This is a Guest Post by Richard Close. As a former IRS Revenue Officer, Richard “stole” $10 Million for the IRS. Now he works to help American taxpayers. Richard writes IRS news and updates daily on his website, The IRS Hitman. You can find answers to common tax questions in his knowledge vault.
Ah, tax season. That time of year where people grouse about the greedy government. Some folks are so in need that they start looking for ways to cheat on their taxes. Here’s a hint: Never cheat on your taxes. The risks far outweigh the rewards. How do I know? Because I used to work for the IRS, and I saw first-hand what happened to tax cheats.
When people learn I used to work for the IRS, they want in on the secret. What’s the silver bullet that will help you save the most when you file your taxes? We all know about tax deductions, but which ones are worth the trouble? In my opinion, you should look at all of them. It may seem like you don’t qualify for most at first, but if you look closely for legal “tax cheats” or loopholes in the IRS rules, you may find new ways to save.
As an advocate for the American Taxpayer, I in no way condone committing tax fraud. However, there are ways you can make those tax “cheats” — legal tax deductions — work for you without dire IRS consequences. Be creative, but work within the law. You just might save some money this year on your tax filings. Here are some common tax cheats people try (and fail at), as well as legal alternatives.
Pet Costs
Your pet is not a dependent, no matter how much you feel Fido is part of the family. Even if your pets run up expensive medical bills, personal pet costs are not typically tax deductible.
- Tax Cheat: However, if you have a service animal, you can claim the expenses of maintaining the animal as a medical deduction. Businesses can deduct qualifying pet costs, too. Here’s a clever example: The owners of a junkyard had to act fast to remove their snake and rat problem. Their solution was to set out bowls of cat food to attract feral cats. The cats made short work of the vermin, and the cat food was considered a legitimate business expense.
Attorney Fees
If your legal dispute is “personal” in nature, the IRS won’t allow you to deduct your attorney fees. This includes common issues like divorces, property disputes, and even personal injury cases.
- Tax Cheat: Attorney fees for your business are deductible (subject to a 2% floor). Oddly enough, you can deduct personal legal fees related to contesting, paying, or claiming a refund on your taxes.
Charitable Service
You can deduct goods and cash donated, but you can’t deduct services you’ve donated to a charity — even if you measure the value.
- Tax Cheat: You can, however, deduct costs you paid while performing the service.
Telephone Landlines
You can’t deduct the cost of your home telephone line, even you use that phone for your business.
- Tax Cheat: You can, however, deduct the cost of a second telephone landline or a cell phone that is used exclusively for your business. In addition, you can deduct long distance and similar charges on your land line if you prove business use.
Commuting Costs
You can never deduct the cost of going to and from work, no matter how far you live from the workplace. Even if your commute is expensive, the burden is a non-deductible expense.
- Tax Cheat: Work-related travel expenses are deductible. This includes costs to visit clients and vendors, going to a business meeting away from where you work, and traveling back and forth during the workday.
Home Improvements
The IRS considers home improvements personal expenses and will not allow you to claim these expenses as tax deductions.
- Tax Cheat: However, if you’re installing a wheelchair ramp or making a similar health-related home improvement, you can claim the costs as medical expenses. Additionally, you can get a tax credit when you install qualifying energy-efficient home improvements.
Gym and Health Club Fees
Even if your doctor recommends you lose weight for your health, you cannot deduct expenses that are merely beneficial for your health, like gyms and health clubs. (The IRS says the same thing about specialty health foods.)
- Tax Cheat: However, if your doctor specifically prescribes a gym or health club membership for a diagnosed medical condition it will qualify as a medical deduction.
Two Top Tips
Here are two final tips for those who are looking to save on taxes:
- Itemize. Many taxpayers claim the standard deduction amounts, and I can’t blame them. There’s less math, less document hunting, and no rules to read. Yet with minimal effort you can maximize your deductions and save big by itemizing deductions.
- Pay a pro. Working with a tax professional or using tax-filing software is almost always worth the investment. A qualified and reliable tax professional will find the best ways for you to save.
Hopefully, these tax tips will help you save some cash this tax filing season. Remember, examine your taxes closely, and when in doubt, consult with a tax professional to see what you can and can’t deduct. You may be surprised by how greatly you can benefit from being a legal tax cheat.
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When I saw the title of today’s post I said to myself, “That looks like something that will be submitted to reddit.”
Anyway, I look at a lot of tax returns in my job. And the wealthiest people have the most complex returns–sometimes dozens of pages of schedules. I take two lessons from this:
1) the rich really do try to make every penny work in their favor, and
2) we need a more simple, progressive income tax in the U.S.
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Two points.
It’s probably just me, but I don’t like the word cheat being used for the recommendations. You tell us not to cheat on taxes, than use that terminology for your advice. Though I get it, it just seems bad form.
Second, while many of the recommendations can be used, many can’t because it’s hard to reach the limits necessary to allow the deduction. So it would have been helpful if it was framed how useful they really are. For example, I seem to recall you can’t use the medical deduction until all your medical expenses hit something like 5-7% of your gross income. Likewise there are limits for the travel related expenses for business. Putting these into some context (like if I had a heart attack or accident and that plus the follow-up care could put me over the limit so don’t forget it) would have added to the discussion and the worth of the advice.
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This article is terribly FLAWED, not so much in content because these are legit things, but in presentation. Unless you are familiar with the tax code you might be wasting your time trying to itemize when the standard deduction is better for your particular situation especially if you don’t understand form Schedule A. In the end, unless you plan correctly, itemizing as an afterthought is not going to work for you on January 1 if you didn’t get all the deductions in by December 31. The only really good advice was talk to a tax pro, the rest is worthless info that has a lot of “gotchas” that he failed to mention in the article.
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I have used TurboTax’s Deluxe, on-line edition the past two years and have loved it. For $30, I know I got much larger refunds than I would have just doing it the old-fashioned way by myself. I highly recommened it. They explain all these types of deductions and make sure you don’t miss any.
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Great post!
To add on to the work-related expenses… if you have to move for less than a full year for a work-related expense and it isn’t reimbursed by the company (say, for a semester-long or academic-year sabbatical), then those expenses including rent/hotel etc. are tax deductible.
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My dad was a successful entrepreneur and schooled me early in the ways of maximizing ones deductions. Make it a habit and you will definitely benefit. The irs dot gov website has tremendous resources.
If you itemize, don’t forget to donate stuff to charity for a deduction!
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I absolutely agree about hiring a tax professional. They are up-to-date on the latest tax law and the time, aggrivation, and frustration saved by using one is well worth the fee.
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H&R Block has been offering “free” tax preparation for those that file 1040 EZ. I assume they try to sell you something else while you are having your taxes prepared.
Personally, I like using Turbo Tax. It is very easy to use, and makes figuring deductions a snap. And, the software does all the math and calculates the best way to file. Since I do my Mom’s taxes and the kids use it, it has been a great value. No, I don’t work for Turbo Tax!
For more complex returns, you definitely want to consult a tax pro.
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We have hired a CPA the last 3 years, but she has gotten so expensive that we’ll be doing our taxes ourselves this year. I’ll have to remember to get together all of my costs while performing charity work…I sort of forgot that the toll road charges were deductible…oops. Thanks for the tips – I’ll definitely tune in later today as well.
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This is not “cheating” – the deductions are written into the tax code or regulations and the IRS knows it. I think GRS is better than using loaded words to get traffic.
Attorney fees for your business – why not on Schedule C (or E as appropriate) where they are fully deductible? Maybe you have a different definition of “business”?
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I don’t understand why you’re calling it a “cheat” if it’s legal. It sounds like you’re just trying to be sensationalistic and also CYA.
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I agree that using tax software, like TurboTax, is well worth the cost. It makes things go much more smoothly and it always seems to get me a larger return than if I filled out the forms on my own.
I also agree that deductions should not be referred to as “cheats.”
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Also, if you have diagnosed Celiac Disease you can get a tax deduction on all gluten free foods you buy – as long as you save the receipts and have a copy of your doctors diagnosis.
http://www.ehow.com/how_2089426_get-tax-deductions-food.html
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Thanks, Meredith! I just told two friends about that.
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I wonder every tax season, has anyone quantified the additional revenue the IRS has garnered over the years simply due to tax preparation software. It seems to me the IRS has collected a vast sum more than it would have, just by nature of making the filing process easier for the majority of Americans.
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Kevin M says “I think GRS is better than using loaded words to get traffic.”
+1
These aren’t cheats, and they aren’t even particularly obscure. I am interested in tax code stuff, and I hope there will be more articles about it, but this didn’t really provide anything useful.
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Last year, I did my own taxes. I paid about $3,500, and then I got a letter from the IRS claiming I owed them another $9,000.
I hired a tax guy to deal with that, he cleared up the bill, and turned the $9,000 bill into a $9 refund.
Guess who’s doing my taxes this year? That same guy. I had expected to be paying about $3,500 again, but he just went through everything and I’ll only be paying about $250. For me, a professional is *well* worth his fee of a couple hundred bucks to save me thousands of dollars and the stress of getting giant bills from the IRS due to my own mistakes.
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If people are looking for a way to learn these why not just take the H&R Block tax classes they offer? I did and I worked for H&R for a tax seson and it taught me all of those plus more. Then you have a much better understanding of how you can accomplish those nifty tax deductions.
Another tip is that with the newest version of college education credits you can claim part of your internet costs for school and other technology costs to you such as a new laptop or computer that you bought for school.
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I went to an H&R block tax professional and was rewarded with 3 consecutive years of audits with 2 different IRS offices that had different opinions on what was prof and what was not. I had to spend another couple hundred dollars on a real accountant to fix the H&R block tax professionals return. Then hsbc bank sent me to collections on the interest for the rapid refund loan I recived. I was so mad and I thought they were H&R block that I told them to go F them selvs and good luck if they ever saw a dime out of me. Well that was another 200$ I had to pay and will not be off of my credit report for another 6 months.
I was at the end of my rope with the audits and they were fixing to garnish my wages for over to the tune of $40,000 that I did not owe when I called the IRS tax payer advocates. It’s a division of the IRS that helps you get thru audits but they work for the IRS. They had all 3 audits fixed in 6 months after 5 years of worrying my life away.
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I think if you are doing your own taxes, and getting this far in to the weeds, its time to see a professional!
Pat
http://compoundingreturns.blogspot.com
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Hey guys,
I’m just chiming in while a sunburned J.D. is in Africa and sans internet connection.
I get the gripes about using the word “cheat.” I liked it in the title because the article discusses actual cheats and the legal alternatives, and uses quotation marks around “cheats”, but calling the alternatives “cheats” when they are legal breaks, and not using quotation marks around the word, can be confusing. I think it was meant more tongue-in-cheek.
Also, J.D. and Tyler K. have inspired me to just use a pro this year, especially since my taxes are going to be a little more complicated than in years past!
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+1 on “cheat.” Don’t like it. Even though it’s clearly tongue-in-cheek and all the recommendations are legal, it reflects what I think is the single biggest failure of our society, which is that we are always looking for the easy way or the shortcut. We don’t need to pander to that here.
I really recommend either taking the H&R Block course, or reading your way through the excellent IRS site, whether you do your taxes yourself or hire an accountant.
The hardest part of doing taxes is compiling your records. And that is only hard the first time. The second-hardest part is getting familiar with the forms you need. But the instructions are really good. You just have to read them. There should be no “winging it” with taxes!
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I work at a CPA office and I can tell you that the software that is used (lacerte) is owned by intuit the same makers of turbo tax. having said that the tax code is not simple, and it is that way for a reason. if you take your return to one of those quick tax services, you are getting what you pay for the training is a couple of months at best. also there are many differences between the states and the feds when it comes to taxes so that can be a sure way to get yourself nailed, but truthful the best way to avoid an audit is to not be greedy and leave a bit on the table and don’t file on april 15th. they spend most of the year clearing out return filed on april 15th that the people that file later are the first to be audited, and because people with more complex returns go on extension the small fish that file after april 15th sneak through for the most part.
Top Tip is not to be greedy on stuff tho that is the major tip off the IRS.
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Those are not “cheat”s, they are regular tax deduction ideas. But other than that a nice list of easily overlooked deductions.
Regarding medical expenses, the transportation (driving to/from the doctors office), lodging if it is for treatment, etc are all deductible. Charitable deduction – appraisal fees are deductible. There are a lot like these, computer depreciation cost if it is used for business, cell phone cost, investment advisory fee, safe deposit box used to store your investment, etc.
Most of the common deductions, Turbo Tax or H&R Block software (NOT the people, I am not a fan of their “expert” tax pros) will handle. But there are a lot of areas where an actual CPA might be much better. It is not a good idea to not take deductions we deserve for the fear of audit, but we should know where to draw the line. Business is part of our life now with answering emails and always on the call… we might not be able to clearly what is business and what is personal. An expect can do this or read all the instructions and forms thoroughly
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Instead of “cheat,” I think you want “loophole.”
Not all tax experts are the same, even at the same company. But a GOOD one is worth double or more of their cost.
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Can someone please clarify the following: Why is it worth paying a tax professional to prepare my taxes instead of just using TurboTax or some equivalent software program? I’ve used TurboTax for years, even as my taxes have gotten much more complex. Doesn’t the most recent software know as much, if not more, than a human brain about all the recent deductions? And TurboTax walks me through questions about every possible deduction, so I don’t feel like I’m missing something.
So, please shed light on why hiring a human can be better than tax software that I use myself. Thanks!
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Margot, it depends on how complicated your taxes are. For most people (myself included), using TurboTax is more than enough. For others (like my dual-citizen husband who has to sync two disparate tax returns), it’s quite worth it to see a professional.
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@21, My taxes aren’t all that complicated, so I do them in turbotax. But I definitely had to delve into turbotax to claim some stuff that they didn’t point me too.
For those who talk about deductible medical expenses, I’m not even sure you get to deduct them if they are greater than 5-7% of your income. Or perhaps the IRS has a different definition of medical expenses. I pay my own health insurance, and the cost of premiums + dental appointments (considered a medical expense) are definitely more than 7% of my income. But when I entered all that into turbo tax, my tax liability did not go down.
I don’t make enough to justify a professional yet, but I am pretty darn sure I’ll be getting an accountant once I finish grad school and am making actual money (and get married and thus making much more if you include my soon-to-be spouse’s income). Tax codes just have so many little ins and outs.
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This is the same person who asked why a tax professional was advantageous to TurboTax or other software. I earn a lot (over $200,000) and have some deductions. But, I still don’t see how a tax professional would know more or do better than software that’s programmed with all of the tax code. I’m happy to switch to a tax professional if someone can convince me it’s worth the money. Thanks for your help!
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I was interested to find out that you can deduct education expenses (including books) related to your current job sphere (training for a new career path isn’t deductible). It’s subject to a 2% limit but if you take a part time course that relates to your current career it’s worth knowing about.
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@18 April Be sure to use a CPA or Enrolled Agent. People at H&R block style places often only took a two week class and are a prepaper. I don’t consider that professional!
@20 Different CPA offices use differnt software.
@22 Professionals can help you with tax planning. If you “just” have a W-2 there may not be too many more deductions for you but they can help show you the tax benefits of different retirement plans, etc. Professionals also help determine which deductions are legal. A lot of people think they qualify for deductions that they don’t and end up getting caught. IRS doesn’t care if you didn’t know. The liability rests on a CPA if they didn’t know and you get caught.
It’s always best to see your CPA BEFORE you make a home purchase, rental home purchase, land purchase, invest into a business, roll over to a ROTH (which many commissioned retirement planners suggest even though it’s not tax advantageous for all clients), etc. to find out the tax consequences.
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Personally, I like being able to know how to do my taxes and know how various expenses and transactions made over the year will affect me come tax time. Mine have grown increasingly complex so I’ve begun using the TurboTax Home & Business (I have rental income as my home is a double) for several years and have been extremely pleased with the results. I like to know about the various deductions myself but if I miss some it always points them out to me and then most importantly the next year I can begin keeping better records.
I wish I had known this time last year some of what I know now as regards health insurance and expenses. As I’ve been paid the past 2 years as a self-employed contract worker I’ve maintained a high-deductible health insurance plan, which is deductible as a SE ee. I did not realize though that I could set up my own health savings account which would have allowed me to pay for the out-of-pocket expenses we paid for the birth of our first child and receive a deduction for the money deposited. But I’ve since set one up and although I haven’t been able to use the funds for medical expenses yet it should have a nice tax savings effect, plus 3% interest. Hopefully we’ll qualify to deduct those expenses and it’ll be wash.
So I guess I would also like to learn more about what can be done prospectively to cut down your tax load for future years.
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I prefer a professional; more precisely, an enrolled agent. TurboTax is OK for federal returns, but when it comes to state returns, especially my state (Calif.), the software takes a hard nose-dive into near-uselessness.
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Speaking as an employee of the IRS, let me make the following observations:
1. Tax software is awesome. I see more problems with CPAs using a calculator and a pen than the average taxpayer with software. If your preparer doesn’t print out a complete copy of what is filed, and doesn’t explain every line, be wary. At a minimum, you should at least know what might be questioned. An efile signature page is not a full return.
2. As soon as you sign the return, you become responsible for your own taxes. The IRS will not go after your preparer. Fraud reports are usually ignored. Any contract or “insurance” you have with the preparer is your business. Fight it out with the preparer, the IRS still goes after you.
3. Check your returns with a magnifying glass. Half the problems I see at the IRS are a matter of incorrect names + social security numbers. Seriously. I saw a preparer make the same mistake on dependents for three years – the software “saved” the wrong info. It took longer than three years to fix and the taxpayer had some of his refunds expire. Moreover, I don’t care if your name is “booger” – it MUST exactly match the records at the Social Security Administration to e-file.
4. If your preparer is paid by a percentage of your refund – be wary. They will be tempted to give you deductions you shouldn’t take. The next year when you are audited, you may have to pay back thousands plus penalties and interest because you claimed dependents you shouldn’t have.
5. Almost ALL audits are done by mail and computer. If you can’t prove your deductions with clear paper receipts, don’t try. There is a small fudge factor before the IRS computers turn on, but once they do, all deductions must have receipts. Receipts must be clear – I had a taxpayer show up for an audit with 10 pages of credit card bills – not a single expense showed any detail. I denied $15,000 in alleged un-reimbursed business expenses.
6. Most taxpayers can use the most basic of tax software – and should – instead of using an accountant / cpa / enrolled agent. However, this is not a substitute for professional tax planning. Tax programs are fantastic, but I wouldn’t use them for estate planning, inheritances, or even basic corporations or partnerships.
7. Take control of your own financial life. The statement, “I have an accountant do all that – I can’t be bothered,” is a recipe for disaster at audit time. When asked, “where did this deduction come from?” is laughed at when the reply is, “my cpa did it.”
8. If married – get your spouse involved. No excuses – none. If you are “not good at numbers” you will be doubly sorry if your spouse suddenly dies, has a business failure, or you have a divorce.
9. If you or your preparer are not e-filing – ask why. It is a total myth that the IRS won’t audit handwritten returns. If you do e-file, either yourself or with a preparer, get the acceptance confirmation number. I have seen hundreds of taxpayers who 5 months after filing never bother checking. By that time, the IRS rejected the return in April and your preparer has closed up shop for the year. Get PROOF of successful filing. No proof – don’t pay.
These are my opinions and are not the official policy of the IRS, Department of the Treasury, or the US government.
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Wilson, I hope you don’t qualify to deduct those expenses! There is significant pain and suffering involved if you do.
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My husband has a part-time position at a counseling clinic where he is considered self-employed and pays monthly rent to the clinic. Last year, at H&R Block we were told we could deduct his traveling expenses for driving across town to the office each day he has a client. Is that not accurate then? We plan on using the same person this year, but I certainly don’t want our filing messed up.
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Sadly, we’ve reached the point where the tax code is about as complicated as the medical field. If you have no deductions, great. However, as someone who has a rental property, a side business and several other tax complications, I would never do my own taxes. Even software like Turbotax doesn’t help in those situations. Going to a professional tax preparer you trust makes sense, just like going to a doctor for a serious illness.
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To #32 – Have you seen how much hospitals charge for every aspect related to child delivery? Almost all of it was paid for by insurance, but my wife blew threw the deductible of her high insurance plan in pre-natal care, visits, etc to get to that point and I believe that is deductible, unless I’m wrong about the perentage of health expenses v. income, only 2% right?
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If travel expenses to / from work are not tax deductible, then why is there flexible spending for it, which ultimately allows you to take the cost of those as a “before tax” cost.
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[pulling hair out over some of the comments above, and mounting soapbox]
I am a tax professional with over 10 years of experience working with a broad variety of clients – from really ignorant to highly sophisticated. I have also worked for TurboTax in the past (but no longer do so).
Here’s my two cents…
If you have a simple tax return (i.e., no income other than a W2, interest, and dividends, and no deductions beyond mortgage interest, taxes, and charitable contributions), then using a software program is fine. Otherwise you should be using a tax pro. Really.
The problem is rarely the tax software. It’s usually the person answering the questions.
I base this statement on having watched dozens of people prepare their own tax returns (part of my job while working on TurboTax). The only things that everyone consistently gets correct on their returns are their name and address.
The people who are most susceptible to making errors are the confident ones. [I'm talking to you @Margot] They think they know what they’re doing, and in GENERAL they do, but in particular they don’t. Their overconfidence leads them to answer the TurboTax questions without having taken the time to read them thoroughly because they think they know where we’re going with the question. The less confident people usually take the time to read each question thoroughly and normally answer it correctly and completely even though they may know less about taxes than the confident taxpayer.
If you use a pro, I’d recommend that you wait until after April 15 to have them prepare your return. Your preparer will not be a zombie from the 12-14 hour days commonly worked during busy season, and they’ll work harder to track down additional deductions (due to the lack of time, some preparers will not chase down low-end deductions prior to April 15).
FWIW, I would recommend an EA over a CPA most times (full disclosure: I’m a CPA). The EA will usually be less expensive and will oftentimes be more focused on the issues facing individuals since many CPA firms aim at business clients and consider individual returns to be of secondary importance (most biz returns I prepare are billed at between $1,200 and $2,000, while it’s difficult to charge more than about $600-700 for most individual returns, so the focus is getting more business clients rather than individuals).
If you insist on going to a tax store like HR Block, another benefit of waiting until after April 15 is that the poorly-trained and less experienced preparers are usually gone by then so you are more likely to get someone who knows what they are doing.
[dismount soapbox]
Also, @Kevin M in re: comment #9, your suggestion of taking attorney fees on the relevant schedule is a good one. I’m sure the author knows better than to suggest that biz-related attorney fees are subject to the 2% AGI limitation, so I suspect that the author intended for that mention of the 2% limitation to go after the SECOND sentence, not after the first.
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Hi, I just received an email from TurboTax late yesterday afternoon. The email said they wanted to advise me about an issue in TurboTax that may effect my 2011 Fed. return. Certain customers who received a child tax credit may have filed an incorrect return. Basically, their software gave people up to $1,000 child tax credit even if they entered ’0′ for months the child was in their home! I have used the software for the past 4 years and trusted it. I called them and asked for help-they wanted me to sign a form so they could do the amended forms. Of course they’re not willing to pay the $1,000 anyone was overpaid by the IRS. The CSR asked me was I expecting TurboTax to pay my debt to IRS?! I understand it is my debt and not theirs but what do I do now? Do I pay the $1,000 or do I review and determine if any of the time my granddaughter spent at my home is enough to meet the 7 months or more rule? I checked everything several times, making sure all numbers and spelling was correct. I never thought answering a question correctly would cause me a $1,000 overpayment. Is there any advice you can offer? Will IRS allow me to make payments on something like this? What do I do now?
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I typically don’t leave observations on websites but you have some good info material.
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Good put up, thanks
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Great article. Thank you for the valuable information that I can use to help my passion grow. Life pleasant surprises
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