What The Public Should Know About Using Tax Return Preparers Eric M. Bielitz, Esq. October 26, 2018
Income Taxes, Generally
Why is it important to file income taxes? Not filing income taxes is a crime, though prosecutions are very rare. If you earn above a set threshold, you will need to file a tax return. It is always good idea to file an income tax return every year, as it can also help to reduce the risk of identity theft.
Important tip for those interested in citizenship: For immigrants, filing tax returns shows that you have good moral character, which is important for citizenship. This is a question on the citizenship exam.
Time to assess additional taxes and penalties The IRS and Comptroller only have three years from the date a tax return is filed to assess additional taxes, penalties, etc. That clock does not start until a return is filed.
When can I get my refund? Refunds, if due, will not be paid without a tax return first being filed.
Is it possible that I don t owe taxes? Yes! It is possible that one may not actually owe taxes. However, if a tax return is not filed (and the appropriate claims are not made), the government could file a return on your behalf and determine that taxes are owed.
What about penalties? There are two types of penalties: 1. failure-to-file penalty 2. failure to pay penalty For federal income taxes, these are two separate penalties. Even if one cannot pay, file to avoid the failure to file penalty.
Can a tax debt be discharged in Bankruptcy? In some circumstances a tax debt can be discharged in bankruptcy, but only if a return is filed.
Taxes are a Personal Responsibility. A Taxpayer may choose to do their return themselves, to use tax software, or to hire someone to prepare a tax return. Using software or hiring a return preparer does not excuse the taxpayer if there is something wrong with the return. If there is something wrong with the return, the government holds the Taxpayer responsible for additional taxes, interest, and penalties.
Choosing a Tax Return Preparer
Who May Prepare Tax Returns for a Fee? In Maryland, only lawyers, accountants/cpas, enrolled agents (EAs), and registered tax return preparers may prepare income taxes of other people for a fee. Every professional return preparer must have a Preparer Tax Identification (PTIN) Number from the IRS. A Notary Public may not prepare tax returns, unless the Notary is also a lawyer, CPA, EA, or registered tax return preparer. Beware of Notarios! If one uses a professional tax return preparer, they should only use a professional who is properly credentialed.
Verify a Tax Return Preparer s Credentials
Government on-line databases can confirm credentials The IRS PTIN Directory lists every person who has a PTIN and some other credential. It can be searched by credential, and zip code. https://irs.treasury.gov/rpo/rpo.jsf. The Maryland Courts Attorney list lets one enter the name of a person, and will show if that person is an attorney in good standing. https://mdcourts.gov/lawyers/attylist. The Maryland Board of Public Accountancy website has a License Search function. One may use this feature to find a CPA or verify a person is in fact an accountant in good standing. https://www.dllr.state.md.us/license/cpa/. The Maryland Board of Individual Tax Preparers also has a registration search function on its website one may use to find registered return preparers or verify that a person is a registered return preparer. https://www.dllr.state.md.us/license/taxprep/.
Comptroller s List of blocked tax return preparers The Comptroller and IRS have limited authority and resources to police tax return preparers. Comptroller Franchot regularly releases press statements listing tax return preparation businesses he has banned from electronic filing for alleged fraud or other bad acts. To see if the return preparation business is on the list, do the following Google search: Comptroller + (name of business), (street of business) site:comptroller.marylandtaxes.gov
Asking for a Quote Tax preparation is a business, and each business sets its own rates. It is ok to ask for quotes. When asking for a quote, it is important to communicate the scope of the work. Important information includes: What income forms one has, such as W-2 (employee wages), if one has 1099s, specify what kind they are. If one has a business or not. If one thinks they will take the standardized deduction or an itemized deduction. Will bookkeeping (organizing and tallying of receipts or other records) be required?
Free Tax Return Preparation The IRS Volunteer Income Tax Assistance (VITA)program sponsors non-profits to provide free income tax preparation to low income persons. On the Eastern Shore, the VITA program is Somerset/Wicomico County 410.749.1142 These programs are staffed by trained volunteers. Anyone can become a ShoreUp! Volunteer tax return preparer by completing their training. Other VITA programs have ceased to exist due to inability to find volunteers. AARP also sponsors free tax return preparation for low and moderate income persons, but locations in Maryland are limited.
Free software available The IRS website includes free tax return software for qualified taxpayers. https://apps.irs.gov/app/freefile/jsp/index.jsp. Maryland also offers a limited free tax return preparation software. https://interactive.marylandtaxes.gov/individuals/ifile_choose Form/default.asp.
Tax Return Preparer Red Flags The Return Preparer will Not Sign the Return or Has No PTIN. Paid return preparers are required to sign the returns they prepare and put their PTIN on the returns. If they do not put their name on their work, they are not to be trusted. Return Preparers Who Claim To Get the Most Refunds A return preparer s job is to prepare his client s tax return correctly, not to make up deductions or other tax benefits. Some return preparers may advertise that they will get you every deduction/credit/etc. you are entitled to. This is not always bad. It could simply mean they do a very thorough job OR it could mean they care more about claiming refunds than doing the work correctly.
More tax return preparer red flags Refund Advances A common practice is for a tax return preparer to give their clients a refund anticipation loan, refund advance, or instant refund. In exchange for a check that day, the taxpayer pays an additional fee to the return preparer AND agrees to have the government pay their refund to the return preparer. Crooked return preparers file incorrect returns, claiming refunds their clients are not entitled to. They give their client the instant refund check and then collect the full refund from the government. But! The client is on the hook to repay the full refund to the government, plus penalties and interest, once it is determined that the return was wrong.
More tax return preparer red flags Schedule C when Taxpayer Does Not Have His Own Business Schedule C is an IRS form that details profits and losses from a small business (including independent contract work, such as being an Uber driver) that is only owned by the taxpayer. If a taxpayer does not have a small business, a tax return preparer should NOT include a schedule C. A common scam is when a crooked return preparer will invent Schedule C income for a low-income person, in order to claim a larger Earned Income Credit, and thus a bigger refund.
Common Tax Mistakes Giving Incomplete or Incorrect Information to a Return Preparer. If the information a Taxpayer gives to their return preparer is wrong or incomplete, the return will be wrong. Claiming People as Dependents Who Are Not The number of dependents a taxpayer claims will affect their tax bill/refund. Dependents are minor children, elderly adults, or infirm adults, who live with the taxpayer and who receive more than half their support from the taxpayer. Note: there are some legitimate exceptions, especially with minor children. For example, a child may live with the mother, but the mother and father may agree the father will claim the child as a dependent and the mother will not. There have been problems with return preparers incorrectly listing some people as dependents. The taxpayer should check to see who is listed as his dependent on the income tax return. If someone is listed as a dependent who the taxpayer isn t sure about, the taxpayer should ask his return preparer why that person is listed.
More common mistakes Not Keeping Receipts When a taxpayer claims a deduction or credit, it is his responsibility to have the proof he is entitled to that deduction or credit. That means keeping receipts (in the case of a car, a mileage log). If a Taxpayer is audited, and cannot prove they are entitled to a deduction or credit they claimed, the government will deny it, and increase the tax bill (often with penalties). Receipts should be kept for three years at a minimum. Keeping the original receipts is best, but a PDF scan of receipts is also ok. Guessing The numbers on a tax return must be accurate. Guessing is not accurate.
Telephone Scams THE IRS DOES NOT CALL PEOPLE. THE IRS COMMUNICATES ONLY BY MAIL. THE IRS DOES NOT ACCEPT GIFT CARDS FOR PAYMENT. Beware of IRS Imposters: If you owe tax, the IRS will communicate with you by U.S. mail, NOT by email, text message, or phone The IRS will also NOT threaten jail, or demand payment in the form of a gift card
Contact Information Eric M. Bielitz ebielitz@mdtaxattorney.com Janice Shih Maryland Volunteer Lawyers Service jshih@mvlslaw.org 443.451.4061