As the end of the year approaches, taxpayers again need to start thinking about compiling their records in order to prepare their income tax returns. At the same time, taxpayers also may need to consider the selection of a tax return preparer. Taxpayers must use care and caution when choosing a tax preparer. Remember, you are legally responsible for what’s on your tax return even if it was prepared by an another individual or firm.

Most tax return preparers are professional, honest and provide excellent service to their clients. However, unscrupulous tax return preparers do exist and can cause considerable financial and legal problems for their clients.  Therefore, it is important to find a qualified tax professional.

The following tips will help you choose a preparer who will offer the best service for your tax preparation needs.

1. Check the preparer’s qualifications. Ask if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics. Remember that not all tax preparers are CPAs. Verify clearly the preparer’s qualifications (or the firm’s qualifications) to prepare tax returns, and understand the differences between a CPA (Certified Public Accountant), enrolled agent, and unenrolled tax return preparer. Inquire also if the return preparer is authorized to E-file your return, i.e., able to file the return electronically with the IRS. E-file is commonly available among tax preparers today, and enables the return to be filed with less chance of loss or delay. E-file also generally reduces the time for refunds, and can help decrease the chance of undeliverable refund checks.
2. Check on the preparer’s history. Check to see if the preparer has any questionable history with the Better Business Bureau, the state’s board of accountancy for CPAs or the state’s bar association for attorneys.
3. Find out about the preparer’s fees. Avoid preparers that base their fee on a percentage of the amount of your refund. This may give an unscrupulous preparer the incentive to enter inappropriate or inaccurate entries on the return which may maximize a refund but ultimately expose you to even greater tax, penalties and interest if reversed by the IRS. Also be wary of preparers who broadly claim that they can obtain larger refunds than other preparers. While more knowledgeable or more skilled tax preparers generally can maximize available tax benefits, broad claims of producing larger refunds often are greatly exaggerated or based on unique or very specific factual circumstances that may not apply to you.
4. Make sure the tax preparer is accessible. Make sure you will be able to contact the tax preparer after the return has been filed, even after April 15, in case questions arise. Inquire also the extent to which the preparer or the preparer’s firm will be available to advise you or is authorized to defend you or the return if the return is selected for examination by the IRS.
5. Provide all records and receipts needed to prepare your return. Most reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions and other items. Be wary of a preparer that ignores obvious sources of income in your records or encourages you to claim expenses which you cannot support with proper documentation. If any unreported or under-reported income later is discovered by the IRS, or if any undocumented expenses later are reviewed and reversed by the IRS, this could expose you to additional tax and interest, and potentially also expose you to accuracy-related penalties.
6. Never sign a blank return. Avoid a tax preparer that asks you to sign a blank tax form. Although this may seem convenient to help you file your return quicker, this is improper. A blank signed return sometimes also is a method which unscrupulous preparers use to cheat taxpayers by entering bogus expenses that create fraudulent refunds, refunds which the unscrupulous preparers then later misappropriate to themselves. Although such tax return-related scams by fraudulent preparers are relatively uncommon, they do occur, and taxpayers have a duty to guard themselves from falling victim to such schemes.
7. Review the entire return before signing it. Before you sign your tax return, review it and ask questions. Make sure that you understand everything and that you are comfortable with the accuracy of the return before you sign it. Although you may have recourse against a preparer that enters inaccurate information on your return (either intentionally or unintentionally), you generally cannot avoid accuracy-related penalties imposed by the IRS for those mistakes.
8. Make sure the preparer signs the form. A paid preparer must sign the return as required by law. Although the preparer signs the return, you still are responsible for the accuracy of every item on your return.  The preparer must also give you a copy of the return.

As one additional tip, be careful of offers from tax preparer firms to advance you money against an expected refund so that you can get your money faster. The fees associated with these loans or advances often are very high (even compared to regular credit card interest rates), and thus are not worth the small burden of waiting several additional weeks to receive the full refund. If you are concerned about getting a refund sooner, avoid the late rush and file as early as possible in the tax filing season, and consider using a tax preparer that uses E-file to expedite the filing of the return and the processing of your refund.

If you suspect an abusive tax preparer or suspect tax fraud, you can report your suspicions to the IRS on Form 3949-A, Information Referral or by sending a letter to Internal Revenue Service, Fresno, CA 93888.  Form 3949-A also is available from the IRS website at www.IRS.gov or ordered by mail by calling 800-829-3676. Taxpayers also can check the following link from the IRS website, Where Do You Report Suspected Fraud Activity?

If you know other people who are searching for a tax preparer, or who may have questions in choosing a tax preparer, help them out by passing them this article.

Millions of workers will see their take-home pay rise during 2011 as a result of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which was passed by Congress on December 16, 2010, and signed into law by President Barack Obama on December 17, 2010. The new law provides a two percentage point payroll tax cut for employees, reducing their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid. This reduced Social Security withholding reportedly will have no effect on the employee’s future Social Security benefits. The new law also maintains the income-tax rates that have been in effect in recent years, and extends other tax provisions passed in recent years.

Following passage of the new law, the Internal Revenue Service on December 17, 2010, released instructions to help employers implement the 2011 cut in payroll taxes, along with new income-tax withholding tables that employers will use during 2011. Employers should start using the new withholding tables and reducing the amount of Social Security tax withheld as soon as possible in 2011, but not later than Jan. 31, 2011. IRS Notice 1036 contains the percentage method income tax withholding tables, the lower Social Security withholding rate, and related information that most employers need to implement these changes. Publication 15, (Circular E), Employer’s Tax Guide, containing the extensive wage bracket tables that some employers use, will be available on www.IRS.gov in December 2010.

In the Information Release announcing the instructions, the IRS stated that it recognizes that the late enactment of these changes makes it difficult for many employers to quickly update their withholding systems. For that reason, the agency asked employers to adjust their payroll systems as soon as possible, but not later than Jan. 31, 2011. For any Social Security tax over withheld during January, employers were requested to make an offsetting adjustment in workers’ pay as soon as possible, but not later than March 31, 2011. Employers and payroll companies handle the withholding changes, so workers typically will not need to take any additional action, such as filling out a new withholding (W-4) form.

Of course, workers should review their withholding every year and, if necessary, fill out a new W-4 and give it to their employer. For example, individuals and couples with multiple jobs, people who are having children, getting married, getting divorced or buying a home, and those who typically wind up with a balance due or large refund at the end of the year may want to consider submitting revised W-4 forms. IRS Publication 919, How Do I Adjust My Tax Withholding?, provides more information to workers on making changes to their tax withholding.

For more information about the new law and about the new withholding requirements, consult your professional tax advisor or tax preparer, or go to www.IRS.gov.  Also, please pass on this article to other employers you know to help them implement these changes.

On December 2, 2010, the Internal Revenue Service released final guidance for small employers and small tax-exempt organizations eligible to claim the new small business health care tax credit for the 2010 tax year. The release includes a one-page form and instructions small employers will use to claim the credit for the 2010 tax year.

New Form 8941, Credit for Small Employer Health Insurance Premiums, and newly revised Form 990-T now are available on the official IRS website at www.IRS.gov. The IRS also posted on its website the instructions to Form 8941 and Notice 2010-82, both of which are designed to help small employers correctly figure and claim the credit.

Included in the Affordable Care Act enacted in March 2010, the small business health care tax credit is designed to encourage both small businesses and small tax-exempt organizations to offer health insurance coverage to their employees for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half of the premiums for single health insurance coverage for their employees. It is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.

The new guidance addresses small business questions about which firms qualify for the credit by clarifying that a broad range of employers meet the eligibility requirements, including religious institutions that provide coverage through denominational organizations, small employers that cover their workers through insured multi-employer health and welfare plans, and employers that subsidize their employees’ health care costs through a broad range of contribution arrangements.

Small businesses can claim the credit for 2010 through 2013 and for any two years after that. For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small businesses and 25 percent of premiums paid by eligible tax-exempt organizations. Beginning in 2014, the maximum tax credit will increase to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible tax-exempt organizations.

The maximum credit goes to smaller employers—those with 10 or fewer full-time equivalent (FTE) employees—paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 or more FTEs or that pay average wages of $50,000 or more per year. Since the eligibility rules are based in part on the number of FTEs, not the number of employees, employers that use part-time workers may qualify even if they employ more than 25 individuals.

Eligible small businesses will first use Form 8941 to figure the credit and then include the amount of the credit as part of the general business credit on its income tax return. Tax-exempt organizations will first use Form 8941 to figure their refundable credit, and then claim the credit on Line 44f of Form 990-T. (Though primarily filed by those organizations liable for the tax on unrelated business income, Form 990-T also will be used by any eligible tax-exempt organization to claim the credit, regardless of whether they are subject to this tax.)

For additional information about the credit, consult your professional tax advisor or tax preparer. More information about the credit, including a step-by-step guide to claiming the credit and answers to frequently asked questions, also is available on the Affordable Care Act page on www.IRS.gov.

Please also forward this article to any small business or small tax-exempt organization which you know that might be able to utilize the new credit.

Got Kids? They may have an impact on your tax situation. Listed below are the top 10 things you should consider if you have children.

1. Dependents. In most cases, a child can be claimed as a dependent in the year in which the child is born. For more information see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.
2. Child Tax Credit. You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. The Additional Child Tax Credit is a refundable credit and may give you a refund even if you do not owe any tax. For more information see IRS Publication 972, Child Tax Credit.
3. Child and Dependent Care Credit. You may be able to claim this credit if you pay someone to care for your child under age 13 so that you can work or look for work. For more information see IRS Publication 503, Child and Dependent Care Expenses.
4. Earned Income Tax Credit. The EITC is a benefit for certain people who work and have earned income from wages, self-employment or farming. The EITC reduces the amount of tax you owe and may also give you a refund. For more information see IRS Publication 596, Earned Income Credit.
5. Adoption Credit. You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child. For more information see the instructions for IRS Form 8839, Qualified Adoption Expenses (the 2009 version was the most recent available at the time of this writing).
6. Children with Earned Income. If your child has income earned from working, then your child may be required to file a tax return. For more information see IRS Publication 501.
7. Children with Investment Income. Under certain circumstances, a child’s investment income may be taxed at the parent’s tax rate. For more information see IRS Publication 929, Tax Rules for Children and Dependents.
8. Coverdell Education Savings Account. This savings account is used to pay qualified educational expenses at an eligible educational institution. Contributions are not deductible; however, qualified distributions generally are tax-free. For more information see IRS Publication 970, Tax Benefits for Education.
9. Higher Education Credits. Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar-for-dollar, unlike a deduction, which reduces your taxable income.  For more information see IRS Publication 970.
10. Student Loan Interest. You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions. For more information see IRS Publication 970.

The forms and publications on these topics can be found by clicking on the embedded links in this article, or on the official IRS website at www.IRS.gov, or by calling 800-TAX-FORM (800-829-3676). (At the time of this writing, most of the publications are the 2009 versions, but should be updated by the IRS closer to tax filing time.)

If you missed taking advantage of any of these topics for the 2009 tax year, there still should be time to amend your return and take advantage of the above deductions and credits. For further information about your specific filing situation and to discuss which of the above topics might apply to you, consult your professional tax advisor or tax preparer. Also, help spread the word about these tax topics by forwarding this article to other people you know who have children.

The Internal Revenue Service today announced that it is looking to return $164.6 million in undelivered refund checks. A total of 111,893 taxpayers reportedly are due one or more refund checks that could not be delivered because of mailing address errors.

A taxpayer only needs to update his or her address once for the IRS to send out all checks due. Undelivered refund checks reportedly average $1,471 this year, compared to $1,148 last year. Some taxpayers reportedly are due more than one check. The average dollar amount for returned refunds reportedly rose by just over 28 percent this year, possibly due to recent changes in tax law which introduced new credits or expanded existing credits, such as the Earned Income Tax Credit.

If a refund check is returned to the IRS as undelivered, taxpayers generally can update their addresses with the “Where’s My Refund?” tool on www.IRS.gov. The tool also enables taxpayers to check the status of their refunds. A taxpayer must submit his or her Social Security number, filing status and amount of refund shown on their 2009 return. The tool will provide the status of their refund and, in some cases, instructions on how to resolve delivery problems. Taxpayers checking on a refund over the phone will receive instructions on how to update their addresses. Taxpayers can access a telephone version of “Where’s My Refund?” by calling 1-800-829-1954.

While only a small percentage of checks mailed out by the IRS are returned as undelivered, taxpayers can put an end to lost, stolen or undelivered checks by choosing direct deposit when they file either paper or electronic returns. Taxpayers can receive refunds directly into their bank, split a tax refund into two or three financial accounts or even buy a savings bond. The IRS also recommends that taxpayers file their tax returns electronically, because e-file generally eliminates the risk of lost paper returns. E-file also generally speeds up refunds.

The public should be aware that the IRS does not contact taxpayers by e-mail to alert them of pending refunds and that such messages are common identity theft scams. As a good policy in general, the IRS warns taxpayers not to release any personal information, reply, open any attachments or click on any links to avoid malicious code that will infect their computers.  The best way for an individual to verify if she or he has a pending refund is going directly to www.IRS.gov and using the “Where’s My Refund?” tool. 

For more information, taxpayers should consult their professional tax advisor or tax preparer.

When you prepare to file your tax return, there are two important things that will factor into your tax situation: dependents and exemptions. Here are five important facts to know about dependents and exemptions before you file your next tax return.

1. If someone else claims you as a dependent, you may still be required to file your own tax return. Whether or not you must file a return depends on several factors, including the amount of your unearned, earned or gross income, your marital status, any special taxes you owe, and any advance Earned Income Tax Credit payments you received.
2. Exemptions reduce your taxable income. There are two types of exemptions: personal exemptions and exemptions for dependents. For each exemption you can deduct a set amount on your tax return (this amount generally changes each year). Exemption amounts are reduced for taxpayers whose adjusted gross income is above certain levels, depending on the taxpayer’s filing status.
3. If you are a dependent, you may not claim an exemption. If someone else—such as your parent—claims you as a dependent, you may not claim your personal exemption on your own tax return.
4. Your spouse is never considered your dependent. On a joint return, you may claim one exemption for yourself and one for your spouse. If you are filing a separate return, you may claim the exemption for your spouse only if your spouse had no gross income, is not filing a joint return, and was not the dependent of another taxpayer.
5. Some people cannot be claimed as your dependent. Generally, you may not claim a married person as a dependent if he or she files a joint return with his or her spouse. Also, to claim someone as a dependent, that person must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children. See IRS Publication 501, Exemptions, Standard Deduction, and Filing Information for additional tests to determine who can be claimed as a dependent.

For more information on exemptions, dependents and whether or not you or your dependent needs to file a tax return, consult your professional tax preparer or tax advisor.  You also can consult IRS Publication 501, which publication is available on the IRS’s web site at www.IRS.gov or can be ordered by calling 800-TAX-FORM (800-829-3676).

Everyone who files a Federal tax return must determine which filing status applies to them. It is important you choose your correct filing status since it determines your standard deduction, the amount of tax you owe and ultimately, any refund owed to you. Here are eight facts about the five filing status options which you should know in order to choose the correct filing status for your situation.

1. Your marital status on the last day of the year determines your marital status for the entire year.
2. If more than one filing status applies to you, choose the one that gives you the lowest tax obligation.
3. Single filing status generally applies to anyone who is unmarried, divorced or legally separated according to state law. (Note that under current Federal law, same-sex marriages, state-law civil unions and state-law domestic partnerships do not qualify for married status for tax filing purposes).
4. A married couple may file a joint return together. The couple’s filing status would be Married Filing Jointly.
5. If your spouse died during the year and you did not remarry during the same year, you may still file a joint return with that spouse for the year of death, provided the joint return election is not revoked by a personal representative for the deceased spouse.
6. A married couple may elect to file their returns separately. Each person’s filing status generally would be Married Filing Separately.
7. Head of Household generally applies to taxpayers who are unmarried. You also must have paid more than half the cost of maintaining a home for you and a qualifying person to qualify for this filing status.
8. You may be able to choose Qualifying Widow(er) with Dependent Child as your filing status if your spouse recently died, if you have a dependent child, and if you meet certain other conditions.

There is more information about determining your filing status in IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. Publication 501 also is available on the IRS web site at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676). For further information, consult your professional tax preparer or tax advisor.

If you were married or divorced recently, there are a couple of things you’ll want to do to ensure the name on your tax return matches the name registered with the Social Security Administration (SSA).  Listed below are five tips for recently married or divorced taxpayers. Following these steps should help avoid problems when you file your tax return.

1. If you took your spouse’s last name or if both spouses hyphenate their last names, you may run into complications if you do not notify the SSA. When newlyweds file a tax return using their new last names, IRS computers cannot match the new name with their Social Security Number.
2. If you were recently divorced and changed back to your previous last name, you also will need to notify the SSA of this name change.
3. Informing the SSA of a name change is fairly easy; you just need to file at your local SSA office a Form SS-5, Application for a Social Security Card (for applicants in the U.S.), Form SS-5-SP, Application for a Social Security Card (for Spanish speaking applicants who have difficulty translating the SS-5), or Form SS-5-FS, Application for a Social Security Card (for applicants applying outside the United States).
4. The various Forms SS-5 also are available on the SSA’s Web site at www.socialsecurity.gov, by calling 800-772-1213, or at local offices. It usually takes about two weeks to have the change verified.
5. If you adopted your spouse’s children after getting married, you will want to make sure the children have an SSN. Taxpayers must provide an SSN for each dependent claimed on a tax return. For adopted children without SSNs, the parents can apply for an Adoption Taxpayer Identification Number – or ATIN – by filing Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions with the IRS. The ATIN is a temporary number used in place of an SSN on the tax return. The W-7A also is available on the IRS’s Web site at www.IRS.gov, or by calling 800-TAX-FORM (800-829-3676).

For additional information about your tax filing requirements, consult your professional tax preparer or tax advisor.

A crucial filing deadline of Oct. 15 is looming for many tax-exempt organizations that are required by federal law to file their Form 990 with the Internal Revenue Service or risk having their federal tax-exempt status revoked.  Nonprofit organizations that are at risk can preserve their status by filing returns by Oct. 15, 2010, under a one-time relief program.

The Pension Protection Act of 2006 made two important changes affecting tax-exempt organizations, effective the beginning of 2007. First, it mandated that all tax-exempt organizations, other than churches and church-related organizations, must file an annual return with the IRS or submit an electronic notice with the IRS. The Form 990-N was created for small tax-exempt organizations that had not previously had a filing requirement. Second, the law also required that any tax-exempt organization that fails to file for three consecutive years automatically loses its federal tax-exempt status. The IRS conducted an extensive outreach effort about this new legal requirement but, even so, many organizations have not filed returns on time.

Here are 10 facts to know for nonprofit organizations that seek to maintain their tax-exempt status.

1. Small nonprofit organizations at risk of losing their tax-exempt status because they failed to file required returns for 2007, 2008 and 2009 can preserve their status by filing returns by Oct. 15, 2010.
2. Among the organizations that could lose their tax-exempt status are local sports associations and community support groups, volunteer fire and ambulance associations and their auxiliaries, social clubs, educational societies, veterans groups, church-affiliated groups, groups designed to assist those with special needs and a variety of others.
3. A list of the organizations that were at-risk as of the end of July 2010 is posted at IRS.gov along with instructions on how to comply with the new law.
4. Two types of relief are available for small exempt organizations—a filing extension for the smallest organizations required to file Form 990-N, Electronic Notice, and a voluntary compliance program for small organizations eligible to file Form 990-EZ, Short Form Return of Organization Exempt From Income Tax.
5. Small tax-exempt organizations with annual receipts of $25,000 or less can file an electronic notice Form 990-N also known as the e-Postcard. To file the e-Postcard go to the link herein for IRS website and supply the eight information items called for on the form.
6. Under the voluntary compliance program, tax-exempt organizations eligible to file Form 990-EZ must file their delinquent annual information returns by Oct. 15 and pay a compliance fee.
7. The relief is not available to larger organizations required to file the Form 990 or to private foundations that file the Form 990-PF.
8. Organizations that have not filed the required information return by the extended Oct. 15 due date will have their tax-exempt status revoked.
9. If an organization loses its exemption, it will have to reapply with the IRS to regain its tax-exempt status and any income received between the revocation date and renewed exemption might be taxable.
10. Donors who contribute to at-risk organizations are protected until the final revocation list is published by the IRS. 

Business owners may hire people as independent contractors or as employees. There are rules that will help owners determine how to classify the people they hire for Federal tax purposes. This will affect how much owners pay in taxes, whether they need to withhold from their workers’ paychecks and what tax documents they need to file.

Here are seven things every business owner should know about hiring people as independent contractors versus hiring them as employees. (Note:  these rules apply for Federal tax purposes—different rules might apply for State tax law purposes. Business owners should consult their tax professional or tax preparer for more information.)

1. The IRS uses three characteristics to determine the relationship between businesses and workers:

• Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
• Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
• Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

2. If a business owner has the right to control or direct not only what is to be done, but also how it is to be done, then the worker is more likely to be treated as an employee by the IRS. 

3. If a business owner can direct or control only the result of the work done—and not the means and methods of accomplishing the result—then the worker is more likely to be treated as an independent contractor by the IRS. 

4. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.

5. Workers can avoid higher tax bills and lost benefits if they know their proper status.
 
6. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.

7. Business owners can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at www.IRS.gov by selecting the Small Business link.  Additional resources include IRS Publication 15-A, Employer’s Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530?  These publications and Form SS-8 also are available on the IRS website or by calling the IRS at 800-829-3676 (800-TAX-FORM).

For more information, consult your tax professional or tax preparer.