Tax preparation is the process of completing tax forms required by the IRS and/or state tax authorities.  Individual taxpayers and businesses can prepare tax returns on their own or with the help of a professional tax preparer. One of the advantages of hiring a professional tax preparer is that a qualified professional typically will have a deeper and more precise understanding of the tax code than the average taxpayer. This expertise and experience can help a taxpayer better determine the expenses and circumstances that qualify them for tax deductions, credits, and other financially favorable allowances.

There are three types of tax practitioners that have an elevated status of “unlimited representation rights” before the IRS: enrolled agents, certified public accountants, and attorneys. Tax professionals with these credentials may represent their clients on any matters including audits, payment/collection issues, and appeals. Here are the basic qualifications behind each of these credentials, per the IRS: 

  • Enrolled Agents – Licensed by the IRS. Enrolled agents are subject to a suitability check and must pass a three-part Special Enrollment Examination, which is a comprehensive exam that requires them to demonstrate proficiency in federal tax planning, individual and business tax return preparation, and representation. They must complete 72 hours of continuing education every 3 years.
     
  • Certified Public Accountants – Licensed by state boards of accountancy, the District of Columbia, and U.S. territories. Certified public accountants have passed the Uniform CPA Examination. They have completed a study in accounting at a college or university and have met experience and good character requirements established by their respective boards of accountancy. In addition, CPAs must comply with ethical requirements and complete specified levels of continuing education in order to maintain an active CPA license. CPAs may offer a range of services; some CPAs specialize in tax preparation and planning.
     
  • Attorneys – Licensed by state courts, the District of Columbia or their designees, such as the state bar. Generally, they have earned a degree in law and passed a bar exam. Attorneys generally have on-going continuing education and professional character standards. Attorneys may offer a range of services; some attorneys specialize in tax preparation and planning.

When to File  

The tax filing deadline usually takes place on April 15, however, due to the ongoing pandemic and the distribution of multiple stimulus checks in 2020, February 12, 2021 was the first date the IRS accepted and processed tax returns for the 2020 tax year. May 17, 2021 was the due date for most taxpayers to file their 2020 income tax returns. Taxpayers who are living in a state where a national emergency was declared have until June 15, 2021 to file their return.

Filing Taxes Late

If you do not complete your tax preparation on time or file your return by the due date, you may be subject to a failure-to-file penalty and/or interest. To avoid penalties and interest, you would have to file for an extension prior to the tax deadline.

If you are due a refund, but you did not file a tax return, you must file within three years from the date the return was originally due to obtaining that refund.

W2s, 1099s and other Tax Documents

Individuals preparing to file their taxes need to first ensure that they have gathered all the tax documents required to accurately file. Taxpayers who fail to include certain tax information on their tax return could risk a delay to any tax refund they may be owed and may have to work with the IRS to correct errors on their return.

Income

Arguably the most important documents needed to complete a return are income documents. Usually these come in the form of W2 Forms and 1099 Forms.

W2 Forms: This is the most common income reporting form issued to typical wage-earners. In addition to showing your annual earnings, it also shows the amount of taxes withheld from your paycheck, including taxes for Medicare, Social Security, and state taxes, if applicable. Employers are required to issue out your W-2 by January 31. Taxpayers should be on the lookout for a physical copy that is sent in the mail as well as an electronic copy.

1099 Forms: There are various types of 1099 forms that can be distributed to an individual based on the type of work or service they provided. For example, 1099-NEC forms are known for contract work. If you received credit or debit card payments, or you received 200 or more payments totaling $20,000 or more through a third-party payment processor such as PayPal or Amazon, then you should receive a 1099-K form from the third party that handled your payment processing.  If you earned at least $600 in rent, prizes, royalties or other qualifying income sources, then you will be issued a 1099-MISC. Individuals who have investment earnings will receive a 1099-INT form for interest,1099-DIV for dividends, and 1099-B forms for broker-handled transactions.

Tax Documents

In addition to income statements, taxpayers will also need to collect the following information for their tax return to be prepared and filed correctly:

Prior years federal and state tax return: In some cases, it may not be necessary to utilize past year returns to file. However, if you are struggling to complete your return, referencing your return from the year before may help remind you how you filed and what you qualify for.

Social security numbers for you, your spouse, and any dependents: In addition to children under 19, elderly parents, certain students, adult children with disabilities, and others can qualify as dependents on your tax return.

Individuals, Corporations, Partnerships, LLC/LLP, Estates, Trusts & Gifts

 Standard C corporations are taxed on the corporate level based on their reported profits, while their shareholders are taxed on any after-tax profits the corporation distributes to them in the form of dividends.

Profits produced by partnerships, sole proprietorships, S corporations and limited liability companies (LLCs) are not directly taxed. Instead, they’re considered pass-through entities, where taxes on profits are assessed only at the individual level to owners/shareholders who are required to report their share of the business’s profits (or losses) on their personal tax returns.

Although not directly taxed as separate taxable entities, most partnerships and S corporations are still required to file an annual federal return at the entity level.  Sole proprietorships and LLCs, however, are not required to file a federal return at the entity level. Instead, the owners of sole proprietorships and LLCs report their share of the organization’s profits and /or losses as part of their personal tax return. 

LLCs have the additional option to be taxed as a sole proprietorship, partnership, or corporation. LLPs on the other hand, are required to file as a partnership.

An estate tax is a tax on a person’s assets after death. If an estate is large enough, it may be subject to federal estate tax. As of 2021, the threshold for a taxable estate was $11.7 million. Federal estate tax rates can range from 18% to 40%, and depending on what state you live in, there may be additional estate taxes to pay at the state level. Generally, assets spouses inherit are not subject to estate taxes.

Beneficiaries who receive distributions from the trust’s principal balance do not have to pay taxes on the distribution. The IRS views this money as already taxed before it was even placed into the trust. Once the money is placed into a trust, the interest it accumulates is considered taxable as income, either to the beneficiary or the trust itself. The trust is required to pay taxes on any interest income it holds past the end of the tax year. Interest income the trust distributes is taxable to the beneficiary who receives it.

Gift tax is considered a federal tax on transfers of money or property exceeding $15,000 to another individual or individuals in which the transferrer of the money or property receives either nothing or an amount worth less than the transferred value in return. If a gift is $15,000 or more in a year, you will be required to file a gift tax return by filing IRS Form 709 to disclose the gift. The person that receives the gift usually does not need to report the gift.

Not-For-Profit and Nonprofit Organizations

Not-for-profit and nonprofit organizations are tax-exempt entities. While the terms not-for-profit and nonprofit are often used interchangeably in casual conversations, within the tax code, they are in fact two separate types of organizations. Each is regulated by a different set of federal statutes and requirements for maintaining tax-exempt status, including different rules governing how these organizations can distribute funds to their respective members, directors, owners, and staff.

In most cases, not-for-profits are not allowed to generate profits for owners. Instead, any money that is earned by or received through donations is utilized to fulfill the organization’s objective and keeping the organization running. Generally, these types of organizations are considered tax-exempt charities or other types of public services organizations and are not required to pay any taxes.

In nonprofit organizations, income is typically not distributed to the other group’s members, directors, or officers. Nonprofit organizations engage in activities for both public and private interest without pursuing the goal of commercial monetary profit. Nonprofits are also exempt from federal income taxes under subsection 501(c) of the IRS tax code.

In order for either a not-for-profit or a nonprofit organization to be tax-exempt, they must meet the following requirements:

1. Be organized and operated exclusively for charitable, scientific, religious, or public safety purposes.

2. Collect income and turn over the entire amount (minus expenses) to organizations or individuals who are lawfully recognized as legitimate charities.

Credits and Tax Deductions 

Taxpayers looking to maximize their tax refund (or minimize the amount they owe) should take advantage of any tax credits and deductions they may qualify for.

  • Credits can reduce the amount of taxes you owe.
  • Deductions can reduce the amount of your income before you calculate the tax you owe.

Tax credits and deductions can significantly increase your tax refund, or if you owe the IRS, credits and deductions can help lower your tax bill.  Taxpayers can look into the following credits and deductions to see if they qualify:

Credits for Individuals:

  • Family and dependent credits
  • Income and savings credits
  • Homeowner credits
  • Healthcare credits·       
  • Education credits

Deductions for individuals:

  • Work-related deductions
  • Itemized deductions
  • Education deductions
  • Healthcare deductions
  • Investment-related deductions

Electronic Tax Filing  

The IRS has done quite a bit of work in recent years, updating itself for the digital age. In fact, the IRS now recommends that taxpayers “e-file” (meaning, file their returns online) rather than mailing in traditional paper forms. And according to the IRS, taxpayers filing online will often receive their tax refunds faster if they file online. The IRS has a terrific resource page that provides information on the IRS’s official free e-filing program as well as on independent tax professionals and software that are authorized by the IRS for e-filing at https://www.irs.gov/filing/e-file-options.

Filing a Paper Tax Return  

Taxpayers still have the option to file their tax return on paper and mail it to the IRS. However, the processing time is much longer – with refunds on paper returns taking up to eight weeks or more, while e-filers usually receive their refunds in three weeks or less. And be sure to double-check that you’re mailing your return to the correct IRS office. The IRS has scores of offices across the country, and each office is set up to process specific kinds of returns. The proper office for mailing your return to depends on your state of residence, the type of return your filing, and whether your return includes a tax payment. Also, remember that you may be mailing your return to a different address than in the past because the IRS does occasionally change the locations of its processing centers.

Tax Preparation Services at Optima Tax Relief

Everything listed above is a tax preparation solution that Optima Tax Relief is more than happy to assist you with. In fact, we have an entire team of tax preparation specialists dedicated to this core service. So, if you’re struggling with your taxes or haven’t filed returns for past tax years, rest assured we are here to help. Call today for your free consultation!

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