by David Roberts

Introduction

Every year as soon as the ball has dropped in Times Square and the New Year's signs are taken down, the big tax chains begin swinging into action and opening their doors for their only season of revenue. They aren't the only ones getting into the tax preparation business. Rent to Own Furniture and Appliance stores, Car Lots, and Check Cashing stores seem to have salepersons who are now able to prepare and file taxes when just last month they were employees hawking their respective products. This presents a danger to the consumer for a few reasons and we will examine those reasons here.

1. Experience and Training

As it is for the average customer walking in to the big tax prep chains, they are dealing with tax preparers who, as smart as they may be, often have little to no experience in the preparation of tax returns. The training for these newbies at best is eight hours of training over a weeks' period of time. These are school bus drivers, students, retirees, and others drawn to part time work. Having trained some of these preparers, for three of the major tax prep chains, I can tell you that yes, there are talented people in these positions, but there are others who I would argue that they aren't ready to be paid to prepare a return. The argument I got back from the tax store owners was that they needed warm bodies filling seats and filing returns, capable or not. The goal was always numerical, not accuracy.

However, in the examples of the car lots, check cashing stores and furniture and appliance stores, the person preparing your return may actually have less training than the newbies in the tax prep chains. These preparation services are called, "third party" because while the tax prep chains use unqualified persons every year, their main work focus is the preparing of returns. The other examples are using tax preparation services as a 'hook' to get you into the door to buy a Television, Car or to cash your rebate check.

More often than not these 'preparers' before tax season were sales people and after tax season will continue to be sales people. Their experience in this aspect of their store is likely less than yours is. You would be better off using Turbo Tax online or one of the free IRS websites to prepare your taxes than going with these guys.

2. They Have a Vested Interest in the Outcome

Any time the person preparing your return benefits should you receive a higher refund, there is an opportunity ripe for fraud, and once you sign that return, their obligation to accuracy ends, and you are on the hook. Some of these stores offer the tax preparation for free to get you in the door, and if they can bump up a refund of $2000 to $4000 thinking you would get the better car, and they would get a better commission in the sale of that vehicle or appliance, your best interest is out the window.

A larger check amount means more revenue for their store as it represents more money you intend on spending there. And there are individuals who are out there who are interested only in the here and now, let consequences be damned, if it means they get the HDTV now, let the IRS catch up with them later. But for most of us, we actually care about getting it right so we don't have those consequences to deal with.

This brings to mind another fraud that occurs along these same lines. Every year there are preparers who charge a prep fee based on the amount of the refund. Let me state in very clear terms, THAT IS ILLEGAL. Why? because they can bump up their fee by adding deductions you aren't entitled to and don't legitimately have, investment losses when you've never invested a dime, student loan interest or tuition credits when you aren't a college student simply to get more out of you. If any preparer ever tells you that the cost for preparation will be a percentage of your refund, RUN! You are dealing with a criminal, whether he knows it's illegal or not it will be nothing but trouble for you.

3. Their Loyalty is Divided

A good tax professional will attempt to do what he or she can to make sure their clients don't pay more than they need to in taxes, but will do so in a completely legal and ethical manner. A good tax professional's fiduciary responsibility is to you, his client and his emphasis is on satisfying you with his services. The Joe Schmo car salesman's main goal is to get you into a car he gets paid a commission on. While he should be focusing on making sure your return is accurate, (if he knows what an accurate return looks like), he is focusing on selling you the high end model and not the 10 year old clunker. Joe's fiduciary responsibility is in getting you enough of a refund that he gets a decent commission.

Conclusion

So with little experience, and sub-standard training a cashier at the check cashing store is now a tax preparation specialist. And while there may be many people lined up at the door because this one guy at the check cashing store seems to get people more money back than the others, you need to be cautious about who you choose to prepare your return. They are not interested in getting your return accurate, they are interested in what they can sell you once the check is in their hands.

If you must get your return prepared in a big chain tax prep franchise, do so, you certainly don't need a CPA for about 90% of returns prepared. But be forewarned about these third party tax preparation services. I would no more get a return prepared at a rent to own store than I would purchase anything from them or any other business else looking to cash in on other people's idiocy. A Test: Ask the preparer a tax related question you already know the answer to and if he or she can't answer, find another preparer.

 

 

 

Introduction

While the franchised tax prep chains do have their own tax prep training curriculum, they don't always adhere to the "don't pass, don't pay" policy which is supposed to eliminate substandard preparers from their roster. Here are ten questions along with their answers that you can use to make sure that the person you are having prepare your taxes knows what they are doing. Use 1 or more of them and if they can't answer these simplistic questions, you will be better off going with someone who can.

1. If it's cheaper to file the 1040A can I file with that form and deduct my mortgage interest?

Answer: It's usually cheaper to file with the 1040A because the options on deductions are limited to student tuition and loan interest. Generally the more forms involved means more deductions for you but the cost of preparation will be higher. And no, you cannot use the 1040A and take the mortgage interest deduction.

2. I have a W-2 from the previous tax year I didn't get until after I filed last year, can I use it for this year?

Answer: No, the proper way to handle this error is to refile for the prior year with the additional W2 and not include it on this year's return.

3. My spouse has an outstanding student loan and they will take my part of the refund to pay his loan, should I file separate?

Answer: Not necessarily, there is a form called the Injured Spouse form that will allow you to appeal to the IRS to keep your portion of the tax refund. Filing separate causes you to lose your Earned Income Credit and other tax credits as well. The form you need is #8379 and will allow you to file jointly, you will not however be able to file electronically, it must be mailed in, this may change for tax year 2009.

4. What is the name of the form I will need to file if I own a small business that is a sole proprietorship?

Answer: A regular 1040 with a Schedule C will work just fine for any small business, there may be additional forms to file for Automobile expenses, etc. If your business is a partnership you will need a Form 1065, if it's an S-Corp, you will need an 1120S and if it's a C-Corp, an 1120.

5. I just got a divorce at the beginning of this year (2009) can I file single for 2008?

Answer: No. You must use the status you were in as of December 31st of the tax year you are filing. There needs to be one more civil moment between the two of you before you part ways permanently so that you can sign that final tax return as a married couple.

6. My 8 year old cousin lived with me all year; can I use him for Earned Income Credit?

Answer: That depends. If you have full legal custody of your cousin and have adopted him as your child, yes. If not, then no, the dependents you use for EIC have to be your children or adopted children. Recently, this has become a problem for the IRS because it seems that groups of people have gotten into the habit of dependent sharing. Only two dependents are needed for the big payoff in Earned Income Credit, so in many communities it is not unnatural to have families claiming kids that aren't theirs often juggling the kids between those who would benefit most from having the extra deductions. Any perceived fraud in this area can get all parties involved disqualified from collecting EIC for up to ten years.

7. I live in my mother's house with my children can I still claim Head of Household?

Answer: If there is someone else in the household, paying bills, rent, mortgage, groceries, etc, then the answer is no. Head of Household is a designation reserved for a single parent, or someone caring for elderly parents who do not have an income to help with the expenses. This is where a lot of fraud comes in as well, because there are those married or cohabitating couples who have four children and each will claim HOH status to get the maximum benefit and the maximum Earned Income Credit amounts. You cannot be both married AND Head of Household (ask any husband that one).

8. My girlfriend doesn't work and stays home to take care of the kids can I claim her as a dependent?

Answer: No. Even if you pay all rent, bills, etc and provide her with a car, phone and clothing, there is no legal way to claim her as a dependent if she is not your wife. Unfortunately, engagement rings are not deductible either; just think of it as an investment in the future. You can however claim the kids, if they are yours and no one else can.

9. I have to wear a suit to work; can I deduct the expense of dry cleaning, purchases of suits, etc.?

Answer: To be able to deduct work clothing, that clothing must be a uniform of some sort that would not normally be worn anywhere but work. Suits would not qualify and neither would dresses, blouses, etc. Overalls worn for mechanic work or medical related clothing would.

10. Is itemizing my deductions really a benefit to me?

Answer: That depends. Everyone is entitled to the standard deduction of whatever it happens to be that year. Unless you own a home and pay mortgage interest, most of the time the rest of your deductions won't get you over that standard deduction hump. If the preparer is telling you to itemize and you are a renter, remember that they get paid more in preparing a 1040 with a bunch of schedules than they do with a 1040A or 1040EZ with few if any deductions. If you add all your itemized deductions without a mortgage interest payment and they equal just at what your standard deduction would be, save the money on the prep and go with a 1040A. This answer would change if you had children or were expecting EIC or additional refundable tax credits.