A Taxing Exercise
by Richard
Forget all the fanciful proposals now being touted to supposedly reform the tax code. That will all be decided by a new President and a new Congress next year. Or not.
What we have facing us now is the urgent and unpleasant task of putting 2007 to rest….and so some pointers are in order…
Do-It-Yourself
If your life has not been sufficiently complicated with proprietary business and partnership income you may be able to handle this on your own. If your income is reported on a W-2 statement, and you have nothing more exotic than contributions to an IRA, a 401K, and a Health Savings Account, and perhaps home mortgage interest and property tax deductions you will be well served by using one of the commercial tax preparation software packages available.
I’d be willing to bet the error rate using these software programs would be lower than using many of the storefront tax preparation services. And I’m sure, by now, you’ve heard the horror stories about calling the IRS for assistance. Call five different employees with the identical facts and you may end up with five different answers.
Your Local CPA
For those of you who must file separate schedules to report investment, business and partnership income, expenses and losses, the terrain is much more uncertain. I’m not sure you will have sufficient firepower by going to the storefront preparers, whose preparer staff is both seasonal and for the most part unlicensed.
That leaves you with the pool of enrolled agents and CPAs, and even here appearances may be deceiving. There’s a clever bit of arbitrage going on behind these closed doors, and much to your surprise your return may have ricocheted around the globe, with the raw data sent out by your firm, to return as a finished product by an outsourcing firm twelve times zones removed.Your final preparation fee may be in the low four figures, even though they punted the grunt work of crunching the numbers to someone whose compensation was less than three figures. Nice work if you can get it. I’m talking about your local CPA, not that poor guy or gal who was subcontracted abroad.
A Big Five Global Firm
So maybe you are thinking about going to one of the big five (four?) global accounting firms that emerged from the accounting firms mega-mergers. Even here there are issues. Number one being the fee. Then there is the matter of IRS scrutiny of the tax shelters that the global CPA firms have promoted to their wealthy clients.
Far from being a safe port to ride out the storm, just being a client of a firm that promotes iffy tax shelters with no fundamental economic basis or rationale may expose you to significant and unnecessary scrutiny.
One More Thing To Watch For…
After running this gauntlet, you may find a local firm that does all their own work in house. Your only concern then is the possibility of being cross sold into a number of related products. These might include instant tax refunds (in effect, high interest loans secured by the collataral of your tax refund), mortgage refinancing, and most insidiously, variable annuities and cash value life insurance.
You may be as surprised as I was to learn that the AICPA, the self regulatory authority for CPAs, allows their members to earn commissions from the sale of such financial products.The only industrial strength disinfectant for this dismal swamp is disclosure. Not the industry disclosure buried in a 400 page prospectus, but the disclosure that comes when you ask your preparer if they derive client income from any source other than their professional tax preparation fee.
And you ask this in an e-mail exchange, where you can archive the response forever. If the investment /retirement complex has learned anything in the past decade, after being forced to disgorge billions in enforced settlement actions, it is that e-mails are never, ever, ever fully deleted.
One final thought: if you have extensive investment income involving dividends and capital gains, don’t expect to ever file your returns by April 15th. The first batch of 1099s you will receive from your broker are nothing more than pro formas that they must, by law, send to you. Due to the complications in reporting such investment income, you won’t receive your amended and corrected 1099s until late May, based on our experience the past few years.
No need to panic. Pay your estimated tax, file an extension, and remember to wrap it all up by October 15th. When you do finally choose who to go to for help, please remember this mantra. Be active rather than passive. Learn to buy, and not to be sold. Never trust too much or too soon. Not when it’s your money on the table.
