Thursday, April 30, 2009

Tax Freedom Day

Ironically enough, on April 16th there was a group of students tabling on the quad at American University, advocating for the abolition of taxes.

These students yelled out to me, "Do you HATE taxes?! We're advocating for the abolition of all taxes!!"

I took one of their post cards which shows the trend of our "Tax Freedom Day" for the past 40 years. The tax freedom day is the day when you start working for yourself, and stop working for the government. This year, Americans only had to work, on average, until April 13th for the federal government. Their wages for the rest of the year are theirs to keep. This method of thinking is alternative to reasoning that about one-third of each day's wages earned goes to the government. Another trend on the post card I received indicates that our tax freedom day, adjusted for the federal budget deficit, is a record high May 29th this year.

A short recap of my tax season:
  • My longest day was 14.5 hours.
  • My shortest day was 4.5 hours.
  • My hardest worked stretch of time was 47 hours in 4 days.
  • Sometimes people receive taxable payouts because someone they know has passed away. It is unbelievably awkward to try asking a client if their significant other is still alive.
  • I received several tax forms from clients that had food on them. I'm not talking about coffee, either. I had a form with a smushed blueberry on the backside.
  • After my last post, I conned Windows Vista into letting me illegitimately beat the Minesweeper basic level in just 9 seconds. My legit record is still 16 seconds.
  • My waist expanded by 0.5" between my first day at work and my last.
  • this is getting a little personal.....

All in all, I learned a lot and I'm glad to have written this blog to chronicle the adventure. I will continue my position at this firm through this summer, and will continue to write about my experiences. My role will be different for the summer months, however, because other accounting tasks begin to take greater precedence.

Your continued readership is much obliged.

Sunday, April 19, 2009

April 15th

My first April 15th at a tax firm was pretty wild. The attitude was serious but relaxed. These feelings are somewhat contradictory, but allow me to explain.

Every member of the team has a few outstanding items, like returns and extensions, that absolutely must be finished by the end of the day. At the same time, excitement flows through the halls as everyone is about the complete their hardest-worked week of the entire year. Some people have vacations planned for the week after April 15th, and others are just happy to get back on a regular schedule.
I completed extensions for most of the day, but at 4:00 PM is when my April 15th began to take off. Follow along:
4:00 PM - Extensions finished, time to begin stuffing envelopes.
4:30 PM - Envelopes are stuffed, ready to make Post Office run number one.
4:40 PM - The post office nearest the firm is closing at 5:00 PM, so I will stuff my back-pack with hundreds of pieces of mail (it was raining) and scurry down the street.
4:55 PM - Remarkably, there was no line at the post office, and the clerk was kind enough to "circle-stamp" all the envelopes right in front of me. The circle-stamp reads "April 15th" on it. Score one for the clients.
5:05 PM - Back at the firm, reporting the good news (the mail made it). Time to rest for a moment as my hair dries out.
5:08 PM - Cleared the minesweeper basic level in 16 seconds flat. See below.

5:10 PM - Time to learn some new software before the next task arrives at my desk. I've decided to run the training tutorials in QuickBooks. Knowing this program will help in my current position later on.
6:30 PM - Begin reading Form 1040 instructions. There are some things about the by-hand mathematics of taxes that I want to figure out. I'll only get through a few pages of this tome, but at least it's pretty understandable.
7:15 PM - Things are beginning to wind down. The time has come to choose who will be making the late-night downtown post office run.
The only post office in and around DC that was open until midnight this year was the one next to Union station, at 2 Massachusetts Ave, NE, Washington, DC. Other offices were open until 8:00 PM, but because of the economy, the USPS has made cuts. Normally, two members of the firm must make the late-night downtown post office run, but this year's journey was absolute horror because of the fact that everyone in a 50 mile radius was having to come to DC to mail their taxes given all the early closings elsewhere.
8:00 PM - I and another junior member of the team have been chosen for the "honor" of going to the post office.
9:00 PM - After some more reading and a cup of coffee, we leave for the post office.
I will add that the early closing of post offices everywhere other than DC was not well publicized, and a completely reckless act on the part of the US Postal Service. The chaos that the USPS caused in downtown DC should be illegal. It was pouring rain, the cars were not moving ANYWHERE, and drunkards from the Irish pub across the street from the post office were dancing in the roadways.
Two people make the late-night post office run in DC because one drives while the other gets out and takes the mail as close to the front doors of the office as possible. I was the driver. I waited briefly on F street for my partner to return from the delivery, and when I wanted to leave, I couldn't. Still in front of the pub, someone was dancing around near my rear bumper, and I couldn't back out. It. Was. Crazy.
This, my first April 15th, was one to remember. Not like my first day of high school, where in my first class all the teacher gave us to do was pop bubble wrap.
I am glad the tax season is over. School is beginning to heat up, with projects and exams coming quickly.

Wednesday, April 8, 2009

Extensions, Tax Planning, IRS Indebtedness

I have been swamped with extensions. Federal Form 4868 is my new best friend.

It is true that there are too many returns to finish all before April 15th, but some clients either want to go on extension or must go on extension.

Some clients can try to avoid paying all the tax they owe by the deadline, but the IRS is smart. Taking a look at this informational page, you can see that the penalties are stiff for both failing to file and failing to pay adequate tax in time. People can't just not pay tax and then expect to collect interest on whatever they owe while their extension gives them 6 months to think about what they're doing.
On the other hand, some clients have yet to receive all their tax documents from sources of income or expense. It is possible to complete a tax return with only the information that is known at the time of filing, but then an amended return must be completed at a later date, once all the paperwork is in order and the return can be regenerated. It's easier just to "go on extension."

Extensions are really tricky though. Sometimes big pieces of the puzzle are missing and it can be very difficult to determine whether a client needs to write the government a check by April 15th just in case, or if the client has actually already paid enough tax through W-2 withholding.
---Explanation of Form W-4---
Withholding of tax from an employee's paycheck is something that Form W-4 helps people figure out each year. This "Employee’s Withholding Allowance Certificate" has a worksheet attached which asks questions about a person's living status (dependents, etc.). Based on the answers to these questions, a person can determine their number of exemptions. It is this number which helps a company determine the right amount of tax to withhold from an employee's paycheck. Because people have other sources of income besides their job and can have really huge deductions, the Form W-4 is not the solution to determining a total tax figure. Rather, tax planning professionals, like at the place where I work, help in determining what someone's projected tax liability looks like.

---Transition from W-4 to Estimated Tax Payments---

Some people have to make "estimated tax" payments based on what they think they'll owe the IRS at the end of the year. I would venture to say that at least the simply majority of high net-wealth clients make quarterly estimated tax payments.

I see these commercials on television all the time reaching out to people who are in debt to the IRS. They say, "Do you owe the IRS $10,000 or more? $50,000? $100,000 or even more???" ... NO, I don't owe the IRS a hundred-thousand dollars!!! I used to ask myself, 'how can there be people out there--like these seemingly average looking people on the television--who owe the IRS anything more than $10,000?' I used to legitimately wonder, but since working at the tax firm, it's become very clear to me at least one way in which someone can stack up IRS debt of n dollars and beyond. Read on...

Something I've noticed about the W-2s of people who make a LOT of money is that the company never withholds and remits nearly enough tax to the IRS. For example, a W-2 showing $1,000,000 in salary payments might only have withholding of federal income tax of $210,000, which isn't nearly enough, especially since the tax rate caps off at 35% for all income above $357,700 for 2008. Assuming 'married filing jointly' and deductions (expenses, taxes paid, charitable contributions, etc.) of $200,000, this big earner is still going to owe $251,575 in federal income tax.

The IRS will assess a penalty at the end of the year if this person really owes $41, 575 ($251,575 - $210,000). So, anticipating this underpayment of tax, the client should divide the estimated amount owed by 4 quarters, and submit a payment every 3 months, roughly, so that total tax liability and total tax paid come out as close to even as possible at year end. This is tax planning in its simplest form.

Imagine this though:

Joe the Plumber starts working in 2007 and earns $40,000. Then in 2008 he discovers a way to work 10 times as fast. All of a sudden, it's December 31st and Joe's made a ton of money. He didn't anticipate earning this much (because inspiration strikes like lightning and can't be anticipated), so he didn't make any estimated tax payments to the IRS throughout the year. Joe spends all his newly attained wealth before March 25th (an arbitrary date) when his tax accountant tells him he owes the IRS a huge amount.

THIS is how someone can suddenly owe the IRS an enormous sum of money. They don't have enough withheld to begin with, and then they spend what they've earned before realizing they owe lots of tax.


Tax withholding is the only way the income taxation system in this country is able to function. If tax wasn't withheld, not enough people would have the discipline to set aside their estimated tax payable until year end.

Sunday, April 5, 2009

Subtractions from Income

I've begun working on extensions! Many many extensions. The time has come that if there are returns that won't be finished in time to be reviewed properly, then they are to go on extension. I am using the computer system to make extension forms for Federal and State governments. The process is a little quirky to learn at first, but I think I have the hang of it now. It's simply a matter of getting used to the software, Prosystems fx.

In other news, I worked on a return that had a very obscure Maryland state deduction. After I put the monetary value of the deduction into the computerized form, I had to classify the deduction with a code, so that the state knows what the deduction is related to. When I say deduction, I mean what the state technically calls a "Subtraction from Income."

When I looked up the codes to use for different, special deductions, I noticed a whole bunch of strange things that people can subtract from their income in the state of Maryland. I've opted to list three of these:

1) Cost of conservation tillage equipment.

2) Value of farm products donated to a gleaning cooperative.

3) Purchase cost of manure spreading equipment.

Talk about random... My best guess would be that a particular lobbying group has worked very hard over the years to get these provisions put into the Maryland state tax code. To the majority of people though, these potential subtractions from taxable income seem quite useless, I imagine.

The work I am doing at the tax firm is interesting and generally not boring, but I am looking forward to the end of tax season. April 15th will mark the day when I get my Saturdays back. Because I've been working on Saturdays, my weekend is really only 1 day. As such, I have these three-day class/work cycles that seem to loop infinitely without giving me any time to take a breath.

P.S. Thanks, "Anonymous" and "Kiersten" for your comments! But seriously though, why on earth would anyone name their kid "Anonymous?"