Is it time to give your CPA the boot?

It’s that time of year again to assemble all of your financial information and bring it to your Certified Public Accountant. However, some of you may be dissatisfied with your current Certified Public Accountant and are contemplating a change.

 

The following list of the Top 10 Questions to ask in order to determine if it is time to change certified public accountants:

1. Do you grab your chest when you open your CPA's bills?
2. Do you feel shunned by your CPA whenever you call his office?
3. Are you tired of seeing a new face handling your account each year?
4. Are extensions your CPA's MO?
5. Are you no longer shocked when you receive an IRS notice?
6. Do you find yourself auditing the work of your CPA?
7. Do you suspect that your CPA never heard of tax planning?
8. Can't remember the last time your CPA discussed his findings with you?
9. When you receive your financials, is it already time for next year's?
10. Do you wake up in the middle of the night in a cold sweat, worrying about an IRS audit? 

In addition to the 10 questions listed above, I decided to compile a list of 10 things to be especially on the lookout for to assist you in deciding whether now is the time to change CPAs.

 

My Top 10 List for Knowing When It’s Time to Give Your Current CPA the Boot! 

1. Your CPA brags about all the money he made on investment referrals to Bernard Madoff’s Investment Securities.
2. The cover letter accompanying your tax return is in Sanskrit, bearing a New Delhi address.
3. You received a wedding invitation of your CPA’s marriage to his prison cellmate, Buster.
4. Your CPA included your dog, Muffy, as a dependent on your 2009 Form 1040.
5. Your CPA billed you for a 2009 Form 1040 tax return filed for Muffy.
6. Your CPA’s tax organizer asks you for all of your credit and debit card numbers, CVV numbers, PIN numbers, expiration dates, names as they appear on the cards, and zip code.
7. Your financial statements and tax returns appear on his website as testimonials.
8. Your CPA off-handedly mentions that he recently hired some big mafooch named Guido to handle collections.
9. Your CPA text messages his attorney always before signing your financial statements and tax returns.
10. Over drinks your CPA lets it slip out that that correspondence course—found on the back of a matchbook cover—sure paid off for him.

Thousands Wrongly Claimed Electric Vehicle Tax Credits

Car companies like General Motors and Nissan are slowly rolling out rechargeable electric cars. But that didn't stop thousands of U.S. taxpayers, including prisoners and some IRS employees, from incorrectly claiming lucrative tax credits for the electric vehicles last year.
A Treasury Department inspector general report says nearly 13,000 taxpayers erroneously claimed about $33 million in credits for plug-in electric and alternative vehicles during the first six months of 2010. The inspector general says about 20 percent of the $163.9 million in credits provided to taxpayers were claimed in error. The report did not indicate whether the taxpayers made the claims out of confusion or purposely tried to take advantage of incentives for which they were not qualified. President Barack Obama has pushed for 1 million electric cars on the road by 2015 and the tax breaks are part of that strategy. The government has offered numerous incentives to drum up interest in the vehicles, including a $7,500 tax credit for a plug-in electric drive motor vehicle and incentives for converting a car into a plug-in.
Auto companies are just beginning to mass market the vehicles. Since December, GM has sold 647 Chevrolet Volts, an electric car with a backup gasoline-powered engine. During the same period, Nissan sold 106 versions of the Leaf, which is powered by a rechargeable battery.
But a Treasury Department inspector general review of provisions in the economic recovery law found problems with thousands of taxpayers claiming the credits for cars that failed to qualify. For example, some car owners tried to claim the $7,500 credit for their Hummer H3, Dodge Durango or Cadillac Escalade. Someone claimed it for a golf cart.
The report said some IRS employees erroneously claimed the credits. They were referred to the department's Office of Investigations for further review. The IRS and inspector general's office declined to provide additional details on the cases.
Even prisoners tried to take advantage. The inspector general found that 29 prisoners received $49,926 in vehicle credits even though they were incarcerated throughout 2009.
The IRS agreed with a series of recommendations made by the inspector general to recover erroneous credits and to make changes to manuals and software systems to ensure that taxpayers don't claim vehicles that fail to qualify. The report said efforts by IRS management to reduce the incorrect claims helped the department protect $3.1 million in revenue.
The IRS said in a statement it was "committed to running a balanced program on Recovery-related provisions, making sure we process taxpayer claims quickly and accurately while safeguarding against improper payments." The IRS said it was "taking aggressive steps to recapture the credits people erroneously claimed."

How To Do Your Taxes On The Cheap

It's that time of year again. Tax filing season. This year the feds are cutting you a small break: Due to a District of Columbia holiday followed by a weekend, personal tax returns are due three days later on April 18. (On the other hand, due to Congress' December tax changes, those who itemize their deductions can't begin to file until Feb. 14.)
But you can also do something yourself to make this filing season a little less painful. An array of computer-based programs can help you do your tax returns accurately--cheaply or even for free. Some 60% of individual taxpayers use a paid human preparer. As a result, according to an IRS study, the median income taxpayer shelled out $258 for tax prep in 2007.
But the majority of taxpayers, provided they've got the time, patience and computer savvy, can do tax prep themselves. Know that when it comes to taxes, do-it-yourself is not for everyone and can't be done the old-fashioned way--with blank copies of the actual forms and instructions, a pencil, a good eraser and maybe a calculator. Despite all the talk over the years of tax simplification, the truth is that pretty much the opposite has happened .(One reason not to do any but the simplest return by hand is that many of the numbers to be entered on your 1040 and its schedules depend on other numbers whose values can change as you complete the return. At a minimum you'll need some computer firepower to do all these cascading calculations and recalculations. (Paid preparers couldn't cope without software, either.) Form 6251, for calculating the dreaded alternative minimum tax, has 54 steps. Schedule D for capital gains and losses has 22 steps.
No wonder that according to the IRS' own studies, just 8% of taxpayers did their returns without benefit of a pro or software in 2008, down from 28% in 2000.
If do-it-yourself software is not for you and you're broke, one option--used by 3% of taxpayers in 2008--is to take advantage of the free human-based tax help out there. The IRS oversees two such initiatives, the Volunteer Income Tax Assistance Program and the Tax Counseling for the Elderly Program. The AARP foundation runs AARP Tax-Aide, with volunteers at 6,500 locations across the country.
In addition, many law schools and legal services organizations offer tax-help clinics; ask around. If you don't have a computer, use one at your local library and Google "free tax help" and your city. And don't forget to check with the librarians; it's possible tax help will be available in the same facility.
The three top sources for software tax prep are Intuit's TurboTax, H&R Block At Home (which used to be called TaxCut) and TaxACT. You can buy them as stand-alone disks, downloadable software, or as a Web-based program used with an Internet connection. There are more than a dozen other tax prep products with names like OnlinetaxPros.com, TaxSlayer, 1040NOW.NET and TaxSimple. Most of them require an Internet hook-up.
Pricing by a single vendor can vary, so it pays to look around. A stand-alone disk of TurboTax Deluxe, which allows you to activate the program for one state, and to electronically file one federal return, lists for $59.99. Does anybody pay that? When we checked, it was selling for $49.99 at Costco or Staples. Some vendors on Amazon.com charge just $41 (and usually with no sales tax or shipping charge). The online version from TurboTax with a state return is $36.95.
But if you have a brokerage or mutual fund account, check with your provider. At Vanguard, downloadable TurboTax Deluxe with a state return is free to Flagship Services and Asset Management Services Clients. Fidelity and TD Ameritrade also offer discounts to customers.
The Internal Revenue Service, which saves money every time a taxpayer files electronically rather than on hard paper, promotes a program called Free File Alliance that offers free tax prep computing from 19 providers. The main requirement is that the taxpayer has an adjusted gross income of $58,000 or less. Good candidates for free prep and filing include anyone who is able to file using the IRS Form 1040EZ.
Besides the income limitation, there are a number of other caveats. Many of the free tax prep vendors have age restrictions. Not every one operates in every state. If you need a particularly obscure form, you may be out of luck. Many, but not all, of the Free File Alliance participants will charge you to do a state tax return. Read the fine print.
Whatever your choice, keep good records of whatever you shell out for tax prep. Such costs are deductible--but with two catches. One, you can only benefit if you itemize and your unreimbursed employee expenses and certain other miscellaneous items (including the tax help) top 2% of your adjusted gross income. Two, you can't take the deduction for this year's costs until next year.

Can you claim home buyer tax credit?

If you bought a home last year, you may be eligible for a tax credit of up to $8,000 when you file your 2010 tax return. But before you start shopping for hardwood floors, make sure you qualify. And even if you're eligible, you'll need to take extra steps to prove that your claim is legitimate.

Congress first enacted a home buyer's tax credit in 2008 in an effort to revitalize the housing market. Since then, the credit has been revised and extended several times. Here are the factors that will determine your eligibility for the credit:

•When you signed the contract to buy your home. To claim the credit on your 2010 tax return, you must have signed a contract to purchase your primary residence before May 1, 2010.

•When you closed. Home buyers who closed as late as Sept. 30, 2010, qualify for the credit, as long as their original contract called for the purchase to be completed by June 30. Congress added the extension because many of last year's home purchases involved short sales or homes in foreclosure, and banks have been slow to process those transactions, says Terry Rice.

•Where you lived before you bought the home. For homes purchased Nov. 7, 2009, to April 30, 2010, there are two tax credits: a first-time home buyer credit and a repeat home buyer credit.

The first-time home buyer credit is worth 10% of the purchase price of the home, up to a maximum of $8,000. The law defines a first-time home buyer as someone who hasn't owned a principal residence in the three years before the purchase. The repeat home buyer credit is worth up to 10% of the purchase price, up to a maximum of $6,500. The law defines a repeat buyer as someone who has owned and lived in the same home for at least five consecutive years of the eight years. If you're married, both spouses must meet the residency test.

•How much you paid for the home. The first-time and repeat home buyer credits are limited to homes purchased for less than $800,000.

•Your income. The full credit is available to taxpayers with a modified adjusted gross income of up to $125,000, or $225,000 for joint filers. (Those limits apply to homes purchased after Nov. 6, 2009; there are lower cutoffs for homes purchased before that date.) A reduced credit is available for home buyers with MAGI of up to $145,000, or $245,000 for married homeowners.

Payback time

Now comes the bad news for taxpayers who claimed the home buyer's credit in 2008. Starting this year, they'll have to pay it back.

That's because the original first-time home buyer's tax "credit" was in fact an interest-free loan that had to be paid in equal installments over 15 years. The law gave home buyers who claimed the credit a two-year grace period, which means the first installment is due this year. H&R Block estimates that more than 950,000 taxpayers claimed the credit in 2008.

The maximum 2008 "credit" was $7,500, so if you claimed the full amount, you'll have to pay $500 when you file your 2010 tax return, Roth says. "A lot of people will end up owing a fair amount of taxes this year because of the additional $500 they'll have to repay," he says.

If you bought a house in 2008 then sold it, you could owe even more, because in that instance, you're required to repay the entire amount of the credit all at once.

Tax credits claimed for homes purchased in 2009 and 2010 don't have to be repaid, as long as the home remains your primary residence for three years. If you sell the home within 36 months after the purchase, you'll have to repay the credit. The repayment can't exceed the gain on the sale, so if you didn't make any profit on the sale, you may not owe anything. However, your "basis" for purposes of calculating the loss or gain on the sale is the amount you paid for the home minus your tax credit, says Rice. For example, if you bought your house for $100,000 and claimed an $8,000 first-time home buyer's credit, your basis is $92,000.

Be prepared to wait

The IRS is requiring taxpayers who claim the home buyer's tax break to provide documents proving that they purchased a home within the required time frame. To meet that requirement, you must file your tax return by mail.

The IRS imposed the requirement to deter fraud. The Treasury Department's inspector general reported last year that thousands of individuals, including nearly 1,300 prison inmates, had fraudulently claimed the tax credit.

Documents you may need to include:

•A copy of your settlement statement. For most home buyers, that's the HUD-1 provided at closing. Sign the settlement statement, even if the document doesn't have a line for your signature.

•For newly constructed homes, a dated copy of the certificate of occupancy that shows your name and the address of the home.

•For repeat buyers, copies of documents showing that you lived in your previous residence for five consecutive years during the past eight years. Acceptable documents include mortgage interest statements, property tax records or homeowners insurance statements. You don't need to provide five years of the same documents, the IRS says. You can use a combination of documents to verify the years you were in the home.

Paper-filed returns take the IRS up to six weeks to process, vs. less than two weeks for e-filed returns. Returns that claim the credit may get extra scrutiny from the IRS, which could also delay your refund. "It's worth it to get the credit," Pickering says, "but people need to be patient."

8 ways to drive down your 2010 tax bill

The year 2010 is now over. But as you tackle your Form 1040 for the 2010 tax year, you can still find ways to keep that final bill down for your income of last year.
Here are eight tips to keep in mind.
1. Find your records. Locate every single scrap of paper or e-mail that's potentially tax-relevant before you sit down to fill out the IRS forms or take your papers to an accountant.
"Organization doesn't have to be fancy," says CPA Terry Rice. "Just have a place for everything, a place so easy to get to that you'll actually use it for receipts and for all those tax statements that come in after the first of the year."

2. Make a list of every possible deduction and the specific record that backs it up. If you've planned and executed a personal tax plan for 2010, you'll have completed key elements of it by midnight on New Year's Eve. For some people, this included making the maximum allowed contribution to a tax-deferred retirement account and making all planned charitable deductions before year's end. For other taxpayers, it included deferring the collection of certain income until 2011, so as to put off paying taxes on it, or paying deductible expenses in 2010, even though they weren't due until 2011, so as to get a tax break on them.

3. If you're not already itemizing deductions, use the list you've assembled to decide whether you should be. If you're paying mortgage interest and property taxes on your home, or have other tax-deductible expenses, you may well save on taxes by itemizing instead of claiming the standard deduction. But be careful — deduction rules are complicated. Make sure you're claiming only qualified write-offs.

4. Take a partial write-off on investment losses. If you lost money on investments in 2010, you can use the loss to offset capital gains on investments that rose in value. Even if you have no gains, you may still deduct up to $3,000 of your losses each year to offset ordinary income. If you have more than $3,000 in losses, you can carry the excess forward to deduct in future tax years. Although this may not be enough to fully recoup your investment loss, it will help by reducing your tax bill.

5. Make the smart choice between deducting state income tax or state sales tax. Tax law allows you to deduct one or the other. If you live in a state that taxes income, the income tax deduction is probably best for you. But if you bought a big-ticket item like a vehicle, boat or airplane during the year, deducting the state sales tax might be better. Do the math, then decide.

6. Remember those special energy credits. Tax credits are better than tax deductions because they are a direct dollar-for-dollar reduction in your bottom-line tax bill. For 2010, especially generous ones are available: You are allowed a 30 percent credit of what you paid during the year to outfit your primary residence with certain energy-saving skylights, windows, roofs, furnaces, water heaters and central air-conditioning units, up to a maximum credit of $1,500. In 2011, credits for spending on these items are much less generous, but of course you will save energy as well. A taxpayer who owes no federal income tax for 2010 does not qualify for an energy tax credit.

7. Remember those reinvested dividends. Technically, this isn't a deduction, but it can help reduce your tax bill.
If you own mutual funds that automatically invest dividends in extra shares, keep in mind that each reinvestment increases your "cost basis" in that fund. (Cost basis is the original price, plus fees, of an asset such as stocks, bonds and mutual funds.)
Adding the dividends to the cost basis will reduce the taxable capital gain (or increases the loss) when you redeem shares. If you forget to do this, you'll be overpaying your tax.
8. Use direct deposit for any refund. This won't affect the dollar amount of your taxes, but by opting for electronic transfer rather than a check, you'll have a shorter wait for any money that's due to you.

How To Find the Cost Basis of Your Stock

If I had to pick one question I get most often, it's how to figure the cost basis of a stock. Readers ask it mostly around tax time, but it comes up all year. The cost basis is how much you paid for a stock, including commissions and reinvested dividends. We'll talk about stock, since that was your question, but many of the same factors apply to mutual funds and other assets, including your home.

After you buy a stock, your broker will tell you how many shares you bought, at what price, and what you paid in commissions.

Your cost basis will determine how much tax you owe when you sell the stock. If you sell a stock for more than your cost basis, you will owe capital gains tax on the profit. If you don't have the cost basis, you risk paying too much tax, which you don't want to do.

Second, your cost basis is a key ingredient to tracking your investment performance.

Given how vital cost basis is, I'm amazed at how many people don't keep track of it. Every week I hear from an investor trying to find out what they paid for a stock.

You can't rely on your broker to track cost basis for you, either. Some don't track cost basis correctly. Even more likely, if you ever transfer your brokerage account to another firm, your cost basis most likely will be lost.

So. What should you do if you need to find a cost basis? Generally, you have a few options based on how you answer the following questions:

• Does the stock still trade and do you know the date you bought the stock? If so, you're in luck. Using USATODAY.com's free historical price quote lookup, you can pull up a stock's high, low and closing price on that day. If you want to look up prices for another stock, just put the name or ticker in the Get a Quote box on that page, and click on the Historial Quotes tab when the new stock comes up.

• Does the stock no longer trade and you know the date you bought the stock? This scenario gets trickier. Depending on why the stock doesn't trade, you might need to do more calculations, which goes beyond this column. Most online services don't carry historical quotes for defunct stocks. But you can get back copies of USA TODAY newspapers or The Wall Street Journal at your local library and look up historical stock prices that way.

• Do you not know the date you bought the stock? This is the worst-case scenario. Your only hope might be to check your old brokerage statements to try to determine when you bought the stock. You don't want to ever get into this situation. If you read on, I'll show you how to make sure you always have your cost basis.

My top suggestion, while it won't help you retroactively, is to start using Microsoft Money Plus Deluxe.
If you enter all your stock trades into Money Plus, you'll always have the cost basis. All your stock data is stored on your computer's hard drive, so you have access to the information at all times, if you back it up. Money Plus not only tracks your investing performance, but lets you print out detailed reports showing your holdings and your cost basis. The software also lets you figure out, before you sell a stock, what the potential capital gains hit would be, using its built-in Capital Gains Estimator. Money Plus offers other personal finance tools to help manage your checking and savings accounts.

There are other options. But they have serious issues, so I can't wholeheartedly recommend them. Some of the alternatives:

• Intuit's Quicken. Quicken also helps track the cost basis on your investments. I can't recommend the software, though, because some users, including me, have had trouble running it on computers with Microsoft's latest operating system, Vista.

Even some Mac users say Money is the best choice. Quicken hasn't been updated for the Mac in many years, although Intuit says an update is due this summer. Some Mac users run Windows just so they can use Money.

• Online personal finance tools. Several online offerings are interesting, but still not adequate for investors.

One option, Mint.com, looks promising and does a nice job showing you the balances in your accounts, from brokerage to checking and retirement. But some may not like the idea of giving all their account information to a third-party website. To use Mint to track your accounts, you must provide your user name, password and trading password.

Forgetting potential security concerns, which may never be an issue, Mint doesn't yet have the power to handle what most investors need in tracking cost basis. For one thing, at least in my experience, the service doesn't allow you to track different lots. So, let's say you bought 100 shares of GE stock in 2006 and another 100 in 2007. You have two lots of GE stock, each of 100 shares.

Mint groups both purchases into one, providing some sort of average for all 200 shares, which isn't adequate for most users. There are tax benefits to tracking what you paid for the first 100 shares of GE and the second 100 shares.

Mint doesn't track the timing of transactions well enough for serious investors, either. If you bought the stock recently, the date of purchase may be imported into Mint. However, if it's an older position, you might be out of luck. While you can manually enter the price you paid for a stock into Mint, you're not able to enter the date you bought it.

This is inadequate. Gains on stock you own more than a year are taxed at a lower rate than stocks you own a year or less. Mint seems to be improving the service constantly, so it's worth watching.

But for investors who need to track their cost basis, Microsoft Money is still the way to go. Hopefully Microsoft will continue to improve that software, perhaps improving the links to its MSN Money service, as well.

How to Barter Without Getting Audited

The act of trading goods and services may be as old as time, but it is spiking in popularity as of late.

“Bartering is getting really big right now because people don’t have cash,” says Terrence Rice, CPA.

So let's say you are a dentist and your dog needs walking. You trade services, don’t exchange money, and the deal is done, no strings attached, right?

Wrong.

“Not reporting your barter income can easily lead to an audit by the IRS,” says Rice.

Here’s how to avoid an audit:

Document everything

Barter agreements work the same way as cash agreements, Rice explains, and need to be documented in kind.

“Report your barter income on your tax return and label it ‘barter revenue,’” he recommends. “Full disclosure is always best. Your barter income is taxable. Make sure to report what you would have received in cash.”

For example, if I bartered $100 worth of my CPA services for $100 worth of window washing for his office, he would need to report $100 to the IRS because that is the amount he would have been paid if the transaction wasn’t a barter.

“Report your barter income on your revenue line,” he advises.

Make it legal

In addition to reporting barter income on your tax return, Rice advises business owners to create legal documents for each barter transaction.

“Create a document that explains the barter agreement and then make sure both parties sign that document,” he says.

Hire an outside firm

Fortunately, there is help for small business owners who don’t know whom to barter with and/or want to avoid a dreaded call from the IRS. Companies such as ITEX help to initiate what is called ‘modern barter exchanges.

While direct barters can often be accidental and result in uneven exchanges ($200 of dentist work for $50 of window cleaning), modern barter companies help eliminate discrepancies and keep transactions legit with the IRS.

Other modern barter exchange companies include IMS, Barter Network and BizXchange.

Get informed

Perhaps the best way to protect your company from a barter-induced audit is to know the facts.

Great resources include the IRS Tax Requirements for Barter Exchanges, National Association of Trade Exchanges and International Reciprocal Trade Association.