How to avoid red flags when you change tax prep
Taxes are one of the few constants in life, but what happens when you change the way you do your return?
People move or get divorced, tax preparers pass away. There is always the lure of do-it-yourself - the number of people using tax software to file, like Intuit's TurboTax, increases by 6 percent annually, according to the Internal Revenue Service. And then there is the reverse exodus of people who have decided their financial lives are too complicated, and they need to hire a professional.
With so many changes, consistency takes a beating. If you are on the wrong end of it, you could end up drawing the dreaded attention of the IRS.
Here are the items that can trip up taxpayers when they switch the way they do their taxes:
1. Mileage logs
When John Dundon took over his father's tax business after he passed away last July, the biggest surprise for the Denver, Colorado-based tax preparer was that road-warrior clients were not keeping mileage logs.
"Boundaries erode all the time between practitioner and taxpayer," Dundon says. Laziness seeps in disguised as trust, and years later, there are simply no logs.
Dundon tells his father's crossover clients they need a renewed zeal for paperwork - get a GPS device or a smart phone app for next year. For 2014 taxes, he is asking clients meticulously through calendars and maps to sort it out.
2. Rental property depreciation
Depreciation is a deduction you can take on certain assets, like rental property. The tax impact can be pretty significant, especially if you are trying to off-set income like rent.
The dollar amount is determined by a formula you follow year-after-year, called a depreciation schedule, which could run almost the full course of a 30-year mortgage.
"You definitely need that schedule. You can try to guess at it, and you'd probably be okay, but you wouldn't be doing it 100-percent right," says tax preparer Anil Melwani, who runs his own firm, 212 Tax & Accounting Services, in New York.
If it was not done at all previously or done wrong? You'll need to file an amended return to correct it, Melwani says.
3. Carryforward losses
The IRS allows taxpayers to take $3,000 in losses a year on investments, and to carry forward those losses indefinitely until the amount is all used up. But use it or lose it - meaning, if you miss a year because you forget, you can't pick it up in the following years as if nothing happened.
Harvey Bezozi, who has his own firm in Boca Raton, Florida, has a new client this year who will likely have to file amended returns because she skipped over this with her last preparer.
4. Home office
Taking the home office deduction? Stay consistent with the square footage of your home office. The best way to do that is to get out your tape measure and only include space that you use exclusively for work.
If there's a pingpong table in the middle of the basement study you're trying to claim, that's a no-go, says Dundon.
5. Life changes
There is a lot that a new tax preparer - or a tax software autobot - can learn about you by just looking at your past returns, but their questionnaires will not catch everything. If you have a baby, buy a house, get divorced, have income in a foreign country or have job-hunting related expenses, you've got to speak up.
But things can get missed when people do not know enough to know what they are missing. That's what drove a DIY-type like Ben Jaffe into the hands of a paid tax preparer this year.
Jaffe, a 29-year-old who works in PR in New York, bought a house in 2014 while his wife had a baby. He made the switch away from tax software because, he says, "I wanted an expert opinion to verify that I was doing everything right."
One hour and $500 later, he's feeling confident: "It saved me a lot of time and stress."