HOW TO PREPARE YOUR TAX PREPARER

The “envelope system” not only gets you organized, it offers peace of mind as well. Here’s how to put it to work.

You don’t have to pay a penny more in tax than the law requires. Unfortunately, as former Citicorp Chairman Walter Wriston once pointed out, “All the Congress, all the accountants and tax lawyers, all the judges and a convention of wizards cannot tell for sure what the income tax law says.”

What can you, a non-expert in taxes, do in the face of such overwhelming complexity and convolutions? Find an expert, that’s what!

BEWARE! No one person knows all the answers. The last person I know about who really comprehended the details of the tax code was the late Wilbur Mills, the Arkansas Democrat who served as chairman of the House Ways and Means Committee from 1958 until 1974 before being rocked by scandal.

Assuming you’ve found someone sufficiently competent to do your tax return properly, how do you prepare for him or her? This is an important question.

Remember, a tax return isn’t supposed to be fiction in numerical form. You’ve got to give your preparer the right numbers to put on the paper or in the electronic file.

That means that you have to put together the information. But because you’re not the tax expert, you shouldn’t be the one deciding what’s allowable as a deduction and what’s not. You have only three basic functions:

I recommend that my clients use what I call the “envelope” system, which allows you to do all three easily and simply. This is what you should have done last year and what I highly suggest you start doing immediately for your 2005 return. And you can probably use it right now if you’re starting to get ready for your 2004 return.

Putting the “Envelope System” to Work

First, find and save all your receipts. I want you to picture dead presidents on those receipts — they represent real dollars in your pockets. You wouldn’t walk out of a store without your change; don’t leave without your receipts.

As you get your receipts, put them in a shoebox or a special file. (If you haven’t started, start now!) Each month (or every couple of months) when you reconcile your checkbook, break down those receipts into categories and create an envelope for each category.

You’ll have an envelope for charitable contributions, another envelope for investment expenses, another for medical expenses, etc. If you can’t think of a category, make up a descriptive name and use that. Your preparer can translate it into deductible classifications.

Put the related checks (or the carbons if that’s what you have) in their appropriate envelopes. Add up the receipts, add up the checks, don’t double count, and put the sum of that category on the outside of the envelope. Those are the numbers you give to your tax preparer.

The system is easy, so simple you can do it while watching television or listening to music. But it achieves several of your goals without your breaking a sweat.

Never give your tax preparer a shopping bag of unclassified receipts — especially now. It’s a waste of his time and your money. Except for those of us who do this for a living and actually enjoy it, tax preparation isn’t a whole lot of fun. It’s certainly not fun for you as the taxpayer. Either you’re going to give up some more dollars to the IRS, or you’ll be getting a refund of money you’ve lent to the IRS — interest free. In either case, you want to minimize the pain. I’ll also warn you: preparers consider bookkeeping a service for which they charge over and above the cost of preparing your income tax return.

Minimize your pain! My envelope system does that. Your preparer now has final numbers for each category. The preparer will tell you what’s not allowable and more quickly and accurately complete your return.

Remember, what you really want from your preparer is analysis and questions. Any monkey can put numbers in boxes. You’re paying for the knowledge and insight as to where to put those numbers and what expenses are allowable. The more your preparer knows about you, what you do and where you want to go, the better the service you’re going to get.

Other Ways to Prepare

How else can you prepare for your accountant? If you’ve had sales of stock or mutual funds, make sure you’ve got the cost-basis of those shares available for your preparer. Don’t forget to include in that cost-basis any reinvested dividends and capital gains. You don’t want to pay tax on them twice.

That means, call your broker now to get that information. The last thing she’s going to want is a call the second week of April requesting copies of information that was already sent to you. She generates income by making sales, not by being responsible for your bookkeeping. She’s got enough problems with everyone else calling her for the same details.

Along the same line, call your tax preparer now. You’re not his only client, and the later you wait the busier he’s going to be. I tell my clients that anyone I see after April 1 is probably going on extension. Remember, taking into consideration the stress, workload and hours slept during tax season, most preparers will probably be able to serve you better this month than in mid-April.

Finally, recognize what you want out of your preparer. You should be looking for more than simple numbers in boxes. You need a preparer who asks questions. Lots of questions.

You also want your questions answered. It’s all right if your preparer doesn’t know the answer immediately, as long as he gets back to you after researching the issue. And it’s important that he does get back to you.

You want to walk out with direction and suggestions for minimizing your taxes for this year. If your preparer asks you to complete an intake form and does your taxes just from that, you might as well get a tax preparation computer program and do it yourself. After all, you’re already prepared.

No More Fear

My envelope system, if done correctly, also gives you complete audit protection. More people fear a tax audit than death itself. But not you, not any longer.

A tax audit is nothing more than the IRS requesting substantiation for the numbers on your return. But you’ve already done that. The numbers on your return come right off your envelopes for each category.

So, for example, if you’re audited on your charitable contributions, the IRS wants you to prove that number. No problem for you. Just give your representative the “donations” envelope. It will have all the receipts and checks to substantiate the number on your return.

The same goes for any other category on your return. Remember, the numbers on your return came from the receipts and checks in each envelope. You’ve already pre-audited yourself and should have no more fear of the IRS. Honest.