Income Tax
Preparation, Software and Services

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Tax preparation software and professional tax services vary in both accuracy and cost.

      A tax preparer wants to complete as many tax returns as possible, in the least amount of time, for the highest fees they can get. A taxpayer wants to take whatever time is necessary, to find every deduction available, that will help them legally pay the lowest possible tax, and do it for a reasonable fee. The two goals aren’t always compatible.

      Personal computers have made it possible for most real estate investors to keep books and do their own taxes. Accounting software like Peachtree, Intuit’s Quicken or Microsoft Money, coupled with tax prep programs like Intuit's Turbotax, Kipplinger's Tax Cut and several others, have made doing our annual taxes almost user friendly; particularly for the average taxpayer with W-2 wages and a few investments.

Tax Talk

      Your tax return is the IRS 1040. That form, or its offspring the 1040EZ, may be the only paperwork necessary for many young wage earners. But as the song says, "freedom’s just another word for nothing left to loose". Once you begin acquiring assets, life with the IRS becomes more complicated and your return is likely to require several schedules and forms attached to the 1040. You need Schedule A to report mortgage interest, property taxes and unusual medical bills. You need a Schedule B for investment income from banks and securities. You need a separate Schedule C for each business entity you own. Schedule E is used for royalties and real estate investment properties. However each Schedule E is limited to reporting just three properties; A, B and C. If you own all or part of more than three investment properties you need another Schedule E for every three.

Tax Return Software

      The early versions of most consumer tax preparation software limited many important schedules to just a few copies. When you do taxes by hand you can just make a copy of the form and move on, but a computer program integrates everything so you cannot add to what is provided in the program.
      The first versions of Turbotax that were designed for consumers allowed just three copies of Schedule E, enough for just nine properties. Later versions increased to five copies of Schedule E. Consequently, real estate investors, who owned more than fifteen properties, and wanted to do their own taxes with computer software, were forced to buy the much more expensive and difficult to learn "Professional Edition", designed for firms like H & R Block.

      The professional program, like its consumer counterpart, has recently become much easier to learn and use. Now Turbotax also offers a Pay-Per-Return professional edition that makes the cost of using it comparable to an off the shelf copy of their consumer package.

Now, Doing Your Taxes Can Be Fun

      Today, even real estate investors with dozens of properties find doing their own tax returns fairly easy and certainly "rewarding".  It's easy to experiment with the gray areas. You can try moving some expenses from improvements - to repair, and instantly see the difference it makes to the bottom line.
       The tax programs will not allow you to fill out a form incorrectly, they do the math for you, and they constantly check for errors. They also run rather complete "IRS" audits when you are finished.
      Perhaps the best argument we can give you for buying the software and doing your own taxes is that you can buy the same program that your tax preparer is using. You may want to test your ability by doing this year’s tax return and having your professional preparer do it too. Then compare.

Do Your Taxes On Line

    You can now do your income taxes on line. SecureTax takes you through an interview, much like Turbotax, and allows you to fill out both federal and state tax forms using a secure Internet connection. You then print out the completed forms, attach W-2s and 1099s, sign and mail. There is no charge for the service unless you also want them to file your return electronically.

      WebTurboTax from TurboTax brings you all the benefits, functionality and content of their #1-selling software, including support for all states that impose an income tax. Using the new Smart Interview System, you can work on your taxes safely and securely anytime and from any place where you have a Web connection. State-of-the-art encryption technology and security procedures protect your personal information at all times.

File Electronically

      In 1998, 900,000 taxpayers did their own returns on a personal computer and sent them directly to the IRS electronically. That might seem like a lot, but it amounts to less than one percent of the 100 million-plus individual returns the feds received. The total number of returns funneled $792.6 billion into the federal government, and $169.2 billion into state and local governments, according to the Tax Foundation.
      By the way, the government will collect nearly $10,000 for each man, woman and child in America.

Scared to Death of Taxes

     If you are still uncomfortable, or unsure about how to do your taxes, or if you think your situation is too complex, you may still want to work with a commercial tax preparer.

      Tax Preparers differ greatly in education, training and fees, so choose one carefully to ensure you pay only for the services you need.

•   An Enrolled Agent is certified by the IRS after having worked five years as an IRS auditor or after passing a government exam. Enrolled agents are authorized to represent you before the IRS
•   A Certified Public Accountant (CPA) has passed a professional qualifying exam. CPA's are also authorized to represent you before the IRS. A public accountant may have special accounting training, but lacks certification and cannot represent you before the IRS.
•   An Attorney has passed the bar exam but may or may not have special tax training. Attorneys are authorized to represent you before the IRS.
•   Tax Preparer is any other individual described as a "tax preparer" may or may not have special training or experience. Some tax preparation firms require that their staffs have extensive training and experience, while others have less rigorous requirements or none.

      The more complex your tax situation, the more you may want the advice of someone with specialized experience. However, you may be charged more for the advice of these professionals.
       Many taxpayers, such as retired people, owners of small businesses, professionals, and people with large amounts of income from sources other than wages and tips, may especially benefit from using a preparer with specific experience in their area.

      To find the preparer that best suits your needs there are a few things you need to know about them. Call several and ask:

•   What is their training or experience in preparing tax returns, particularly in real estate investing or any other relevant area?
•   How do they check for accuracy?
•   Do they review all returns for arithmetic errors only or also for errors in tax-law interpretation?
•   Approximately how much they charge to prepare your taxes?
•   Do they file returns electronically?
•   Will they be available throughout the year if you need help with an audit?
•   Can they represent you if the IRS audits your return?
•   What do they charge for an audit?

      Even when you hire a professional to prepare your taxes, it is your responsibility to make sure your return is accurate. You are personally liable for any additional tax, interest, or penalty, even if you have a written guarantee that the preparer will pay any interest or penalty you are assessed as a result of their work.
      Select your tax professional with as much care as you would an attorney or doctor.

Before you visit the tax preparer

•   Make a list of any tax-related questions that occur to you and ask about them.
•   Gather and bring to the preparer any information or documents that might apply to your taxes, including your last year's return. Remember, too much information is better than too little.
•   After your return is prepared, check it to make sure the information is correct.
•   You will have an advantage if you get your taxes prepared early because your professional will have more time to do a thorough job for you

What To Expect

•   When you visit the tax preparer, look for professional practices.
•   A professional should go through a checklist of deductions to see if any apply to you
•   A professional preparer should not guarantee you a refund before completing your return or suggest that you take non-existent deductions or propose other improprieties.
•   A preparer should not ask you to sign a blank return or one completed in pencil.
•   A preparer also should sign your return and enter his or her name and social security number (or federal identification number).

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Taken in part from: Facts for Consumers, from the Federal Trade Commission.

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