What does it take to prepare a tax return? It's simple, right? Just follow the instructions the IRS publishes for each form. You don't want to take the time to read all those instructions, so you think you will hire somebody else to do that.
Unfortunately, for too many "less expensive" preparers, reality is that they are hiring non-trained, non-certified, non-IRS-approved folks who just sit at a computer and enter data, without much of a clue as to what the tax laws are, or how complicated a situation can become.
We recently acquired a new tax client who originally went to one of those national chain tax preparation services. It was not the cheapest by price, so one would think they would do a better job than many, right?
A middle-aged couple in California. Their combined gross income is higher than $150,000. They own their home in California and inherited one in Nevada. They spent a ton of money fixing up the Nevada home and turned it into a rental. In the process, they donated all the old furniture, clothing, etc., to a local thrift store. Their donations came to well over the $5,000 limit, requiring a special receipt and appraisal, which they didn't get. One of them is required to have an office in their home, running up about $10,000 of employee business expenses each year. Since they live in California, they are "fortunate" to be able to say they pay rather high state income taxes. They bought a car which is considered a luxury car by IRS standards, in 2009.
The original tax preparer from that national chain proceeded to skip all rental income and told our new client they didn't have to report it. Put the mortgage and property taxes on Schedule A, calling the Nevada home a second home instead of a rental. They entered the new car as a computer so they could take maximum depreciation expense not allowed on "luxury autos." They failed to deduct any employee business expenses. They also reported the large charitable donations incorrectly. Finally, they didn't compute the Alternative Minimum Tax, which, because of the high gross income, high state income tax, etc., was applicable. These are all audit triggers with the IRS and California. It was only a matter of time before either or both started sending notices to this couple, who thought they were safe by picking a "national chain tax preparation company."
After we fixed all the above, and other unmentioned errors, the client owed IRS and California a combined $10,000 in additional taxes and interest. We will work hard to get any penalties abated, but that story is yet to be finished. There were also many tax planning and simple changes that could have helped this couple to save a lot of unnecessary tax each year - savings that weren't even pointed out to them by this national chain tax preparer.
Until Congress actually does simplify the tax law, you need to be sure your tax preparer really knows what they are doing. Don't just trust somebody sitting at a computer in a mall.
• Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459.