Tax Time Tips

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March 2008

It's that time again—time to file your income taxes. Nobody enjoys tax time, but being armed with the right information can help you accomplish this chore quickly and safely. This month's review provides information on free e-filing, an update on “quick refund” loans, and tips for finding a reliable tax preparer with expertise to match your needs.

E-file your taxes for free

The number of people who file their taxes electronically has increased each year. In 2007, 80 million people e-filed their taxes. While many people pay a fee to e-file—for example, through software programs or tax preparers—the IRS offers the Free File program. According to the IRS, most taxpayers—70% or 97 million—are eligible to use Free File.

The Free File program is provided by the IRS and the Free File Alliance, which is a group of commercial tax preparation software companies. Taxpayers with an adjusted gross income (AGI) of $54,000 or less in 2007 are eligible to use the Free File program.

Here are some quick tax tips: Most taxpayers are eligible to use IRS Free File program. Free File can only be accessed through the IRS website. E-file your taxes to get your refund quicker. Choose direct deposit of your refund to get it even faster. Choose a tax preparer carefully. Make sure you check their credentials and experience.

The free online tax preparation and filing services are provided by commercial tax preparation software companies and can only be accessed through the IRS website. Even if you've used Free File in a previous year, you still must access it through the IRS website or the provider may charge you a fee. Read the descriptions carefully before starting because each company has their own criteria – for example, it may not be available to residents of all states or it may be offered only for taxpayers under the age of 50. You may want to use the "Guide Me To a Company!" feature to help you choose.

Additions to the program for this year include:

• Several providers now offer Free File in Spanish.
• Some providers now offer preparation services for state income taxes for free.
• Free File can be used to prepare the Earned Income Tax Credit (EITC) schedule for free.
• Free File can be used to file Form 4868, Application for Automatic Extension of Time to File.

For a more detailed look at e-filing, see our updated Remar's Review, Want a Quick Federal Tax Refund? Think E-File.

An Update on "Quick Tax Refunds"

Ads for "quick tax refunds" have appeared for years during tax season. These "quick tax refunds" are usually refund anticipation loans (RALs). In 2006, according to the latest report from National Consumer Law Center and Consumer Federation of America, 9 million Americans took out RALs that totaled $900 million in loan fees and over $90 million in other fees. That's almost a billion dollars. They paid effective APRs ranging from 50% to 500% not including application fees. If application fees are included, the effective APRs range from about 80% to nearly 1,200%. In addition, most of these taxpayers qualified for free e-filing. Why pay interest to borrow your own money, particularly when the loan provides money only 8 to 10 days sooner than e-filing with direct deposit?

Watch out for the latest offering in RALs—the instant or same day RAL—in which you get the money today instead of in 1 or 2 days. These RALs have higher fees.

Since the quick refund is a loan, you must pay back the lender the full sum you borrow even if the IRS refunds less than you anticipated, freezes the refund, or denies the refund.

For more details, see our updated Remar's Review, "Quick Tax Refunds" What's Real? What's Really a Loan?

Tips for Picking a Reliable Tax Preparer

Are you one of the millions of taxpayers who prefer to have someone else prepare your tax return? If so, here are various options for obtaining assistance and tips for choosing a tax preparer.

Free Tax Assistance

The IRS has two programs offering free tax assistance. These programs are community based and provide free tax preparation assistance by certified volunteers. Most sites also offer free e-filing.

The Volunteer Income Tax Assistance Program (VITA) offers free tax help to people whose annual income is typically $40,000 or less. Volunteers can help with special credits, such as the Earned Income Tax Credit (EITC), Child Tax Credit, and Credit for the Elderly. VITA sites are located in convenient locations such as community and neighborhood centers, libraries, schools, and shopping malls. Call 800-829-1040 to locate the nearest VITA location.

The Tax Counseling for the Elderly (TCE) program offers free tax help to people age 60 and older. Call 800-829-1040 to locate the nearest TCE location.

AARP provides the Tax-Aide program which offers free tax help to low and middle income taxpayers with special attention to people age 60 and older. Tax-Aide is part of the TCE program. You do not need to be a member of AARP to use the Tax-Aide program. Many sites also offer free e-filing. Call 888-227-7669 to locate the nearest Tax-Aide location or visit the AARP Tax-Aide website.

Free Tax Return Preparation for You by Volunteers from the IRS provides more information.

Picking a Tax Preparer

You should choose carefully when selecting someone to prepare your tax return. Remember, you are legally responsible for what's on your tax return whether you prepared it or you paid someone to prepare it. Use the following questions to find a tax professional that meets your needs.

Check credentials. What education in tax and accounting does the person have? What licenses or certifications do they have? Holders of the following credentials must meet continuing education requirements in order to keep the designation.

• Certified public accountant (CPA)
• Enrolled agent (EA). An enrolled agent is licensed by the federal government. They have either passed a rigorous two-day exam administered by the IRS and a detailed background check, or they worked at the IRS for at least 5 years interpreting and applying IRS codes and regulations.
• Tax attorney
• Accredited tax advisor (ATA)®. ATAs have completed formal coursework and have at least 5 years of experience in tax preparation, compliance, tax planning, and consulting.
• Accredited tax preparer (ATP)®. ATPs have completed formal coursework and have at least 3 years of experience in taxation.

Note that only attorneys, CPAs, and enrolled agents can represent you before the IRS in all tax matters including audits, collection actions, and appeals. Other preparers may represent you only in audits regarding a return that they signed as a preparer.

Experience. How long have they been in practice? What are their areas of expertise? What services do they provide? Do they belong to any professional organizations? If so, do they have a code of ethics? How do they keep current on changes in the law?

Check references. Ask for references and talk to them. You can also check with the Better Business Bureau or the appropriate certification agency such as the state board of accountancy (CPAs), state bar associations (attorneys), or the IRS Office of Professional Responsibility (EAs).

Determine cost. What will it cost to prepare your return? Do they have a base fee? Do they charge by the hour? Do they charge by the form? Don't use a preparer if they base their fee on a percentage of the refund.

Availability. Is the preparer available only during tax time or throughout the year? Tax issues can arise up at any time, not just between January and April.

Who will actually prepare the return? Make sure you know and talk to the person who will actually prepare your return. In some firms, preparing returns may be delegated to another person who may be less experienced.

A note about preparers at the national tax preparation chains and similar local businesses: These preparers may be an inexpensive choice for a simple, straightforward return. But if your return is more complicated, you may want to find a preparer that has more experience with your type of situation.

Tips for Choosing a Tax Preparer from the IRS provides more details on these and other tips.

Prepared for Corning Credit Union by Remar Sutton & Associates, March 2008. All rights reserved.