson Hewitt income tax course. She tells you that her evening phone number is the best phone number to reach her. Prepare Chantel s tax return. a Employee's SSN 435-00-4001 b Employer identification number (EIN) 00-4006001 c Employer's name, address, and ZIP code 1 Wages, tips, other compn 2 Fed inc tax withheld 3 Social security wages YOUR COMMUNITY SCHOOL BOARD PO BOX 593 YOUR CITY YS ZIP CODE 22500.70 494.61 22500.70 4 SS tax withheld 5 Medicare wages & tips 6 Medicare tax withheld 1395.04 22500.70 326.26 7 Social security tips 8 Allocated tips 9 Advance EIC payment d Control number 10 Dependent care benefits 11 Nonqualified plans 12a 7231A45J e Employee's name. address, and ZIP code Suff. 13 14 Other 12b OMB No. 1545-0008 Form W-2 Wage and Tax Statement 2010 Statutory employee CHANTEL L FARVER 12c Copy B To Be Filed with 1976 WEST LAKE AVENUE APT 2174 Retirement plan X Employee's FEDERAL Tax Return 12d This information is being YOUR CITY YS ZIP CODE Third-party sick pay furnished to the Internal Revenue Service. 15 State Employer's state ID number 16 State wages, tips, etc 17 State income tax 18 Local wages, tips, etc 19 Local income tax 20 Locality name YS 4006001 22500.70 1125.04 22500.70 225.01 YLC JH-TELG 5/26/09 Department of the Treasury -- IRS FILER S name, street address, city, state, ZIP code, and telephone number USA UNIVERSITY 254 DUMPRIES PLACE YOUR CITY YS ZIP CODE FILER S federal identification no. 00-4006002 435-00-4001 STUDENT S name CORRECTED $ 2 $ STUDENT S social security number 3 1 Payments received for qualified tuition and related expenses 5000.00 Amounts billed for qualified tuition and related expenses OMB No. 1545-1574 Form 1098-T If this box is checked, your educational institution has changed its reporting method for 2010 4 Adjustments made for a prior year 2010 5 Scholarships or grants Tuition Statement Copy B For Student CHANTEL L FARVER $ $ This is important Street address (including apt. no.) 6 Adjustments to 7 Checked if the amount tax information scholarships or grants in box 1 or 2 includes 1976 WEST LAKE AVENUE APT 2174 and is being for a prior year amounts for an furnished to the City, state, and ZIP code academic period beginning January - Internal Revenue YOUR CITY YS ZIP CODE $ March 2011 Service. Service Provider/Acct. No. (see instr.) 8 Checked if at least 9 Checked if a 10 Ins. contract reimb./refund half-time student graduate student $ 0.00% Form 1098-T (keep for your records) Department of the Treasury - Internal Revenue Service ProFiler Practice Scenarios 6-5
Lessons Learned This section describes the lessons you should have learned from this exercise. Dependents, Child Tax Credit, and Earned Income Tax Credit ProFiler identifi es Chantel s son, Tyree, as her qualifying child for a dependent exemption, the Child Tax Credit (CTC), and the EITC based on answers to your questions about their relationship, Tyree s age, how long they lived together during the year, and whether Tyree provided more than half of his own support. ProFiler will also identify Nikol as a qualifying child for the EITC. You must ask the taxpayer these questions and faithfully record the answers. Never assume that you know the answers without asking. Even though Chantel has given Nikol s father the right to claim her exemption, she is still entitled to claim her for the EITC. Beginning in 2009, the following items for determining whether an individual is a qualifying child for any tax benefi t have been modifi ed: To be a qualifying child, the child must be younger than the taxpayer. If a taxpayer s child fi les a joint return, then they cannot be the taxpayer s qualifying child, unless the return was fi led only as a claim for refund. If a child can be claimed as a qualifying child by their parents, but no parent claims them, then they cannot be claimed by anyone else unless another individual s AGI is higher than the highest AGI of any parent of the child. The taxpayer s child is a qualifying child for purposes of the CTC only if they can and do claim an exemption for the child. ProFiler offers the following four categories for a dependent: Children who lived with the taxpayer for more than six months Children who did not live with the taxpayer due to divorce or separation Other dependents such as children who lived with the taxpayer for less than seven months, parents, grandparents, cousins, and unrelated members of the taxpayer s household Nondependent children (such as the custodial parent s child) or a disabled adult who lived with the taxpayer You should have entered Tyree as a child who lived with Chantel for more than six months. Additional Child Tax Credit The Additional Child Tax Credit is a refundable credit that is available to some taxpayers with earned income above $3,000 who are not able to use all of their nonrefundable CTC, because their tax liability is too low. ProFiler uses the answers you provide to complete Form 8812, Additional Child Tax Credit, and enters the allowable credit for eligible taxpayers on the appropriate line on Form 1040. 6-6 ProFiler Practice Scenarios
Filing Status: Head of Household ProFiler selects Head of Household (HOH) as the fi ling status for Chantel when you answer that she is not married and that she provided more than half the cost of keeping up a home for herself and a qualifying individual. ProFiler identifi es Tyree and Nikole as qualifying individuals for HOH from the answers to questions in the Dependent section. In some instances, a taxpayer may be considered unmarried even though they are legally married as of December 31 of the tax year. All of the following tests must be met for this situation to be true: A separate tax return is fi led. The taxpayer paid more than half the cost of keeping up their home during the tax year. The taxpayer s spouse did not live in the home at any time during the last six months of the tax year. Temporary absences due to special circumstances, such as military deployment, do not count. The home was the main home of the taxpayer s child, stepchild, or foster child for more than half the year. The qualifying individual must be claimed as an exemption on the taxpayer s tax return unless a noncustodial spouse is able to claim the exemption using the rules for children of divorced or separated parents. Schedule M Information The Making Work Pay Credit (MWPC) is part of the American Recovery and Reinvestment Act (ARRA) of 2009. It is equal to 6.2% of a taxpayer s earned income, but cannot be more than $400 ($800 if MFJ). The credit is reduced if the modifi ed AGI is more than $75,000 ($150,000 if MFJ) To be eligible to receive the MWPC, the individual must have a valid Social Security number (SSN). The credit is refundable. This means it will be shown in the Payments section of Form 1040, Page 2. The MWPC cannot be taken in any of the following situations: The modified AGI is $95,000 ($190,000 if MFJ) or more. The individual is a nonresident alien. The individual can be claimed as a dependent on someone else s tax return. ProFiler Practice Scenarios 6-7
Education Credits or Benefits Money spent on tuition, fees, and other items required for a student to attend a post-secondary educational institution may enable a tax benefi t on a taxpayer s return. There are currently two education credits available: American Opportunity Credit Lifetime Learning Credit American Opportunity Credit - This is an expanded Hope Credit available during 2009 and 2010 for each student attending the fi rst four years of post-secondary education. The maximum credit amount is $2,500, of which up to 40% can be a refundable credit. Income threshold limits apply each year and may reduce the available credit, or eliminate the credit s availability for taxpayers who have a modifi ed AGI above $90,000 ($180,000 if MFJ). The credit is calculated after determining the amount of qualifi ed tuition and related expenses. Beginning with 2009, qualifi ed tuition and related expenses has been expanded to include amounts spent on course materials. Course materials are defi ned as books, supplies, and equipment needed for a course of study, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance. Once the amount of qualifi ed expense has been determined, the credit amount is calculated by multiplying the fi rst $2,000 spent on such items by 100% and then multiplying the next $2,000 of qualifi ed expenditures by 25%. Lifetime Learning Credit - A nonrefundable credit of up to $2,000. It is available for all postsecondary education. The credit amount is calculated by multiplying up to $10,000 of qualifying expenses by 20%. Unlike the American Opportunity Credit, the Lifetime Learning Credit does not take into consideration each student attending eligible schools. $2,000 is the maximum allowed credit on a single tax return, no matter how many family members are students. This credit also has income thresholds for phasing out the allowed credit. The threshold begins at $50,000 of modifi ed AGI ($100,000 if MFJ). Carefully enter the information in the Education Expenses for Credits, Deduction and Distributions section. ProFiler compares the credit and deduction amounts, and selects the more advantageous method for the taxpayer. In this scenario, Chantel is eligible for the Lifetime Learning Credit. Based on her situation, the most advantageous benefi t she is eligible for is the Lifetime Learning Credit, which is 20% of the $5,000 she paid in education expenses. However, due to Chantel s tax liability being less than the available $1,000 Lifetime Learning Credit, she is limited to receiving an education credit equal to her tax liability. Tax Updates and Expiring Provisions The standard deduction for HOH fi ling status increased to $8,400 (up from $8,350 in tax year 2009). Also, the increased standard deduction for new vehicle sales and excise taxes, real estate taxes up to $500 ($1,000 if MFJ), and casualty losses has expired for tax year 2010. The Tuition and Fees Deduction previously available for qualifi ed Education Expenses has expired for tax year 2010,. Therefore, taxpayers (or their qualifi ed dependents) should use either the American Opportunity Credit, which is available for undergraduate study, or the Lifetime Learning Credit, which is a nonrefundable credit available for most types of post-secondary education. 6-8 ProFiler Practice Scenarios
Electronic Signature and Storage (ESS) Beginning with tax season 2010, there will be more than one method to sign and store Front Offi ce Paperwork (FOP): Electronic Signature & Storage (ESS), or manual signatures and fi ling cabinets. ESS provides an alternative to manually signing and storing FOP documents. ESS allows customers to electronically sign (esign) FOP documents instead of using the traditional pen-to-paper signature. The documents are also stored electronically, which reduces the number of documents that must be signed and stored in the actual offi ce. Because customers will have electronic access to their FOP documents via JacksonHewitt.com, they will not have to leave the Jackson Hewitt offi ce with a large stack of papers after completing the tax interview. ESS is NOT an alternative to signing tax returns, so tax return signature documents, such as Form 8879, must still be signed with a PIN and/or manually. A copy of the signed Form 8879 must be kept on fi le for three years after the return due date, or the date the return is fi led, whichever is later. When ESS is the selected option for signatures, the FOP Wizard screen shows the printer as identifi.esign and the button for printing the FOP documents displays esign instead of Print. In the case of a jointly filed return, where one of the taxpayers is not present during the original signing process, all documents must be reviewed by the taxpayer and the tax preparer prior to placing the document package On Hold for signature by the second taxpayer. Click on Pages to View to review all pages in the document package, and then click Hold. For more information about ESS, review the ESS Rollout Guide. ProFiler Practice Scenarios 6-9
6-10 ProFiler Practice Scenarios