How big is YOUR refund?

I get the impression from time to time (usually when meeting with tax client prospects) that the general (read: uninformed) public has a tendency to rate the competency of tax preparers based on how large or small their refund is. The meeting usually starts something like this:

Prospect: My tax guy last year got me $10,000 back. Can you all do the same thing?

That's when we typically begin to educate the prospect that the return is in fact their responsibility and that our goal in the process is to 1) help them take advantage of tax breaks available to them and to 2) help them comply with all the necessary tax regulations. We cannot control variables that our not made known to us before they happen, such as: how much you are having withheld from your paycheck; whether or not you have taken an early IRA distribution; the fact that you had a dependent roll off of your return from last year; or any of the other thousands of different scenarios that could affect your taxes this year as compared to last year.

Bottom line: there is no correlation between refund amount and tax preparer competency.

Beware of anyone who either guarantees you a certain refund or that charges you based on your refund amount. And as always, interview your preparer to make sure they are a good fit and that they appear ethical.

(If you'd like to talk to someone at DMF about this post, please email us at admin@dmfcpas.com)

What is a PTIN and why should I care?

You may have heard some rumblings about new income tax return preparer requirements beginning in 2011. If you are paying someone to prepare your tax return for you, they will be required to have what's called a PTIN: which is a Preparer Tax Identification Number.

Why the changes? Historically, almost anyone with a calculator and a brain was able to prepare and sign income tax returns and receive compensation to do so. That's right, your hairdresser and postman have been able to prepare, sign, and receive compensation for the preparation of your income tax return. Let's just say the return preparer "industry" has been controlled in a less than ideal manner.

Beginning in 2011, all paid preparers are required to have a PTIN to identify themselves with the IRS. Additionally, anyone who is not a CPA, lawyer, enrolled agent (or anyone who works for those people) will be required to pass education requirements in order to continue to prepare returns.

My belief is that the primary goal of this endeavor is to protect taxpayers when they select persons to prepare their tax return. It has been estimated that it takes around 6.1 billion hours for everyone to comply with the internal revenue code each year. Let's remember, the IRS code is (at this moment) roughly 3.8 million words. Shouldn't you be sure your return preparer is qualified to prepare your return?

From the IRS, some tips on selecting a tax preparer: http://www.irs.gov/individuals/article/0,,id=133088,00.html

Taxes on Cash?

A common question we get here at DMF is: Should I get rid of my cash balance in my business in order to help reduce my tax liability?

While there are many answers to that question, the short answer is: No. You don't pay taxes on cash balances in your business; you pay taxes (at the individual level most likely) on activity that creates that cash balance.

In a perfect cash-basis environment, your year-end cash balance would in fact be your taxable income. However, none of our business clients operate in an environment like that. That's because most businesses enter into transactions that affect cash but don't affect their tax liability. Or transactions that affect taxable income but don't affect cash.

These transactions include (but aren't limited to): incurring or paying off debt, buying or leasing equipment, expenses for meals and entertainment, and inventory purchases.

Bottom line: the differences between cash flow and taxable income are sometimes difficult to explain and even harder to understand. Make sure your tax professional explains or reconciles the difference for you.