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- Tax matters: A 10-part series on taxes (Feb. 3 - April 7, 1999)
- April 15: Day of Reckoning (Feb. 3)
- Talk to the IRS (Feb. 10)
- Hiring a Tax Pro (Feb. 17)
- Deductions for investors (Feb. 23)
- Filing Online: Words to the Wise (March 3)
- Filing the Intuit Way (March 10)
- Keeping it Simple (March 16)
- Fairy Godmothers for Procrastinators (March 23)
- Tax Audit Fear and Loathing (March 31)
- Last Ditch Solutions (April 7)
Wednesday, February 3, 1999
By Steven E. Brier
If you're like most people, it's been more than 10 months since you last gave even the most fleeting thought to filing your taxes.
By now, you should have received the 1099s, the W-2s and all the other fun forms you need to do your taxes. Since there are 10 weeks left to file, all those forms are probably tucked in a corner somewhere collecting dust.
Well, it might just be a good idea to grab that paperwork and get started early this year. Filing your taxes will be more complicated than ever, what with the last of 1997's reforms taking effect as well as all the tinkering Congress did with the tax code in 1998. As a result of those changes, the Internal Revenue Service has revamped about 155 different forms.
It wasn't so long ago when the tax-time ritual for millions went like this: Pack up all those receipts, W-2s and other tax-related items for an expensive visit to a professional--or hunker down for an unpleasant weekend (or two) at the dining room table.
Although those options still exist, the personal computer and the Internet now offer additional--and often less painful--choices. You can get professional advice, access to IRS forms and instructions, and online software that will step you through the whole process. The cost for all this is free to fairly inexpensive.
You'll find a broader range of tools and information on the Internet this year than ever before. There has been an amazing expansion in the number of websites devoted to taxes-and the useful help you can get at those sites. We'd like to report that the IRS has entered the digital age with the same speed and agility as private industry. Unfortunately, it hasn't. But the tax mavens at IRS are scrambling to modernize ancient computer systems, streamline staffing and, like almost every other entity these days, do more with less.
Bob Barr, the IRS assistant commissioner for electronic tax administration, says the IRS is expecting about 126 million personal tax returns to be filed this tax season, about 30 million of them electronically.
Electronic filing is better for you and the government. The IRS prefers electronic returns because they have fewer errors (between 1 percent and 2 percent), require fewer follow-ups and cost far less to process. Refunds for electronic filers are twice as fast, too. Returns filed on paper, on the other hand, must be manually keyed into the IRS computer system. Errors on the returns themselves, and in the data-entry process, mean that about 20 percent of all returns have a problem requiring a follow-up. At the peak of filing season, about 50,000 people toil at ten IRS service centers processing that tsunami of paper.
In the coming weeks we'll show you where to get help with your return. We'll look at the major commercial tax-preparation web sites, software that's available, what the Government has to offer, changes in the tax law, getting professional help, and more. Stay tuned.
Part II
Tuesday, February 9, 1999
Talk to the IRS
Okay, so no taxpayer wants to get within 100 miles of an IRS agent. In part 2 of our series on your taxes we run a fine-tooth comb through the IRS website, where you can ask questions and get information without giving your name.
By Steven E. Brier
Linda Wallace recognizes that not everyone wants to talk to the folks at the Internal Revenue Service. After all, these people have their hand (both hands, some would argue) in your pocketbook.
Wallace can't do anything about the hand(s), but as IRS chief of electronic information services, she is determined to make it easier to get something back from the IRS.
That something is information. Lots of it. And it's available on the IRS Web site in forms, computer spreadsheets, demographic information, locator maps and a host of other stuff that will keep legions of taxpayers slouched over their calculators this tax season. Whether you are doing your taxes at the dining room table, on a computer or with the help of a professional, the site has stuff you can use.
And it's all anonymous. Though the site counts the number of visitors, Wallace says the IRS does not track users. "We feel everyone wants to be anonymous," she said. "Not everyone wants to talk to the IRS." (Oh boy, is that an understatement...)
To find out--without talking with an agent--which deductions might apply, what's taxable and what isn't, plus other arcane tax subjects, go to the Tax Trails. This section contains about 30 sets of simple yes/no questions that can tell you whether a particular tax situation applies.
Keeping with its bureaucratic mission, the IRS has forms. Reams and reams of forms. And though many are sent out in the mail every year, or available at libraries and post offices, odds are that the one you need will not be at hand late at night when you finally start your taxes. The site's forms database has dozens upon dozens of items available to be read online or printed out.
This year, the IRS is expanding its use of "fillable forms," which can be completed on line, then printed out for inclusion in your tax return. If you need a lot of forms, or if the printer on your computer is slow, you can request the forms to be mailed to you. Of course, that probably won't do much good around mid-April.
Wallace's group put together the Taxi, or Tax Interactive section, to help newbies get around. Taxi has a list of tax terms--in plain English--as well as explanations of who can tax, where the money goes, and even advice for those blanching at the deductions in their first paychecks.
If you're a moonlighter, running a business, or thinking of it, check out the Small Business Corner. The information, although centered on tax advice, includes links to the Small Business Administration and more.
A final word to the wise: The IRS has got huge capacity to handle Internet traffic to its site, but don't be surprised if there are delays logging on and downloading forms in the final days before April 15. So get on, and get on early for the least stress. Make your check payable to Department of the Treasury, please.
Part III
Wednesday, February 17, 1999
Hiring a tax pro
Computer software can't take the place of a tax pro. Here's how to tell if you need professional help with this year's return.
By Steven E. Brier
Needing professional help is nothing to be ashamed of these days. If Bob Dole can talk in public about Viagra, and the folks on Jerry Springer can talk about--well, you know--maybe you can talk about your finances with a tax professional.
And though there is a substantial amount of tax help available on the Web, including help from professionals, sometimes going to a pro and laying bare your financial soul is the best way to go.
"A software package will work you through a tax return very competently," says Edward Karl, director of the tax division for the American Institute of Certified Public Accountants, (http://www.aicpa.org/) "but what it won't do is help you with financial planning, asset preparation or tax planning."
Those are subjects that many people take to a tax professional, financial planner or CPA.
Things that might prompt you to seek professional tax help include marriage, divorce, a death in the family--events that drastically change your status. The distribution of assets during a divorce and separation, for example, may have tax ramifications. If a child is born with severe mental or physical defects, the family may want to establish a trust to help support the child, which also has tax ramifications. Although tax software often includes some financial planning, it may not have the range of options available to a pro.
"Another example would be if you started or contemplated starting a business," Karl said. "If you have a Schedule C business, you need not just the tax information but business information."
Tax information available on the Web has improved drastically in the past few years. Once limited to forms and information, the Web now has sites that will prepare your taxes. Some of these come from established desktop software vendors, others from companies taking advantage of the capabilities of the Internet. And though the sites may look spiffy, they cannot look you in the eyes and judge how aggressive--or conservative--you want to be on your taxes.
That ability is still the province of a tax pro. The problem with pros, at least this time of year, is their time: It's getting tight. That means that new customers may not get the time to sit down and discuss their needs, wants and changes with their new partner.
You'll find these basic types of professional help with your taxes: The tax-preparation services, such as H&R Block. But these services may employ tax preparers with minimal skills who simply enter your data into a computer program. CPA's, financial planners and tax preparers. CPAs must pass a rigorous battery of exams to gain this designation; planners and tax preparers vary in their tax credentials. Be sure to investigate before you hand over your returns. Tax attorneys generally charge the most and some specialize in representing you before the IRS.
Quiz: Do you need an accountant?
Part IV
Tuesday, February 23, 1999
Deductions for investors, online and otherwise
Attention, active investors. If you're intent on deducting costs associated with your trades, here's a few secrets about the tax code you need to know.
By Steven E. Brier
Researching and trading stocks seems to have become America's favorite pastime. At tax time, the most active investors want as much as possible to deduct the costs of their investment activity. Unfortunately, that has the same potential for trouble as citing the constitutionality of taxation as a reason for withholding that check with your return.
There are deductions available for online investors, to be sure. But these follow the same rules as regular old-fashioned call-up-the-broker accounts. Commissions are figured in your cost-basis and IRA fees, account maintenance fees, interest on margin accounts (as it offsets income) are the same whether trading over the Internet, or by broker.
Beyond these deductions, the situation gets dicey. What about a computer used primarily for trading stocks and tracking your portfolio? That is deductible says Dan Collins, vice president of accounting services at Virtual Growth, a Silicon Alley accounting firm. But before you get your deductibles up, Collins throws in a few caveats.
"It's deductible as an investment expense, on Schedule A, and subject to the 2 percent threshold," Collins says. "And there is a reasonability standard. If you are not a big trader and have some capital gains for some stocks, you can't just deduct a new computer. You also have to keep a log and show your use."
So what else might you deduct? How about fees to access investment sites on the Web? Software for the computer? Internet connection fees? Perhaps your phone line. Or even that ultimate edge of the tax envelope, deducting the part of your home where you do your trading.
Well, it's fairly easy to figure out if something is a medical deduction and if it crosses that category's 7.5 percent threshold. The same for daycare expenses. Not so with investing expenses. The IRS readily admits there is no "laundry list" of items than can or cannot be deducted for traders.
The ever-helpful IRS simply has no help to offer. There is no particular code or set of regulations. There are, however, a lot of court cases, but the rulings go back to 1941, and there are many layers of conflicting cases that sometimes apply. In other words, watch out.
Also, for the purposes of taxation, there are three different categories of securities traders --investors, traders and dealers--and the tax consequences are vastly different for each category. Placing yourself in the wrong category can be the tax equivalent of the bomb that abruptly appears on Macintosh computer screens.
As an IRS spokesman said (alas, in a phone interview we don't know if he was smiling when he uttered these words), "There are a lot of people who invest in daily high-level trading and they are going to be caught up in some of the tax rules."
So if you have heavy-duty deductions in mind, professional help is probably mandatory.
Part V
Wednesday, March 3, 1999
Filing online: Words to the wise
This year, you can fill out your tax returns on the Internet without having to mess around with installing software.
By Steven E. Brier
The Government just can't help it. Taxes get more complicated every year. More forms to fill out, more difficult calculations to perform, more mind-boggling twists and turns to navigate. Unless your tax status is exceedingly simple, help is mandatory.
That's where computer software can be a lifesaver. This year, there's more help available than ever before, thanks to the Internet. You don't have to buy those expensive software programs that tie up your hard drive or worry whether your computer can handle the latest release.
The two major providers of desktop tax software now have Web versions, allowing you to calculate your federal and state income taxes, for less than the cost of traditional software packages.
Using the Web to do your taxes has other benefits, too. Since your tax data resides on secure computers out in the great beyond, you are not tied to any one computer when filling out the forms. You can get on the Internet from any PC (or Mac) that's equipped with a web browser and pick up your work right where you left off.
Backing up your data and saving it from year to year is done automatically. The price ranges from about $10 and up, or about one-half the cost of state and federal versions of the software. Plus, the latest forms are posted on the web sites as soon as they are released.
Many of the providers give you a free trial run, only charging when it's time to either print or file the final product. The Web versions allow you to rocket your return off to the IRS with the push of a button.
Market leader TurboTax, from Intuit, put its full product line on its Web site this year. The lessons learned in designing the user interface for the web have been put to use on the desktop product, too, so users will notice little difference in the look and feel of the two. Under a program being pushed by the IRS, Intuit is offering people with adjusted gross incomes of less than $20,000 free use of its products, but only if they go to the Web site through the side door. (http://www.quicken.com/freedom)
H&R Block, publishers of Kiplinger's TaxCut, decided not to put its full product on the web, opting only for the 1040EZ filer, (http://www.taxcut.com) free to all takers. The company hopes that college students and others who use the 1040EZ will come back when they graduate to murderously complex forms.
SecureTax, from Universal Tax Systems, is the new kid on the block. Unlike the others, SecureTax has no desktop product, using the Web for all its software (http://www.securetax.com).
All of the Web-based tax providers vouch for the ironclad security of their sites, and swear that they will not use your tax information for anything. (IRS penalties are quite severe for misusing tax data, so they are not likely to be pulling your leg.)
But before you run out and start doing your taxes on the net, keep in mind that the software and hardware that make up the Internet were designed for moving big blocks of data around, not the small bits of information needed to interactively do things like taxes. So even if you have a high-speed connection to the Web, a complicated return may take quite a bit of time.
More words to the wise: Software has its limitations. Software programs are built for a general audience and cover all the common tax situations. An expert who knows the back alleys of the tax code can be worth more than a carload of software programs if your taxes are complex. Experts can also help you with finnancial planning--a task software can not even begin to handle.
Finally, don't wait until the last minute to file. It's a good bet that Web servers to these sites will be busy or slow. Then you could find yourself joining the queue at the local computer store.
Part VI
Wednesday, March 10, 1999
Filing the Intuit way
The leader in the tax-preparation software biz offers a web-based product that's both cheap and good. It's just not very fast.
By Steven E. Brier
Mardi Gras is over and your excuses to put off doing your taxes are dwindling. Like many of us, you want the help that software can provide, but you don't want to add another program to your chock-full computer.
Intuit, king of the world, at least for tax software, is one of several companies anxious to lend a hand. And, if your income is less than $20k a year, they'll even do it for free. Intuit has offered a Web-based product for several years, adding more each go-round. This year, it brings its full-fledged product to the Web (http://www.turbotax.com/webturbotax/).
The program starts off with a simple registration process, designed to ensure that your data is seen only by you. You will need to pick a name like "Ralphc85i" or some such memorable thing. Be prepared to record the name you choose immediately. Without it, you will be punished by having to re-register and re-enter all your data.
The registration process is followed by a walk-through of the program, a list of what is required to file and then advice to help you organize your paperwork. This last is most helpful and, since you don't have to pay anything to try the program, it's worth signing up just to use this feature. (It costs $9.95 to file or print a 1040EZ, but the fee is not collected until the end of the process. The fee goes up to $19.95 for the 1040/1040A, and another $9.95 to $19.95 for a state return, far less than what the company charges for its desktop packages.)
Like the desktop product, the Web version steps you through a series of interviews to gather the information it needs to prepare the return. There is a list of frequently asked questions on the right side of the screen, changing to keep pace with the interview questions, and a chart down the left showing where you are in the process.
One annoyance: If your mouse strays over the navigational chart, it pops out to twice its size to show more detail, obscuring your screen in the process. And, since reaction times are slow on the Web, this flying menu can show up long after you've moved the mouse away.
It's also easy to get tripped up by another of the security mechanisms, the automatic log-off. If, while doing your taxes, you get up to put the kids to bed or grab the phone to fend off yet another telemarketer, the program senses your inactivity-AOL style-stores your data, and logs you off.
The program can handle the federal return as well as all the states (and District of Columbia) that require a return, but is limited to one federal and one state return. If you need to file returns in two states, you are out of luck.
And, though Intuit has done an admirable job at cleaning up the interface and reducing superfluous screens, entering information on some forms remains a tedious process.
Intuit on the Web is pretty good, but hampered by the idiosyncrasies of Internet technology. If your tax needs require the orchestration of a Viennese waltz, stick to desktop software or go to a pro.
Part VII Tuesday, March 16, 1999
Keeping it simple
Kiplinger's TaxCut software on the Web is easy to use, if your return isn't too taxing.
By Steven E. Brier
Kiplinger, the perennial also-ran in the tax software business, has pared down its full-featured software package, Kiplinger's TaxCut, and put it up on the Web. For folks with simple returns, this product works like lightening.
TaxCut has been the eternal bridesmaid to Intuit's TurboTax as far as market share goes. It is again in the Web world, though this time on purpose. The people at H&R Block, who market TaxCut products, did not think the Web was ready for the full-fledged version that handles all types of returns.
But the stripped-down version offered on the Web at taxcut.com excels where Intuit's product gets bogged down: It's exceedingly easy and quick. If you've got a 1040EZ all you need to do is log on, enter your data and file electronically for free. Gene Goldenberg, vice president of H&R Block and publisher of the TaxCut line, said he sees this as a way to attract new customers.
"Our feeling that this was advantageous to help them out now," Goldenberg said. "Hopefully they will remember us when their return gets more complicated."
To start, just go to the TaxCut web site. Answering a few simple questions will quickly let you know if you can use the program. If so, you're off to the races. If not, the program leads off to a place where you can buy and download the full desktop version. (We liked the full product over Intuit's comparable software because it's easier to use and cheaper.)
By keeping the Internet program simple, TaxCut is not plagued by some of the Web-induced problems that hampered WebTurboTax. Filling out the forms is smooth because there is less data on each screen and fewer bits of information to send back and forth.
Part VIII
Tuesday, March 23, 1999
Fairy godmothers for the procrastinators
If you're deadline challenged, these two online tax applications will help you get it done.
By Steven E. Brier
It's getting close to midnight for those of you headed to the Taxman's Ball, but if you haven't found your dancing partner, don't despair. Two sophisticated online tax tools can help you finish your return faster than you can say, "Cinderella."
Of the two programs, SecureTax, launched three years ago as the online arm of Universal Tax Systems, is the most ambitious. For a mere $14.95 (or $9.95 if you're using the 1040EZ) you can prepare, electronically file and print a hard copy of your federal and state returns. But two notes of caution if you plan on filing your state return over the Web.
Don't send state and federal returns separately. Of the 36 states that permit online filing, only three, California, Maryland and Minnesota, allow you to submit your state return separate from your federal one. However, if you live in one of the three above mentioned states, any leeway you might get from filing separately is lost. SecureTax forces you to file your federal and state forms simultaneously no matter where you live, provided, of course, your state accepts electronic filing. So be ready to prepare and file your state and federal returns all in one go.
If you have to file a state return in more than one state, forget it. IRS regulations prevent you from electronically filing more than one state return with your federal taxes. If you live in one state and work in another, this poses obvious problems. You can use SecureTax to prepare up to three state returns, but you will only be able to electronically file one of them.
The tax application itself works much like TurboTax or other off-the-shelf tax programs. The tax forms are presented in easy-to-read and discrete pieces. As you fill out each one, Steve the online tax wizard (For CNBC fans, notice the resemblance to Ron Insana.) is there to help you every step of the way and point out any potential trouble spots in your return.
It's only at the end of the process, when you see what your return is, that SecureTax asks for money. If you're unhappy with the result, you can start over or go elsewhere.
OneTax, from the folks at Thomson Financial Network, takes a more minimalist approach to the types of returns it handles. The price is $9.95, and like SecureTax, you pay only when your done.
Before getting started, you answer a quick series of questions to find out if your return is basic enough for the program to handle. "We don't do business. We don't do Schedule C. We don't do multiple states," said Jane Moynihan, a company spokeswoman.
While most taxpayers won't notice the missing pieces, if you do do Schedule C or multiple states, the program recommends you seek out a professional. On the other hand, if your taxes are simple enough for the program, you are taken to a login screen where you sign up and start the obligatory interview.
The battery of financial questions from OneTax moves much faster than most Web-based tax programs and requires a bit more knowledge of tax terms -- trade-offs the company says it had to make to get a snappy response over the Internet.
So, if you've been putting off doing your taxes (and who hasn't?), these two Web-based tax packages can help you get a move on (and who shouldn't?). Bippity-boppity-boo.
Part IX
Wednesday, March 31, 1999
Tax audit fear and loathing
A tax audit isn't the end of the world. But we've got some tips that will help you avoid one all the same.
By Steven E. Brier
The odds of a tax audit are small --and getting smaller each year. That's not much solace though if you get an audit notice in the mail. And when it comes to audits, no news is not necessarily good news. If you got that refund and months, even years, go by without a word, the taxman may still want to have a little chat. If so, here's some advice.
"Don't panic," says Vincent Vienna, tax partner with Smolin, Lupin and Co. in West Orange, N.J. "You can survive a tax audit pretty much intact," he says.
Most audits are fairly straightforward, and involve little more than a letter asking for an explanation or confirmation of a piece of information. A quick letter back and you're usually done. But since the rules say the IRS has three years to audit a return (from when it was filed or due, whichever is later), hang onto those receipts and documentation. If the IRS suspects fraud, though, the calendar doesn't count.
There are dozens of reasons for an audit, and the IRS is kind enough to list some of them on its Web site. The site includes a statement of taxpayer's rights, too. More information is available here. Intuit also lists 10 ways to avoid an audit, including simple things like filing a neat and legible return.
Even more interesting reading are the audit guides from the Market Segment Specialization Program. These guides, used by the IRS, focus on specific types of businesses, typically small businesses such as pizza stores, as well as self-employed people including entertainers and cabbies.
Tax preparation software can look out for you by flagging things that may catch the attention of those aforementioned auditors. Professional preparers know what to look for too, so listen up if yours says some things may trigger an audit. Keep in mind, though, that just because something may trigger an audit doesn't mean it's not valid. Just be prepared to justify it.
If you get called in for an audit, consider hiring someone to represent you, either a CPA or other professional approved by the IRS. When an auditor deals with an outside pro, they tend not to push as hard, the pro keeps things from getting personal, and you may end up with a better deal.
Finally, if you are worried whether your return has audit written all over it, go to Are You Audit Bait our quiz that attempts to predict the odds of an audit based on the information you provide.
Part X
April 7, 1999
Last-ditch solutions
Here's how to appease the tax gods if you can't get your act together by April 15.
By Steven E. Brier
Tax day is nearly here and you're not going to be ready in time. What's your next move?
You're going to file for an extension. And unlike your third-grade teacher, the I.R.S. doesn't care if the dog ate your paperwork. Just fill out a request for extension (officially known as form 4868) and send it off by the normal due date, and you have an extra four months to file. No muss, no fuss, no questions asked.
"An extension to file a tax return is easy to file," said Vincent Vienna, tax partner at Smolin, Lupin and Co. "It's not questioned."
There is, of course, a catch. (With the I.R.S., there always seems to be a catch.) You have to be prepared to pony up any money you may owe.
"An extension to file is not an extension to pay," Vienna said. "You must make a good faith effort to have 90 percent of your tax liability paid -- they want 100 percent -- by attaching payment."
If you don't have sufficient paperwork to determine your tax liability, you can estimate it using last year's return as a guide. Of course, you want to be as close as possible, so try and figure out the true number with the paperwork you do have, or consult a tax pro.
There are other types of extensions, for people working outside the U.S. and Puerto Rico (two months) and those in the military serving in a combat zone (loosely 180 days from the last day in the zone), though people in those spots will want to talk with a pro.
The I.R.S. is going to give a freebie to people who take the extension. August 15 falls on a Sunday, so you don't have to file until Monday, the 16th.
And if that's not enough, you can file for an additional two months time, to October 15. The form is here. But be prepared to have an excuse this time.
What if you can't pay your taxes? The I.R.S. doesn't like that. The best advice is to file your return and include an explanation. Be prepared to pay a penalty and interest as well as working out a payment schedule_if the agency determines that you qualify.
Last modified: July 24, 2008