Where to turn for professional help with tax returns
Mr. Smith (not his real name) used to live in Boston. When he moved his family to California, he bought a house just before real estate prices took off there. His wife, not taken with California, insisted the family return to Boston before a year was up.
Mr. Smith bought his West Coast home for $48,000, and sold it for $75,000 nine months later. But the $27,000 gain never made it to his bank account. Because he owned the house less than a year, the gain was 100 percent taxable - it was not taxed at the 40 percent capital-gains rate.
But that's not all. He bought his new house in Boston for considerably less than $75,000. He could not, however, defer the gain - again because he had not waited a full 12 months. If Mr. Smith had waited three months, he would have saved $7,000.
Mid-April is one time when ignorance is anything but bliss. To accommodate those who want to pay the government their fair share - and no more - but don't know how to go about it, professional tax preparers have set up shop all across the country.
Before putting your taxes into the hands of a professional, you should consider what type, if any, would best serve your needs.
The three most common types are the chains, the accountants, and the Internal Revenue Service.
Of the tax-preparation chains, H & R Block, with between 8,000 and 9,000 offices nationwide, is the largest. Ten percent of all tax returns filed last year were filled out by H & R Block. With such volume comes several advantages, Mr. Cullinane says. There will almost certainly be an office near you open all year, and it's hard to go anywhere without running into H & R Block - even if you move from one coast to the other.
One thing H & R Block does not claim to be, says Mr. Cullinane, is infallible. But if the IRS rules you did not pay enough tax, H & R Block will pay the penalty (0.5 percent a month up to 25 percent of the additional tax), as well as the interest on the additional tax. (You must, of course, pay the additional tax yourself.) And if you get audited, an H & R Block official will accompany you to the audit.
H & R Block prices are competitive with other multi-office preparers. A short form, 1040A, costs $12 to $14. Form 1040 with itemized deductions (Schedule A) is done for around $40. The average person should expect to spend about $ 60: that includes Form 1040, Schedule A, and Schedule B (interest income) or Schedule C (self-employment). The state form is an additional $9.
At Tax Man, whose 23 offices in Massachussetts and New Hampshire prepared 18, 500 returns last year, the average charge was $38.44, including the state form. As with Block, the more forms, the more Tax Man charges. Tax Man also offers financial counseling on tax and investments - which usually takes less than two hours - at an hourly rate of between $50 and $90.
As with other professional preparers, you shouldn't expect an immediate payback. But, says Robert Murray, president of Tax Man, ''Most people find that we can turn up enough deductions over a five-year period to pay for our services. At least one out of five years, Tax Man finds a $100 deduction that you would have missed.''
In the West, Triple Check is a presence, but a more expensive one. It has 65 offices in California and 16 others spread around Arizona, Texas, Idaho, Florida , Hawaii, Colorado, and Washington state. These offices prepared close to 75,000 returns last year. Triple Check prices depend on one's gross income. Those earning under $10,000 a year, pay $55 (state and federal forms) and $5 for each of the schedules. Below $20,000, the charge is $80, plus the schedules. And over
Tax-preparing chains best serve those with relatively simple taxes, tax experts say, because the employees have relatively little training, basically just on filling out the forms. If you are in a fairly high-income bracket, are looking for investment advice, and personal service year-round, you should probably go to a certified public accountant (CPA).
But you will pay. Lillian Call, a tax partner at Seidman & Seidman, says: ''Those who come to an accounting firms are well acquainted with the philosophy that you get what you pay for. What is important is not the time that is used, but the knowledge that is conveyed.''
At Seidman & Seidman, the minimum fee is $250, plus computer costs, Ms. Call says. If you go to Coopers & Lybrand with all your receipts sorted and deductions organized, you will probably pay more like $55 an hour, says Linda Doty, a tax partner in their Denver office.
If you are not a ''very affluent individual'' with stock portfolios and tax shelters, Ms. Call says you would be better off going to an individual CPA. Looking in the yellow pages is one way to find one, but not the most reliable. Your choice could disappear during the year and not be found when and if the IRS disagrees with your assessment. Ms. Call suggests asking officials in the controller's office of your company to refer you to a reputable CPA, or asking an accounting professor for the same information. Individual practitioners' fees vary widely, but Ms. Call says some are ''pretty hungry,'' and therefore pretty inexpensive.
If you do go the professional tax-preparation route, you will need to bring with you certain records. These include W-2 forms, bank statements, dates and amounts of stock transactions, and records of all deductions.
Few people light up at the words ''tax preparation.'' Matthew Lesko, author of ''How to Get Free Tax Help'' (New York: Bantam Books. $2.95), is one of them. That's because the agency that checks your tax return, the IRS, will also give you free assistance in preparing it in a variety of ways. ''So many people have unfounded fears about the IRS,'' Mr. Lesko says. ''And the H & R Blocks of the world spend a lot of advertising dollars perpetrating those fears. But the IRS doesn't advertise'' to allay them.
In his book, Mr. Lesko cites the case of Michael Skigen, an accounting professor at Georgetown University. In 1979 he created a tax return for a hypothetical family of four. He calculated the family should get a refund of $ 485. He then went to five tax preparers and two IRS offices, receiving different estimates at each place. According to Mr. Skigen, the H & R Block office in Maryland told him the family owed the IRS $2,238 - and charged him $49 for the service. The IRS district office said he should receive a $305 refund. As for preparation expense, the IRS charges nothing.
The IRS has 60,000 tax experts available for free advice, says Mr. Lesko. There are 11,000 tax offices where people can get their taxes done without charge. There are toll-free 800 numbers, and 20 law schools (including Harvard) which will help you with your taxes. Their names are available through the IRS. And the endless wait for assistance? The average wait on the telephone is 45 seconds.
A Government Accounting Office study found that those going to the IRS were less likely to be audited than those going to paid professional. Anyway, Mr. Lesko says, the IRS is auditing fewer people these days - 25 percent less than in 1977, only 1.8 percent of those filing returns, most of them people with incomes over $50,000. And 35 percent of those audited either pay no additional tax or receive a refund. That should take some of the fear out of doing taxes yourself, or with the help of the IRS, he reasons.
In the final analysis, it is the taxpayer, not the tax preparer, who is responsible for the accuracy of the return. ''So what if they go to the audit with you?'' he says. ''They won't go to jail with you.''
Most important, he says, preparing your own taxes is cost effecive. A very simple return will cost $30 to $50 if prepared professionally, saving you perhaps an hour of sifting through the tax code. ''It's true the tax code is complicated,'' Mr. Lesko says, ''but for 90 percent of us, it's simple,'' because most people's finances don't include much more than a house and a few deductions.
Public awareness of the services the IRS provides, Mr. Lesko says, is one reason the number of people filing their own returns has increased 25 percent over the past five years.