Living through a taxing season

Few people would deny that preparing and filing our taxes can be an ordeal – like the TV show “Survivor” but with no possibility of being voted off the island. Still some things make the experience more bearable.

Roger Graham

Roger Graham

For one, keeping even the minimum of records during the year can make doing taxes less onerous. I like to keep a file in my desk during the year and I throw anything remotely related to taxes into it. I also keep my checkbook reconciled and up to date so that I can quickly scan the register for charitable contributions.

Most of us do not have financial affairs that are complicated enough to pay someone to do our taxes. We are well advised to consider doing our taxes ourselves – there is nothing like reading tax form instructions to keep you mentally sharp. From my perspective the instructions for your tax forms are written in a way that does not require understanding tax code. Just follow the instructions and you will be fine.

If you do not have the philosophical constitution for doing your taxes yourself you are in very good company. A huge industry of people, organizations and resources exists that is dedicated just to do your taxes. Some of the tax resources are free. I use forms provided by the IRS that allow me enter data onto the forms and then save the forms (www.IRS.gov). There is also the IRS Free File Program that you can use if you have a simple tax return (one with a few W2’s for wages, a few 1099s for dividends and/or interest income, maybe some kids and child care) and adjusted gross income less than $56,000.
Tax software programs are another very good option and, frankly, many of my accounting colleagues use them for their taxes. These programs are sophisticated as well as intuitive and they will guide you with well-conceived questions. The best of these programs are inexpensive ($50-$100), will do both your federal and state returns, allow you to save your forms electronically and will even electronically file with the IRS. I can’t personally recommend a particular program but a very good series of reviews and recommendations can be found at http://www.consumersearch.com/tax-preparation-software/best-tax-software.

After receiving my undergraduate degree my taxes were very simple. Filling out the forms did not take much time and there never seemed to be any issues with how the returns were prepared. Later on I owned a construction contracting business in Montana. Those returns seemed complicated to me and so I took my books to a local CPA firm.

That year doing my taxes included a charge of over $600 for the CPA. That was my first year as a contractor and I made less than $20,000 – how could doing my taxes be so expensive? I had cash revenues and cash expenses but little inventory. I didn’t need the expertise of a CPA, my returns were just not that complicated. I learned a valuable lesson that year. A little bit of record keeping goes a long way.

If you plan on paying someone to do your taxes this year, be aware that any person who prepares assists or advises you on your income taxes for a fee must be licensed by the State of Oregon. To protect yourself, make sure you ask for their license. Each year some taxpayers are victims of fraudsters. Go to http://www.oregon.gov/OTPB/press_releases.shtml for an article on protecting yourself when engaging a tax preparer.

The State of Oregon licenses tax preparers at three levels with each level having its own requirements for education, experience and testing. At the highest level are Certified Public Accountants (CPAs). CPAs must have five years of college course work, have passed the Uniform Certified Public Exam and have at least one year of related experience supervised by another CPA. At the next level are Licensed Tax Consultants (LTCs). LTCs must have a minimum of 80 hours of basic income tax law education, pass a tax preparer examination, and have worked a minimum of 780 hours as a Licensed Tax Preparer (LTP). LTPs essentially work as apprentices under the supervision of an LTC or a CPA.

If you decide to hire someone to do your taxes, talk frankly with them about their fees. Licensed tax preparers normally charge according to the amount of time required to perform the services requested. Fees vary depending on the type of service required, the prevailing costs in the community, the licensee’s level of expertise, and the complexity of the work. Be prepared to pay more for the expertise of a CPA than for a LTC and more for an LTC than for an LTP.

It is not uncommon to have done your taxes and then receive a letter from the Internal Revenue Service. I often get them after I do my mother’s taxes. Although such letters give her a scare, I find the letters to be fairly straightforward. Either I have calculated something wrong, something was unsubstantiated, or my mother forgot to tell me something. I write a nice letter back to the IRS either explaining my position or accepting their position with the additional tax and all is well. The IRS isn’t really after us – it is just following the rules.

Sometimes however, you may want to hire someone to represent you before the IRS. For that you will need to hire either a CPA or an Enrolled Agent (EAs). EAs are empowered by the U.S. Department of the Treasury to represent taxpayers before the IRS for audits, collections, and appeals. EAs are therefore authorized tax practitioners who have technical expertise in the field of taxation. If none of this works out your next step will be to hire an attorney and take your case to court.
As tax deadlines near, the best advice is don’t panic. Take advantage of professional help or software programs for filing this spring – and begin planning early for next year. Keep those receipts and reconcile your checkbook, debit and credit card statements. It simplifies things in the long run.

~ Roger Graham is a professor of accounting at Oregon State University.

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