Early tax filers scramble for refunds
‘I want my money’
Early tax filers scramble for refunds; most will pay down debt
CHICAGO (MarketWatch) — Cynthia Jeanguenat, a professional tax preparer in Virginia Beach, Va., said she was inundated with clients’ tax forms in the second week of February. What jumped out, however, was the large number of the usual clients who had filed earlier than in years past.
“People are creatures of habit and tend to come in at the same time every year,” said Jeanguenat, who is an enrolled agent at Horizons Unlimited. “But some of the folks who already are in I don’t normally see until the middle or third week of March.”
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Call it the race for the refund. According to a recent study by BigResearch for the National Retail Federation, Americans who expect to see a chunk of cash back from the U.S. Treasury overwhelmingly — 71% — said they already did or had planned to file their 2008 tax returns by the end of February.
And they’re increasingly filing their tax returns electronically, another method to speed up the refund process. Nearly 60% of the respondents expecting refunds said they will correspond with the Internal Revenues Service online this year. Of all taxpayers, more than 53% said they are filing electronically.
Online filing can speed refund by up to several weeks, the IRS says. The agency generally allows those who file electronically to begin tracking refunds on its Where’s My Refund page 72 hours after filing, but it takes three to four weeks after mailing a paper return for that function to kick in. Check out Where’s My Refund.
“A large group of taxpayers clearly are driven by their refunds,” said Julie Miller, a spokeswoman for Intuit Inc., which make the TurboTax software. “They also tend to have simpler returns.”
The BigResearch survey found that young adults, mainly between the ages of 18 and 34, expect to receive refunds. Fewer households with annual income under $50,000 expect to receive a return than households with incomes above that.
Though nearly half of all early filers, 48%, will use their refunds to pay down debt and nearly as many, 40%, will pad their savings, those numbers aren’t much different than they were last year or the year before.
The same is true for the 11% who are taking a vacation with the money and the 11% who said they will make a major purchase. Nearly 27% said they will put the funds toward everyday purchases. The numbers don’t add up to 100% because taxpayers could express more than one use for the money.
“Whether consumers use a refund to pay down debt or simply to get a handle on everyday expenses, ‘free money’ goes a long way these days,” said Phil Rist, executive vice president at BigResearch.
One possible surprise
Jeanguenat said that many people are likely to be surprised this year by tax bills from capital gains on stocks whose values have tumbled. Mutual fund managers, for example, were likely to have sold sinking stocks out of particular funds. However, she said that if the stock had been in the fund for some time — and purchased at a substantially lower price — there could still be gains from the sale.
“That’s a very hard concept for people to get when they know they’ve lost a lot of money,” Jeanguenat said. 
Jennifer Waters is a MarketWatch reporter, based in Chicago.
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AXWATCH
Hiring tax-time help
Eight tips for finding a tax preparer
LOS ANGELES (MarketWatch) — As TaxMama, I receive many letters from readers who’ve suffered at the hands of unscrupulous tax preparers, including hearing from taxpayers who’ve had to pay tens of thousands of dollars of additional tax.
More often than not, the tax pro that made the mistakes is no longer picking up the phone, maybe has even shut down his business.
Did you know that most states don’t have any rules or laws regulating or licensing tax professionals? Presently, only California and Oregon require licenses if the preparer isn’t already a certified public accountant, enrolled agent or attorney. New Jersey enacted professional standards that went into effect in 2008. Maryland has new rules requiring testing, starting next year.
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Contractors need licenses, drivers need licenses, but the folks who deal with your taxes and who have detailed access to your personal finances? No oversight at all in 46 states. It’s no wonder any fool can open shop without any training or experience and make a mess of your finances.
All too often, the fly-by-night tax offices grow their business by promising bigger refunds than the taxpayer would get anywhere else. How do they do this? By making up deductions and expenses and putting them on your tax return. If you don’t read your return thoroughly before you sign it, you won’t even realize what they did. See related story on tax preparers’ mistakes.
Since 2002, Nina Olson, the National Taxpayer Advocate, has recommended that Congress enact national standards for tax professionals. Of course, year after year, the recommendations get postponed. Perhaps this year, with a $1.2 trillion federal budget deficit even before any fiscal stimulus plan, Congress will enact legislation to ensure the IRS is able to collect more of the money due the U.S. Treasury — or at least stop giving away millions in fraudulent tax deductions and credits.
Finding a tax pro
In this free-for-all environment, how do you find a reliable tax professional?
It’s not as hard as you think, actually. First, there are three groups of tax preparers who are licensed by either professional organizations or the IRS:
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Certified public accountants: Governed by the American Institute of Certified Public Accountants (AICPA) and each state’s CPA society. See this site for more information.
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Enrolled agents: Governed by the IRS’ Office of Professional Responsibility. See this IRS page for more information.
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Tax attorneys: Governed by the American Bar Association’s taxation section and state bar associations. See this ABA site for more information.
In addition to association oversight, these particular tax professionals also have to answer to the IRS and follow the legal guidelines in Circular 230. See the IRS document (PDF).
But that covers less than half a million tax professionals in the U.S. Does that mean all the other millions of unlicensed tax professionals are to be avoided? No! There are many excellent, experienced, up-to-date tax professionals working in states that don’t require any licensing. But how do you find the ones you can trust? Let’s do a little quick elimination, shall we?
1. Putting down roots
Look for a tax professional who has been in business for many years. If the tax preparer has just opened shop, especially a storefront, and isn’t licensed, stay away.
2. E-filers
Does the tax professional offer e-filing? In order to get IRS approval to file tax returns electronically, they must file an application with the IRS. The IRS does a small bit of checking on the individual. Still, it’s not enough, since much of earned income tax credit fraud comes from electronically filed tax returns.
To become an “electronic return originator,” as the IRS calls it, you must pass a federal suitability check, which may include the following vetting:
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FBI criminal background check;
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Credit history check;
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IRS records check to a) ensure that all individual and business returns are filed, and balance paid or appropriately addressed, and b) identify instances of fraud and preparer penalties;
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A history check for prior non-compliance in IRS e-file programs.
IRS routinely audits compliance of EROs, so you are assured a certain level of ethical responsibility. No guarantees, though. Sometimes, new storefronts spring up overnight. By the time IRS comes to shut them down, they are gone. To repeat, avoid brand-new, seasonal storefronts.
3. Refund anticipation loans
Does the tax preparer push refund anticipation loans? Does their office or Web site bombard you with images and messages about the benefits of getting your refund right away? Generally, this is a huge money maker for these short-term offices. And it’s a waste of your money. Anyone that pushes RALs needlessly is not your best choice.
4. Membership counts
Is the tax preparer a member of any professional organizations? Unlicensed tax professionals who stay current on tax law changes, strategies and procedures are generally members of one or more tax associations. For instance, the National Association of Tax Professionals welcomes unlicensed tax preparers as well as CPAs, EAs and attorneys. They set standards of education similar to the AICPA, American Bar Association and the National Association of Enrolled Agents. You will find other reputable tax associations at TaxSites.com. See the site.
See National Association of Tax Professionals site.
See National Association of Enrolled Agents site.
5. Big isn’t better
Don’t overlook small, home-based offices. TaxMama works from home — and so do many of my most experienced advisers. You can find some excellent skills, values and personal service from folks with who keep their overhead low.
Also, whether operating in a traditional office or not, small firms will often give you more personal attention than bustling, larger operations. You’d be surprised at the kinds of clients small firms work with. They don’t work solely with individuals and small businesses. Some service sizeable corporations and millionaires.
Larger, national firms are more expensive. But they offer you help with some of the more complex issues requiring private-letter rulings, opinion letters on gray areas, and nested entities.
Naturally, you want a tax pro whose office is open year-round. It’s also wise to schedule at least one planning appointment aside from your tax preparation appointment. You’d be surprised how much help a tax pro can be in reducing your taxes and increasing your wealth, even if you only have a job and no complicated tax issues.
In addition to these suggestions, take a look the guidelines IRS provides on how to select a tax preparer. See the IRS page on choosing a tax preparer.
6. It’s all about you
Once you’ve taken all the objective criteria into account, it’s time to look at the subjective factors. Find someone who understands your tax situation and your industry. The best way to find someone is to start by asking people you know who are similar to you. Folks your age, working in your industry, who are happy with their tax professional, can give you recommendations. Remember to vet those recommendations against the earlier criteria.
When you are going through tough situations like divorce, unemployment, foreclosure, tax debt, or failure to file tax returns, you need someone who knows the issues that specifically relate to you. When you’re under pressure, you don’t want someone who’s going to be learning on your time. Sometimes, even if you already have a tax professional you love and trust, your situation is beyond their expertise. Ask them to bring in or recommend a consultant to help you deal with those specific issues.
When your situation means you’re going to need someone to speak to the IRS on your behalf, the only people who can do that are attorneys, CPAs, and enrolled agents. You’ll need to sign a power of attorney form for them to represent you without your presence.
One of the most important things to consider when working with a tax professional is how they make you feel about you. Do they make you feel dumb and intimidated? Stay away. You want someone you can call up when you need help. Be prepared to pay for the time and advice, but work with someone you are not afraid to call before you take any financial steps during the year.
7. Avoid fraud
Don’t chase after recommendations from friends who’ve got some great guru who can get you huge refunds. The fraudulent preparers who make up numbers to put on your tax return get their clients into trouble. The IRS is actively chasing and finding them. When IRS does find them, they audit all the returns that preparer has signed. Who needs that kind of stress?
Don’t go to your preparer and ask them to use last year’s numbers, or look for your answers on their ceiling. That’s not fair to them — or to you. If that’s the kind of tax return you want, prepare it yourself. There are lots of free and low-cost options online and in boxes.
Take the extra time to get your records in order before you go to your tax appointment. You’re going to come out ahead. Experience shows that your real numbers are generally higher than you dare to estimate.
8. Price is no object
You’ll notice that price wasn’t mentioned. A tax professional who does a good job will more than earn the fee you pay, because they will save you more in taxes and trouble than the price of their fee.
Eva Rosenberg is the founder of TaxMama.com and an enrolled agent licensed to represent taxpayers before the IRS. She is the author of the evolving e-book, “The 100% Home-Based Business Tax Solution.” Reach her at taxwatch@gmail.com.
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