Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Posted by taxguru on September 28, 2002

Tax Simplification

A few days ago, IRS announced that they have raised the threshhold for needing to attach Schedule B to 1040 forms. For as long as I can remember, if you had interest or dividend income of more than $400 during the year, you have been required to list the payers on Sch. B. With totals less than $400, you could just enter them directly on your 1040 without any requirement to show the details.

I assure you, I’m not just looking for excuses to disagree with IRS. I have no shortage of those. However, while I applaud their efforts to simplify things for taxpayers, I can’t endorse this new plan, for basically the same reason I don’t advocate electronic filing of tax returns.

IRS has become very efficient at matching up information documents received from payers, such as W-2s and 1099s, with income tax returns, and automatically kicking out notices when too little income is being reported. If too much income is reported, IRS isn’t about to alert you to that.

While it is impossible to completely avoid discrepancies with IRS figures, I have found that a good way to minimize that happening is to attach a lot of details to tax returns, especially when you have something a little out of the ordinary. For example, I frequently attach Sch. B when the total interest or dividends is less than $400 because I want IRS to see how we arrived at our total. This is very important for jointly owned accounts, where we need to back out a portion of interest that is being reported by someone other than the person whose name & SSN are on the 1099. It is also important for nominal accounts, such as minor children, where a parent’s SSN is on the account, but we are backing out the interest on Sch. B.

While some tax preparers do charge a certain amount per schedule or form, my computer program does all of that work; so I have always charged purely based on my time, regardless of how many different pages we have. By including the details of interest & dividend income, even when they are lower than the required amount (now $1,500), there is a very good chance that IRS will be able to match everything up at the Service Center and not need to send you or your client a discrepancy letter and bill.

Again, I have found that there are some tax preparers around the country who have a shortage of work after April 15; so they intentionally avoid attaching too much explanatory documentation to tax returns just to generate some off-season work responding to IRS notices and handling the audits that this causes.


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