Complex tax returns likely call for preparation aid

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QUESTION: With tax season upon us, is it better for me to use a fee-based tax preparer, do it myself or use a free tax preparation service?

ANSWER: If you are an employee or self-employed or a retiree and your income is approximately $52,000 or less, you should consider using a free tax assistance site. Those who earn less than $58,000 and are comfortable with using question-based software such as TurboTax should take advantage of the service provided at this website: myfreetaxes.com/hacbed.

This service, a result of a partnership between HACBED, Aloha United Way, United Way Worldwide and the Walmart Foundation, allows those earning less than $58,000 to prepare and electronically file their federal and state tax returns for free. Under other "free" programs, taxpayers can file their federal returns for free but are typically charged a fee for their state returns. Taxpayers who earn above the income limitations previously indicated but who have fairly simple returns and prefer not to self-prepare can take advantage of the services of paid preparers at chain-type operations. Those with complex returns should probably consult a certified public accountant, enrolled agent or a tax attorney.

Q: What do fee-based tax preparers charge?

A: There are different types of fee-based preparers ranging from CPAs, enrolled agents and tax attorneys to preparers who work seasonally at tax preparation companies that operate large chain-store type businesses. According to a recent survey, average prices range from $180 at a chain preparer to $261. (That’s based on a survey by the National Society of Accountants for a Form 1040 with Schedule A.) Fees generally increase when additional schedules or forms are required to be filed with the basic return.

Q: When would it be wise to use a fee-based tax preparer?

A: In my opinion, anyone who has a complex return — for example, a return involving depreciation, large gains and losses, a partnership, corporation, or any business involving employees, to name a few — should seek the services of a CPA, EA or tax attorney who would be able to represent them in IRS-related matters such as an audit. With limited exceptions, only CPAs, enrolled agents or tax attorneys can practice before the IRS.

Q: Are free tax preparation services reliable?

A: All volunteer tax return preparers are required to train and obtain certification from the IRS before they are allowed to prepare tax returns. There are four different levels of certification — basic, advanced, military and international — and the rules require that volunteers prepare only those returns for which they are properly certified.

The rules also require that each return be reviewed by another preparer before being finalized. Since this program began in 2006, I have not received any complaints about significant errors at any of the sites operated by our partners.

Nationally, a report by the treasury inspector general for tax administration indicated that VITA volunteers had an 85 percent accuracy rate on the earned income tax credit and a 92 percent accuracy rate on the child tax credit and dependency exemption, two areas where the rate of error was much higher among self-prepared and commercially prepared returns.

When considering these "error" rates, however, people should keep in mind that a tax return can only be as accurate as the information provided by the taxpayer. As for concerns about fraudulent tax claims, volunteer sites have nothing to gain by helping taxpayers fraudulently claim large refunds. Our services are free and not tied in any way to the amount of a taxpayer’s refund.

Q: If I didn’t make much money last year and don’t think I owe any taxes, should I still file a return?

A: Yes. Even if the IRS’ guidelines do not require you to file a return, you should file one if taxes were withheld from your paycheck. In most cases, you will receive a refund of those taxes. Last year the IRS announced that it had approximately $917 million in unclaimed refunds that were set to expire (taxpayers have three years to file for their refunds).

Q: Where can I find out about free tax preparation services in Hawaii?

A: Go to our dedicated website at www.hawaiitaxhelp.org for a listing of free tax sites and more information about this program. There is a contact form for those who want to send a question to the program director. Interested persons can also call 211, which is Aloha United Way’s free help and referral system.

Q: Is there anything else you would like our readers to know?

A: HACBED and its partners, which include nonprofits and for-profit organizations, educational institutions, credit unions and religious organizations, have been offering free tax assistance to qualified Hawaii residents since 2006 and recently formed the Hawaii VITA and Financial Empowerment Coalition, the first coalition of its kind in the state of Hawaii which is registered with and recognized by the IRS. As of last tax season, this program has helped more than 21,500 taxpayers save over $3.6 million in tax preparation fees.