February, 2008 Tax Tip
Your Role in Making Your Tax Return Interview Productive
Most taxpayers do not fully appreciate the inherent value of an in depth, quality interview with their tax return preparer. It will help ensure that income is properly reported and all allowable deductions are taken. It can also indicate areas where there may be tax exposure which need to be addressed. By now you should have received most, if not all, of your tax documents and will be contacting your tax professional. This month’s Tax Tip offers suggestions on how you can help yourself and your preparer achieve optimal results on your return.
1. Verification - Errors have been known to occur on tax reporting documents. You should verify the data on W-2's, 1099's, 1098's, and other tax information documents. Carefully review the amounts, social security numbers, and other information reported. If there are any discrepancies between what is reported and what your records show, contact the issuer immediately so that corrected forms can be prepared. You need to also advise your preparer. For example, if you made a year-end mortgage payment that is not reflected on the 1098, tell your preparer so that he or she can make the appropriate adjustment. The same applies if dividends, interest, and other payments are reported to you that you did not receive until 2008.
2. Organization - The more information you provide to your tax preparer the more he or she will be able to help you and the better value you will get for your money. While most preparers will accept a “shoebox” full of papers, you will save time and money by organizing the papers into categories. Also, write descriptions and numbers legibly! Some of my clients must think I am a pharmacist that can read scribbled data. Most preparers provide an organizer to help you assemble and categorize your data. An organizer is available on the Links tab at my website, www.rontaxcpa.com. If I prepared your 2006 return I can upload an organizer that will have the categories and amounts of the items on that return for your reference. I recommend that you look over your 2006 return and make a note of the changes that apply to 2007. As questions occur to you write them down and take them up during your interview. Remember, the time you save the preparer will result in a lower fee to you, as most preparers charge by the amount of time spent.
3. The Interview – The IRS has a strict set of rules and regulations that a tax preparer must follow. You should expect your preparer to adhere to these rules. The ultimate responsibility for an accurate tax return lies with you. During my interview process I ask many questions in an effort to uncover every tax deduction legally available. Be wary of a tax preparer that accepts your data without asking any questions or suggests amounts to use on the return.. It goes without saying that you should be honest with your preparer. It is not the responsibility of the preparer to act as an auditor, nor will he or she necessarily ask to see all your supporting documents or request proof of the amounts you provide.
When you receive your completed return, review it carefully before signing it or the E-file authorization forms, if your return is being filed electronically. I recommend that you retain your copy of the return permanently and the supporting documents for four years.
4. Documentation to be Provided
- Tax reporting forms, including all original copies of W-2’s, 1099’s (including social security), K-1’s; and 1098’s (including student loan interest and higher education tuition and fee amounts)
- IRS/state correspondences sent or received
- Dates and amounts of your estimated tax payments
- Other tax-related documents, including home purchase and refinance settlement statements, year-end tax statements from your brokers, vehicle purchase contracts, etc.
- Buy and sell dates, cost, and sales price of each security sold (per IRS requirement). If the sales were through brokerage accounts, these should appear on the tax statements from your brokers. NOTE: If the securities were not acquired through the same broker that sold them, the selling broker may not have access to your original purchase date and cost. If so, you will need to obtain that information from the acquiring broker.
- For each business vehicle provide total, business, and commuting mileage, and operating costs, such as gas, insurance, repairs, etc.
- Home office data, including total and business area square footage, insurance, utilities, and other expenses
- Registration invoice for each of your vehicles
- Dates of birth and social security numbers for you and your dependents, including dependents born in 2007
- Profit and Loss Statement and, if available, a Balance Sheet for your proprietorship(s)
- If using a different preparer this year, a copy of your 2006 federal and state returns and, if you own any depreciable property (real estate, machinery and equipment, etc.), 2006 depreciation schedules. Your preparer will need to know the depreciation history in order to properly compute 2007 depreciation.
5. Other information
- Travel and entertainment expenses require the date, place, amount, nature, names of those present, and business purpose. Each record must be prepared contemporaneously with the occurrence of the event. Documentary evidence (invoice or receipt) is required to support any lodging or meal and entertainment expenditure of $75 or more
- Law requires that you have a signed written receipt for any gift to charity of $250 or more. For non-cash donations to charity that total more than $500, you need to provide the charity’s name, address, a description of the item(s) contributed, the date, how the property was acquired, and its fair market value. All cash donations must be evidenced by an acknowledgement from the charity or by a bank record, such as a cancelled check. Non-cash donations must be in “good used condition or better”. Many tax professionals are using as a rule of thumb whether it’s in good enough condition to give to a friend or relative. My take is that there is usually not enough involved to risk being scrutinized by the IRS.
- Remember that an IRA or SEP account is still available for year 2007. An IRA can be funded through April 15th, and a SEP through the due date, including extensions, of your return.
- If you moved to another state during 2007 you need to show all items of income by the source state in which earned. In this regard interest and dividends are generally attributable to the state of residency.
- Interest you receive from the sale of real property used by the buyer as a residence requires the buyer’s name, address, and social security number.
- You can deduct the larger of sales tax or state income tax paid in 2007. Therefore, if you made large purchases (car, furniture, appliances, etc.), review your records to determine the amount paid for taxable items.
Heeding the above advice will allow you to file the most accurate and tax efficient return possible. I would welcome the opportunity to work with you on your 2007 returns.