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Are tax returns really the commodity that they are often perceived to be? Is a tax return prepared by the tax service in the mall of the same quality as that prepared by a major CPA firm?

What does it mean to have a “quality” tax return? In fact, can a tax return be prepared in such a way as to reduce income taxes or reduce audit risk?

As someone who has been involved in the tax return preparation process for almost 30 years, let me share some thoughts on this subject.

In all the firms and companies I’ve worked, the basic accuracy of tax return preparation was excellent. There was always a good review process and I don’t believe there were major mistakes on very many returns produced by these firms. I find this also to be the case on returns that I see from clients who are new to ProVision. It’s rare that I find a flagrant error in a return.

But does that mean that these firms all produce the same quality of tax return? The clear answer in my experience is a resounding “NO!” Let me explain.

Accuracy in a tax return simply means that the information provided by the client was reflected on the tax return. It does not mean that the tax return was prepared in the BEST way it could have been prepared. In fact, I RARELY see a tax return from a new client that was prepared the way we would prepare it at ProVision.

Tax Return Preparation Either Always Reduces or Increases Your Audit Risk Let me give you some examples.

Example #1: Where you claim your deductions matters Suppose you have some expenses that could either qualify as investment expenses or business expenses. Either classification would be “deductible” on the tax return. BUT, a business expense is MORE DEDUCTIBLE than an investment expense.

How is that possible? An investment expense is deducted on Schedule A and is classified as a “Miscellaneous Itemized Deduction.” There are several limitations on a miscellaneous itemized deduction. First, you only get to deduct these type of expenses to the extent they exceed 2% of your income. So, if you have $300,000 of income and $7,000 of investment expenses, you only get to deduct $1,000. What’s worse is that if you are in the Alternative Minimum Tax like millions of taxpayers, you don’t get any benefit for your investment expenses.

How does this relate to audit risk? Miscellaneous itemized deductions tend to be more heavily scrutinized by the IRS, so they have a tendency to increase audit risk. In this case, how your tax return is prepared not only impacts how much you pay in tax, but also your audit risk.

Example #2: Tax return preparation matters even when you owe no tax Many taxpayers believe that their audit risk is low because they don’t have any tax liability, so who and how their tax return is prepared doesn’t matter. This is not necessarily true! Here’s why:

Losses reported on Schedule C are commonly scrutinized because of the possibility of hobby losses (turning a personal activity into a “business” but not putting in the effort to turn a profit which makes the activity a non-deductible hobby activity in the eyes of the IRS).

Losses reported on Schedule E for rental real estate are commonly scrutinized to make sure the rental losses are indeed deductible. The rules in this area can be very complicated so the IRS is on high alert to catch errors.

Having no tax liability does not mean you are off the hook when it comes to audits!

Behind Every Secret Remember, behind every one of my secrets is knowledge – the type of knowledge that makes you aware of what creates massive tax savings so you begin to see your daily routine a little differently…like how to reduce your audit risk even while you are reducing your taxes!

Reduce your taxes now!

Keep NeatOne of the easiest ways to get audited is by simply not providing all the correct documentation. When doing your taxes, it can be easy to miss a step or forget to include a few things. Unfortunately, this looks like evasion to the IRS, so do everything you can to keep all your tax documents together before tax season. That way you can make sure that all of your returns are accurate before you file them. Keep Business SeparateIt’s easy to get carried away when buying stuff for “the office”. However, make sure that when you are buying anything for your business that it is a business expense allowed by the IRS. Additionally, too many write-offs for your business that seem suspicious are a big red flag for the IRS, so only write-off items that clearly serve a business function. Check Your IncomeMake sure the income you put on your return matches the income number on your income forms exactly. While this does not always make for an audit, it only takes a few things to raise suspicion. Listing an incorrect income is of the easiest ways to get audited, but can easily be avoided by double-checking your return before you file it.

Taxes are your single biggest expense against your income. Knowing what deductions you’re entitled to can save you hundreds, if not thousands of dollars. This article will cover vehicle related deductions that often get overlooked by home-based businesses. Our focus will be for individuals with no employees, however many of the deductions will apply to small business and large corporations as well.
There are two ways to calculate Vehicle deductions:
1. Standard mileage for 2006 is $0.445/mile
2. Actual cost method + depreciation
Lets start with the “standard mileage rate”. You can write off each mile you drive that is related to your business at $0.445/mile. This is called the “standard mileage rate”. So if you drive 10 miles to visit a client, then 10 miles to return to your home office, you can deduct 20 miles. 20x.445=$8.90. However, you cannot deduct all your miles, such as going to the grocery store. You can see how this can add up to a substantial amount. Some professions such as real estate require a lot of driving.
In addition to your standard mileage rate, you can also deduct parking fees and tolls in connection with your business travel. If you have a loan on the car, then you can deduct the interest paid on the loan to the extent that you use the car as a business expense. So if you use your car 50% for business and 50% for personal use, then half the interest paid on the loan is deductible! Remember, this is for self-employed only. You cannot deduct interest on a loan if you are an employee using the car for your job.
The standard mileage rate is by far the simplest, but may not offer you the largest deduction. Instead, you can choose the “Actual Cost Method”. In this method, you deduct all the expenses related to owning and maintaining your car. This would include and is not limited to oil changes, repairs, tires, brakes, tune-ups, washing and waxing, auto-club memberships, license plates, and car insurance. Again, all of these expenses are deductible for the portion that you use the car for business. For example, if you drive 20,000 miles during the year, and 15,000 miles are for business, and the remaining miles are for personal use, then you can deduct 15,000/20,000 or 75% of all those expenses.
In addition to the actual cost method, you can deduct a depreciation value. This is a value that reflects the loss of value to the car over time due to wear and tear. The simplest example of this would be if you bought a new car in 2006 for $20,000, you can deduct 20% of the value the first year times the percentage of business use. So if you use the car 75% for business, you calculate your deduction as follows: $20,000×75%x20%=$3000.
For the following years, you use the following schedule:
First year: 20%. (Half a year)
Second year: 32%
Third Year: 19.2%
Fourth Year: 11.52%
Fifth Year: 11.52%
Sixth Year: 5.76% (half a year)
What if you trade an old car you were using for business for a new car? You would have to recalculate a “basis” cost for depreciation. You also have a different depreciation schedule if you use the car less than 50% for business or if you buy a hybrid electric car.
We have by no means covered all the twists and turns that would affect how you calculate your deductions. Fortunately a popular tax software like TurboTax or Taxcut will walk you through each step in calculating your deduction then give you which method yields you the biggest deduction. If you’re going to use a tax accounting service, make sure you go over these kinds of deductions with the tax professional. Bring this article with you and ask them if the have experience with how to prepare returns small businesses and all the deductions that are available to you. If they hesitate or stutter, go somewhere else. If could cost you thousands.

Is a tax return prepared by the tax service in the mall of the same quality as that prepared by a major CPA firm? What does it mean to have a “quality” tax return? In fact, can a tax return be prepared in such a way as to reduce income taxes? Are tax returns really the commodity that they seem to be? As we approach Tax Season, I wonder how many people understand the potentially vast differences in the quality of tax return preparation?

As someone who has been involved in the tax return preparation process for almost 30 years, let me share some thoughts on this subject.

Accuracy in a tax return simply means that the information provided by the client was reflected on the tax return. It does not mean that the tax return was prepared in the BEST way it could have been prepared. In fact, I RARELY see a tax return from a new client that was prepared the way I would prepare it.

Let me give you some examples. Suppose you have some expenses that could either qualify as investment expenses or business expenses. Either classification would be “deductible” on the tax return. BUT, a business expense is MORE DEDUCTIBLE than an investment expense. How is that possible? An investment expense is deducted on Schedule A and is classified as a “Miscellaneous Itemized Deduction.” There are several limitations on a miscellaneous itemized deduction. First, you only get to deduct these type of expenses to the extent they exceed 2% of your income. So, if you have $300,000 of income and $7,000 of investment expenses, you only get to deduct $1,000. What’s worse is that if you are in the Alternative Minimum Tax like millions of taxpayers, you don’t get any benefit for your investment expenses.

On the other hand, if you were able to deduct these same expense on your Schedule C or your Schedule E, you would be able to deduct 100% of the expenses. In addition, the expenses would reduce your self-employment income from your business. That’s another 15.3% tax benefit on top of the income tax benefit.

Another example of less than stellar tax return preparation relates to depreciation. Depreciation is the government’s gift back to investors, especially real estate investors, for investing in long-term assets such as equipment and buildings. What most tax preparers don’t understand is the idea of a cost segregation or chattel appraisal. The whole goal with depreciation is to get more of it sooner. This provides the investor with a terrific tax benefit in the early years of property ownership. And under the important wealth creation principles of leverage and velocity, the sooner we have cash, the sooner we can invest it and obtain major returns from our investment. The problem appears to be a lack of knowledge from many tax preparers and CPAs about the rules surrounding cost segregation.

The one area where I do see mistakes relates to those taxpayers who file returns in multiple states. This is a specialty area of mine, which I teach at Arizona State University. Even in the major firms, there is a lack of understanding by the Federal tax departments of the many opportunities for tax savings when preparing multistate tax returns.

What it comes down to is whether your tax preparer/CPA has the knowledge and creativity necessary to prepare the BEST return possible. And is it worth it to you to pay a little more to get the better result? Are you focused on the amount you pay your advisors or are you focused on the return they provide you on your investment? Let me give you an example.

Suppose you have a choice of paying $750 for your tax return to a small CPA firm or $2,000 to an innovative, knowledgeable firm. All things being equal, anyone would choose to pay the lesser amount. But what if all things are not equal? What if the $750 gets you an adequate, accurate return but the $2,000 would get you a return where you pay $5,000 less in tax? Which is the better deal? In one, you are out $750 with no return on your investment. In the other, you are net ahead $3,000. Clearly, the $2,000 fee returns a greater value.

This tax season, review your own tax situation and the advice you are receiving from your tax preparer/CPA. Are you getting the return on investment you want? Are you getting the planning ideas you need? Are your taxes going down or do they continue to increase? Taxes are such a major part of your wealth creation that you cannot afford to ignore one of the most important part of the tax planning process – tax return preparation.

Warmest regards,

Tom