Practice Scenario 5 Concepts In this exercise, you will be applying the following concepts: IRS and Industry Procedures Electronic Signatures Recordkeeping Requirements ProFiler Expertise Occupational Diagnostics (Deductions@Work ) Business Codes for Self-Employed Taxpayers Due Diligence and the Earned Income Tax Credit Lessons Learned Tie-Breaker Rule Earned Income Tax Credit Additional Child Tax Credit Filing Status: Single W-2 Errors Form 1099-MISC and Self-Employment Income Form 1099-R Coupons Schedule M Information 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 5-1
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 to 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. 5-2 ProFiler Practice Scenarios
ProFiler Expertise This section describes how ProFiler helps you handle the following situations. Occupational Diagnostics (Deductions@Work ) Some occupations are likely to have specifi c deductions. For example, 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. Business Codes for Self-Employed Taxpayers ProFiler has many built-in features to help you locate the information needed to complete various schedules. When you reach question 1524, Enter the business code that most closely matches the client s principal business or profession, you are directed to use ProFiler s question Help to view a complete list of business codes. When you click select a business code in the Help section, ProFiler loads Adobe Acrobat and displays a list of business codes. Follow the instructions on the screen to select an appropriate code. If you need additional instructions, consult the ProFiler Help screen. 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. When preparing Schedule C for self-employed taxpayers, ask all the questions you need so you are confi dent in the information you are reporting. This includes, but is not limited to, assuring yourself that the taxpayer understands all recordkeeping requirements for self-employed individuals. 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 5-3
Practice Tax Return Scenario Use the taxpayer 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 Linda D. Van Gokkel (12-02-1984, 431-00-4001) is single and lives with her mother at 26531 Bear Lake Crescent, Apartment 2569, Your City, YS and ZIP Code. Her daughter, Mary T. Van Gokkel (07-15-2006, 401-00-4005), lived with her all year. Mary does not provide any of her own support. Linda s cell phone number is 512-000-1616. She has no other phone. Last year, Linda had her tax return prepared by a Certifi ed Public Accountant (CPA). Her cost for last year s tax preparation was 325. Linda chooses not to give her email address. She is not interested in receiving emails. When you ask if anyone else lives with them, Linda tells you that she and Mary live with her mother, Elizabeth. Linda is concerned because her mother wants to claim Mary on her tax return this year. Elizabeth made more money than Linda, so she paid all of the rent and utilities for their apartment. Linda paid for some of the food and all of the clothing and other needs for Mary. Linda has also decided she wants to claim Mary. Linda is a cosmetics sales associate (W-2s are shown). As a side job, Linda occasionally demonstrates Sophisticated Lady cosmetics at a department store. She received the Form 1099-MISC shown. She also earned and recorded 130 doing demonstrations for Pretty Girl cosmetics, but did not receive any tax information from them, so she is not sure what to do about it. Realizing that Linda may have some expenses for her business, you ask her to think about any money she has spent for her side jobs. Linda does remember that she bought a tote and some other small supplies totalling 29.69, and she still has her receipt. She uses the cash method of accounting for her cosmetics sales and does not maintain an inventory. Linda closed her 401(k) when she left her job at Liggett s Department Store. In response to your inquiries, she tells you she used the money to pay off her credit cards, and paid no medical bills during the year. Her Form 1099-R is shown. Linda received the EITC in 2009 and did not get a letter requiring her to fi le Form 8862, Information to Claim Earned Income Credit After Disallowance. She authorizes Jackson Hewitt to discuss her return with the IRS and to generate her PIN. After you explain the costs of the various options for receiving funds, Linda decides to apply for a Refund Anticipation Loan (RAL). She would like to receive her proceeds on an smartcard/ipower Card. Her mother s maiden name is McKay. The smartcard/ipower Card number on the package envelope is 3244136520. Linda gives you permission to disclose information about her to a bank and to mail promotional materials to her based on her tax return information. Linda presents a state driver s license (#1121G8, issue date 12-01-2006, expiration date 12-31-2012) as identifi cation. Her employer s phone number is 512-000-7339. Linda decides to purchase the Gold Guarantee after you explain the costs and benefi ts of both the Accuracy Guarantee and the Gold Guarantee. She is also interested in taking a Jackson Hewitt income tax course. Her cell phone number is the best number to reach her. Linda brought in the Jackson Hewitt coupon shown. 5-4 ProFiler Practice Scenarios
1 Wages, tips, other comp. 2 Federal income tax withheld 9782.91 3 Social security wages 4 Social security tax withheld 9782.91 606.54 5 Medicare wages and tips 6 Medicare tax withheld 9782.91 141.85 d Control number Dept. Corp. Employer Use Only 01A-4001 2 VS VS-431004001 c Employer's name, address, and ZIP code VANITY SHOP 7 ARMITURE TERRACE 1 Wages, tips, other comp. 2 Federal income tax withheld 4227.15 3 Social security wages 4 Social security tax withheld 4227.15 262.08 5 Medicare wages and tips 6 Medicare tax withheld 4227.15 61.29 d Control number Dept. Corp. Employer Use Only 01B-4001 D1 LIG LIG431004001 c Employer's name, address, and ZIP code LIGGETTS DEPARTMENT STORES PO BOX 100 YOUR CITY YS ZIP CODE b Employer's FED ID number a Employee's SSA number 00-0400500 7 Social security tips 8 Allocated tips 431-00-4001 NEW YORK NY 10044 b Employer's FED ID number a Employee's SSA number 00-0400501 7 Social security tips 8 Allocated tips 431-00-4001 9 Advance EIC payment 10 Dependent care benefits 9 Advance EIC payment 10 Dependent care benefits 11 Nonqualified plans 12a See instructions for box 12 11 Nonqualified plans 12a See instructions for box 12 14 Other 12b 14 Other 12b 12c 12c 12d 12d 13 Stat Emp. Ret plan 3rd party sick pay 13 Stat Emp. Ret plan 3rd party sick pay e / f Employee's name, address, and ZIP code LINDA VAN GOKKEL 26531 BEAR LAKE CRESCENT #2569 YOUR CITY YS ZIP CODE 15 State Employer's state ID no. 16 State wages, tips, etc. YS 9782.91 17 State income tax 18 Local wages, tips, etc. 489.15 9782.91 19 Local income tax 20 Locality name W-2 97.83 YLC Federal Filing Copy Wage and Tax Statement 2010 OMB No. 1545-0008 Copy B to be filed with employee's Federal Income Tax Return e / f Employee's name, address, and ZIP code LINDA V GOKKEL 26531 BEAR LAKE CRESCENT #2569 YOUR CITY YS ZIP CODE 15 State Employer's state ID no. 16 State wages, tips, etc. YS 4227.15 17 State income tax 18 Local wages, tips, etc. 78.11 4227.15 19 Local income tax 20 Locality name 42.27 YLC W-2 Federal Filing Copy Wage and Tax Statement 2010 OMB No. 1545-0008 Copy B to be filed with employee's Federal Income Tax Return Prepare Linda s return. ProFiler Practice Scenarios 5-5
CORRECTED (if checked) PAYER'S name, street address, city, state, ZIP code, and telephone no. 1 Rents SOPHISTICATED LADY COSMETICS 5 FASHION PLAZA 2 Royalties OMB No. 1545-0115 2010 Miscellaneous Income CHICAGO IL 60605 PAYER"S federal identification number RECIPIENT'S identification number Form 1099-MISC 3 Other income 4 Federal income tax withheld Copy B For Recipient 5 Fishing boat proceeds 6 Medical and health care payments 00-0400504 431-00-4001 RECIPIENT'S name LINDA VAN GOKKEL Street address (including apt. no.) 26531 BEAR LAKE CRESCENT APT 2569 City, state, and ZIP code YOUR CITY YS ZIP CODE Account number (see instructions) 7 Nonemployee compensation 8 620.00 9 Payer made direct sales of 10 5,000 or more of consumer products to a buyer (recipient) for resale 11 12 13 Excess golden parachute 14 payments Substitute payments in lieu of dividends or interest Crop insurance proceeds Gross proceeds paid to an attorney This is important tax information and is being furnished to the Internal Revenue Service. If you are required to file a return, a negligence penalty or other sanction may be imposed on you if this income is taxable and the IRS determined that it has not been reported. 15a Section 409A deferrals 15b Section 409A income 16 State tax withheld 17 State/Payer's state no. 18 State income Form 1099-MISC (keep for your records) Department of the Treasury - Internal Revenue Service PAYER'S name, street address, city, state, and ZIP code LOYALTY FUNDS 1900 CYPRESS ST SUITE 200 FRANKLIN SQUARE PAYER'S federal identification number 00-0400502 431-00-4001 RECIPIENT'S name LINDA Street address (including apt. no.) City, State, and ZIP Code YOUR CITY Account number (see instruction NY 10010 RECIPIENT'S identification number VAN GOKKEL 26531 BEAR LAKE CRESCENT # 2569 Form 1099-R YS ZIP CODE 1st year of desig. Roth contrib. CORRECTED (if checked) 1 Gross distribution 2a Taxable amount 2b Taxable amount not determined 1250.00 1250.00 OMB No. 1545-0119 2010 Form 1099-R Total distribution X 4 Federal income tax withheld Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Copy B 3 Capital gain (included Report this in box 2a) income on your federal tax return. If this 0.00 form shows 5 Employee contributions 6 Net unrealized federal income /Designated Roth appreciation in tax withheld in contributions or employer's securities box 4, attach insurance premiums this copy to your return. IRA/ 7 Distribution SEP/ 8 Other code(s) SIMPLE This information is 1 % being furnished to the Internal 9a Your percentage of total 9b Total employee contribut Revenue Service. distribution % 10 State tax withheld 11 State/Payer's state no. 12 State distribution 13 Local tax withheld 14 Name of locality 15 Local distribution Department of the Treasury - Internal Revenue Service 5-6 ProFiler Practice Scenarios
Lessons Learned This section describes the lessons you should have learned from this exercise. Tie-Breaker Rule With today s extended families and changing lifestyles, this exercise provides an example of some of the complicated family situations that exist. It shows how questions of dependency, fi ling status, the EITC, and the Child Tax Credit (CTC) become complex when multiple generations of the same family live together. Even though it is a complicated situation, ProFiler can help you sort out the issues when you enter the answers to all of the questions accurately. 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. Earned Income Tax Credit The Earned Income Tax Credit (EITC) is a refundable tax credit for taxpayers who meet specifi c earned income thresholds and who are not fi ling as Married Filing Separately (MFS). Prior to tax year 2009, the EITC was payable to taxpayers who have either 0, 1, or 2 children and meet the income threshold and fi ling status requirements. Beginning with tax year 2009 and continuing for 2010, taxpayers who have 3 or more qualifying individuals will be eligible to receive an additional amount of EITC. ProFiler Practice Scenarios 5-7
Mary is a qualifying child for both Linda and Elizabeth. Use the Tie-Breaker Rule for situations where a child is a qualifying child for more than one taxpayer. ProFiler helps you correctly apply the Tie-Breaker Rule in situations where the taxpayers are unable to agree about who will claim the child. To document your due diligence, you should have entered YES to Question 12609, Can anybody else claim Mary Van Gokkel as a qualifying child? Let ProFiler help you explain the rules so the taxpayer can make an informed decision about what they want to do within the rules. Explaining how the Tie-Breaker Rule applies can assist taxpayers in determining who claims a child. Linda is Mary s parent, but Elizabeth is not Mary s parent. If both taxpayers claim Mary, the IRS applies the Tie-Breaker Rule and gives the benefi t to Linda. Keep in mind that Linda must make the decision and tell you whether she wants to claim Mary. 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. Filing Status: Single A taxpayer can file as Single if, on December 31 of the tax year, they are unmarried or legally separated from their spouse under a divorce or separate maintenance decree, and they do not qualify for another fi ling status. Sometimes a taxpayer may desire to use the HOH fi ling status, but finds that they do not qualify because they did not provide more than half the cost of keeping up a home. Due diligence requires you to make further inquiries when the income a taxpayer reports does not seem to support a claim of having provided more than half the cost of keeping up a home. If the taxpayer can claim their own exemption, then they cannot be claimed as a dependent on any other taxpayer s return. This is because they do not meet the requirements to be a qualifying child or a qualifying relative for the other taxpayer. In this scenario, Linda does not qualify to fi le as Head of Household (HOH) because she did not provide more than half the cost of keeping up a home. Due diligence requires you to make further inquiries when the income a taxpayer reports does not seem to support a claim of having provided more than half the cost of keeping up a home. Linda can claim her own exemption. She cannot be claimed as a dependent on Elizabeth s return because she does not meet the requirements to be a qualifying child or a qualifying relative for Elizabeth. ProFiler lists the requirements for each of these. W-2 Errors You should carefully look at the name and SSN on all W-2s and note any discrepancies. Linda s last name is incorrectly presented on one of her W-2s. She should ask her employer to correct its records and to also correct her W-2 with the IRS. Name and SSN errors can affect the taxpayer s credit for Social Security taxes and can sometimes result in the taxpayer receiving a notice from the IRS. 5-8 ProFiler Practice Scenarios
Form 1099-MISC and Self-Employment Income All income that Linda earned on the side is taxable and must be reported on her tax return, regardless of whether she received a Form 1099-MISC. Nonemployee compensation is selfemployment income and is reported on Schedule C. Although Linda had two sources of selfemployment income, she has only one business and should have only one Schedule C. You should ask Linda about any expenses she had while demonstrating cosmetics. Explain that she needs to have documentation to support her expenses. Linda s travel to her offi ce or fi rst business location is considered commuting mileage and is not an allowable business expense. Also, travel from her office or fi nal daily business location to home is considered commuting mileage. All other mileage is treated as deductible business mileage. Also, she may have receipts for smocks that she purchased and wore while demonstrating cosmetics to her clients, which is an allowable business expense. Net self-employment income (or loss) impacts the amount of earned income used to calculate the EITC and the Additional Child Tax Credit. You must practice due diligence to report accurate selfemployment net income, especially as it relates to determining the EITC. Form 1099-R Linda s 401(k) distribution is taxable on Form 1040, Line 16b, and this early distribution is also subject to a 10% additional tax. Because Linda s Form 1099-R correctly reports Code 1 in Box 7, she is not required to fi le Form 5329. When you answer that no exception applies, ProFiler calculates the 10% additional tax and reports it directly on the appropriate line on Form 1040. Remind Linda that this early distribution limits her eligibility for the retirement savings contribution credit for the next two years. ProFiler tracks this distribution and pulls it forward through LYS if she returns to Jackson Hewitt next year. Coupons Linda brought in a Jackson Hewitt coupon. On the ProFiler Product and Service Options screen, enter the coupon code shown on the coupon. ProFiler calculates the 25 discount based on the coupon code entered. 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 5-9
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. 5-10 ProFiler Practice Scenarios
ProFiler Practice Scenarios 5-11
5-12 ProFiler Practice Scenarios