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TAXTIME: A Primer

February 7, 2005
Face it. Most of us don't like to pay taxes, especially those who spend a lot of time watching the devil-may-care antics of that odd assemblage known as Congress. But like it or not, this is the time of year to start gathering all of last year's earnings and expense statements, because the only thing worse than paying taxes is not paying them. Untold trouble awaits those who try to outwit, or outrun, the taxperson. The Tax Code is complex, which means there are lots of ways to get into trouble. Here are some strategies to avoid:

• Using a "Creative" Tax Preparer No question some tax preparers will get you a bigger refund than the others, by exaggerating deductions, understating income and so forth. One big problem with this: these guys eventually get caught and when that happens, the IRS starts pawing through the returns they prepared for their clients. At the very least, you will be hit with back taxes, interest and penalties. Worst case? Criminal charges, ruinous legal costs, prison food.

This is a lesson now being learned the hard way by the Florida and Alabama clients of Baxter and Associates. In Louisiana, Mr. Ed's Tax Service is accused of defrauding the government of more than $45 million. There are many more examples in our Tax News section.

• Taking Religious Orders There are any number of fast-talking promoters selling schemes that claim you can incorporate yourself as a church and become tax-exempt overnight. In reality, you can become a felon overnight and find thyself living a life that is perhaps more monastic than you had anticipated.

These are admittedly extreme examples. Most of us are diligent, law-abiding, etc., and want to do the right thing, including:

• Be Frugal Most of us can do our own return. It's not necessary to pay big bucks for tax preparation unless you won the lottery, made or lost scads of money or inherited a collection of oil fields. Your return may not be perfect, but commercial tax preparers make mistakes too. Before you hire a tax preparer, review the complaints on our site, so you'll know what to watch out for.

• Need Help? The IRS offers online help at its Web site, IRS.gov. So do numerous non-profit organizations, including ACORN, which is offering free help in 45 cities this year. Chances are your credit union, community center or employer can help you with simple questions, or at least point you to someone who knows the answer.

• File Online It's much better to file your return electronically. It will be processed faster, which means you'll get your refund sooner. You can file an online return using the IRS' "Free File" system, but be careful! The IRS site links you to private providers and some of them charge extra for some services. We hear from many consumers like Maureen, who wound up paying Taxbrain.com $25 for a service she thought would be free.

Note: Many of the IRS-recommended sites don't do state returns, so you will still have to print and mail your state tax return. Be sure to pick a company that offers the services you need.

• Avoid Electronic Filing Fees If you use a commercial tax preparer, you should not have to pay an extra fee to have your return filed electronically. Ask about this before choosing a preparer. Be very suspicious of any tax preparer who charges extra for online filing.

• Avoid Refund Anticipation Loans Also known as "instant" returns, the quick-refund loans offered by major tax preparers, in malls and even on street corners, are a predatory sham of the highest order. The cost is astronomical -- 1700 percent or more. Anyone in urgent need of cash can do much better somewhere else. The only good thing to be said about refund loans is that not everyone can get them.

• Low Income? Remember the EITC This lovely acronym stands for Earned Income Tax Credit. This year, low-income families can claim a credit of up to $4,500, potentially lifting many out of poverty. The IRS offers an online tool that will help you determine if you're eligible.

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If you've had a bad experience -- or a good one -- with a consumer product or service, we'd like to hear about it. All complaints are reviewed by class action attorneys and are considered for publication on our site. Knowledge is power! Help spread the word. File your consumer report now.

August 22 2008

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