Need help with your taxes?
Here are 7 tips for a hassle-free income tax compliance season.
By FACC Member, Mathieu Aimlon, CPA
Expert-comptable diplômé, France (non inscrit)
During the fiscal year October 1, 2019 September 30, 2020, the Internal Revenue Service (IRS) processed more than 240 million tax returns and forms, down from 253 million the previous fiscal year. Individual and business income tax returns and employment tax returns account for 218 million (90%) of the returns and forms filed in the fiscal year ended September 30, 2020.
Unlike in France where one governmental agency (direction générale des finances publiques, DGFiP) is charged with collecting income tax and another one (l’union pour le recouvrement des cotisations de sécurité sociale, U.R.S.S.A.F.) is missioned to collect employment taxes, in the U.S. the IRS is responsible for collecting both taxes.
With 157 million tax returns filed in the fiscal year ended September 30, 2020, up from 154 million the previous fiscal year, individual income tax returns represent about two returns out of three filed during that period. In comparison, 11 million business income tax returns were filed during the same period. This represents only 5% of the number of returns and forms filed.
During the fiscal year ended September 30, 2020, the IRS collected nearly $3.5 trillion in Federal taxes paid by individuals and businesses. Individual income tax and employment taxes account for $3.1 (88%) of the $3.5 trillion collected during that fiscal year:
- individual taxpayers paid $1.9 trillion (54%) of the $3.5 trillion collected;
- businesses paid $264 billion in business income tax, and
- individual taxpayers and businesses paid $1.3 trillion of employment taxes. Employment taxes include payroll tax, self-employment tax.
The IRS issued more than $736 billion in refunds out of the $3.5 trillion collected in the fiscal year ended September 30, 2020.
Most of the individual income tax returns are filed between January and April. And this year, even if you are not otherwise required to file a 2021 federal tax return, you should consider filing a tax return. This would allow you to claim the child tax credit and or the recovery rebate credit if you are eligible for the third round of stimulus check, also known as economic impact payment, but did not get the payments or did not get the full amount.
Although the number of self-prepared individual income tax returns has been increasing steadily, most taxpayers are still using the services of a paid tax professional to prepare or to assist with their tax return preparation.
We’re providing this guidance to assist taxpayers who use or plan on using the service of a paid tax professional to prepare their tax return with the paid tax preparer sourcing and selection and the income tax return preparation process. We’ve adapted most of the following tips and tricks for the unwary taxpayer from the IRS and the New York State tax agencies’ communication materials. We hope you find them informative.
1) Use a reputable tax professional
The IRS recommends using a reputable tax preparer. For the federal tax agency, that includes certified public accountants (CPA), enrolled agents (EA), or other knowledgeable tax professionals. One of the benefits of using a reputable tax preparer is that they should help you avoid errors on your tax return.
Anyone with a preparer tax identification number (PTIN), with or without proper tax credentials, can prepare a tax return for a fee. However, a limited number of states require a minimum level of education. New York State for instance requires a high school diploma or its equivalent. Tax professionals with credentials include certified public accountants (CPAs), tax attorneys, and enrolled agents.
An accountant is not a regulated professional designation. And it is commonly used to designate professionals with formal accounting education as well as professionals with no formal accounting education, or little to no accounting knowledge. In other words, all CPAs are accountants, but not all accountants are CPAs.
If you are using in New York State the service of a paid tax preparer who is not a CPA, a tax attorney, or an IRS enrolled agent, he or she must:
- give you, before beginning any discussions about tax preparation services, a copy of the New York State consumer bill of rights regarding tax preparers, and
- let you review it and answer any questions you have.
Please note that if the paid tax preparer is in New York City, they may give you a copy of the New York City consumer bill of rights regarding tax preparers instead
2) Do your homework
Before you decide to use a paid preparer’s service, we recommend you do some due diligence:
- Check the paid preparer’s qualifications. You should check out, for instance, the searchable directory of federal tax return preparers with credentials and select qualifications that the IRS has developed.
- Check the paid preparer’s history. Ask people in your network whether they know anyone who has used the tax professional? Were they satisfied with the service that they received?
- Ask about the paid preparer’s service fees
- Ask to e-file your income tax return
- Consider whether the paid preparer will be around after April 18th, to answer questions that you might have about the preparation of your tax return months, or even years, after the tax return has been filed
- Never sign a blank return
- Report abusive tax preparers to the IRS and or to your state tax agency, for instance, the New York State Department of taxation and finance if you are in New York or the paid preparer is in New York State
3) Avoid “ghost” tax return preparers
The person you paid to prepare your tax return is required to have a valid preparer tax identification number (PTIN). You should be wary of a paid preparer who:
- refuses to sign the return that they prepared for you
- refuses to include their PTIN on the return
- requires payment in cash only and does not provide a receipt
- invents income to qualify you for tax credits
- claims fictitious expenses deductions to boost the size of the refund or to reduce your tax liability
- directs refunds into their bank account, not your bank account
- promises to obtain larger income tax refunds than other preparers
- bases their fee on a percentage of the amount of the refund
- claims to have connections with the tax authorities (IRS, New York State Department of Taxation and Finance, etc.) which permitted him or her to gain special approval to use a loophole in the tax code.
4) Do not report your PPP Loan forgiven
If you received a paycheck protection program (PPP) loan and your bank approved of its forgiveness, you shouldn’t report on your income tax return the amount forgiven. This is because PPP loan forgiveness is not a taxable income.
In addition, you may write off the PPP-funded expenses.
The PPP loan is a multibillion forgivable loan program that Congress designed to help businesses in operation in the United States as of February 15, 2020 keep their workforce employed and overcome the challenges that the COVID-19 pandemic created.
5) Review your tax return with care before signing it
You must sign your tax return if it is paper filed or sign an authorization form to file it electronically. But, before you sign your return or give authorization to electronically file your tax return, you should:
- review your tax return carefully
- ask questions on entries you don’t understand, and
- ensure that it reflects your bank account information for any direct deposit refund. Direct deposit is the quickest way to get your refunds.
6) Validate your tax return
No matter who helps you with your tax return preparation, you are responsible for its validity and the accuracy of all the information on your income tax return.
The first step to help ensure you file a complete and accurate tax return and, where applicable avoid refund delays, is to gather all your year-end documents that support your income, the expenses that you can write off, or the credits that you can claim to reduce your tax liability.
If you are using a paid tax preparer service, we recommend you set up a tax meeting with them and provide your year-end tax documents by the end of February. That gives your tax preparer time to review your tax documents, to draft your tax return and to review it with you.
7) File your tax return electronically
Electronically filing a tax return reduces errors because the tax software does the math, flags common errors, and prompts the preparer for missing information. It can also help taxpayers claim valuable credits and deductions. Electronically filed tax returns are processed faster than paper filed ones.
Have a hassle-free 2022 tax season!
Mathieu Aimlon, CPA, Expert-comptable diplômé, France (non inscrit), is a principal at Aimlon CPA P.C., which provides comprehensive accounting, auditing, and tax services to businesses and nonprofit organizations throughout the United States and in France.