What do we know so far?
We are certain that some taxpayers have noted that their personal information was used to file fraudulent tax returns. The suspicious activity was detected by the Minnesota State Department of Revenue and other states have noted similar behavior. The common thread throughout all of the reports is that the fraudulent returns were filed with TurboTax software. As a result, Intuit, the maker of TurboTax, halted the transmission of state returns for about 24 hours. Intuit has since included additional security measure in their tax filing process to prevent fraud. As of now, the other large tax software providers such as H&R Block and TaxACT have not reported the same unusual activity.

Was there a security breach?
At this time, this is the big unknown. The FBI has started an investigation and Intuit has stated that they do not believe that their computer systems have been compromised. Furthermore, Intuit is working with a third party security firm, Palantir, to investigate the fraudulent activity further. The explanation that Intuit has given thus far is that the activity is the result of phishing email scams and possibly a breach of an outside third party database unrelated to Intuit.

Who is at fault?
Intuit’s explanation is certainly plausible. There are many sophisticated email phishing scams and other ways for hackers to access personal information. However, we are concerned that it appears as though the scheme targeted only TurboTax and none of its competitors.

Should I reconsider filing with tax software?
That’s a question only the taxpayer can answer. The risk for fraud and identify theft has always existed with any form of tax preparation. Having said that, the risk is certainly greater with online tax software than it is with a tax professional. Furthermore, as is the case with almost every online service, users must agree to the terms of service which disclaims TurboTax from being responsible in the event of fraud. This means that if you are a victim of fraud and another party filed your tax return for you, you’re on your own in resolving the matter.

Isn’t tax software the cheapest and fastest way to file?
Yes. The fee for filing online with tax software will almost always be less than hiring a tax professional. However, there is more risk with filing online and there are tax compliance and planning limitations with these programs. A software program simply cannot replace a CPA or Enrolled Agent. Still, if you do decide to continue to file online or on paper, there are additional security measures to take. You may want to consider obtaining an Identity Protection PIN (IP PIN) from the IRS. This process can take months to process, but it can provide added protection. Once the pin number is issued, it becomes your personal password that must be included on your tax return or the IRS will not process the return.

More tax questions? Browse answers or ask tax filing questions online. You can also find accountants online here.

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Can you claim a tax credit for foreign pension income?
Generally, the answer is yes. In filing the Form 1116, you will be given the option of classifying the income in a certain category. For instance, if the pension income is due to a distribution, we can apply certain tax principles and the language in the publications to classify the income as general category (column B). Specifically, if we reference the Form 1116 instructions it states that, “General category income is income that is not passive category income or income described in categories c, d, and e, discussed later.” Foreign pension income is not defined in any of these other income categories. Furthermore, if we review the definition of passive income in IRC Section 469, pension income does not fall in the passive income category. This is just one example of the care that needs to be put forth in completing this form.

When do we file the Form 1116?
The first step is to file your foreign tax return reporting all of the income, deductions and exemptions, which results in a net tax that can be claimed on the Form 1116. If no foreign tax is due, then the Form 1116 is not applicable. See page 2 of Form 1116 under the Header, “Foreign Taxes Not Eligible for a Credit.”

What if foreign taxes are withheld?
If you are certain that the foreign taxes withheld with be your final foreign tax liability, then you may file the Form 1116. For instance, in Canada if you aren’t electing Section 217 treatment, the tax deducted would be considered your final tax obligation to Canada and no Canadian return is necessary to be filed. You would be able to claim the foreign tax credit for the amount on Form 1116.

More Questions? Ask your foreign tax questions or find a tax accountant online.

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How much does it cost to hire a tax pro to file a 2014 tax return?
According to the National Society of Accountants (NSA), it costs $273 to hire a tax professional to prepare an itemized individual tax return, which includes a state tax return. The tax prep fee increased 4.6% as compared to the $261 average a year ago, but a lower growth rate than the 6.1% year over year increase last year. If the taxpayer is just claiming the standard deduction, the average cost is $159 versus $152 a year ago or an increase of 4.6%. You may be asking yourself how $273 is affordable when you compare that to online tax software program which range from $10 to $72 to file a federal and state tax return. While it is less expensive than the average price to hire a tax professional, there are other factors to consider. First, the tax professional will undoubtedly be able to provide advice and consultations that simply aren’t available with a tax software program. Second, the tax filer does not have to spend time completing online tax forms. Third, the tax filer will have peace of mind that a CPA or Enrolled Agent is partly accountable for their return. Fourth, the $273 fee for an itemized federal return and state return or $159 for a simple return, are only averages. There are many tax preparers that offer services below these rates. Many of the accountants in our network can attest to that as you can submit a request here to file your taxes online and receive quotes from multiple tax professionals.

What are the fees for business tax returns and other services?
The survey indicated a wide range of average prices for different type of services. For instance, the average fee to prepare a business return such as a form 1065 or 1120 can cost $634 and $817 on average versus $590 and $806 a year ago or up 7.5% and 1% respectively. Most accountants offer these services with a one hour free consultation with an average value of $100.

If you’re wondering how the pricing in your area compares to the rest of the country, the survey provided details. Those in the Pacific states (AK, CA, HI, OR, WA) can expect the highest fees at $348 vs. $303 a year ago, followed by the Mid-Atlantic states (NY, NJ, PA) at $314 vs. $274 a year ago, followed by the South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV) at $268 vs. $270 a year ago and then the East South Central states (AL, KY, MS, TN) at $262 vs. $294 a year ago. The New England states (CT, ME, MA, NH, RI, VT) were at $246, the West South Central (AR, LA, OK, TX) states were at $205, East North Central states (IL, IN, MI, OH, WI) were at $240, the West North Central states (IA, KS, MN, MO, NE, ND, SD) were at $198, and the Mountain (AZ, CO, ID, MT, NV, NM, UT, WY) states were at $256.

More tax questions? Browse answers or ask 2014 tax questions online. You can also find accountants online here.

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How can the IRS be ready to accept returns on time?
The IRS commissioner John Koskinen commented that the agency reviewed the late tax changes and determined that they updated all of their systems to reflect the latest tax laws. The IRS also has about 3 weeks to complete any updates.

How should I file my tax return?
Whether you utilize tax software or tax professional, filing electronically will help to ensure an accurate and timely filed return. Furthermore, taxpayers that file electronically should receive their tax refund fairly quickly.

When can I expect my refund?
When you file your tax return, you will be given an option to receive your refund by direct deposit, paper check, or to buy Savings Bonds. Most taxpayers that e-file and elect to be paid via direct deposit can expect to receive their federal tax refund within 10 to 14 days after the return is accepted. If you don’t receive your federal tax return after 21 days, then you may need to contact the IRS. If you filed a paper tax return and elected to be paid in the mail, it will take much longer. Usually, it will take 4 to 6 weeks in that case.

How can I track my refund?
You can track your refund on the IRS site called Where’s My Refund, but the length of time it takes for the information to appear varies greatly depending on how you filed. If you filed electronically, information about your refund will generally appear 72 hours after the IRS acknowledges receipt of your return. However, if you sent your return by mail, it will take three to four weeks for a status update. If there’s no information yet, check back each Wednesday. You need to input your Social Security number, filing status (single, married filing jointly, etc.), and amount you’re owed to access the information.

More tax questions? Browse answers or ask tax questions online. You can also find an accountant online here.

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How is your firm different from other accounting practices?
Our accounting firm, Safir & Freyman CPA’s, P.C., not only has decades of work experience, but we also work with the latest and greatest technologies available in the marketplace. The result is that we are able to not only provide traditional accounting services such as bookkeeping and tax preparation work, but we can offer our clients strategic advice as their most trusted business advisor.

In addition, our efficient processes allow us to provide our services at an affordable fee in comparison to the majority of the market. Lastly, we focus a lot of our attention on building client relationships and understand how important it is to be very accessible.

What types of technologies are you using to work with clients?
We use the latest technology tools in the most efficient way possible to make it easy for clients to work with us. For instance, we use DocuSign and Box.com for clients to easily and securely send workpapers as well as collaborate on current business tasks. In addition, we have interactive tax organizers & host virtual meetings to reduce the guess work for clients. We believe that a paperless environment allows for easy submission of documents and significantly enhances the client/professional experience.

How exactly does your pricing work?
We understand that our clients (business + personal), always want to know how much it will cost upfront for our services. Given our experience across industries and projects, value pricing (i.e. flat-fee) is always an option for our clients. Pricing doesn’t have to be overly complicated. We look at how much time we think the job will take, the rate of potential error, and the rate for performing those services. Hourly rates are also an option, but some clients want the peace of mind of knowing the price upfront.

What types of clients do you serve?
We serve clients in the following industries: financing, transportation, marketing, professional services, restaurant, salon & spas, human resources, manufacturing & construction, non-profits, real estate investments, retail, and international. In addition, we aren’t restricted by geography in the sense that the cloud-based tools that we use provides us with the capability to offer our services to clients worldwide.

How do you share your knowledge with existing and prospective clients?
I send out client letters to keep everyone abreast of the latest tax law changes. I believe clients should have the opportunity to access the same information that I’m privy to as an accounting professional. For instance, I recently sent out a letter covering the importance of correctly classifying your employees as there is a heightened risk for tax audits.

We also conduct accounting and income tax seminars on site, as well as help businesses train new employees in accounting software such as QuickBooks.

Also, on my spare time, we give back to the community by providing our services to non-profit organizations at significantly reduced fees or on a pro-bono basis. Companies we assist include GenSpace NYC, Coalition for American Roots Music and many more.

How should a business contact you if they are interested in learning more about your firm?
They can reach out to me directly at the contact information below or they can visit our company website here or from my BIDaWIZ profile here.
Greg Freyman, CPA, CGMA
gfreyman@taxproff.com
(646) 722-4159

The latest IRS tax season filing results
The latest figures provided by the IRS indicate that of the almost 116 million e-filers as of April 18, 2014, 70 million returns were prepared by a tax professional and the remaining 46 million were self-prepared (i.e. DIY software). This compares to 112.7 million in the year ago period, when 69.5 million returns were prepared by professionals and 43.2 million were self-prepared. This translates to a 1.3% market share shift toward DIY software as professionally prepared returns dropped from 61.7% of the overall e-file market in 2013 to 60.4% in 2014 (Table 1 – Tax Filing Method Market Share Changes). While the data indicates that DIY software providers are taking share from professionals, it’s important to note that professionally prepared returns still grew in aggregate by 518,000 for the season. In addition, we believe that much of the market share shift relates to the taxpayers that were previously using the tax preparation franchises such as H&R Block (in-person), Jackson Hewitt, Liberty Tax and have opted to use DIY software instead. Our conclusion is based on both the quantitative and qualitative data that we’ve captured from our survey as detailed below.

Table 1

The survey
During the 2013 tax season, we surveyed over 3,500 users throughout the country that visited BIDaWIZ for tax help and/or to find a preparer to file their personal tax return. The respondents that were chosen at random, varied by income level, profession, age, geography, ethnicity and other demographic data. Thus, we believe that the survey results are representative of the general population that falls within the consumer tax category.

Which filers are searching for online tax help?
At the forefront of the survey, we gathered information to identify the method that the visitor uses to file their return. The respondents that worked with a professional used either a CPA or Enrolled Agent at a traditional CPA firm or a preparer at one of the tax preparation franchises (H&R Block in-person, Jackson Hewitt, Liberty Tax). There were also some respondents that prepare their returns themselves using pen and paper. However, the results indicate that the majority of the respondents utilize DIY software (Table 2 – User Survey: Tax Preparation Method). Of which, TurboTax, H&R Block and to a lesser extent TaxACT represent the software programs that were used by most filers.

Table 2

The data also tells us that many DIY filers are searching for online tax help. During the survey period, nearly 80% of our website traffic was generated through online user search activities. Specifically, a majority of our visits were sourced through the popular organic search engine terms related to “tax questions” and derivations thereof. In addition, many of the filers searching for tax help were using professionals from the tax preparation franchises. This data-point would substantiate the conclusion that the market share shift can largely be attributed to the filers using tax prep franchises.

In addition, we were also able to identify the respondents’ background based on the nature of the inquiries (Table 3 – Survey: User Tax Based on Inquiry). The majority of these users were self-employed, owned property (rentals), or had employment related inquiries. These results illustrate that DIY filers are frequently searching online to get answers to their tax questions because they need assistance with inquiries relevant to those key user types.

Table 3

What are the issues causing filers to search online?
We reviewed further into the key issues that are causing both DIY software filers and those that use a paid preparer to visit our site.

To better understand the data, we curated and categorized the user inquiries by type as it relates to the personal tax filing process. The different types of inquiries related to the following categories and sub-categories:

The data tells us that both “reporting income” and “tax deduction” related inquiries are not being addressed well for both filers that utilize professionals or DIY software (Table 4 – User Survey: Tax Prep Method By Inquiry Type). While the figures are similar for these two filing methods at 50% & 44%, we believe there are key differences as to the context of these inquiries. Specifically, many of the DIY software “reporting income” inquiries relate to actually entering in certain information from 1099s, W-2 & K-1 forms whereas professionally prepared return inquiries for this category are more in the context of tax advice. For instance, filers that utilize tax professionals are wondering about strategies to implement for the timing of recognizing income/expenses. Another key observation to note is that DIY software filers are having many filing and state tax related inquiries that are not being addressed by the software programs or the services available to them.

Table 4

Are the respondents satisfied with their current filing method?
The majority of respondents indicated that they would explore changing filing methods or providers. Specifically, there were TurboTax & HR Blocks users that articulated dissatisfaction with the level of support and access to relevant knowledge base data. Additionally, while the cost for using a professional was a concern when we asked, many of these respondents commented that they would consider using a professional due to the inability for DIY software programs to provide adequate support. In addition, they would also consider a DIY solution provider that had a more robust offering than their current method.

What should DIY software programs do to better cater to their clients?
These providers are executing well in converting many individuals filers to DIY software. However, they are not addressing all of the key issues that filers are facing when using their programs. Self-employed individuals, investors, property owners, employees working in multiple states remain at risk when using a DIY software program to file their return. State tax advice/assistance is perhaps a significant opportunity for DIY software providers to focus on in the future to further gain share from professionals and amongst themselves.

What do we recommend for professionals?
Professionals remain the most reliable source for a taxpayer to file their return. However, the cost for using a preparer as well as the access to one may appear to be prohibitive. We recommend that professionals work on improving their internal efficiencies to better cater to their existing clients as well as build upon their online reputations. There are many opportunities for professionals to share their knowledge with new and existing clients online.

More Questions? Browse Answers or ask your tax questions.

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Tags: tax software, accountants, personal tax, Ryan Himmel

Health savings account contribution limits for 2013
You can contribute up to $3,250 for individual health insurance coverage and $6,450 for family coverage and an additional $1,000 if you’re 55 years or older. To contribute to a health savings account, you must have a high-deductible health insurance plan of at least $1,250 for individual coverage and $2,500 for a family plan.

What is the tax benefit?
It works similar to a traditional 401(k). Specifically, the tax deduction health savings account contributions lowers the account holder’s modified adjusted gross income. In addition, the contributions grow tax-deferred and can be withdrawn tax-free to pay for current and future medical expenses. Unlike a flexible spending account (FSA), the account holder does not have to use the funds by the end of the year.

What medical expenses qualify for a health savings account?
Account holders can apply out-of-pocket medical expenses to their health savings account. This would include co-payments for medical care and prescription drugs, your deductible, and other items that aren’t covered by insurance such as routine dental work. Please note that most health savings account administrators provide the covered individual with a debit card to use for these expenses.

How much does a health savings account cost?
Many employers cover the fees associated with the account such as administrative costs. If you have an individual or family plan you opened yourself, you may be subject to a start-up fee and then a $3 to $5 monthly fee and/or transaction fees. It shouldn’t cost you more than $50-$100 annually, but be aware of the transaction fees. There are also other fees for items such as excess contributions, copy of account and tax statements, and account closures.

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Should you file jointly or separately?
When you begin to file your individual tax Form 1040, you’ll notice that you have several options to select from in electing a filing status. In many instances, if you’re married, you’ll want to elect the status to file jointly via line 2 of your Form 1040. In fact, the majority of the population that is eligible (i.e. 96%) elects to file jointly as opposed to separately. However, there are still some reasons to consider filing separately.

One spouse has significantly less income and large itemized deductions
You’ll need to run the numbers, but there may be reason to file separately if one spouse has significantly less income than the other and large expenses eligible to be claimed as itemized tax deductions. Let’s suppose one spouse has large medical expenses of $25,000 and income of $35,000 for the year and the other spouse has adjusted gross income (AGI) of $250,000. If the couple files jointly, then none of the medical expenses may be claimed as an itemized deduction. This is due to the fact that only medical expenses paid out of pocket that exceed 10% of your adjusted gross income may be claimed as an itemized deduction. The couple’s total AGI is $285,000, which translates to $28,500 when factoring in the 10% floor. However, if they file separately, then the spouse with an AGI of $35,000 may deduct $21,500 in taxable income ($25,000 less $3,500). Medical expenses are just one example of itemized deductions that need to be considered. Others to factor in include casualty losses or un-reimbursed employee business expenses.

One spouse has large capital gains and dividends
Filers with taxable income over $400,000 ($450,000 for joint filers) will face a 39.6% tax rate for the 2013 tax year. If you happen to be in this ordinary income tax bracket, dividends and long-term capital gains are subject to a 20% tax rate as opposed to 15% for lower income filers. In addition, if you earn $250,000 ($300,000 for joint filers) there will be a 3% reduction to the itemized deductions you normally claim and phase-outs for personal exemptions. Thus, it may be worthwhile to file separately to keep your taxable income below these amounts. Again, you’ll need to run the numbers to confirm, but it may warrant that you investigate the scenarios.

On a similar note, taxpayers may also face the 3.8% investment flat tax if their adjusted gross income exceeds $200,000 ($250,000 for joint filers). For instance, an investor with $200,000 in wages and $25,000 in investment income either through capital gains (including home sales in excess of the capital gains exclusion), interest, rent, royalties or dividends, will be subject to a 3.8% tax on the $25,000, if they are a single filer.

One spouse has tax liens or you’re going through a divorce
Other scenarios in which filing separately can be a benefit are if one spouse has tax liens against them, owes unpaid child support, or is being audited by the IRS. You’ll want to make sure that you aren’t liable for your spouse’s tax debts and may lose any tax refund that you are due. If you’re going through a divorce, we advise that you keep your finances and tax filings separate as well.

More tax questions? Browse answers or ask tax filing questions online. You can also find accountants online here.

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