Thursday, December 27, 2007


2007 started off with a bit of a shock for many seniors receiving Social Security checks concerning the monthly Medicare Part B premium deduction. Under the Medicare Modernization Act of 2003, the special "surcharge" kicked in for Social Security recipients whose 2005 “modified” AGI exceeded $80,000 if Single and $160,000 if Married. Those who fell victim to the surcharge saw their monthly premium amount increased from the basic $93.50 to between $105.80 and $161.40. The modified AGI includes tax-exempt interest income reported on Line 8b of Page 1 of the 2005 Form 1040.

February 2007 (I don’t remember the exact day) marked my 35th Anniversary as a paid tax preparer. This year I managed to survive my 36th tax filing season. Yes, I started out very young.

In what seems to be becoming a habit, Congress waited until the very last minute in December of 2006 to extend for 2007 only a group of popular tax breaks. The IRS had already “gone to press” with the 2006 federal income tax forms and instructions without these breaks. So we had to enter “E” on a certain line of the 2006 Form 1040 if claiming the above-the-line deduction for educator expenses and “T” on another line to indicate an adjustment to income for tuition and fees, or “B” if claiming either “E” or “T” and the actual deduction indicated on that particular line And we had to enter “ST” on Schedule A if opting to claim state and local sales tax instead of state and local income tax.

The occasional forgetting to enter the appropriate letter symbol prompted correspondence from “Sam” and a delay in issuing any refund.
I read somewhere that this 2006 irresponsibility of Congress cost the IRS about $1 Million. Who knows how many million Congress’s 2007 irresponsibility will end up costing?

As I had mentioned in an April posting, I noticed a few common items on 1040s during the season. Interest income was up substantially – a result of “more better” CD rates. So were capital gain distributions from mutual funds – a sign that the market did pretty good in 2006.

Taxpayers were able to claim a special telephone excise tax rebate on their 2006 returns, or a special form if no tax return was filed – either the actual amount of excise tax paid over a three (3) year period or a standard rebate amount of $30.00-$60.00 based on the number of exemptions. All of my clients who were eligible claimed the standard telephone excise tax credit amount.
The IRS reported that there was a lot of fraudulant rebate claims filed, and also that many taxpayers who were entitled to a rebate did not claim one.

For the first time taxpayers who elected to have their federal refund directly deposited could choose to have the refund sent to up to three separate accounts by using a special form. None of my clients did this. Everyone who elected direct deposit had all their money sent to one account.

I ended the tax filing season with probably a few less GD extensions than the year before. More of the extensions were “client based” – they got their information to me too late – and less were filed solely because of my workload.

Mark Everson left his position as IRS Commissioner in April of 2007 to become President and CEO of the Red Cross. Everson’s Chief of Staff Kevin Brown took over as acting Commissioner. Brown then left the IRS in mid-September to follow Everson to the Red Cross and become the organization’s Chief Operating Officer, and Linda Stiff, IRS Deputy Commissioner for Operations Support, became the acting Commissioner.

George W nominated
Douglas H. Shulman, Vice Chairman of the Financial Industry Regulatory Authority (formerly known as the National Association of Securities Dealers), to be the new Commissioner of the Internal Revenue Service in late November. A week later Everson was fired by the Red Cross because “he had engaged in a ‘personal relationship’ with a subordinate employee”. As of this writing I do believe that Shulman has yet to be confirmed.

The Tax Foundation reported that TAX FREEDOM DAY 2007 was April 30th, 2 days later than 2006. This is the day on which the average American has earned enough money to pay all federal, state and local taxes. The Foundation estimated that for 2007, government at all levels would take an average of 32.7% of the nation’s income, down from the 34% high in 2006.

On May 25, 2007, George W signed into law the US Troop Readiness Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007, a $120 Billion emergency war supplemental funding bill. Part of this legislation was the Small Business and Work Opportunity Tax Act of 2007, which was, up until last week, the only major tax legislation passed in 2007.

The act increased the federal minimum wage over a three year period, raised the “kiddie tax” age limit to from 'under age 18' to 'under age 19', or 'under age 24' for full-time students, beginning with tax year 2008, and increased the Section 179 “expensing” limits and indexed them for inflation.

As we will be voting for President in 2008, the various campaigns have been off and running for most of 2007. The candidates have embraced and suggested a variety of different tax plans and proposals, including the so-called “Fair Tax” national sales tax. Most of the ideas put forth by the candidates only add to the complexity of the Tax Code, and many are bad ideas. No one is calling for a real overhaul and simplification of the Code.

The IRS reported an increase in electronically-filed tax returns for 2007. 79.98 Million e-filed returns were accepted through October 15th, a 9% jump from the 73.3 Million e-filed returns received for all of 2006. Direct deposit of refund checks were also up. As of October 15th the IRS reports had directly deposited 61.4 million refunds, 8% more than last year.

While I encouraged my clients to have their 2006 federal, and NJ, income tax refunds directly deposited, I continued to prepare all my federal returns manually and have yet to file a 1040 (or 1040A) electronically. Where possible I did submit my 2006 NJ-1040 refund returns via NJWebFile. New Jersey requires that I file all full-year resident state tax returns electronically unless the client chooses to “opt out” by signing a form.

Of course the major tax story of 2007 concerned the dreaded Alternative Minimum Tax (AMT).
As early as August the IRS and tax preparers were urging Congress to either reform the AMT or at least pass another temporary fix. There were also voices, mine included, calling for Congress to kill the damned thing altogether. As the year went on with no action in sight, the IRS and we tax preparers began to get worried. Treasury and IRS officials made several pleas to Congress to pass a patch before the Service had to “go to press” with the 2007 forms and instructions.

When Congress finally decided to do something it was split down party lines. The Democrats insisted that the income lost by passing another one-year fix had to be “offset” by increasing tax revenues elsewhere. One offset was to close a loophole for hedge fund investors. Republicans did not want any offsets. Both sides held out until, once again, literally the very last minute, after all the 2007 forms and instructions had been printed and the IRS software created, with the Democrats blinking first.

On the surface there was some merit to the Republican position. The revenue generated by the AMT over recent years was indeed “found money”. When creating the original Minimum Tax the Congress did not intend that it should penalize the middle and upper middle classes. The creation of the Minimum Tax was not really even a revenue-raising measure – but rather a typical lazy Congressional reaction to an outcry by citizens rather than a response to the problem that caused the outcry. But the current reality is that the moneys from the “unfixed” AMT had secretly been counted on to balance the budget, and providing offsets was the fiscally responsible thing to do.

While it seems just about everyone in both parties was against the current AMT and for the patch, there was talk that Republicans were not quite as sincere about fixing it as they appeared to be. This is because it is “blue states” that are hardest hit by this dreaded parallel tax system.

Anyway the bottom line is that Congress once again acted irresponsibly - and as a result the processing of 2007 tax returns and issuance of refund checks will be delayed.

Unethical tax preparation companies like Henry and Richard and Jackson Hewitt will no doubt take full advantage of the delays to push low-income taxpayers into usurious Refund Anticipation Loans.

Another 2007 tax story concerned the “subprime mortgage” crisis.

Families who wanted to buy a home that they could not afford had found lenders willing to give them a mortgage with a minimal down payment, a low interest rate, and small monthly payments for an initial limited period. When this initial limited period passed and it was time to refinance the mortgage, housing prices had dropped – such that in many cases the principal balance on the loan was more than the market value of the home – and interest rates had gone up. The overextended families could not afford the new monthly payments and the lenders had to foreclose on the properties.

In many situations the borrowers and lenders reached agreements so that portions of the mortgage debt were “forgiven” by the lenders. This debt forgiveness is generally taxable income to the borrower.

Once again Congress reacted instead of responding and passed a bill last week that excludes from taxable income for three years any “debt forgiveness” from a mortgage secured by a principal residence and incurred in acquiring, constructing or substantially improving the residence.

This is bad tax policy. Why do homeowners who have bitten off more than they can chew deserve tax relief any more than individuals who went overboard with credit card debt? Neither of them deserves any special treatment. No one put a gun to their heads to force them to borrow more than they could afford to pay back. Congress should not send a message to America that it is ok to be fiscally foolish and live beyond your means because you won’t have to pay the consequences.

There was no further action taken on the issue of registration and regulation (licensure) of all tax return preparers (including “unenrolled preparers” like me). However, NATP reports that the new IRS Director of the Office of Professional Responsibility has been quite public recently on the topic, telling the American Bar Association that his office is “preparing for what we believe is the inevitable”. The Senate bill (S. 1219) remains “out there”, but Congress has been too busy with other things.

While I support the concept of licensure, the Senate bill calls for testing of all unenrolled preparers. This would be literally impossible for the IRS to implement effectively, as there are currently some 1.2 Million of us. There would have to be some kind of “grandfathering”, and I have on several occasions suggested a method for NATP to pass along to Congress. At this point in my career I have no intention of taking a test to prove that I know what I am doing!

On the NJ state tax front there was really no activity to report. While both tenants and homeowners received increased property tax “rebates”, neither really has any more money in their pockets. The increased rebates were mostly paid for by the 2006 sales tax increase – so it was a case of taking money out of one pocket to put it in the other.

Such was the tax year in review. Did I forget anything important?

2008 will get off to a rocky start with the processing delays. Hopefully Congress will put an end once and for all to the dreaded AMT and extend the expired tax breaks early in the year. But I wouldn’t bet the farm on it!



Anonymous said...

I think your statement about Jackson hewitt is untrue- I went to a Jackson Hewitt and I found them helpful and in no way push a high interest loan. As a matter of fact they have continue to send me tax information throughout the year helping me with tax planning. I will go back and continue to send people to them. They are not all corporate offices and not all the same-- I find your one sided view wrong. Why don't you try them before you talk about something you have no facts to support it.

Robert D Flach said...


I have no personal experience with Jackson Hewitt (why would I?).

My comment on JH and the RALs comes from the fact that their tax-season ads do not say anything about going to Jackson Hewitt to have your tax return prepared properly and accurately by competent tax professionals. The ads only tell you to go to Jackson Hewitt and walk out with a check in your hands!

Were you aware of the scandal involving Jackson Hewitt offices last season?

The Government Accounting Office did an undercover "sting" of the "fast food" tax preparation chains not too long ago and found errors, some very substantial, in every single return prepared in the survey. While I do not believe the report actually mentions H+R, Jackson Hewitt or Liberty specifically by name - it does state that it went to offices of the popular commercial tax preparation chains. Who else is there?

Obviously, all individual JH employees or offices are not totally unethical, just as I am sure that there are also a handful of ethical and competent H+R Block people out there somewhere.