Open season

Tax Season 2013 is open! Kind of.

Jan. 30 marked the first day that individual taxpayers were able to file their federal income tax returns. This day was later than in previous years because of the Jan. 2, 2013 passage of the American Tax Relief Act of 2012. Many provisions of this tax legislation affected income tax laws for 2012, requiring time to reprogram IRS computers before returns could be accepted and processed.

Because of the numerous retroactive changes in tax laws passed in the ARTA, only the simplest of income tax returns can be filed currently. If you’re eligible for education credits, you will have to wait until mid-February before the IRS will accept your return.

Many taxpayers with businesses or people who might be eligible for the energy credit will have to wait until the end of February or the first part of March. The IRS has listed the forms which are affected on their website.

Another event affecting the preparation and processing of your income tax returns, unnoticed by most people, is that a federal judge for the U.S. District Court for the District of Columbia barred the IRS from regulating who can commercially prepare a federal income tax return.

Beginning Jan. 1, 2011 the IRS began requiring people who prepared income tax returns for compensation to register for and obtain a Preparer Tax Identification Number (PTIN). Unless you were a CPA, an Enrolled Agent, or an attorney, to receive a PTIN the IRS were requiring an individual to pass a basic competency exam by Dec. 31, 2013 and then annually take 15 hours of continuing education courses. Individuals who met these requirements would receive the designation Registered Tax Return Preparer (RTRP). The IRS’ intent was to eliminate unqualified and dishonest income tax return preparers, a worthy goal.

Because of these additional regulations, three independent tax return preparers and the Institute for Justice filed suit against the IRS. Judge James Boasberg ruled the IRS had overstepped its authority and enjoined the IRS from continuing the program, effective immediately. The IRS asked the Judge to postpone the effective date of his injunction until they could appeal his decision, but Friday, the Judge denied this request.

Since it is now legal for anybody to prepare your income tax return for compensation, like the sales clerk at the clothing store in the TV commercial, how should you choose a competent tax return preparer to insure optimal results?

A safe bet is to engage a certified public accountant to prepare your income tax returns. To use the CPA designation, most states require a CPA to have passed at least 150 college hours before they are allowed to sit for the CPA exam. The CPA exam is a comprehensive and difficult test where only the strong survive. Once the exam is passed, CPA’s must adhere to a code of ethics and maintain a minimum of 40 hours of continuing education a year.

Let me shamelessly plug the western Arkansas CPAs. As a practicing CPA in Fort Smith for more than 30 years, I know a large percentage of the area’s CPAs personally. Though most aren’t as good-looking as I am, the ones I know are competent, ethical, and a safe bet if you want your income tax returns prepared accurately and in compliance with federal and state income tax laws. I’m sure there is one scoundrel in the bunch, but I don’t who that would be.

Granted, CPAs aren’t the only professionals capable of preparing accurate income tax returns. Enrolled Agents have also passed comprehensive exam demonstrating knowledge of tax laws and they too are required to take 16 hours of continuing education each year. However, there are only a handful of Enrolled Agents in Western Arkansas.

Through the years, I have seen tax returns prepared by companies in our area that were absolutely atrocious, probably criminal. Not one, however, was prepared by a CPA or enrolled agent. That is not meant to say that all CPAs are saints and above reproach. Although I don’t know one personally, I have read news stories about CPAs guilty of crimes and placed in prison. It’s just rare.

What else should you consider when hiring a tax return preparer? Experience counts. In addition to knowledge of the Internal Revenue Code, how to apply that knowledge is important.

Don’t be afraid to talk with a tax preparer about price. But consider that price isn’t the best way to choose a preparer. Missing an allowable deduction or tax credit could cost you much more than a couple hundred dollars price difference. Think value, not price. FYI: it’s a myth that CPAs always charge more than non-CPA preparers.

A side note, Sunday, Feb. 3, 2013, marked the 100th anniversary of the ratification of the 16th Amendment to the U.S. Constitution granting our government the power “…to lay and collect taxes on income, from whatever source derived….”.

In 1913, adjusted for inflation, a couple with taxable income of $93,700 paid a tax rate of 1% in comparison to today’s tax rate of 25%. An interesting article on the history of the U.S. federal income tax rates published this past Friday can be found at this Bloomberg story.