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Frequently Asked Questions

What should I expect from my accountant?

A good accountant can prepare your tax return. He or she can assist you with:

  • Accounting and recordkeeping
  • Income tax planning
  • Business planning and problem solving, including cash flow planning
  • Accounting and payroll software selection and use
  • Estate tax planning
  • Relationships with financing resources
  • Staffing questions and solutions
  • Insurance services

The greatest value you can receive from your accountant is assistance in the processes of increasing profits and managing your money wisely. An accountant can provide you with year-round financial and general business advice and consulting.

Should I file my own tax return or hire a professional?

There are some individuals that are well versed and quite capable of preparing and file their own tax returns. Test yourself with “Tax IQ Quiz: How well do you know your taxes?,” to rank your own skill level. If you are ready to file your own tax return, we offer you free e-filing and in many cases free filing software to prepare your own return. E-File your own return today!

If any of the following apply to your situation, consider having your tax return prepared by a professional:

  • You don't bother to keep up with the latest tax laws. Every year congress passes new laws, the IRS comes out with new rulings and judges make decisions that affect your tax situation. Your daily news will cover developments that concern a large number of people but they don't report on every change. A certified public accountant takes continuing education courses to stay up to date and subscribes to newsletters and alert services. We live, eat and breathe this stuff 24/7.
  • You haven't had a professional prepare or review your return in more than 3 years. If you prepare your own returns, it's a good idea to let a professional preparer review your returns at least every three years. That's because you only have three years to amend a return to change any items of income, deductions, or credits that were reported in error or omitted on your original return.
  • You are uneasy with how to handle an item for filing of your tax return.
  • You prefer the comfort of working with a caring professional.
Do I need a tax professional or should I buy tax preparation software?

You do not need to buy tax preparation software and clutter your computer hard drive or risk not having a copy of a return when you need one. Our tax preparation software is reliable, accurate and safe. E-File your own return today!

Compare filing online with us and filing online with TurboTax®

Tax FormOnline with BFSOnline with TurboTax®
1040EZFreeFree
1040A$15$30
1040$50 (all forms)$50 to $100 (limited forms)
Any State$20$35
E-fileFreeFree

The best part is that we are here when and if you need a professional tax preparer. If you are uneasy with how to handle an item on your tax return, we can prepare your tax return for you.

If you are looking for more than just a tax return and want a relationship with a tax professional that is familiar with your finances, your family, and your goals contact us.

Is the sale of my residence taxable?
That depends on the amount of profit from the sale. Single taxpayers can exclude from tax up to $250,000 of profit on a home sale and married couples can exclude up to $500,000. To take the full exclusion, you must generally have owned and used the home as your principal residence at least two of the five years prior to its sale. Also, you can't use the exclusion more that once every two years. A reduced exclusion may apply in some cases.
When I sell my home, do I have to replace it with a more expensive home to postpone taxes on the sale?

No. In fact, you don't have to reinvest in another house at all. If you meet certain qualifications, you can use your sale proceeds for whatever purpose you choose — without having to pay tax on your profit in the sale.

The Taxpayer Relief Act of 1997 eliminated two longtime provisions in the tax law. Under the old rules, taxpayers age 55 and older had a once-in-a-lifetime opportunity to exclude $125,000 of gain on the sale of their principal residence. In addition, once every two years, you were allowed to roll over the gain from one house to the next as long as you purchased a replacement house of equal or greater value. Doing so allowed you to postpone tax on the gain.

Now, you can no longer roll over the gain from one home to another. And the gain exclusion for those age 55 and older no longer exists. However, individuals can exclude up to $250,00 of profit ($500,000 for married couples) if you meet certain requirements.

Will my tax return be Audited?

The IRS uses various programs and techniques to determine which returns are audited. Among them are:

  • Matching programs — information returns (such as Forms W-2 and 1099s) are matched to your tax return, using your social security and other identifying numbers. If discrepancies are found a discrepancies notice is generated by the IRS requesting you to explain the differences. Unclear or evasive answers can generate a tax assessment, or you may be summoned to the local IRS office to explain the differences to an auditor.
  • Statistical analysis — The IRS computer system will grade (analyze hundreds of variables) for tax returns. If your return comparisons fall outside the “typical” taxpayer profile, your chance of an audit increases.
  • Occupation — The IRS has chosen certain taxpayers to audit. A higher percent of self-employed, farmers and individuals within prescribed ranges of income therefore have a higher percentage of being audited.
  • Random audits — a selected number of tax returns are randomly picked for examination.

You can reduce your chances of being audited by filing an accurately prepared return with appropriate supporting documentation.

How can I reduce my odds of being audited?
Make sure your return is accurately prepared. Attach supporting documentation to your return for any extraordinary items.
How does the IRS conduct an audit?

In a number of ways:

  • Correspondence audits — are handed entirely by mail. They consist of written questions about possible errors, such as filing status or wages reported. Unclear or evasive answers can generate a tax assessment or escalate the case to an office audit.
  • Office audit — involves the taxpayer being summoned to a local IRS office to meet with an agent. Office audits are often limited to specific items; the agent can expand the audit if the taxpayer's explanations raise additional questions.
  • Field audits — are conducted at the taxpayers business or an accountant's office. All pertinent taxpayer records must be available at the chosen site and will cover tax-related activities for the years under audit.
  • Random audits — a selected number of tax returns are randomly picked for examination.

Call us when you receive a letter from the IRS. We will advise you, respond on your behalf and represent you if you so desire.

I filed my tax return and later discovered an error. How can I fix it?

It is not uncommon to find oversights and errors on returns. The IRS allows you to correct your return for up to three years after you file your original return by filing an “amended” return. You need to tell the IRS why you are correcting the return and include the appropriate documentation.

If you have discovered income or deductions that you should have reported on your income tax return, give us a call. We can help you set the record straight.

Is there anything wrong with getting a big income tax refund every year?
Yes, it means you are giving the IRS an interest-free loan when you could have the use of that money during the year to invest for yourself. As early as possible each year, you should take the time to estimate your total tax bill for that year. Consider adjusting your withholding so that the amount your employer withholds comes closer to what you will actually owe on your tax return. You can change your withholdings at any time during the year by giving a new Form W-4 to your employer. Calculate your withholdings with the IRS Withholding Calculator.
What is backup withholding?

Banks and other businesses that pay you interest, dividends, rent, or for services you render as an independent contractor may be required to withhold income taxes from the checks they give you. The backup withholding rate is 28% for 2007.

You will be subject to backup withholding if:

  1. You fail to provide the business paying you with your correct taxpayer identification number when they request it.
  2. The IRS notifies the payer to start backup withholding because you failed to report all of your interest and dividend income on your tax return.
Who has to make estimated tax payments?

If you have income from which no income tax is withheld (such as business income), you may be required to make quarterly estimated tax payments. Also, if you don't have enough income taxes withheld from wages and pensions to cover your tax liability, you may need to make estimated tax payments.

Federal estimated taxes for individuals are paid with Form 1040-ES and are due on April 15, June 15, and September 15 of the tax year involved and on January 15 of the following year.

If this is your first year with self-employment income or increased interest and dividend income, review your requirements for quarterly estimates to avoid being penalized by the IRS.

*When April 15 falls on a Saturday, Sunday or legal holiday, the deadline for filing is moved to the next business day.

What kind of penalties will I be charged if I pay my taxes late?

If you fail to pay all your taxes by the April 15* deadline, you'll have to pay the IRS interest and penalties on your underpayment. The IRS charges interest at its prevailing rate, which it publishes quarterly. The late payment penalty is generally .5% for each month there is an unpaid balance, up to a maximum 25% penalty.

When you file a late return with a balance due, another nasty penalty kicks in — the late filing penalty. This penalty amounts to 5% per month, for a maximum of five months. For example, if you owe $5,000 in taxes and failed to file a return or an extension by April 15, the failure-to-file penalty could build up to as much as 25% or $1,250.

*When April 15 falls on a Saturday, Sunday or legal holiday, the deadline for filing is moved to the next business day.

If I pay someone to care for my child while I work? Can I deduct this expense?
No, you can not deduct the expense BUT you CAN take a tax credit, which is more valuable than a tax deduction. You can take the child care credit if you pay someone to care for your child who is under the age of 13, or for a child or other dependent (any age) who is physically or mentally incapable of caring for themselves. You must have earned income in order to claim the credit, and you must need the child care to allow you to work. The maximum credit is 35%. Eligible expenses are $3,000 for one child and $6,000 for two or more children.
What is a tax-deferred (tax free) exchange?

Tax-deferred exchanges are often referred to as tax-free. Certain exchanges allow investors to trade one piece of property for another piece without paying income tax on the transaction. If you sell a piece of business or investment property for cash, you may owe tax on the transaction. However, if you follow certain rules, you can exchange property for “like-kind” property and postpone the tax consequences of the sale. That allows you to keep all of your money invested instead of turning some of it over to the IRS.

Basically here's how a tax-deferred exchange works.

  1. You hire a qualified intermediary to coordinate the sale and hold the sale proceeds from your property. You have no access to the cash.
  2. After a sale, you have 45 days to identify a replacement property and 180 days to purchase it.
  3. Your intermediary forwards your money to the closing agent to complete the exchange.
  4. Generally, you must replace property with property of an equal or greater value to achieve a totally tax-deferred exchange.
What tax bracket am I in?

Your tax bracket (marginal rate) refers to the highest tax rate at which a portion of your income is taxed. In other words, the percentage that you will pay in taxes on your next dollar of taxable income. The amount of income included in each bracket depends upon your filing status (i.e., single, married joint, married separate, or head of household).

For example, the 2007 tax rates for a single person are as follows:

Taxable IncomeTax Rate
$1 to $7,82510%
$7,825 to $31,85015%
$31,850 to $77,10025%
$77,100 to $160,85028%
$160,850 to $349,70033%
Over $349,70035%

Suppose you are single and earn $40,000. After subtracting the standard deduction, personal exemption, and your IRA contribution, your taxable income is $27,250. The first $7,825 of your taxable income is taxed at a 10% rate. The remaining $19,425 of your income is taxed at a 15% rate. Because it's the highest rate that applies to some of your income, you are considered to be in the 15% bracket.

Are my social security benefits taxable?
Up to 85% of social security benefits can be taxed. Whether your benefits will be taxed depends upon your total income from both taxable and tax-exempt sources. Once your total income reaches $25,000 ($32,000 for married couples), a portion of your benefits will be subject to income tax.
How long should I keep my tax records?
Just how long to keep your records is a matter of judgment and a combination of state and federal statutes of limitation. The IRS can audit your return for up to three years after you file a return. The period of audit is increased to six years if you omit more than 25% of your income from a return. However, the IRS can and has come back on a taxpayer for “failure to file” indefinitely! The only remedy to “failure to file” is a copy of the filed return.
Should my corporation own our business building or should I own it personally?

If your business is incorporated, it is often a good idea to personally own the real estate occupied by your corporation.

If appreciated real estate is sold by a regular corporation, the gain will be subject to double taxation if the corporation distributes the money to you. However, if you own the real estate personally, there is no double taxation. Though the double taxation does not apply to S corporation, there can be problems when an S corporation sells its operation business and its real estate.

If you personally own the property, you can lease it to the corporation. Because of the depreciation, you may well generate a tax loss on your personal return.

There are nontax advantages of personal ownership of business real estate as well. See us and your attorney before you buy business real estate or change the form of ownership on real estate you already have to discuss the facts in your situation.

What if I owe more money to the IRS than I can pay?

The IRS offers several options to taxpayers who cannot pay their taxes in full when they file their return.

  1. You can charge your taxes on a credit card. The IRS's credit card service providers charge a “convenience fee” of about 2.5% in addition to the interest rate your credit card company charges on your balance.
  2. You can request to pay your taxes to the IRS in installments. If you owe less than $25,000 and agree to pay off the balance within a five-year period, the approval process is pretty straightforward. Larger balances can be set up on an installment plan too, but they won't be automatically approved. The IRS will continue to add interest and penalties to your account until you pay off the balance.
  3. You can enter into an “offer-in-compromise” agreement with the IRS to settle your tax bill and get off to a fresh start. Under this arrangement, the IRS will settle your account for a portion of the tax you owe if you agree to file and pay your future taxes on time. You'll have to submit financial information to the IRS to prove that you don't have the money or ability to pay off the entire balance.
What is a “passive activity” loss?

The complicated “passive activity rules” were created to curb a growing abuse by taxpayers who were using tax-shelter losses to offset ordinary income (wages, interest, dividends, etc.). Passive investments include real estate, limited partnerships, and other businesses in which a taxpayer doesn't play an active role.

The rules create a tax “basket” for passive activities. The gains and losses from various passive activities are netted against each other. If the net result is a loss, the loss is generally suspended or carried forward to the next year where the process is repeated. In other words, the law generally eliminates the ability to offset ordinary income with passive losses until you dispose of an investment.

Can my child set up an IRA?

If your child has wages or self-employment income, he or she can contribute to an IRA BUT only to the extent of earned income — no more.

Your child can choose between making a deducible IRA contribution and a nondeductible Roth IRA contribution. In most cases, a Roth IRA will have the greatest long-term benefit for your child.

Can you make penalty-free IRA withdrawals?

The law generally makes you pay a 10% penalty if you take money out of an IRA before you reach age 59½. However, there are several ways to tap your IRA earlier without incurring the 10% penalty.

  • Equal withdrawals. You can elect to take substantially equal withdrawals based on your life expectancy or the joint life expectancies of you and your designated beneficiary.
  • Home and education. You may also take money from your IRA to help cover home and/or education expenses. For example, if you, your child, or grandchild is purchasing a home and the purchaser hasn't owned a home with the last two years, you can withdraw up to $10,000, penalty-free, to use towards this transaction. Likewise, if you, your spouse, child, or grandchild attends college or graduate school, you can take penalty-free distributions to cover eligible higher education costs.
  • Medical expenses. The IRS also allows penalty-free access to IRAs when taxpayers face certain difficulties. If your medical expenses exceed 7.5% of your adjusted gross income, you may make a penalty-free withdrawal of up to the amount by which these expenses exceed the 7½% floor. Similarly, if you have been unemployed for at least 12 consecutive weeks, you can take a penalty-free distribution to cover medical insurance premiums. Also, you are exempt from the early withdrawal penalty if you become disabled.
  • Military and public service personnel. Special rules apply to those on active military duty and to certain public safety employees.

Remember that you will most likely owe regular income tax on the money withdrawn even if the withdrawal is penalty-free. And the rules are different for 401K plans so check with a professional before you make the withdrawal.

Once I turn age 70 ½ how much money must I withdraw from my IRA account each year?
The amount you must withdraw from your IRA each year is called your required minimum distribution (RMD). Using an IRS life expediency table, you select a factor based on your age, and divide that factor into the sum of all your prior year-end retirement accounts balance. The result is the amount you must withdraw for the current year. You can withdraw as much as you want but not less than the RMD without incurring a penalty.
What if I fail to take my required IRA distribution on time?
You will incur a 50% penalty on the amount that should have been withdrawn.
When must I start withdrawing money from my IRA?
Upon turning age 70½ you must begin withdrawing money form your IRA. Your first withdrawal can either be taken by December 31st of the year you turn age 70½ or it can be postponed up until April 1st of the following year. Your second withdrawal must be taken by December 31st of the year after you turn 70½. In each subsequent year, you must withdraw at least the required minimum amount by December 31st.
I refinanced my home mortgage this year. Can I write off the loan costs?

If you refinanced to consolidate your debts or to obtain a lower interest rate, you must amortize or write off the points over the term of your loan. However, to the extent you used the loan proceeds to make improvement to your home, you can write off that portion of points this year.

If you have been amortizing points on a previous mortgage, you can write off the remaining balance of points in the year the loan is paid off.

When is interest deductible?

Interest is generally grouped into the following categories: business, mortgage, education, investment, or personal. Except for personal interest, all the other categories maybe tax-deductible. Your recordkeeping and your individual situation will determine what category your interest falls into and whether it is deductible. Here are some general guidelines:

  • Business interest — Interest paid in your trade or business is fully deductible
  • Student loan interest — You can deduct up to $2,500 a year for interest paid on certain student loans. You don't have to itemize to claim this deduction, but you can't take it if your income exceeds certain levels.
  • Investment interest — If you itemize, you can deduct investment interest to the extent you have investment income, such as interest and dividend income. You must itemize your deductions to claim this expense. If you borrow money to make tax-exempt investments, the interest expense is not deductible.
  • Mortgage interest — Within certain limits, interest on your first and second residence and on home equity loans is tax-deductible if you itemize.
  • Personal interest — Interest paid on credit cared, personal vehicles, consumer loans, etc, is not deductible.
What is the nanny tax?

The nanny tax is nothing more than three federal employment taxes (social security, Medicare and federal unemployment tax) that employers must pay if the wages of certain household workers exceeds a threshold amount.

The nanny tax only applies to your employees. A worker is generally considered to be your employee if you directly supervise the work and you supply the tools or supplies necessary to do the job. If your help cames from an agency or runs his/her own business, the nanny tax may not apply. Employees can include babysitters, nannies, housekeepers, gardeners, health aides, and other household workers.

When is my hobby considered a business?

Profit motive is the key to distinguishing between a hobby and a business. The IRS is suspicious of any business activity that looks like it provides personal enjoyment, such as antiques, photography, horse racing, etc. If you make a profit in any three out of five consecutive years (two out of seven years for horse activities), your activity is presumed to be a business and any business losses are deductible.

If you fail to show a profit, you may still qualify to deduct your losses if you are running your business with the intent of making a profit. The way you keep records, the amount of time you spend in the business and your financial risk in connection with the activity are some of the factors the IRS will consider.

Even if you hobby doesn't qualify as a business, your hobby income must still be reported on your income tax return. If you itemize your deductions, you can write off your hobby expenses up the amount of your hobby income.

What are health savings accounts?

Health savings accounts (HSAs) are similar to IRAs, except they are intended for medical expenses rather than for retirement. You can make a tax-deductible contribution for 2007 of up to $2,850 to an individual HSA or $5,650 to a family HSA. If you're 55 or older, your annual contribution can be $800 or higher. If your employer makes the contribution as part of a cafeteria benefits plan, it isn't taxable to you. Earnings on investments made with your contributions won't be taxed currently, and withdrawals are also tax-free if they are used for a broad range of medical expenses.

There are restrictions. To be eligible for an HSA, you must be covered by a health plan with a deductible of at least $1,100 annually for an individual or $2,200 annually for a family. These “high deductible” health plans can save you money, since they should have lower premiums. You must be under 65, and therefore not eligible for Medicare, when opening an HSA. If you withdraw HSA funds for non-health expenses, you'll pay taxes, plus be subject to a penalty if you do it before age 65.

What is the best filing status?

The “best” filing status for you depends upon which status you can qualify for and your particular circumstances. Tax savings are only one consideration when selecting your filing status. For example, you might not want to file a joint return with your spouse for personal reasons. Here are the five filing statuses and the qualifications you must meet to use them.

  • Single — You can use this status if you are unmarried at the end of the year.
  • Head of household — You can choose this status if you are single at the end of the year, and you have a dependent and meet certain requirements. In some cases, married, but separated individuals can also use this status. If you're eligible to claim head of household status, you'll probable pay less tax than filing as a single taxpayer.
  • Married filing joint — You can use this status if you are married at the end of the year. However, you cannot use this status if you are legally separated on the last day of the year.
  • Married filing separate — You can use this status if you are married, but choose not to file a joint return with your spouse or if you are legally separated on the last day of the year.
  • Qualifying widow(er) — You can choose this status if your spouse died in the last two years, you claim a dependent, and you meet certain other requirements. You then can use the more favorable tax rates for married filing jointly rather than the rates for single taxpayers.
Can I file as head of household?
Head of household status is available for unmarried taxpayers and certain separated taxpayers who provide a home for a qualifying person, such as a child or a parent. If you qualify, you'll generally pay less tax as a head of household filer than as married filing separately or a single taxpayer.
Do I need to file a tax return after I retire?

You may need to file a tax return even after you retire. You're required to file a return if your income is over certain levels. Generally, you must file a 2007 federal income tax return, even if you don't owe tax, when your gross income exceeds the following limits:

  • Single - $8,750
  • Head of household - $11,250
  • Married filing jointly - $17,500
  • Married filing separately - $3,400

If you are 65 or older or legally blind, you are allowed to make more money before you have to file a tax return. Single taxpayers who are legally blind can make another $1,300, plus an additional $1,300 if they are over age 65. Married couples filing a joint return can add another $1,050 per spouse to their filing limit for each spouse who is over 65 or legally blind.

If your total income is less than these amounts, you will still have to file a return if you are self-employed and your business net income is more than $400.

Even if you do not have to file a return, you might still want to do so. If you paid taxes to the IRS or had taxes withheld from your wages or pension, the only way you can get your money back is to file a tax return.

Does my child have to file a tax return?

If you or someone else claims your child as a dependent, your child will need to file a 2007 return if he or she has:

  • Earned income from wages of more than $5,350
  • Earned net income from self-employment (from a paper route, for example of $400 or more.
  • Investment income only (such as interest and dividends) of more than $850.
  • Both earned and investment income totaling more than the larger of: (a) $850 or (b) $300 plus earned income, not to exceed $5,350.

If no one claims your child as a dependent, your child has the same filing requirements as any other taxpayer.

What if I can't file my return on time?

April 15* is the tax filing deadline for most individual income tax returns. If you can't complete your tax return by then, file Form 4868 with the IRS to give yourself up to six additional months to complete your return.

Caution: Form 4868 only extends your filing deadline. It does not extend your tax payment deadline. If your tax is not paid in full by April 15th, you will face interest and penalties on the balance owed.

*When April 15 falls on a Saturday, Sunday or legal holiday, the deadline for filing is moved to the next business day.

Is bond interest taxable?

That will depend on the type of bond.

  • Corporate bond interest is taxable.
  • Municipal bond interest is generally not subject to federal income tax.
  • Treasury bond interest is free from state and local income taxes.
  • Savings bond interest may or may not be taxable depending on the issue and what you use the bond interest for. The interest on certain Series EE and Series I bonds is nontaxable if it is used for qualified education expenses.
Can I take a deduction on my tax return for a loan to a relative that has gone bad and will never be repaid?
If your loss qualifies as a non-business (personal) bad debt deduction, you can take a tax deduction only in the year it becomes worthless and only as a short-term capital loss. In addition, you must be able to prove that a bona fide debt existed and that you have made efforts to collect the debt.
I just left my job to start my consulting business, how do I handle making estimated payments?

You may be required to make estimated tax payments to avoid tax penalties for underpayment of tax liability. To provide for current payment of income taxes not collected through withholding, estimated payments are made with vouchers, Federal Form 1040-ES.

As a general rule you must pay estimated taxes if both the following apply:

  1. You expect to owe at least $1,000 in tax after subtracting your withholding and credits
  2. You expect your withholding and credits to be less than the smaller of:
    • 90% of the tax to shown on this year's tax return, or
    • 100% of the tax shown on your prior year's tax return. Your prior tax return must cover all 12 calendar year months.

High income taxpayers must pay 110% of their prior year tax instead of the 100% required for other taxpayers to qualify for the ability to avoid penalty for underpayment.

For estimated tax purposes, the year is broken down into four payment periods with estimated tax payments in four installments as follows:

April 15, June 15, Sept. 15, and Jan. 15

Planning notes and tips:

Ohio's estimated tax payment requirements are similar to the federal.

When married couples have one spouse who is self-employed and another who is a Form W-2 employee, the employed spouse can elect to pay in additional withholding taxes to eliminate the need for estimated tax payments.

I hired my first employee. What do I need to know?

First, it is important that the proper documents are collected from your new employee and that the taxing agencies are notified that you are now an employer. Failure to pay employer taxes on your employees in the proper time period and filing the reports is CRITICAL!!! Failure to stay in compliance can cost you your business. Please understand that all the money you withhold for your employees is consider the employees' money, you are the custodian of this money. Therefore the legal system is very strict with your responsibility and handling of your employee's money.

Here is an overview of the forms to have on hand for your new employee:

  • Form I-9. Though not a tax form, the I-9 is required by law to verify your new employee's eligibility to work in the US. Keep the completed form in your files, along with copies of any documentation your payroll policies specify.
  • Form W-4. The information your employee provides on this form is used to calculate the amount of income tax you will withhold from each paycheck. Make sure Form W-4 is fully filled out and signed and put it in your payroll file.
    • Note your employee may also need to complete a state withholding allowance form.
  • Form W-5. Use this form when eligible employees choose to receive advance payments of earned income credit. If you hire both spouses, request a separate W-5 from each. Retain the form as part of your records.
  • New hire reports. State requirements vary, but typically you will need to submit new employee information to a designated State agency within twenty days from your employee's first day of work.

Call us with your payroll questions. We have the forms and answers to set your mind at ease.

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