A Comprehensive Guide to being Prepared for Tax Season: Individual and Business Income Tax Returns

Tax season can be a stressful time for many, but with the right preparation and guidance, it doesn’t have to be. Whether you’re an individual filer, a small business owner, or managing a more complex financial situation; understanding how to get ready for tax season is crucial. We will explore the different options for filing your tax return, including the pros and cons of using a Certified Public Accountant (“CPA”) and a Tax Preparer, so you can confidently choose who to trust with your financial information. Additionally, to ensure a smooth and efficient process, we have compiled a detailed checklist of the information and documents you’ll need to provide. By gathering these items, you will help your CPA/Tax Return Preparer provide an accurate and complete tax return for you. Remember, whether you are married, filing a joint return, or own business/real estate, this checklist will outline the most common required documentation to complete your tax return.

Who should file your tax return

There are many things to consider when deciding who will file your tax return. Do you choose a Certified Public Accounting Firm or a Tax Preparer? Does the firm or tax preparer prioritize data security? What characteristics should I look for in a CPA/Tax Preparer? Are they licensed? Do they offer IRS Representation, should you need it in the future? If you have asked any of these questions during tax season, we are here to help you answer them.

When deciding between a CPA firm and a tax preparer for your tax return, it’s essential to consider the unique advantages and disadvantages of each option.

CPA Firm

Pros:

1. Expertise and Qualifications:
   • CPAs have rigorous training and certification requirements. They possess a deep understanding of tax laws and accounting principles. In addition to a Certified Public Accounting License, a CPA/CPA firm will typically have a PTIN (Preparer Tax Identification Number), which can be obtained from the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.
2. Comprehensive Services:
   • CPA firms offer a broad range of services beyond tax preparation, including financial planning, accounting services, and business consulting. They can provide year-round advice on financial matters. CPA firms also typically offer mid-year tax planning meetings to their clients, allowing the discussion around new deductions and credits to happen earlier in the year so business owners can make decisions that can positively impact their upcoming tax liability.
3. Representation:
   • CPAs can represent you in dealings with the IRS, including audits and appeals.
4. Credibility and Reliability:
   • CPA firms typically have established reputations and a history of reliable service. All CPAs are required to have an undergraduate degree in accounting / tax from an accredited university. They are also required to pass the rigorous state CPA exam to obtain their CPA license/certification.  They follow strict ethical guidelines and professional standards. CPA firms hold state certifications and are required to take over 40hrs of continuing education each year to stay up to date on the latest tax law changes. Any complaints or disciplinary actions against a CPA/CPA firm are public record and can be obtained from the Arizona State Board of Accountancy CPA Directory.
5. Data Security Measures:

1. • CPA firms are bound by strict regulations and professional standards that govern data security and client confidentiality. CPA firms typically invest in firewalls, encryption, and secure servers. They often have dedicated IT staff responsible for maintaining and upgrading their security systems. Firms often have detailed policies and procedures to handle data breaches and cybersecurity threats, as well as the firm’s staff usually receives regular training on data security best practices. Many use advanced tax preparation software with built-in security features, and secure online portals for clients to upload their documents and access their tax returns. CPAs have a professional obligation to maintain client confidentiality and can face significant penalties for a breach, therefore this often results in a high level of vigilance when handling sensitive data.

Cons:

1. Cost:
   • Hiring a CPA firm can be more expensive than using a tax preparer, especially with a more complex tax return.
2. Availability:
   • During peak tax season, it may be harder to get an appointment with a CPA firm. CPA firms have clients that they work with on a regular basis, it is best to schedule your meetings with CPA firms in advance of any tax deadline.

Tax Preparer

Pros:

1. Cost-Effective:
   • Tax preparers usually charge lower fees than CPA firms, making them an attractive option for simple returns.
2. Accessibility:
   • Easy to find and schedule appointments, especially during tax season. Most paid tax preparers, especially when working at a local office or chain company, will have availability in the evenings and weekends allowing for more flexibility in scheduling.
3. Efficiency:
   • Experienced tax preparers can handle straightforward returns quickly, and typically are familiar with the common deductions and credits. Tax Preparers tend to only allow between 1-1½ hours for each tax return making the process very quick, however that can come with some disadvantages as well.

5. Data Security:

1. • Large tax preparer chains often have corporate- level security policies and IT departments dedicated to data protection. These chains typically implement standardized security measures across all locations. Many use advanced tax preparation software with built-in security features, and secure online portals for clients to upload their documents and access their tax returns. Large chains typically have the capital to invest in high-tech security technology and resources and may conduct regular audits of their security practices.

Cons:

1. Qualifications and Expertise:
   • Tax preparers do not have the same level of training or certification as CPAs, many do not have undergraduate degrees in accounting / tax.  Many have not taken the CPA exam to obtain their CPA license/certification. Tax preparers are not required to take continuing education on an annual basis to stay up to date on the latest tax law changes.  Tax Preparers typically only have a limited amount of time to spend on your return before their next client meeting begins.  As a result, you could potentially be missing tax credits or deductions that could have lowered your tax liability.  If you need assistance in determining the type of credentials or qualifications that are held by a specific tax professional, use the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.
2. Limited Services:
   • Tax preparers typically focus solely on individual income tax returns and may not offer other services, such as tax planning, long-term financial planning or business consulting.
3. Representation:
   • Not all tax preparers can represent you in front of the IRS. If your return is audited, you may need additional assistance.
4. Data Security Inconsistencies:
   • The level of security can vary between different locations and individual preparers, depending on how well the corporate policies are enforced locally. High turnover rates can lead to gaps in training and awareness of security protocols. Tax Preparers may handle high volumes of clients, which can result in less personalized attention to data security. Tax Preparer firms typically have large databases of client information that can be particularly attractive to cybercriminals.

Detailed Checklist of Information and Documents

Gathering these items listed below will help your CPA or Tax Return Preparer provide a complete and accurate tax return for you.

Business Information 

• • Business information (name, legal type, accounting basis)
  • Ownership Structure
  • Operating agreement, articles of incorporation
  • Financial statements (income statement, balance sheet, cash flows statement)
  • Revenue details and copies of 1099-NEC received
  • Business expenses (automobile, office supplies, phone, interest, equipment, legal, advertising, meals, travel, etc.)
  • Payroll reports
  • Research and development expenses
  • Fixed asset list
  • Asset purchases/sales
  • Partner/ Shareholder Contributions / Distributions
  • Business debt schedules
  • Tax notices
  • Prior year tax return

Personal Information

For new clients, we require the following personal details:

• Full Name of the taxpayer(s)
• Date of Birth
• Social Security Number(s)
• Address
• Contact Information (Phone number and email)
• Driver’s License
• Bank Information for direct deposit
• Prior Year Tax Return

Dependent Information (if applicable)

If you have dependents, please provide:

• Name of dependent(s)
• Date of Birth
• Social Security Number(s)
• Relationship to the taxpayer(s)
• Custody Information (full custody or split custody)

Income Information

Collect and provide the following income-related documents for all taxpayers on the return:

• Wages: W-2 forms
• Investment Income:
  • Interest Income (1099-INT)
  • Dividend Income (1099-DIV)
  • Capital Gains (1099-B)
  • Reports of any cryptocurrency transactions
• Rental Income:
  • Address of rental property(s)
  • Type of rental property (Residential or Commercial)
  • Number of days the property was rented
  • Rental Income and related expenses (property taxes, repairs, maintenance, insurance, etc.)

Retirement Income

Ensure you have documents related to:

• Pension Income
• IRA distributions
• Social Security Income

Other Income

Additional income sources may include:

• State tax refunds received
• Unemployment compensation (1099-G)
• Income from pass-through entities (K-1 from partnerships and S-corps)
• Dividend income from C-corporations

Adjustments to Income

Provide information on:

• Health insurance paid for self-employed individuals
• Student loan interest
• Educator expenses for teachers

Deductions

Gather documents related to:

• Medical expenses
• State or sales taxes paid
• Property taxes paid
• Mortgage interest
• Investment interest paid
• Donations (cash and non-cash, with receipts if over $500, and 1098-C for vehicle donations)

Credits

For applicable credits, provide:

• Invoices for solar panels
• Purchase agreements for electric vehicles
• Education expenses (1098-T)
• Foreign taxes paid (1099-DIV)

Estimated Tax Payments

If you have made estimated tax payments, please include:

• A list and dates of all payments made
• Copies of any notices received from tax authorities

Additional Information (if applicable)

Lastly, if applicable, provide your Personal Identity Theft Prevention Number from the IRS.

Conclusion

As tax season approaches, being well-prepared and making informed decisions about who will handle your tax return can significantly reduce stress and ensure accuracy. Taking the time to choose the right tax partner to prepare your tax return is critical!  It will ensure your tax information and return is complete, accurate, and secure.  It will also ensure your tax liability is minimized.  Working with a partner that you can trust to look out for your best interests and represent you in dealings with the IRS, including audits and appeals is key.

By following the comprehensive checklist above, you will ensure a smooth and efficient tax filing process. We are here to make the tax preparation process as seamless as possible. If you have any questions or need assistance with collecting these documents, do not hesitate to reach out. Stay organized, keep track of your documents, and remember, we are here to help every step of the way!

If you have any questions or would like to schedule a tax planning or tax preparation meeting, do not hesitate to reach out to us at (480) 980-3977.