A retiree’s tax preparer allowed fines to accumulate for 15 years

Dear Liz: I have a question about an unethical accountant. I am a retiree living on my investments. My accountant continually put me on an extension and every October told me how much to pay. Finally, I discovered I was being billed for interest, fees and penalties for failing to pay estimated quarterly taxes. This has been going on at least 15 years. Is there an entity that governs the behavior of accountants?

Answer: There is — if your tax preparer is actually an accountant. Some tax preparers use that title even if they don’t have an accounting credential, said Henry Grzes, lead manager for tax practice and ethics with the American Institute of CPAs.

If your tax preparer is in fact a certified public accountant, then you can make a complaint to your state’s board of accountancy. You can find a list of boards at nasba.org/ stateboards. Otherwise, you can consider contacting the Better Business Bureau, your state’s consumer protection agency or the Consumer Financial Protection Bureau, Grzes said.

A good tax preparer will alert clients to ways they can reduce their tax bill and will discuss the reasons for filing an extension as well as the need to make quarterly estimated payments, Grzes said. There are no federal regulations governing tax return preparation, although some states have such laws, he said.

For example, anyone who is physically in California and prepares tax returns for a fee, and who is not an attorney, CPA or enrolled agent, is required to register with the California Tax Education Council, Grzes said. The CTEC site has information about how to file a complaint against a tax preparer who isn’t governed elsewhere.

Reducing your taxes in retirement

Dear Liz: It appears required minimum distributions will force me to take an additional $3,500 per month from my retirement funds starting in four years at age 72. This will greatly impact my income tax liabilities as I’m now retired. Are there any strategies to reduce the hit? As my current income tax rate is 12% federal and 9% state, perhaps I should convert some of these funds to Roth IRAs?

Answer: Partial Roth conversions when your tax bracket is low can be an excellent way to reduce future mandatory withdrawals and save on taxes in the long run.

Let’s say you’re married filing jointly and have $60,000 in taxable income. The 12% federal tax bracket ends at $83,550, so you could convert more than $23,000 of your retirement funds without increasing your marginal federal tax rate.

Conversions can affect other aspects of your taxes and finances, so consult a tax pro before proceeding.

Another way to potentially lower your tax bill may be to temporarily suspend your Social Security payments and take more from your retirement funds. Because of the peculiar way that Social Security is taxed, people often face a sharp rise and then fall in marginal tax rates when they have other income, something known as the “tax torpedo.” A tax pro should be able to determine whether delaying or suspending Social Security payments could help you reduce the effects.

Digital documents are safer than paper

Dear Liz: You’ve advocated for going paperless. My preference for paper financial documentation is that paper provides “proof ” in the event something compromises online or email reporting.

Answer:

Proof of what, exactly?

That’s not a rhetorical question. If you don’t understand why you’re retaining a document, and what the alternatives are, you risk burying yourself in paper.

Consider your bank statements, for example. Your paper document is just a reproduction of the digital files that the bank securely stores and regularly backs up. If you do the same, regularly downloading statements and backing them up to secure storage, there’s no reason to convert the files to paper. Paper is in fact more vulnerable, since it can burn up in a house fire, be destroyed in a flood or simply have its ink fade to illegibility. In the rare circumstance where you actually need to provide a paper document, you can simply print it out.

Many people don’t even bother downloading their statements. Many financial institutions allow you to access five or more years’ worth of statements for free, which is as long as you’re likely to need such access.

There are a few documents you should keep in physical form either because they’re most useful that way (passports and driver’s licenses, for example) or because accessing or replacing them can be a hassle (birth certificates, citizenship certificates, divorce decrees and military discharge papers, among others). Even these documents, though, should be scanned and stored securely to prevent their loss or destruction.

Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.