AVOIDING COMMON MISTAKES TO ERR IS HUMAN BUT QUALITY REVIEW IS DIVINE

1. AVOIDINGCOMMON MISTAKES TO ERR IS HUMAN BUTQUALITY REVIEW IS DIVINE Dec. 6 and 7 2013

2. Agenda • Purpose of this session • Sources for presentation • Federal “Challenges” • Oregon “Challenges” • TaxWise “Challenges” • Open Discussion – what did we miss?

3. Purpose • To give returning students information about common mistakes and how to avoid them with the objective of improving our quality

4. Sources for Presentation 4 • DC’s, LC’s, CASH, Volunteers • U.S. Treasury Inspector General for Tax Administration (TIGTA) Audit Report • http://www.treasury.gov/tigta/auditreports/2013reports/201340110fr.html • Volunteer Tax Alerts (VTA) and Quality Site Requirement Alerts (QSRA) • http://www.irs.gov/Individuals/Quality-and-Tax--Alerts-for-IRS-Volunteer-Programs (Current Year) • http://www.irs.gov/Individuals/Previous-Year-Quality-and-Tax-Alerts-for-IRS-Volunteer-Programs (Previous Year)

5. Accuracy of Tax Returns at Volunteer Program Sites 51%

6. Federal Challenges • Interview and Quality Review Procedures 13614-C • Taxpayer Information • Scope • Filing Status • Exemptions • Income • Adjustments • Tax Deductions, Credits • Payments • Amount you Owe

7. Interview and Quality Review Procedures • Inconsistent Adherence to Quality Procedures leads to Inaccurate tax returns (TIGTA Audit Report) • Not obtaining sufficient information to apply tax law correctly • Not following intake/interview procedures • Not following quality guidelines • Not applying tax law correctly • Quality Site Requirements Alert (QSRA) 2013-03 • All volunteer return preparers supporting TCE programs must use Form 13614-C, Intake/Interview & Quality Review Sheet for every taxpayer.

8. Interview and Quality Review Procedures • Verification of the taxpayers’ identity. It is more critical than ever to ask taxpayers for proof of identity and social security numbers to avoid the potential for identity theft or tax fraud. Quality Site Requirement Alert (QSRA) 2013- 01 • Advising taxpayers of their ultimate responsibility for information on the return and that by signing the return, the taxpayer is guaranteeing under penalty of perjury that they have examined the return and its accompanying forms and schedules for accuracy. • Explaining the tax return preparation process to the taxpayer and encouraging him or her to ask questions throughout the interview process.

9. Interview and Quality Review Procedures Completing Form 13614-C. Confirming the taxpayer’s responses provided on the Form 13614-C. Resolve “unsure” entries. Reviewing supporting documentation and confirming with the taxpayer that all income was discussed and noted on the Form 13614-C to ensure that it will be included on the tax return. Exercising due diligence when preparing tax returns, including asking a taxpayer to expand on information that may not appear to be true or accurate.

10. Quality Review Procedures • In the TIGTA Audit, all 19 tax returns prepared incorrectly did not follow one or more of the quality review requirements.  • For 16 (84 percent) incorrect tax returns, quality reviewers did not review the entire Form 13614-C. • For 12 (63 percent) incorrect tax returns, auditor/client was not involved in the quality review process. • For four (21 percent) incorrect tax returns, no quality review was performed.

11. Taxpayer Information • Misspelled names, especially for the Hispanic hyphenated last names • Not checking an ITIN letter for the correct spelling, as defined by the IRS, of the taxpayers name • Incorrect addresses – be sure to verify address from the 13614-C and not just let it default from prior year. Double check apartment numbers/letters. • Incorrect Social Security Numbers (Information worksheet, EIC, Education Credit)– often transposed digits, hard to catch, need to read backwards

12. Taxpayer Information Incorrect Date of birth, particularly for dependants Failure to enter a taxpayer phone number and/or cell phone number (Makes it tough to contact them if there is a problem!) Failure to change a W-2 to reflect the SSN being used by an immigrant who is filling using an ITIN. TaxWise now underlines the SSN box on the W-2

13. Scope • Current scope for Program – be sure to emphasize what is and what is not in scope • Volunteer Portal, Tax Law Training, Training Documents tab, In and Out of Scope Poster C2467 and AARP Tax-Aide Scope Manual TY13 • We are not obligated to prepare all tax returns for all taxpayers. Denying service is not easy, but if you feel the taxpayer is: • providing misleading information; or • the return is out of scope; or • you just aren’t comfortable with the return; Don’t do it!

14. Filing Status – New Chart • Dependents/HoH/EIC • Special considerations for child with divorced or separated parents • Custodial parent gets HoH, CDCC and EIC; non-custodial parent get dependency and CTC • A child does not have to be a dependent to be claimed as a Qualifying Child for EIC purposes • Difference between Qualifying Child or Qualifying Relative

15. W2 & 1099 Income • Failure to override the W2 address if it is different from Main Info address • Failure to enter the correct EIN and spelling of business name on W2 or 1099 • If income from a 1099R is for a disability payment, be sure to check the box that will cause the income to be classified as wages on the 1099 form.

16. Self-Employment Income • Accuracy rate for Schedule C expenses was 69 % in the TIGTA Audit. • Preparers are omitting cash income or are erroneously reporting self-employment income as other income on Form 1040, line 21. • Grandparents receiving payments for child care of grandchildren is reported as miscellaneous income (unless they are doing childcare as a business.) Tax court ruling: http://nafcc.org/media/pdf/businessCenter/SteeleCase.pdf

17. Self-Employment Income You can't deduct phone expenses for the first phone line. Reference is 2012 Pub 535 page 46. Self employed tax payers, using their car within their metropolitan area (aka tax home), who are not claiming business use of home, cannot claim business mileage for the trip from their home to their first business contact nor can they claim business mileage for the trip from their last business contact to their home. Reference is 2013 Pub 17 page184-185.

18. Refund of State and Local Taxes • If there was a state refund received from last year’s taxes, this may be taxable to the feds if the taxpayer itemized the prior year. • If it's an Oregon refund that is taxable to the feds, this is not taxable to Oregon. • If it's another state refund that is taxable to the feds, this is taxable to Oregon, too.

19. Adjustments • Educator Expenses – Accuracy rate for the Educator Expense deduction was 54% in the TIGTA Audit. • Qualifying Educator for grades K-12 must work at least 900 hours during a school year as a teacher, instructor, counselor, principal, or aide. • Educators may subtract up to $250 of qualified expenses. This deduction is available whether or not the taxpayer itemizes deductions. • Volunteers did not include the deduction on the auditors’ tax returns because they did not completely review the Form 13614-C

20. Adjustments • IRA - the accuracy rate for the IRA adjustment was 46% in the TIGTA Audit. • Volunteer Tax Alert 2013-02 February 26, 2013 highlighted the IRA • Taxpayers can reduce taxable income by contributing money to a traditional IRA. Contributions to IRAs can be made as late as the first due date of a tax return and can be considered retroactive to the previous tax year. Contributions up to certain limits can be subtracted from Adjusted Gross Income. • Volunteers did not include this deduction because they did not completely review the Form 13614-C.

21. Tax, Deductions & Credits • Volunteers incorrectly denied deductions and credits on returns because supporting documentation was not provided. • There are no specific guidelines requiring that taxpayer provide receipts to volunteers to support the deduction or credits claimed. • Be sure to warn taxpayers that if the IRS asks for documentation, they need to be able to document deductions. • If there was a state tax balance due from last year’s return, this can be a deduction on federal Schedule A

22. Education Credits When Scholarships exceed qualified educational expenses on a 1098-T, the difference is taxable to the feds.  You may be able to subtract this on Oregon using the "Taxable Scholarships Used for Housing Expenses" Subtraction (subtraction code 333). Here is one example for 2013: Client has a 2013 1098-T that shows $3000 tuition paid and $5000 in scholarships received. They had $500 expenses for text books purchased from Amazon that were not a condition of enrollment and $1000 for housing. They are fully qualified for an American Opportunity Credit. • Is there a taxable scholarship in 2013? How much? • Yes, $5000-$3000-$500= $1500 on 1040 Worksheet 1 • Is there an education credit in 2013? What are the adjusted qualified Educational Expenses? • No, $0 • Is there any subtraction needed for Oregon purposes in 2014? • Yes, OR Subtractions, Code 333 $1000

23. Education Credits In 2014, the 1098-T shows $3000 tuition paid and no Scholarship. There were $500 expenses for text books purchased from Amazon that were not a condition of enrollment and $1000 for housing expenses. They are qualified for the Lifetime Learning Credit this year. • Is there a taxable scholarship for 2014? • No • Is there any subtraction needed for Oregon purposes in 2014? • No • Is there an education credit for 2014? What are the adjusted qualified Educational Expenses? • Yes, $3000

24. Credit for Qualified Retirement Savings Contribution • Only 62% of the TIGTA audited returns had the credit correct • Taxpayers may be eligible for this credit if they made deferrals to a 401K or an IRA or other qualified plan and have AGI of less than $28,750 (Single), $43,125 (HOH), $57,500 (MFJ). Use form 8880 • Volunteer Tax Alert 2013-02 February 26, 2013 http://www.irs.gov/pub/irs-utl/VTA_2013-02_Retirement_Savings_Contributions.pdf

25. Amount You Owe - Penalties • Penalty calculations are out of scope for both Federal and Oregon. • Volunteers sometimes don’t notice that a penalty has been assessed. • If TaxWise is calculating a penalty for federal, go to the 2210 pg 1 form and type a 1 in line 8 in the blank after "2012 tax:" This will eliminate the federal penalty in TaxWise. If TaxWise is calculating a penalty for Oregon, go to the OR 10 pg 1 form and type a 1 in line 8 "Enter the tax shown on your 2012 return after nonrefundable and refundable credits - see instructions." This will eliminate the penalty Oregon penalty in TaxWise.

26. Amount You Owe - Penalties Always tell clients that there almost assuredly will be penalties and interest for underpayment; it's just that calculating them is out of our scope. Also tell clients to expect a letter from Oregon and/or federal with the amount of penalties and interest due. Investigate ways to avoid the penalty and interest in the future. Increasing the amount of withholding is an option. Alternatively, discuss and set up Estimated Tax payments in TaxWise.

27. State Challenges • Federal Pension – tax exemption and box 2 on 1099 checked. Complete OR Wkt2. • Special medical deduction is now a subtraction, so seniors 62 and older don’t have to itemize to get the benefit. Code 351. • Forgetting to subtract federally taxable scholarship income that was used for rent. Code 333. • Knowing about Elderly Rental Assistance.

28. ERA Program for Oregon • While few people qualify due to income and asset limitations, this program is for the very neediest seniors • You or your spouse/registered domestic partner(RDP) were age 58 or older on December 31, 2013; and • You and your spouse’s/RDP’s household income was under $10,000; and • You paid more than 20 percent of your household income for rent, fuel, and utilities; and…

29. ERA Program for Oregon 30 • The total value of you and your spouse’s/RDP’s household assets is $25,000 or less (if you or your spouse/RDP are age 65 or older on December 31, there is no limit on the value of household assets); and • You rented an Oregon residence that was subject to property tax or PILOT; and • You lived in Oregon on December 31; and • You didn’t own your residence on December 31

30. TAXWISE • Do not override income for social security wages and Medicare wages on W2 when there is a contribution to a retirement account (Box 12, code D-G). Enter box 12 code and they will be calculated correctly. • Put estimated payments in the right place on the form: Line 63 linked to F/S Tax Paid worksheet in TaxWise. • Always use Schedule C, not C-EZ, for self-employment, but using Tax-Aide limitations: (expenses less than or = $10K, no employees, no losses, no inventory, no depreciation)

31. TAXWISE 32 • Resolve all “red” entries in the forms tree. • Fill out the Capital Gains Worksheet correctly. All gains/losses flow to Forms 8949 and Sch D. • Enter an explanation at the bottom of Main Info for Rejected and Waiting for Info returns or use the Taxpayer Diary to make notes about the status of the return. • Remember to set return status of each return.

32. Open Discussion What did we miss?