Though tax filing is generally done at the end of the fiscal year, extended filing deadlines in this year of the COVID-19 virus have given a breather to those filing tax returns, and perhaps more time to hire and/or change accountants. It is always good to examine gains and off-setting losses in your portfolio and to position your portfolio to minimize the tax impact on the coming tax year. We usually recommend beginning the process of interviewing and hiring a tax preparer in the fall of the tax year, well before onslaught of tax filings.
But 2020 has certainly been a most unusual year, unlike any time any of us has seen, due to the COVID-19 pandemic. The Internal Revenue Service has extended the 2019 federal income tax filing due date from April 15 to July 15, 2020. If you haven’t yet filed, this gives you some extra time to think about tax preparation for 2019 and get ready for 2020.
If you’ve already filed, there’s a change for you as well. Taxpayers who owe federal income tax for 2019 can defer payments to July 15, 2020, without penalties and interest, regardless of the amount owed. This deferment applies to all taxpayers, including individuals, trusts and estates, corporations, and other non-corporate tax filers as well as those who pay self-employment tax.
Note that if you think you will be owed a refund, the IRS urges you to file electronically as soon as possible. Most tax refunds are still being issued within 21 days.
For taxpayers under an existing installment agreement, payments due between April 1 and July 15, 2020, are suspended. Taxpayers who are currently unable to comply with the terms of an installment payment agreement, including a direct debit installment agreement, may suspend payments during this period if they prefer. The IRS will not default any installment agreements during this period. By law, interest will continue to accrue on any unpaid balances.
Taxpayers have until July 15, 2020, to respond to the IRS to verify that they qualify for the Earned Income Tax Credit or to verify their income. Until that date, the IRS will not deny these credits for a failure to provide requested information.
Interestingly, the IRS notes that more than a million households that haven’t filed tax returns during the last three years are owed refunds; they still have time to claim these refunds. The agency recommends contacting a tax professional to consider various available options since the time to receive such refunds is limited by statute.
Why Hire a Tax Pro?
Sure, you could prepare your federal tax returns yourself through the IRS website, using commercially available software, and filing through a professional tax preparer. Although the IRS e-filing system has been operational since 1986, the big jump in use came in 2009 when Congress required that all tax preparers who prepare more than 10 returns a year use the IRS e-filing system. You can download the forms and prepare your own returns, much as you would have prepared paper forms in prior years. If your income is $66,000 or less, you can also file with the IRS Free File software, available at no cost at https://www.irs.gov/filing/free-file-do-your-federal-taxes-for-free. There are also commercial tax software packages available. Have fun!
Then there are those of us who have always felt that preparing our own taxes is time-consuming, stressful, and much too complex to navigate on our own. If that’s you, you should seek out a tax professional (i.e., someone with an IRS-issued Preparer Tax Identification Number, or PTIN, which they need to have in order to legally prepare your tax return for compensation).
But there are different levels of credentials and qualifications for tax preparers. If you want a tax professional’s help in filing, it pays to know about these credentials and qualifications and the advantages and disadvantages of each type of tax preparer.
An important distinction in the types of practitioners is “representation rights,” the limits placed by the IRS on who may represent clients on any matters before the IRS, including audits, payment/collection issues, and appeals.
Those with unlimited representation rights fall into three categories:
- Attorney. Attorneys are licensed by state courts. Rules differ for each state, but the IRS grants attorneys the ability to prepare tax returns and to represent clients before the agency for any tax matter. Attorneys are required to maintain continuing education requirements determined by the state in which they practice. Often attorneys are the best choice for complex tax matters, but generally their fees reflect their high level of expertise.
- Certified Public Accountant (CPA). A CPA is licensed by a state board of accountancy and must complete a study in accounting at a college or university, pass the Uniform CPA Examination, and meet experience and good character requirements established by the state board. As with attorneys, CPAs are required to maintain continuing education requirements determined by the state in which they practice. A CPA may offer a range of services; some CPAs specialize in tax preparation and planning and can represent clients before the IRS even for original returns prepared by others. A CPA can perform audits, prepare financial statements, provide guidance on corporate governance structures, and deal with various types of business regulation, including not only taxes but also licensure and other requirements. Not all CPAs handle tax issues and those who focus on other areas besides taxes might not be as capable in handling tax issues as a tax professional who is not a CPA.
- Enrolled Agent. An enrolled agent is a tax adviser licensed by the IRS. Enrolled agents are subject to a suitability check and must pass a three-part comprehensive exam that requires them to demonstrate proficiency in federal tax planning, individual and business tax return preparation, and representation. The continuing education requirements for enrolled agents is 72 hours every three years.
Besides those tax preparers with one of the above credentials, there are those who take part in the Annual Filing Season Program, a voluntary program designed to encourage education and filing season readiness for return preparers who are not attorneys, certified public accountants, or enrolled agents. The IRS issues an Annual Filing Season Program Record of Completion to return preparers who obtain a certain number of continuing education hours in preparation for a specific tax year. Participants in the program have limited representation rights. They may solely represent clients whose returns they prepared and signed, and then only before IRS employees such as revenue agents, customer service representatives, and the Taxpayer Advocate Service. They cannot represent clients whose returns they did not prepare and cannot represent clients regarding appeals or collection issues, even if they did prepare the return in question.
Tax preparers who have an active preparer tax identification number (PTIN) but do not have professional credentials and do not participate in the Annual Filing Season Program are authorized solely to prepare tax returns. They have no authority to represent clients before the IRS. All tax professionals must have a PTIN in order to legally prepare your tax return for compensation. Make certain your preparer has one and enters it on your return filed with the IRS.
For simple returns, any tax preparer with a PTIN might do, but those with more complex needs should consider more experienced professionals.
Things to Think About
If you are only meeting with or talking to your tax professional once a year at filing time, you are not taking advantage of critical planning opportunities your preparer can offer. We think it is invaluable to meet with your tax professional before the end of the calendar year to discuss potential planning measures to minimize tax impact and discover other tax advantages outside the scope of your investment adviser.
Using a CPA will give you the value of year-round service; you can always call during the year to get additional services, especially if you own a business. Some tax preparers provide their services on a seasonal or part-time basis and might not always be there to answer your questions or deal with tax notices once tax season is over.
A PTIN is relatively easy to get, so it might be prudent go a step further and get a credentialed preparer—someone who is also a CPA, attorney, enrolled agent, or has completed the Annual Filing Season Program. The Accredited Business Accountant/Advisor and Accredited Tax Preparer are examples of programs that help preparers fulfill the Annual Filing Season Program requirement. These credentials all require varying amounts of study, exams and ongoing education.
How do you find the best tax preparer near you with the credentials you want? One way is to search the IRS directory
http://irs.treasury.gov/rpo/rpo.jsf. It includes preparers with PTINs and IRS-recognized professional credentials. Volunteer preparers and preparers who simply have PTINs won’t be in the database.
The law requires paid preparers to sign their clients’ returns and provide their PTINs. Never sign a blank tax return—unethical preparers could put anything on the return, including their own bank account number so they can grab your refund. Also, the IRS requires any paid preparer who does more than 10 returns for clients to file electronically via the IRS’ e-file system. If your tax preparer doesn’t offer e-file, it may be a sign the person isn’t doing as much tax prep as you thought.
Remember, enrolled agents, CPAs, and attorneys can represent you in front of the IRS on audits, payments and collection issues, and appeals. Preparers who complete the Annual Filing Season Program can represent clients only in limited circumstances. A preparer who simply has a PTIN can’t represent you—even if they prepared your return.
As part of the selection process, we would advise looking into the following areas of the accounting practice and the services provided:
Services. Most firms offer tax and auditing services, but as a small business owner, you might require additional services. These services could include coordinated estate consulting advice with your accountant, financial advisor, and attorney.
Personality. If you go to an accountant only once per year, you are not utilizing the accountant to your maximum benefit. An accountant should work closely with you and your financial adviser to help you implement your financial goals in such a way that it minimizes the tax consequences of those goals. You should feel comfortable dealing with your accountant.
Fees. The IRS warns that tax professionals who base fees on a percentage of a client’s refund should be avoided. Most firms charge by the hour, which may or may not include a monthly retainer. The best, most effective meetings with your tax consultant will be those in which you are fully prepared and well organized with questions and facts. An effective use of an accountant’s time should not involve dumping a paper bag full of unorganized receipts at year’s end. The better organized your financial records are, the less time the accountant must spend on your case and the lower your fees will be.
The scope of your relationship with your tax preparer should be sure to go beyond the scope of number-crunching and tax-form preparation.
As always, if you have any questions about this article or any financial questions in general, please reach out to Bowen Asset at info@bowenasset.com or (610) 793-1001.
Disclaimer
While this article may concern an area of investing or investment strategy in which we supply advice to clients, this document is not intended to constitute a complete description of our investment services and is for informational purposes only. It is in no way a solicitation or an offer to sell securities or investment advisory services. Any statements regarding market or other financial information is obtained from sources which we and/or our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information.
Past performance should not be taken as an indicator or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. As with any investment strategy or portion thereof, there is potential for profit as well as the possibility of loss. The price, value of and income from investments mentioned in this report (if any) can fall as well as rise. To the extent that any financial projections are contained herein, such projections are dependent on the occurrence of future events, which cannot be predicted or assumed; therefore, the actual results achieved during the projection period, if applicable, may vary materially from the projections.