What? It's the middle of February and you still havenot made plans to sit down with your accountant towrestle over the annual chore of income tax filing? Inactuality, you still have approximately 2 months untilthe April 15, 2006, filing date for 2005 taxes, but puttingoff filing your taxes won't make them go away. Andprocrastination won't help you get more organized sothat you can make the most of your filing.
"When physicians are organized, I can then focus onhow to best utilize the data rather than first looking forthe data to be included on the return," explains RalphHeiman, managing director of Sax Macy Fromm, aNew Jersey-based accounting and consulting firm."Some clients come in with piles of paper. Some comein with unopened envelopes and open them in front ofus, and then we have to organize the data. Well, there'sa cost factor to that."
Get Yourself Organized
Being organized at tax time benefits both you andyour accountant. That's why most good accountingfirms send their clients some type of organizer duringthe month of January. "The organizer simplifies thegathering of information," Heiman explains. "It segregatesitems based on income categories and expenses,and shows clients what they did last year. So it gets themto start thinking about all the items that go into thepreparation of a return."
Doug Spencer, CPA, CFP®, with Hutchinson/IfrahFinancial Services, points out that there aren't too manythings the physicians he works with miss from a personalstandpoint. Instead, he says most of the tax oversightsoccur on the practice side, and more often than not, inthe area of converting personal to business.
"Let's say a doctor flew to another city for a continuingeducation course on a Friday and extended theirstay and had some business on Monday, but Saturdayand Sunday were personal time," Spencer supposes."The entire trip could be deductible because the IRS willallow that weekend to count as business. It's just a matterof proper planning and documentation."
Philip Goldfarb, CPA and partner, WMKG LLP,sends his clients a questionnaire in addition to an organizer.Answers to the questions, he says, help him identifycertain tax components that physician-clients mightnot recognize as relevant. Questions include: Did yousell your house this year? Did you refinance your mortgage?Did you buy a new car? "The new car is a perfectexample," Goldfarb explains. "If you bought a ToyotaPrius, you get a tax credit. Or maybe you're using thecar to go from the office to the hospital to do rounds.Those miles are deductible, and to some extent, the costof the car can be depreciated."
Purchasing a car isn't the only investment decisionoverlooked. Goldfarb says it's amazing how manypeople forget to tell him that they put money in anIRA. And even though an IRA would not be deductible,Goldfarb still wants to know if money wasplaced in an IRA. "We have to keep track of the nondeductibleportion of the IRA contribution so thatwhen it's taken out at retirement, we know the clientdoesn't have to pay taxes on it," he explains. "What Igenerally tell my clients is, if you're unsure whethersomething has tax implications, keep it."
Build a Working Relationship
Should your tax preparer have experience workingwith physicians? First and foremost, Spencerposits, it is the relationship that's important.Physicians need to feel comfortable with whomeverthey're doing business. It's not an absolute necessitythat the tax preparer has experience in the physician'sspecialty, as long as they have worked with physiciansbefore. Spencer says that a good tax preparerwill also ask questions: "Sometimes by listeningclosely, you're going to really learn where the taxpayerwants to be. Communication is essential."
Goldfarb echoes those thoughts. In addition, hepoints out that today's CPAs often have different consultingand sideline businesses. Sometimes they deal ininsurance and a variety of investment products. Andwhen you're having your taxes worked on, you don'twant to feel like you're being sold on something else."If you come up against somebody who says, ‘Sure, Ican handle your 1040, but I also sell insurance, andhave you considered that?,'get up and walk out,"Goldfarb suggests. "That person is more interested indeveloping those other sidelines. There's a time andplace to visit those things, but you don't want a taxpreparer who comes across as a salesperson."
Another important consideration, Spencer adds, isthat you work with a professional who is going to domore for you than just tax preparation, someone whowill be there for you beyond April 15. He goes so far asto state that he wouldn't take on a physician just to preparehis 1040. Rather, he wants to be involved in thephysician's business and be there to advise them. "Andnot just when they call," Spencer emphasizes. "I wantto sit down with my clients periodically and see wherethey are in relation to their goals."
Borrowing from the medical field, Spencer pointsout, "We have a saying: Prescription before diagnosis ismalpractice. So we want to diagnose where our clientis and advise them of the best way to do things. It's theirmoney, and they can spend it any way they want. Butwe want to be there as a sounding board."
Spencer urges his clients to contact him when they'refirst thinking about making a large purchase or makingsome type of financial decision, even if it's outside hisarea of expertise. "I can always refer them somewhereelse," he explains. "I'd rather not first find out aboutsomething 5 or 6 months later at tax time."
There are many physicians who like to "do itthemselves" when it comes to preparing their incometax returns. Former IRS official and tax lawyerRichard Davis, now an associate professor ofaccounting at Susquehanna University in Selinsgrove,Pa, says he prefers to see individuals really try andtackle their taxes themselves first. "In large part,that's so they get a better understanding overall oftheir financial situation," Davis explains. "If you goto H&R Block and let them do the tax stuff for you,there's no incentive for you to get a better understandingof your financial situation."
J.K. Lasser's Small
Business Taxes 2006
Small business authority and attorney BarbaraWeltman agrees. The author of (Wiley; 2006), Weltman says theproblem is that the way things usually work is that doctorsonly sit down with their accountant once a yearafter the fact. "If you self-educate, if you understandwhat's going on, you have an opportunity to takeadvantage of things a lot sooner," Weltman explains.
You can also uncover problems before they spiralout of control. Spencer recounts the story of a physicianwho had employed a woman in his practice for about20 years. Over time, he delegated more and moreauthority to her as far as writing checks and overseeingthe practice's finances. "There were a number of itemsthat started to flow through his practice that seemedquestionable," Spencer recalls. "I would call the doctorand he would defer to this woman. She would give usan answer that didn't always make a lot of sense, butthat's the way it was." Over time the problem gotworse, so Spencer arranged to meet the physician forlunch. When he presented some documents to thephysician for examination, the physician immediatelycommented, "That's not my signature."
It turned out the woman had misappropriated inexcess of $100,000. When credit card offers came intothe office to the doctor's attention, she would apply,putting the doctor's name on the application as well asher own. Because she opened the mail, she was able tointercept the credit cards, and subsequent bills, whenthey arrived. Sometimes she would forge the doctor'ssignature; sometimes she would make out the checksand have the doctor quickly sign for them.
"I recommend to all my physician-clients, get thebank statements yourself," Spencer emphasizes. "Idon't care if someone else is reconciling it. You get it,open it, and take 5 minutes to examine it and makecertain it makes sense."
Spencer adds that it all comes back to the importanceof recordkeeping. "No matter how much thephysician delegates, it's still their responsibility," Spencer cautions.
Consider Paying Taxes Electronically
Taxpayers are turning to electronic filing in recordnumbers. The Electronic Federal Tax Payment System(EFTPS) is a free service from the US Department of theTreasury that enables tax preparers, businesses, andindividuals to pay all federal taxes electronically,including income, employment, and estimated taxes.According to the IRS, in fiscal year 2005, the numberof EFTPS payments processed rose 7% to 78 million,with dollar volume up 11% to $1.8 trillion. "It was initiatedin 1996," explains Chris Weisner, a tax preparerwho uses the EFTPS to keep more than 200 doctorsand dentists in sound financial health. "Before we usedEFTPS you had to use paper coupons and checks, takethem to the bank, and it was aggravating. Now I cando it electronically. Most of my clients are physicians,so whatever helps me, helps them."
Last November, the US Department of theTreasury launched Simplify, a national campaign tocommunicate to tax preparers and small businessesthe benefits of paying taxes electronically through theEFTPS. The system offers a variety of payment methods,including the Internet and a telephone voiceresponse system, as well as other electronic solutionsfor tax preparers of all sizes. "Although EFTPSserves a growing number of taxpayers who recognizeit as a reliable, secure, and convenient method fordoing business with the government, far too manytax preparers and small businesses still use papercoupons," explains Donald Hammond, fiscal assistantsecretary for the Treasury Department. KevinBrown, IRS commissioner, small business/self-employeddivision, notes that the agency nowreceives more returns electronically than on paper."This breakthrough shows increased public interestin electronic interaction with the government."
EFTPS uses the most advanced security measuresavailable to protect information, making it a secureway to pay federal taxes. It's convenient in that itallows users to schedule payments in advance, anytime of day, any day of the week, from any location.In addition, EFTPS users receive immediate confirmationthat instructions for payment have been received,and can retrieve exact details about their payment historyfor the past 16 months. Additional informationon EFTPS can be found on the Simplify Web site atwww.simplifyeftps.org.