Tax deadlines change for Northeasterners, TurboTax users

High drama isn't how most people would describe life within the IRS, but when I think of this week's events, that's the image I get. Imagine frenzied hallway conferences and hastily-scheduled meetings to react to breaking news, followed by a raft of ad hoc filing date extensions.

On Monday, the massive Northeast storm forced the agency to extend the federal tax-filing deadline for two days for affected taxpayers and professionals. Tuesday evening, the horrible killings at Virginia Tech resulted in a 6-month extension for those directly and indirectly involved. Last night, several hundred thousand taxpayers and professionals using TurboTax and other Intuit products got stuck in a server traffic jam that forced the IRS today to extend their deadline to tomorrow at midnight (click here for Intuit's instructions on re-filing). Shortly after that, the IRS decided to extend the Nor'easter deadline further, to midnight on April 26.

I commend the IRS staff for their responsiveness. Now, all of you caught in tax limbo, finish up and get some rest!

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An Intuit spokesperson gave me a plausible explanation today for why the company's servers were  caught off-guard. Many of the affected returns were filed by professionals, who apparently are doing far more electronic filing than last tax season. While Intuit tracks software sales over the course of the tax season, it doesn't know how many separate returns will be generated by one piece of professional software. In addition, a lot more people used the online versions of TurboTax, which don't require you to pay until you're ready to file. So those sales numbers weren't known until last night.

Most people who contaced the company's customer service last night weren't blaming Intuit, but wanted to make sure they wouldn't be penalized by the IRS for filing late, the spokesperson asserted. Still, I think the company is going to have to assure its customers that the glitch won't happen again, or risk losing them to worthy competitors like H&R Block's TaxCut. My guess is we won't know until next November, when Intuit promotional material reappears, how the company will handle that problem. Look for the word "reliable" to figure heavily in those ads.

Another tax extension, following a very sad event

The IRS does have a heart after all. Officials there made a wise decision today when they granted six-month federal tax payment and filing extensions to the victims, families, first responders, faculty and students at Virginia Tech.

The agency's press release, issued late today, said affected taxpayers have until October 15, 2007 to file and make payments associated with their 2006 individual tax returns. Qualifying taxpayers won't be subject to filing or payment penalties if they make this new deadline. To qualify, though, they'll need to call the IRS at 1-866-562-5227 and identify themselve before they file or make a payment.

To all of you directly or indirectly affected by this horrific event, I am deeply saddened and sorry. 

Details on the storm-related filing extension

The IRS has finally announced the details regarding its ad hoc, 2-day tax filing extension for folks affected by yesterday's Nor'easter.

The FAQ's in the above link don't mention anything about extra time to establish and fund an IRA for tax-year 2006. But an IRS spokesman gave me the following information late on Tuesday: There is no deadline extension for funding a 2006 traditional or Roth IRA, or a health savings account. So you still need to do that by midnight tonight.

Storm victims get two more days to file!

Individuals affected by the huge storm that battered the Northeast yesterday will get an additional 48 hours--until midnight on April 19--in which to file their federal tax forms, the IRS announced late yesterday.

The agency noted that power outages and public transportation problems made it difficult or impossible for some taxpayers and tax professionals to meet the deadline.

"Because this unusually forceful storm hit within 24 hours of the filing deadline, we are giving affected taxpayers 48 additional hours," IRS Commissioner Mark W. Everson said in a press release.

An IRS press officer told me this morning said taxpayers would not have to detail why they were affected--for example, a wet basement or impassable roads. They merely need to mark their paper tax returns with the words "April 16 Storm." Taxpayers who e-file their returns can use their software’s "disaster" feature, if available.

The offical said the agency had not yet determined whether the extension affects other deadlines, such as the establishment of IRA accounts at brokerage houses. Check back with this blog later today for details.

The last word: Advice, IRAs, and extensions

If you're still in tax purgatory today, I have one thing to say to you: Don't panic.

There's lots of help still available, especially online. You can still use tax-prep software, check helpful Web sites, and look over forums with questions akin to yours. Check out our article, "Last-minute tax help on the cheap" for some ideas.

You also have two days left to do the one thing that still may save you money on your 2006 taxes: Contributing to an IRA. Home business owners, don't forget that you can set up a SEP IRA even if you participate in a 401(k) or 403(b) at work. Today I checked a handful of investment company Web sites, including eTrade, Fidelity, Schwab, and Vanguard. All let you set up and fund your IRA online.

Use that extension if you need to, but pay on time. The IRS grants six-month extensions automatically to anyone who files by tomorrow night, using Form 4868. Keep in mind that you'll still have to provide an estimate of what you owe, and pay that amount by tomorrow. If you don't, you're liable for penalties (ew!) and interest (yuck!) on the unpaid balance.

And if you're hyperventilating when you consider that mountain of money you owe, chill. The IRS gives lots of options for paying over time. Read our article, "What if you can't pay your income taxes?" for some perspective and advice. It's always better to face the music now rather than in a couple of months, when the penalties, interest and IRS wrath have built to a nasty crescendo.

Speaking of music, check out my earlier blog featuring background music for preparing your taxes. May those tunes put you in a better mood at check-writing time.

Warning on Free File

With just a couple days to file your tax return, the last thing you need to worry about is being scammed.

The IRS recently reported the existence of tax-preparation Web sites that are inaccurately saying they're part of the agency's Free File Alliance. Allegedly, the Web sites have accepted tax information from taxpayers, changed the taxpayers’ bank account numbers to their own and then filed the return through a legitimate Free File partner. The IRS says it's assisting the Treasury Inspector General for Tax Administration's probe into the allegations.

So, be sure you're using the real McCoy. To prepare and file your federal taxes through a legitimate participant in Free File, go to the IRS home page and click on Free File. Only the 19 companies located on the Free File page are authorized members of the Free File Alliance. You can use any one on that list, but make sure you qualify; some have additional requirements if you want to prepare and file state taxes as well. Read "Tax prep that doesn't overtax you" for additional advice on preparing your taxes online.

How much for that donated shirt?

My mother must have had a hand in writing the U.S. Tax Code--specifically the part that rewards me for cleaning out my closets.

Several times a year, I lug garbage bags of clothes, shoes and accessories to a local nonprofit's collection bin, and tell myself what a good person I am. Then I go home and place a detailed note in my tax file with the date and contents of my donation. Later, I try to figure out how much the stuff was worth.

Time was, I could donate just about any rag, place a value on it and take a deduction. No more. Any clothing or household items donated after August 17, 2006 generally must be in at least "good used condition or better." (There are other new rules; for details, see IRS Publications 17, 526, and 561.)

The government hasn't yet opined on what makes something "good used condition." But there's help out there to determine the value of your donations, courtesy of the tax-prep products TurboTax and TaxCut. In TurboTax Deluxe Deduction Maximizer and TurboTax Premier Investments, you'll find a supplemental program called ItsDeductible. TaxCut's equivalent is DeductionPro, available in its "Premium" line. (For our comprehensive test results on TaxCut and TurboTax, check out "Tax software test drive.")

The great benefit of these programs is that they determine values for your donated clothing and household goods. You type in "women's cardigan sweater" and the sweater's condition, and the program spits out a value. If you're not sure what to call the item you've donated, you can use a search engine to help. Both products let you print out comprehensive lists of donations and recipients.

We found ItDeductible's search engine a little better than that of DeductionPro. We saw it also gave slightly higher values for non-cash donations, perhaps because it has only three categories (high/medium/low) versus DeductionPro's four (like new, minor wear, average wear, heavy wear). It gave good information on long-term versus short-term capital gains for the purposes of valuing donated financial instruments, but had no information on art and collectibles.

DeductionPro was somewhat more comprehensive. While ItsDeductible only covers charitable deductions (donations of cash, stock, goods; and charitable travel), DeductionPro also covers medical deductions and other deductible items like tax-prep fees. It automatically calculates charitable travel mileage as well as periodic charitable payments, like a $10 payroll deduction to United Way.

You can buy these programs as components of the TurboTax or TaxCut products mentioned above, or as stand-alone programs. Both cost $19.99 as stand-alone products, though only ItsDeductible is downloadable. However, today when I looked on the web site for H&R Block, the maker of TaxCut, I found a free trial for DeductionPro. I didn't try it, but you might want to.

BasisPro: A cure for cost-basis anxiety

Finding the cost basis of a long-held stock or mutual fund is like trying to recall all the phone conversations you've had with an old friend for the past 25 years--including the date and cost of each call.

If you've tried this on your own, you know what I mean. When your brokerage or investment company doesn't provide cost-basis info, you've got to figure it yourself. And the task of identifying how much you've earned--particularly when you've used a dividend-reinvestment plan (DRIP)--is daunting. The hassle is compounded if you haven't kept all your records. And it's nearly impossible if that holding has changed names a few times (think AT&T).

My editor told me he spent a couple of hours one Sunday attempting to determine the cost basis from the sale of Vodafone shares that netted him all of $16.50. He finally arrived at a cost basis of roughly $5.60. "A saner person might simply have listed the cost basis as $0 and paid a little extra in tax," he noted.

Since then, I found an interesting tool to avoid the cost-basis wild goose chase. It's called BasisPro, and it's included in TurboTax's Premier Investments, which you can buy in stores or download for $74.99, plus tax. If you have a lot of cost-basis problems to solve this weekend, this tool may save you money over a preparer's fees. (Even if you use a preparer, you can save on the preparer's overall fee by finding the basis yourself.)

Here's how it works: When you get to the section of TurboTax involving sales of investments, click on the tab that says "Assist Me." You'll eventually reach a page called "Enter What You Paid for This Stock" (as in "Enter Ye of Little Hope"). Before you go screaming toward the fire exit, click the panic button, aka the BasisPro tab. A new window will open up and walk you through some of the same questions, including the date of purchase. If you can't remember, use your best guesstimate.

Now click "Continue," and BasisPro will identify all the company names with which your stock or mutual fund was associated since you got it. In my editor's case, the Vodafone stock is a great-great granddaughter of AT&T. I clicked on the "AT&T" box, and BasisPro instantly calculated a purchase price for the date in question, as well as the number of shares purchased. Another click gave me the cost bases for both long- and short-term capital gains treatment. One more click gave me a dividend-reinvestment schedule.

The whole process took less than 10 minutes. I tested it with a hypothetical mutual-fund sale, and it also worked like a charm.

For comparison, I tried two online services that I thought could help me with cost basis. Both left me quite confused. One was BigCharts, which couldn't identify AT&T on the Vodafone family tree. It was free, but not useful to me. The other was Xcitax, which is really designed for professionals. It costs a minimum of $50 to use. I couldn't follow its instructions, and what it did provide was too complicated for laymen.

Keep in mind that lots of companies have made it easier for shareholders to determine cost basis of their stock, with free interactive services on their Web sites. Typically, you'll find them in the Investor Relations section.

But if you can't get the information from the company or from your brokerage, BasisPro is a good resource. In my admittedly limited test, it performed as promised.

Deductions by the dugout

Attend a baseball game and we'll do your taxes for free. Now, that's a publicity stunt with a twist.

The Gilman Ciocia accounting firm, which has offices in several northeast states and Florida, is offering free tax preparation for attendees of Mets games at New York's Shea Stadium between Wednesday, April 11 and Sunday, April 15. You have to buy a ticket for a game, but executive vice president Kathy Travis insists her company will not be charging to prepare fans' federal and state returns, no matter how complicated. Even Jose Reyes is welcome to submit his W-2.

From what my baseball-minded husband tells me, the tax preparation is likely to be more interesting than the games. Both visiting teams (Phillies, April 11-12; Nationals, April 13-15) are off to miserable starts.

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Hear about any unusual tax-prep gimmicks in your area? Send me a comment, below. Thanks! --TS

Can you use Free File?

I'm a bit baffled by the IRS statement that any household with adjusted gross income of $52,000 or less can use its Free File service. The agency's Free File web page links you to for-profit companies that will let you use their software to prepare and electronically file your 2006 federal return free. The IRS estimates that 70 percent of taxpayers are eligible.

But how, without preparing your taxes, would you know your adjusted gross income (AGI to the cognoscenti) is $52,000 or less?

I guess the easiest way is to use your 2005 tax return and extrapolate based on changes for 2006. If you know you're way above that amount, you won't bother with the exercise. If you know you're below, just enter Free File and have at it. If you're close to the cutoff AGI, you may have to slog through the software to find out if you can file free. Bummer.

For more details on using Free File, check out our story, "Tax prep that won't overtax you."

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Even if you don't use Free File, I recommend e-filing. The IRS recently reported that e-filing of federal taxes is up more than 8 percent from the same time last year, to more than 16 million returns. Time was, most e-filers were early birds expecting refunds. But the agency says there's a trend now for later filers to e-file in place of big, fat paper mailings.

I'd wager that what most people like about e-filing is the quick refund. If you give the IRS your bank account and routing number for direct deposit, you can generally expect a refund within two weeks. There's also the reduced likelihood the IRS will make inputting errors from your form, which cuts down on potential audits. You get an e-mail confirmation when the IRS gets your returns. It's wonderfully efficient.

I got my confirmations yesterday. In a perverse way, I'm relieved to know the IRS has my stuff. I know I won't feel the same when, on April 17, the agency removes more than $2,000 in taxes owed from my bank account.

There's that efficiency again. But not so wonderful.

H&R Block's Emerald Card is a flawed gem

Tax-preparation stores are attempting to solve a problem for their low-income customers without bank accounts. H&R Block is offering its customers a cash card to hold their tax refunds. For no start-up or maintenance fees, clients can load their refunds directly onto a MasterCard debit card called the Emerald Card. Like a savings account, the Emerald Card's balance is protected by the FDIC. Like a credit card, holders are protected from unauthorized purchases. They can add balances throughout the year, spend anywhere MasterCard is accepted, and take out money from participating ATMs for a $1.50-per-transaction fee.

Jackson Hewitt's iPower CashCard is similar, though more costly. You have to pay a $30 start-up fee, plus a Jackson Hewitt "office fee" that averaged $2.24 last year, according to the iPower web site. This card has the same balance protection as the Emerald Card, but requires no fee for using a participating ATM.

I should get excited about these cards. After all, they may be the only protected way "unbanked" people can hold on to their money. But there are drawbacks I don't like. The iPower card expires on July 31, 2007, so you're encouraged to spend that money rather than save it. The Emerald Card also expires, though an FAQ on the Block site suggests you can load your funds onto another card before the expiration date. But what a pain!

Of course, there's no interest offered, though at the low rates most brick-and-mortar savings and interest checking accounts are providing, that's no great loss. Still, by offering no interest, these cards offer little incentive to save, and to periodically shop for higher rates.

What I'd like better would be some truly low-cost, interest-bearing savings and checking accounts for lower-income savers. They're available online (check out Bankrate.com's listing of the top interest-paying accounts), but not of much use to people who don't have easy access to a computer.

One group looking for a solution is America Saves, a coalition of nonprofit, corporate and government entities focused on increasing the savings rate in the United States. Among its programs, America Saves identifies financial institutions that will provide low-minimum-balance, interest-bearing accounts to new savers. Individuals and families can join groups based in churches and community centers that offer "wealth coaching" to encourage good savings practices. America Saves says it has 65,000 such members nationwide.

This approach serves lower-income folks better than a temporary cash card, even one that can be renewed. In my view, if you want to save, don't put your money into Emeralds.

Is your preparer legit?

The Department of Justice's lawuits earlier this week alleging fraudulent tax preparation among some 125 Jackson Hewitt offices in the Atlanta, Chicago, Detroit and Raleigh-Durham regions got me wondering: How can taxpayers avoid involvement with a tax preparer who's not legit?

Nothing in this lawsuit has yet been proved. It's up to a judge to decide whether the franchises, all owned by one franchisee, actually engaged in the practices alleged in the suit, including generating fake W2s; inventing businesses and phony business deductions; claiming "absurd" fuel tax credit sums; and  committing "massive" fraud related to the Earned Income Tax Credit. There is nothing in the lawsuit to suggest wrongdoing by Jackson Hewitt's other offices-- some 6,375 of them nationwide. Jackson Hewitt itself has announced an internal investigation into the allegations.

But the news should give pause to anyone still shopping for a tax preparer. How can you be sure you're getting someone who will help you save the max, but who won't cross the legal line? We offer ideas for finding the right preparer in our article, "Should you do your own taxes this year?" 

Additionally, the IRS says you should be careful with preparers who: 

•Claim they can obtain larger refunds than other preparers

•Base their fee on a percentage of the amount of the refund

•Claim you can redeem hundreds of dollars--or more—from this year’s one-time telephone tax refund program.

A good tax professional will review your return with you, answer questions, and explain entries you don’t understand. He or she also will sign your tax return and provide you with a copy for your records.

It's also wise to deal with someone who won't be settling in Rio after April 17. You want to be sure your preparer's available in the event you get a dreaded letter from the IRS. Understanding the preparer’s credentials is also important; keep in mind that only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all tax matters.

If choosing the right preparer weren't daunting enough, the IRS says there's the risk of being "phished": getting bogus e-mails from scamsters claiming to be from the agency.The IRS says it never sends out unsolicited e-mails, so don't open them. Instead, delete them pronto.

The Jackson Hewitt lawsuits

The Department of Justice filed lawsuits yesterday alleging fraud by a franchisee of more than 125 Jackson Hewitt tax-preparation outlets in Chicago, Atlanta, Detroit, and  Raleigh-Durham, N.C. That leads to some hairy questions for their customers. When a tax preparer is accused of fraud, can the customer likewise face charges?

According to allegations in the DOJ's lawsuit, the targeted Jackson Hewitt franchises "encouraged" fraudulent tax preparation, including creating phony W-2 forms, using fabricated businesses and business expenses in pursuit of deductions; claiming "absurd" amounts for fuel tax credits, and committing "massive" fraud related to the federal earned income tax credit.

If the allegations are proven, where does that leave the customers? Is the DOJ planning to go after customers of the franchises, or is the onus always on the preparer? The lawsuit says these offices prepared and filed over 105,000 tax forms last year; that's an awful lot of people to pursue. But given the nature of the allegations, my guess is that some of those taxpayers may have some 'splainin' to do. As Eric Smith, a spokesman for the IRS, notes, "In the end, you're responsible for the accuracy of the return. You are signing the return."

Jackson Hewitt's reponse to the lawsuit mentions that each franchisee operates independently and is responsible for acting with integrity and in compliance of the law. There's certainly no suggestion that the 6,375 or so other Jackson Hewitt stores will be flagged by the DOJ.

But what will the parent company do to help affected customers in the midst of having their taxes prepared by these outlets? Will Jackson Hewitt steer them toward alternate tax preparers if they request it? In its response yesterday, the company said it "values its relationship with its customers and continues to assist them with their upcoming income tax filing requirements." In this situation, what, exactly, does that mean?

Stay tuned...

The welcome demise of the tax loan

The storefront tax-preparation industry, dominated by chains H&R Block, Jackson Hewitt and Liberty Tax Sevice, has a good grasp of what its middle- and low-income clients want. It's what we all want: Speed and ease of filing. A big, fat refund. Fast reimbursement.

The industry's solution to the latter is the refund anticipation loan, or RAL. The tax-prep service loans the client an amount equal to the expected refund, and sets up a dummy bank account to receive the refund. When the money arrives electronically--usually within 48 hours of filing--the client pays back the loan from the dummy account, which is then closed. The fee to set up a dummy account is around $30.

Sounds reasonable, until you calculate the actual costs. For example, on a refund of $2,500--close to the average--a Jackson Hewitt client would pay the $29.95 service fee plus 2.5 percent interest on the total refund. Assuming the loan is paid back within 11 days--typical, according to the IRS--the effective annual percentage rate (APR) is 123 percent! The not-for-profit National Consumer Law Center (NCLC) which has been monitoring RAls for several years, points out that the APR for smaller refunds can be more than 500 percent, since that $29.95 fee represents a greater percentage of the refund.

It's ridiculous to ask anyone to pay that much, especially the population that frequents storefront tax establishments.

Recently, however, the center reported that RAL loans are losing their allure. Apparently, consumers are wising up. For instance, they're trying new, inexpensive or free services like the IRS's Free File, which can generate a refund from an electronically-filed return within 8 and 15 days. This year, Free File banned advertising for RALs among its participating tax-prep companies, which no doubt reduced the public's appetite for these products.

That's all to the good. Sure, it's exciting to get that cash right away, and in some cases, it's imperative. But my guess is that most folks can wait one more week for their money. And for a little bit of patience, they gain a lot.