Preparing and Filing Your Tax Return

Don't pay more – or less – income tax than the law requires.

In response to complaints from taxpayers and Congress, the IRS has spent a great deal of time and money trying to design forms that will simplify the process of paying your federal income taxes. Yet many Americans still find themselves bewildered about which forms to use and how to complete them.

Even with simplification, completing anything more complicated than a Form 1040-EZ (the simplest tax form) can take hours of compiling records, reading instructions, and filling out the appropriate forms and schedules. By its own estimates, the IRS figures it will take the average taxpayer 3 hours and 34 minutes to complete the most recent Form 1040, and another two hours to complete both Schedule A (Itemized Deductions) and Schedule B (Interest and Dividend Income). That's in addition to the more than 6 1/2 hours you'll spend gathering the necessary documentation and reading instructions on filling out the forms.

As a result, about half of all taxpayers seek outside help in preparing their tax returns, and many others rely on the wide variety of tax preparation guides and software published each year.

There are several kinds of professional help available to assist you in preparing your tax return. If your income is relatively modest and your return isn't too complicated, you may want to consider the use of a tax preparation firm such as H & R Block, which charges set fees for preparing your tax forms. These fees vary with the complexity of your return, but they tend to range from around $50 to $100 for most relatively simple returns.

If your return is more complex, or if you need tax planning assistance, you can have your returns prepared by an accountant or CPA. Accountants hourly fees for preparing tax returns generally run upwards from $75 per hour, and having your return prepared by an accountant or CPA will generally cost several hundred dollars or more.

You may also want to consider using one of the nation's approximately 30,000 "enrolled agents" to prepare your tax return. Enrolled agents have been certified by the IRS after taking an examination administered by the Treasury Department regarding tax laws. They must also spend at least 72 hours every three years attending refresher courses in order to maintain their enrolled status. And enrolled agents who belong to the National Association of Enrolled Agents are required to take at least 30 hours of tax course annually. Generally, having an enrolled agent prepare your return will cost you somewhere between what you would pay at a tax preparation service and the fee a CPA would charge.

If you are over 65, another form of tax preparation assistance may be available. In most parts of the country, college students majoring in accounting or law will help prepare simple income tax returns for senior citizens, often at no cost to the individual. You can find out about programs of this type in your area by looking for announcements in your local newspaper beginning each January. If your community has a council on aging, or department of senior citizen affairs, it should also be able to provide you with information about the availability of these or other volunteer tax preparation programs in your area.

Remember that no matter who actually prepares your return, you remain responsible for its accuracy, and any misstatement of income or deductions can lead to the IRS assessing back taxes, interest and penalties. For that reason, it's important that you have your tax preparer take the time to explain how he or she arrived at your tax liability figures.

If you don't understand the preparer's explanation, it may be worthwhile to have the forms reviewed by another, independent tax preparer. However, just because two tax preparers disagree about the way to prepare your return doesn't mean that either of them is necessarily lax or negligent. Remember that interpretations of the tax laws can vary, and a more aggressive tax preparer may feel that you are entitled to credits and deductions that a more conservative one would not. To some extent, you will need to rely on your own judgment and the comfort level you feel about filing an aggressive return with the IRS.

You can also call the IRS for advice about particular aspects of your tax return, but be forewarned that some studies have shown that IRS telephone advice is incorrect as often as 40 percent of the time. And even if you rely on the IRS for information in preparing your return, you may not be able to avoid additional taxes and interest simply because the IRS operator you spoke with gave you the wrong advice. The only advice from the IRS that protects you later from attempts to impose additional taxes and penalties is advice you get in writing -- and the IRS doesn't give written advice freely.

Remember to keep copies of any records you provide to your tax preparer. The U.S. Tax Court has ruled that you are responsible for substantiating the deductions you claim on your tax return. The fact that your tax preparer lost the records supporting your return does not excuse you from this obligation.

You are also responsible for ensuring that your return is sent to the IRS on time, or that any necessary extensions for filing are sent before the April 15th deadline.

While April 15th has become the most dreaded day on many taxpayers' calendars, it is possible to receive an automatic four-month extension for filing your income tax return. To do so, you'll need to file IRS form 4868 by April 15th. By filing this form, you will be able to delay filing your tax return until August 15th. If you need even more time and you can show a good reason for needing another extension, the IRS may grant an additional filing extension until October 15th.

Keep in mind that while you can receive an extension of time for filing your return, you won't receive an extension for paying taxes, which are still due on April 15th. By that date, you will have to make an estimated payment of what you owe. If your estimate is too low, you will be faced with a 1/2 percent per month penalty as well as interest on the balance you owe when you complete your return. Of course, if you overestimate your tax liability, you will receive a refund of the amount you overpaid.

What happens if your tax return contains an error? Of course, you'll be required to pay any additional tax you owe, along with any interest or penalties that may have accrued. However, some tax preparers will agree to pay the interest and penalties if the error was their fault. Find out your tax preparer's policy in advance and get it in writing, since penalties and interest can be hefty additions to your tax bill.

If you discover an error after you've filed your return, you may be able to sidestep any penalties if you file an amended return listing the additional income. And similarly, if you discover that you failed to take a legitimate deduction or credit on your return, you can file an amended return and ask for a refund of the amount overpaid.