To the Point: Filing income taxes from an accountant's point of view

University Park, Pa. -- It's almost here. The day that most employed Americans dread: April 15. Commonly known as tax day, it has been an annual event since 1913 when the 16th Amendment was ratified:

"The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

Charles Enis, associate professor of accounting at Penn State's Smeal College of Business, offers advice for those who have not yet filed their tax returns.

Is it better to do your own taxes or get professional help?

Enis: I'd say depending on the complexity of the return, if you can do it yourself, fine. But if you come to an area you are not clear on, it doesn't make sense to try and figure it out yourself -- I would suggest trying a software package or get professional help.

What is your opinion of chain tax companies and do you think customers get their money's worth? What do you think about their guarantees -- should customers pay more for these?

Enis:
The chains such as H&R Block and Jackson Hewitt offer a very low-cost tax preparation service, but if it's a sophisticated return or you have your own business or lots of investments, you should see a CPA. But for the average person who doesn't want to bother on their own, these chains are a good deal. It's just like changing oil on a car: people just don't want to do it. One thing to be careful of with chains is their attempt to sell proprietary products. They might say you can save money by opening an IRA with them. I would shop around and find out where you can get an IRA at a much lower fee because some may charge fees that are fairly high.

Is the rumor that someone is more likely to be audited when they do their own taxes a myth, or is there some truth to that?

Enis: Many audits are correspondence audits. If you made a mistake in arithmetic in your return, the IRS generates a letter saying they changed the amount to the following and here's why. That's considered an audit done by correspondence.

The reason you are less likely to be audited when you get your taxes done professionally is because they have software and people to proof their work. They are therefore less likely to make a mistake. It is difficult to proofread your own work. If the return is difficult and sophisticated, a CPA is well worth the money -- you are paying for more expertise.

Are there any other myths that you've heard that you'd like to debunk?

Enis: One myth is that the envelope you get with your return package has a barcode on it that people thought indicated if you would get audited or not. That's not true. It's easier to process your return with that envelope they sent you and it will not affect your chances of getting audited.

What do you think about tax return software?

Enis: It depends on how computer savvy you are -- if you aren't, there are some software packages where you get stuck in a circle and it's hard to break out of it. But someone with a little expertise should have no problem. Although, again, it's a matter of reviewing your return carefully. It's good to have someone check your numbers and to make sure they're on the right line and you didn't transpose any numbers. There's nothing in the software that can stop that kind of error, but good proofreading will. I suggest taking a day or two away from your tax return once you're done, then going back to look over it or have a family member check it. Once you hit the "send" button on the software, it's kind of late. First print off a hard copy and set it aside, then come back and check your numbers.

Why would someone be audited and what should they be prepared for?

Enis: There is a statute of limitation of three years to be audited, unless there's a possibility of suspicion of fraud. If your return looks like you are claiming a lot of charitable contributions the IRS may say, "OK, we want to verify these deductions." Generally, the charity doesn't report donations to the IRS. So they might want to see records of your charitable contributions for the past three years -- receipts of your contributions or letters thanking you for your donation. When you are audited, they usually only look at one or two things on your return and usually they'll look at what you filed for more than one year. If that year goes by, you are not out of woods -- you can still be audited.

When are children no longer dependents, in the eyes of the IRS?
 
Enis: 
Taxpayers who have children under age 19 living in their home for more than half of the year can claim them as dependents. Once the children turn 19, in order for them to be  dependents, they have to be full-time students and under 24 years old. Once they are 24, the only way they can be dependents is if the taxpayers provide more than half their support and their gross income for 2007 has to be less than $3,400 (a number that changes each year, based on inflation). If taxpayers have special needs children, there is no age restriction. The children just have to live there at least half a year and cannot be self-supporting.

Who qualifies for extensions and how?
 
Enis:
The extension for federal taxes has to be filed by April 15, and if you expect to owe taxes, you have to file an estimate of how much you think you'll owe. Extensions are automatic to anyone that files form 4868, which can be downloaded from IRS.gov. It's very simple and gives you until Oct. 15 to file. The Pennsylvania tax form is similar: REV-276. Each state has its own extension form.

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Last Updated April 02, 2009