ONCE AGAIN KAY BELL IS RIGHT ON THE MONEY!

Once again Kay Bell of DON’T MESS WITH TAXES has provided a post that falls under the category of “I couldn’t have said it better myself” with “KinderCongress Needs to Act, Not Act Up”.

Her topic is the nonsense of waiting to the last minute to deal with the issue of the “extenders”. What is said in this post needs to be repeated again and again.

Kay takes the words out of my mouth when she says -

“I am tired of watching this bizarre legislative Kabuki year after year, where promises are made and political mud is slung and bills are introduced but nothing happens. All the while the lawmakers in both parties swear they support the measures.

If everyone's in agreement, then just approve them and do so early in the legislative session!

The tax provisions get pushed back and eventually resolved, but the consequences are that people can't make tax plans or moves when they need to, the filing season is disrupted and no one is happy.”

As I have said before the need to pass temporary extensions of tax law year after year is totally ridiculous. If Congress thinks that the tax break is a good and necessary one they should make it permanent from day one. If they change their mind at a later date they can always repeal an item.

This is much “more better” than having to go through the process of passing an annual one-year extension – which creates confusion for the taxpaying public, makes unnecessary additional work for the IRS, delays the processing of tax returns, and wastes government dollars.

As I said in a comment on another tax bloggers site – I recently saw a show in NYC called COLLEGE: THE MUSICAL which had a song titled ”College Kids Are Idiots”. If anyone wants to write CONGRESS: THE MUSICAL it should include a song with the very appropriate title “Congresspersons Are Idiots”!

CARNIVAL ALERT

I have just been informed that the “78th Carnival of Money Stories” is now appearing at FUNNY ABOUT MONEY (Simple Living = Frugality = Peace of Mind: Personal Finance and Stress Control).

As the host explains, “We have quite a passle of entertaining and interesting stories, which I hope everyone will enjoy”.

My post “Death of a Savings Bond Co-Owner” is included in the Carnival. As the entries are listed in the order in which they were submitted mine is 2nd from last.

ANIMAL FARM

I am not an economist. Nor have I had the time to properly review the “don’t call it a bail-out” legislation, which apparently is still up in the air. So I cannot intelligently discuss the issue. However . . .

My mentor Jim Gill, once a broker with Shearson Hayden Stone, used to always say, "Bulls make money, bears make money, but hogs get slaughtered."

It is obvious that the hogs caused the current financial “situation”. I truly hope that they get the slaughter that they so richly deserve, and are not saved by any kind of bailout. But knowing Congress I suspect that many of its members list hogs among their bigger contributors and supporters.

A 2007 post from the SURVIVING STOCK MARKET blog titled “Bulls, Bears, Hogs and Sheeps” (from Malaysia of all places), which I found in a Google search of the quote, adds “sheep” to the list of investors. Unfortunately the sheep have also contributed to the severity of the situation.

According to the post (the highlight is mine) - “Sheeps are great followers... They don't have to make decisions... All they need to do is to follow the trend or tips.... But one thing is for sure, the stock market is a very highly competitive place... People don't give away tips.... For they need to stay in the front in order to get the profits.. Real tips are not revealed, and those revealed are lousy tips... So, sheeps who get tips, get slaughtered as well... Those that follow trends always happen to be the last and the most foolish of the block... They always enter the uptrend late and when smart people are making their exit.... So, they alone ride the slide downhill....”

Do the sheep (or should we call them lemmings) deserve to be slaughtered as well for following the hogs? What do you think?

Investing, whether in the stock market or real estate, is not rocket science. All it takes is basic common sense, an asset apparently not held by many investors or even brokers.

Is it common sense to think you can buy and maintain a home with only 5% down? Is it common sense to think that housing prices will continue to rise ad infinitum and it is therefore ok to refinance annually and borrow 100%, 110% or more of the current value of a home – so that you can pay off your credit card balances and start to build them up again? Is it common sense to think that a 712 square foot condo (that is not located in Beverly Hills or Park Avenue) is worth $220,000 (though I am glad someone did when my parents were selling their unit, which cost them only $60,000+ five years earlier)?

The bottom line – obviously don’t be a hog. And also don’t be a sheep. Use the brain that God (or nature) gave you!

Before I go I should point out that the legislation does have one provision that applies to 1040 filers - the exclusion for forgiveness of home-mortgage debt, set to expire after 2009, is extended through 2012.

If I may quote from Joe Kristan’s post “Tax Provisions in the Bailout” at the ROTH AND COMPANY TAX UPDATE BLOG – the forgiveness of home-mortgage debt is “a break to the most feckless home speculators, while those who do their gambling at casinos or in the stock market get no such break”.

Just one more thing, he said Columbo-like. Speaking of bank bail-outs, I was surprised when a client, with substantial business and personal deposits at Wachovia, mentioned this week-end that it looked like his bank (also my parents’) was also in trouble. But yesterday morning I heard on the news that Wachovia was being bought out by Citigroup. Years ago, when the trend of bank mergers first began, I predicted that one day there would be just one humongous bank left standing - the Bank of America (not necessarily Bank of America). My prediction may come true sooner than I thought!

I was reminded of my long-time advice regarding choosing a bank at a delightful dinner with friends/clients this past Saturday at The Grain House Restaurant of the Old Mill Inn in Bernardsville. I would advise clients to use the smallest bank in town – a one-brancher if you could find it (are there any left?). As a depositor at a large national bank like, for example, Wachovia you are one customer in billions - but at a small local bank you are one in hundreds, or at most a thousand or so, and would certainly receiver better, more personalized service and attention.

TTFN

BTW – Speaking of Columbo – who was originally intended for the role?. Peter Falk was not the first choice.

AS THE CONGRESS TURNS - WHERE THE FAKAWI?

So here is where we stand with regard to the “tax extenders” –

The Senate approved a dreaded Alternative Minimum Tax (AMT) relief and extenders bill (HR 6049) on September 23. This bill also included a package of clean energy tax incentives.

The House has taken the bill passed by the Senate and split it into separate parts, with some changes, all of which have passed –

· H.R. 7060, the Renewable Energy and Job Creation Tax Act of 2008
· H.R. 7005 – the Alternative Minimum Tax Relief Bill of 2008
· H.R. 7006, the Disaster Tax Relief Act of 2008

The most recent bill, H.R. 7060, includes extensions of various expiring tax credits and deductions, including the R&D tax credit and incentives for renewable energy, along with a provision equalizing the penalty standards for tax preparers and taxpayers.

Now CCH reports in its daily Tax Headlines newsletter item “House Attempts to Woo Senate with Separate Tax Extenders, Energy Legislation” that “Frustration at the lack of Senate movement on the House-passed tax extenders and energy bill (HR 7060) prompted House Ways and Means Chairman Charles B. Rangel, D-N.Y., on September 28 to separate the measure into two tax bills.” The items states that “Rangel introduced the Energy Improvement and Extension Act of 2008 (HR 7201) and the Temporary Tax Relief Act of 2008 (HR 7202)”.

Once again the House and Senate are at odds regarding the issue of “offsets”.

The clock is ticking!

GUEST POSTS

Today (Monday) you can find my 2 cents worth on the topic MISTAKES IN CHOOSING A PAID TAX PREPARER over at Bruce McFarland’s TAXGUY blog.

I realize that my guest post may be controversial – and I look forward to your comments.

I am the second entry in an ongoing series of guest posts on the topic by tax and personal finance bloggers that is hosted by Bruce. The first guest post was last Friday, penned by Gina L Gwozdz of the TAX TIPS BLOG.

Peter Pappas of THE TAX LAWYER’S BLOG continues on Wednesday and LIVING ALMOST LARGE ends the week on Friday.

COMING NEXT WEEK – I will be locking myself behind closed doors and opening up the pages of THE WANDERING TAX PRO for a week-long series of guest posts by the best of the internet’s tax bloggers on the topic MY BEST TAX ADVICE. More information to come later in the week.

DEATH OF A SAVINGS BOND CO-OWNER

Recently a childhood friend, and long-time client, asked me about the tax treatment of savings bond interest on bonds that were owned by his recently deceased mother. His name was also on the bonds. He had not cashed the bonds yet, and wanted to know if he had to or if he could continue to hold on to the bonds.

FYI my friend provided more than half of his mother’s support and had been claiming her as a dependent on his 1040s. As his mother lived with him in his condo he filed as Head of Household. She filed a tax return each year to report a small pension and some minor interest on bank accounts, totaling slightly more than the standard deduction amount for a dependent, and used medical expenses to bring her net taxable income to “0”.

As a preface, I expect we all know that the annual interest earned on US Series E or I Savings Bonds is not currently taxed, but “accrue” and are taxed in full when you cash in the bond – unless you elect to report the accrued interest each year.

The optional method is often recommended for young children with no taxable income – to reduce the overall tax liability on the accrued bond interest. In the year or birth many children are often given savings bonds by relatives and family friends. If the parents file a tax return (with “0” tax liability) for the child’s first year reporting that year’s bond interest, and indicating on Schedule B that they are reporting the accrued interest on US Savings Bonds on an annual basis, then another tax return does not have to be filed until such time as the child has taxable income. In the early years when the child has no tax liability federal income tax is avoided altogether on the interest earnings.

The only possible downside to using the optional method for children is that it requires the parents to keep a good ongoing record of the accrued interest for each year on each bond. This becomes more involved if the child receives additional bonds each year as birthday or Christmas gifts. The amount of annual interest accrued on a bond can be determined on the Savings Bonds website.

We all also should know that US Savings Bond interest is exempt from state income taxes.

In the case of my friend, his mother had not been reporting bond interest annually – and the accrued interest added up to a very substantial amount.

To be honest the only thing I was sure about concerning interest on bonds of a deceased taxpayer was that the surviving spouse or executor can elect to include all of the interest earned on the bonds before the date of death on the deceased’s final 1040, even if the bonds were not cashed in. In this case the person who acquires the bonds after death only has to report interest earned after the date of death.

Other than that I was a bit unsure, so I did some research and found the following -

“If one of two people named on a bond is deceased, the surviving person is automatically the owner as if that survivor had been the sole owner from the time the bond was issued.

If you are named in a bond's registration with someone else who is now deceased, you can:

* Do nothing with the bond {no tax consequence, unless you report the accrued interest up to date of death on the deceased’s final 1040 – rdf};

* Redeem the bond by presenting it with adequate identification at a financial institution that pays savings bonds {and pay the tax – rdf}; or,

* Get the bond reissued (re-registered) in your name alone or with some other living person as long as the bond is still earning interest and is not approaching final maturity {again no tax consequence unless interest reported on deceased’s 1040 - rdf}.

To have a savings bond reissued in this situation, you'll need to send a certified copy of the deceased person's death certificate with the bonds and a reissue request PD F 4000 to a Treasury Retail Securities Site.

If the transferred bonds were owned by a decedent who had used the cash method and had not chosen to report the interest each year, and who had bought the bonds entirely with his or her own funds, all interest earned before death must be reported in one of the following ways.

(1) The surviving spouse or personal representative (executor, administrator, etc.) who files the final income tax return of the decedent can choose to include on that return all of the interest earned on the bonds before the decedent's death. The person who acquires the bonds then includes in income only interest earned after the date of death.

(2) If the choice in (1) is not made, the interest earned up to the date of death is income in respect of the decedent. It should not be included in the decedent's final return. All of the interest earned both before and after the decedent's death (except any part reported by the estate on its income tax return) is income to the person who acquires the bonds. If that person uses the cash method and does not choose to report the interest each year, he or she can postpone reporting it until the year the bonds are cashed or disposed of or the year they mature, whichever is earlier. In the year that person reports the interest, he or she can claim a deduction for any federal estate tax that was paid on the part of the interest included in the decedent's estate.

Example 1:

Your uncle, a cash method taxpayer, died and left you a $1,000 series EE bond. He had bought the bond for $500 and had not chosen to report the interest each year. At the date of death, interest of $200 had accrued on the bond and its value of $700 was included in your uncle's estate. Your uncle's executor chose not to include the $200 accrued interest in your uncle's final income tax return. The $200 is income in respect of the decedent.

You are a cash method taxpayer and do not choose to report the interest each year as it is earned. If you cash the bond when it reaches maturity value of $1,000, you report $500 interest income—the difference between maturity value of $1,000 and the original cost of $500. For that year, you can deduct (as a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit) any federal estate tax paid because the $200 interest was included in your uncle's estate.”

All of the above information is taken from here and here.

An article in THE CPA JOURNAL of the NY State Society of CPAs provides the following example-

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“An individual buys an EE bond, listing a nephew as co-owner (or beneficiary). The purchaser dies after several years; the nephew becomes sole and absolute owner of the bond.

The death of the original owner does not result in a taxable event for federal income tax purposes. The income tax liability on the accumulated interest would pass, along with the bond, to the nephew, and would remain his along with liability on additional accruals. (Rev. Rul. 64-104, 1964-1 C.B. 223.) However, if the person filing the final income tax return of the decedent elects to include all interest earned on all bonds owned by the decedent to the date of the decedent's death, the nephew's tax liability would extend only to the interest accruing from that date. (Rev. Rul. 68-145, 1968-1 C.B. 203.)”

So what about my friend? He has decided that we will not report the accrued interest up till the date of death on his mother’s final tax return, as this would generate a substantial current tax liability and make him unable to claim her as a dependent or file as Head of Household for 2008. As the bonds have a while to go before they mature, my friend will hold on to them for now and cash them in a few each year beginning some time after he has retired, thus spreading out the tax liability.

Any questions?

TTFN

UNANSWRED QUESTIONS

For years I have found myself faced with many questions – longing for answers.

Some answers are self-evident. Why do fools fall in love? Well, after all, they are fools aren’t they?

I have determined the answer to some questions based on history and experience. When will they ever learn? Probably never.

Some questions will probably never be answered. What’s it all about, Alfie? A totally unnecessary remake could shed no new light on the question.

With some questions only time will tell. Will you still need me, will you still feed me when I'm sixty-four? I’ll find out in 9 years and 2 months. This question is for the very few remaining long-time clients for whom I still make a house call in exchange for a home-cooked meal.

Some are no longer relevant. Where have you gone, Joe DiMaggio? Joe went to his “final audit” in 1999.

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And I have given up on others. Does your chewing gum lose it's flavor on the bedpost over night? Easy enough to find out – but who cares? Actually I don’t have a “headboard” as I sleep on a futon.

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There are still questions that haunt me.

I would really like to know what the mama saw. All I know is that what the mama saw it was against the law.

I also want to know what Billy Joe MacAllister and his friend were throwing off the Tallahatchie Bridge when they were sighted by Brother Taylor.

And while we are at it – I always did wonder why Mr. Baker’s secretary had to leave Harper Valley.

Can anyone provide me with answers?

TTFN

NO BOO HOO AT WAMU

In case you were interested I just returned from my local branch of Washington Mutual.

There were no signs, notices or indications that anything was wrong or that anything had changed.

I had no problem using my debit card to enter the lobby or to withdraw cash from the ATM.

So far – so good.

My only concern is that while WaMu business checking was free Chase might have minimum balance requirements and other hidden fees.

WHAT’S THE BUZZ? TELL ME WHAT’S A HAPPENNIN’

* In light of the recent Wall Street mess TAX GIRL Kelly provides an excellent “primer” on capital gains and losses in her post “Some Straight Talk On Capital Losses”. Perhaps the best post I have read on the topic.

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I remember during the early 2000s clients crying about how much they had lost on their 401(k) plans. “It was worth $900,000, but now it is down to $500,000!”. My question was always, “How much did you contribute to the plan?” If they had put in $360,000 over the years and the company had matched 10% they were ahead $104,000! The $900,000 high was a result of the artificial over-inflation of the market during the dot-com boom.

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These clients also wanted to know if they could deduct their loss. First – what loss? Second – as Kelly points out it was a “paper loss” and not a “realized loss”. And third - it happened within a pension plan so it is not reportable on the 1040.

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Kelly ends the post with the absolute best of advice. When it comes to capital gains and losses if you have a tax question, “ask your tax professional - not your broker, not your banker, not your financial advisor (trust me on this).” Do trust her!

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* While we are on the subject of the financial FU - Kristine McKinley of THE TAX WISE MONEY COACH discusses the topic of “Keeping Your Money Safe”.

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* CCH has published a Special Tax Briefing on “Tax Policies of the Presidential Candidates”.

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* Trish McIntire of OUR TAXING TIMES has discovered two “New Websites” of interest.

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* Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG led me to an item by someone who agrees with me about a true “minimum tax” in his post “51% Spend the Money of 49%”. According to Glenn Reynolds at INSTIPUNDANT.COM (highlight is mine) -

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“Personally, I'd like to see everyone pay at least some income tax, and I'd like to see the amount of tax paid, by everyone, go up or down every year in tandem with federal spending. That would encourage fiscal discipline directly. It would also make it harder for politicians to promise everybody a free lunch, but hey -- why shouldn't they sacrifice something, too?”

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* Joe also provides a lesson for all those who use their car for business – don’t leave your business receipts in your car overnight (or at least don't use that as an excuse to the IRS for having no records) – in his post “Salesperson in Training Learns About Deducting Travel Expenses”.

* Drug addict Rush Limbaugh is perhaps one of the last people I would quote on anything – but I must admit that his show did provide a humorous (and probably not far from the truth) parody on Chuck Rangel’s tax problems, as identified by TAX GURU Kerry Kerstetter in his post “Rangel Audio Parody”.

* Speaking of Chuck – the Tax Foundation’s TAX POLICY BLOG provides a good summary of “Congressman Rangel's Tax Woes”. Remember, this is the guy who heads the House committee that writes tax law!

This item was new to me – “Rangel, through his lawyer, requested permission from the Federal Election Commission to transfer $64,500 from his campaign funds to commission a painting of himself to be hung in the Ways & Means Committee room, which he would donate to the House of Representatives.”

* Michael Rozbruch of the TAX RESOLUTION UNIVERSITY blog takes us back to basics with “5 Simple Tax Tips for Individuals and Small Businesses”.

* Peter Pappas of THE TAX LAWYER’S BLOG uses an urban tax myth to tell us one of the reasons why Americans complain about high income taxes in “Taxpayer Pays IRS Bill With Toilet Seats”. His last paragraph is an excellent analogy.

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* Bruce presents the first in his series of guest posts by fellow tax bloggers on the topic of Mistakes Made When Choosing a Tax Preparer over at TAX GUY with an entry by Gina L. Gwozdz of TAX TIPS BLOG. My 2 cents worth on the issue will appear on Monday.

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* This entry appeared some time ago – I was saving it to use in a WHAT’S THE BUZZ-type posting to the no longer “in print” THE FLACH REPORT –

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“How to Turn a Photography Hobby into a Business”, a guest post at FREE MONEY FINANCE by Stephanie Simpson, provides some good advice and information. In the introduction the blog’s host/author states “I've suggested several times that one way to earn extra money is to turn your hobby into an extra income” I have been saying this for years – and have added that if you do it right you can deduct most, if not all, of your hobby’s expenses.

* In addition to my weekly WHAT’S THE BUZZ two other tax bloggers provide a weekly overview of good stuff related to taxes and personal finance that they have found on the internet. These guys often find some real gems that I have missed. TAX GUY Bruce McFarland posts “Passing the Week . . . .” on Sundays and Peter Pappas of THE TAX LAWYER’S BLOG does a weekly “Dr. Tax-O-Sphere, Or How I Learned to Stop Worrying and Love the Tax Code” on Mondays. At times we must look like a mutual admiration society, as we all include each other in our weekly reviews.

TTFN

WHOOO HOO! WAMU BITES THE DUST

When I reorganized my tax preparation business as Taxpro Services Corporation I opened my corporate checking account at Washington Mutual, as a new branch had just opened down the block from my apartment.

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This morning I noticed the following headline on my Comcast.net homepage - “WaMu Becomes Biggest Bank to Fail in US History”.

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According to the article - “The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift's banking assets to JPMorgan Chase & Co. for $1.9 billion.”

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“For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," states FDIC Chairman Sheila Bair. "For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning."

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Chase has compiled a FAQ that all those who bank with Washington Mutual should read.

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I will be going to the WaMu branch either later today or tomorrow morning to use the ATM.

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Cross your fingers!

LAST OF THE DINOSAURS

As most of my regular visitors know I still prepare tax returns “the old fashioned way” – by hand. And I am very proud to say so.

Each tax season I prepare about 400 sets of returns manually. In my 36 years as a paid tax preparer (I prepared my first 1040 in February of 1972) I have never used tax software to generate a 1040, 1040A, or, for that matter, a 990, 1065 or 1120.

Whenever I attend a tax seminar and the instructor asks who still prepares returns manually my hand is among the two or three that go up (on occasion it is the only hand). This is usually followed by a statement by the instructor to the effect – “Well you are the only people here who really know tax law”, or “who really know how to prepare tax returns.” At an NSTP seminar instructor Beanna Whitlock, the association’s Executive Director, wanted to shake my hand.

At a recent IRS Tax Forum in the session on common mistakes made by preparers the instructor went so far as to say that those who use tax software to generate 1040s have basically become nothing more than glorified data entry clerks.

Whenever someone asks me what tax software I use I simply point to my head – indicating my brain.

It is not that I am a “technophobe”. I have embraced the computer and use it constantly to email, blog, keep up-to-date on tax law changes, and research tax issues for client returns, and for word processing. I have been using general ledger and payroll software since the mid 1980s.

There are several reasons why I will never use tax software to prepare tax returns.

The biggest reason is the cost. I have no intention of spending thousands of dollars upfront, and again each and every year thereafter for “updates” and “technical support”, and as a result have to substantially increase my fees without putting any additional money in my pocket or, in my opinion, without providing the client with any additional value.

I honestly do not see any benefit to me as a preparer in using tax software. It would not save me any time. I have done so many returns over the years that I have developed a good “rhythm” and can prepare accurate returns quickly.

The closest I ever came to using tax software is 25+ years ago when I worked as a “para-professional” for one of the then “big eight” accounting firms. The firm used “Computax” for some of its income tax returns. I would manually prepare an “input form” which was given to a data entry clerk for processing. It was my opinion back then that by the time I had filled out the input form I could have prepared the actual tax return!

I must admit that back then, when there was a regular tax, minimum tax, maximum tax, Ten Year Averaging and Income Averaging, I did use a computer application at the firm to verify the tax liability calculation, and the choice of calculation method, on a completed manual return, again via input form. I also admit to working with a programmer client to develop a “Tax Calculation Verification System” software program (which was never completed) to do the same thing some 20+ years ago.

The State of New Jersey requires that I, as a professional tax preparer, file all my full-year resident state income tax returns “electronically”, unless the client specifically requests that I do a manual return by filling out an “opt out” form. The only option available to me is NJWebFile, which is available to all taxpayers for free online at the NJ Division of Taxation website. I use this system whenever possible (there are certain returns that cannot be filed via NJWebFile because of the nature or volume of information reported on the return). In comparison, except for the simpler returns, entering the data for online filing usually takes longer than doing the NJ-1040 by hand.

Using tax software does not relieve one of the need to check the return for accuracy, something that many tax preparers fail to remember. I have often come across prior year returns from new clients prepared via software that contain glaring errors that would have been easily discovered with even the simplest of checking. One still has to carefully check the return for data or math errors as carefully and in the same way one has to check a manual return.

I find that tax software wastes tons of paper printing needless subsidiary statements and reports, adding to their overall cost.

At just about every tax seminar either the instructor or a participant will discuss how his/her software will not always properly handle or calculate a specific issue so that one has to “force” the correct number.

The only advantage to using tax software was pointed out to me by a colleague at a recent tax seminar. On occasion in the process of checking a return I find an error or omission that requires me to pretty much rewrite the entire return. With software all I would have to do is enter the correction(s) and the return would be automatically recalculated and revised. I would still, of course, have to check it to make sure the revisions were properly done.

Because I do not use tax software to prepare returns I also do not file federal income tax returns electronically. I am not against electronic filing – as mentioned above I file NJ state income tax returns online whenever possible, and also file just about all state payroll and sales tax returns online.

I would gladly file federal returns electronically if the IRS provided a method for online filing of 1040s and 1040As totally free of charge, and without the need for outside software or the use of a third party, on its website – similar to the way New Jersey does with NJWebFile.

Another reason why I do not file federal returns electronically is because I have no intention of giving the government my fingerprints, apparently still a requirement for becoming an ERO (electronic return originator).

I challenge my fellow tax preparers out there to give me a good reason, other than the one mentioned above, why I should use tax software to prepare a 1040.

TTFN

AS THE CONGRESS TURNS - THIS JUST IN - PART II

The House has passed the Alternative Minimum Tax Relief Bill of 2008 (HR 7005) by a vote of 393 to 30. The bill does not provide for any “offsets” to “pay for” the patch.

AS THE CONGRESS TURNS - THIS JUST IN

The CCH daily email tax headline newsletter reports that -

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“The Senate overwhelmingly voted to approve an alternative minimum tax (AMT) relief and extenders bill (HR 6049) on September 23…..The Senate bill, which also includes a package of clean energy tax incentives, passed by a vote of 93-to-2.”

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The item also reports that “The House has scheduled a vote on extenders tax legislation on September 24, but Democratic leaders and members of the House Ways and Means Committee said the Senate's partially paid-for package is unacceptable. Instead, Rep. Earl Pomeroy, D-N.D., said that the House might simply pass a smaller tax bill that only includes the provisions that can be paid for by the Senate-approved offsets.”

The White House has said it supports passage of the Senate bill, “despite the inclusion of several provisions that the administration opposes."

The bill contains a two (2) year extension of the expiring tax breaks.

What is it with this need for annual extension of tax breaks – it is nonsense. Either the deduction or credit is a good idea and should be in the Tax Code or it isn’t. While I do believe we have had some temporary tax breaks in the past – this new concept of having to vote to extend tax breaks every or every-other year is unique to Dubya’s term in office.

Let’s hope the cafones in Congress pass an extender bill, with the AMT patch, before the end of the week!

I will keep you informed on developments.

TTFN

ANOTHER CREDIT – FORM 8880

{Surprise! Surprise! Surprise! Bruce, THE TAX GUY, and I have decided to exchange our compatible/complimentary posts. So Bruce’s discussion of the Credit for Qualified Retirement Savings Contribution appears here at TWTP and my take on the topic appears at THE TAX GUY. rdf}

Here is the second post of a continuous feature of well-matched/like-minded post with Robert D. Flach, aka THE WONDERING TAX PRO. Be sure to go see his post today titled “Let Uncle Sam Subsidize Your Retirement Savings” which appears over at THE TAX GUY.

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As tax time starts its approach various articles on the web and in print publications detail tips on how to save on taxes. I believe that no taxpayer should have to pay a penny more in tax than they actually owe.

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One of the best parts about being a preparer is showing taxpayers new to them credits and deductions. Everyone’s face lights up when you show them something new and it makes them money (or they owe less in tax on their income – however you wanna look at it).

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A good example is Form 8880 Credit for Qualified Retirement Savings Contributions. Here an individual or couple is saving for retirement through a qualified plan and get a credit for it.

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(Note: Credits reduce your tax liability dollar for dollar.)

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Qualified lower and middle income taxpayers can benefit from this form. This nonrefundable credit applies to taxpayers who make retirement plan contributions.

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Meaning, if you make a contribution to a traditional IRA, or a Roth IRA, certain salary reduction contributions, or contributions to a plan, you may be able to claim a credit for a contribution. That is if your adjusted gross income is low enough.

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Okay some quick stats from the IRS:

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You may be able to take this credit if you, or your spouse if filing jointly, made -

· contributions (other than roll-over contributions) to a traditional or Roth IRA,
· elective deferrals to a 401(k), 403(b), governmental 457, SEP, or SIMPLE plan,
· voluntary employee contributions to a qualified retirement plan as defined in section 4974(c) (including the federal Thrift Savings Plan), or
· contributions to a 501(c)(18)(D) plan.

However, you cannot take the credit if either of the following –

· The amount on Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 36, is more than $26,000 ($39,000 if head of household; $52,000 if married filing jointly).
· The person(s) who made the qualified contribution or elective deferral (a) was born after January 1, 1990, (b) is claimed as a dependent on someone else’s 2007 tax return, or (c) was a student.

Types of plans allowed -

· Traditional or Roth IRAs.
· 401(k), 403(b), governmental 457, 501(c)(18)(D), SEP, or SIMPLE plans.
· Distributions from your IRA (other than a Roth IRA) rolled over to your Roth IRA.
· Loans from a qualified employer plan treated as a distribution.
· Distributions of excess contributions or deferrals (and income allocable to such contributions or deferrals).
· Distributions of contributions made during a tax year and returned (with any income allocable to such contributions) on or before the due date (including extensions) for that tax year.
· Distributions of dividends paid on stock held by an employee stock ownership plan under section 404(k).
· Distributions from a military retirement plan.

If you qualify for this credit it is great, not to mention a great surprise if you didn’t know about it. If you read this and see you could have claimed in in 2007, 2006 and/or 2005 please see your tax professional and inquire about filing an amended return. But do the math - if the refund claimed on the 1040X is less than what your preparer is going to charge for the amended return it is not worth it. Also use this next year for your 2008 filing if you can.

THREE DOWN - ONE TO GO

As a Silver Member of the New York Musical Theatre Festival I receive a ticket to four of the festival entries. This past week I saw three of my four selections.
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First up was BEDBUGS – “a Sci-Fi Thriller Comedy Rock Musical” with book and lyrics by Fred Sauter and Music by Paul Leschen – last Tuesday evening at the TBG Theatre on 36th Street. I had been at this theatre last year for one of the NYMF offerings. It is a very small venue – perhaps the smallest stage of all the NYMF venues I have been to.
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On that night, the show’s opening night, the audience was held in the equally small lobby – packed in like sardines – as a technical problem with a lighting cable delayed the opening of the theatre’s doors for seating. While waiting in the lobby I was reminded of a comment made by a friend, client, and volunteer at the Paper Mill Playhouse in Millburn many, many years ago about the cast party for the theatre’s production of GUYS AND DOLLS – “I haven’t seen so much kissing and arse-grabbing in my life – and that was just among the men!

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As described on the show’s website, BEDBUGS is “’80s rock excess meets the Creature Feature. It’s 2012 {apparently according to ancient prophesies 2012 is the year the world will end – rdf} and Carly, an exterminator hell-bent on avenging her mother’s freak death {caused by Yugoslavian bedbugs - rdf}, has accidentally mutated NYC bedbugs into bloodthirsty killer Hair Metal Rock Gods. Sweet {read ‘gay’ - rdf} sidekick Burt has a plan, and troubled Canadian chanteuse Dionne Salon has stumbled onto the scene. But will Carly listen to them and save NYC—or be seduced by her own creation?

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The show was a silly mix of comedy, sci-fi, heavy metal and celebrity parody. I especially enjoyed the celebrity parody portion – a side-plot dealt with the Canadian singer and her bald manager-husband with an interest in much younger singers. The singer was performed in drag

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Actor Chris Hall looked menacing as head mutant bug Cimex – somewhat like Dr Frank “N” Furter in green make-up and antennae.

This past week-end I booked 1:00 PM matinee performances for both Saturday and Sunday.

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Saturday was COLLEGE: THE MUSICAL, book and lyrics by Drew Fornarola and Scott Elmegreen, at the Chermuchin Theatre on 54th Street. A new to me venue, bigger theatre than the one at 36th Street, but frankly almost too far of a schlep. It was next to the 18th Precinct and upstairs from a Courthouse. The entrance was difficult to find.

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The show was written while the authors were students at Princeton, apparently about their own experiences in a college dorm. The show does not identify the college – only that the dorm is in Gauss Hall (I do not know if that name has any significance).

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The “playbill” was bigger than the usual 4 or 8 pages. This was because the “Who’s Who” had a page for each member of the cast in the format of what I expect is a Face Book webpage (I have no experience with, or interest in, such “social networking” sites). One learned not only their professional resume but also their personal likes preferences, favorite movies, tv shows, books and quotes, etc.

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The story involves a new “Dweeb” freshman who attends his first dorm keg party and becomes involved with the roommates of Dormitory 211 and their friends. It seems that only one of the group actually studies and goes to class – the others spend their time playing violent video games, watching sports, going to the gym, partying, and throwing up in their room. In general, as female campus security guard Officer Alice, who lusts for the groups’ burnt-out upper-classman social leader, “College Kids are Idiots”.

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The basic apathy of the students (the extra-curricular organizations referred to include a Face-to-Face Facebook Club and the Redhead Club – no political or social activism) is apparently common of “Generation Meh”. The kids sing, “Democrats are stupid and Republicans are evil!”, so why should they get involved (hey, there is a glimmer of truth in the lyric).

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As I went to a local college, living at home for the four years, I could not personally relate to the dorm antics. However, it was entertaining with good group and individual musical numbers and a talented cast.

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The show was 1½ hour without an intermission. To break up the schlep back to 41st Street I stopped for a late lunch of my usual Caesar Salad, Meat Loaf, and Banana Cream Pie at an empty Joe Allen’s (there were only two tables occupied) on Restaurant Row, counting the number of flops on the “Wall of Musical Failures” I had seen over the years.

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Sunday was HEAVEN IN YOUR POCKET, music and lyrics by Mark Houston and book by Houston, Francis Cullinan and Dianne Sposito, at the kind of run-down 45th Street Theatre. Another small theatre, although with a slightly bigger stage than 36th Street, at which I had seen a prior year’s festival production.

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This schlep was “more better”. Eighth Avenue from 42nd Street up was closed off to traffic as there was a street fair in progress. No wonder I noticed signs all up Eight Avenue stating “No Parking on Sunday” during my Saturday schlep.

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The show’s promotional blurb explains, “En route to musical stardom in Nashville, The Heavenly Belles – a female family singing trio {mother, daughter and mother’s best friend – rdf} from Heaven, Oklahoma – take an unexpected detour to Kansas City where an unusual inheritance wreaks havoc with their plans. A handsome cowboy, a kindly Miss-Fixit and a "can-do" decorator {the show’s apparently obligatory gay character – rdf} all chime in with the Belles as they face the music (and each other) in this lighthearted, tuneful romp!”

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The “unusual inheritance” is the “Starlight Lounge”, a broken down honky-tonk on the shores of Lake Wannalotta on the outskirts of Kansas City, which was left to the daughter by her father, who had abandoned the family years before. The trio fixes up the theatre, supposedly so it can be sold, and uses it to showcase their act. The plot concerns the daughter’s desire to break out on her own as a solo country music singer-songwriter in Nashville.

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Excellent performances, both in the acting and singing categories, by the cast. Of the three shows I feel this has the best promise for a life after the festival.

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A humorous exchange in the 2nd Act – it appears that the daughter and the gay decorator were childhood friends who went beyond friendship during their teens. “You were my first,” the daughter reminisces. “You were my last,” replies the decorator.

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Three entertaining musicals at three small and intimate theatres. And one can’t go wrong with a ticket price of $20.00!

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Next up, in early October, is I COME FOR LOVE, another 1950’s sci-fi spoof. It seems that there is at least one each year. The only problem is that it is also at the 54th Street Theatre. Maybe I will break down and take a taxi.

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TTFN

ANOTHER GOVERNMENT UNDERCOVER STUDY OF TAX PREPARERS

The office of the Treasury Inspector General for Tax Administration has prepared a report titled “Most Tax Returns Prepared by a Limited Sample of Unenrolled Preparers Contained Significant Errors” based on an “undercover” operation conducted during the recent tax filing season.

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The following is from the memo to the Commissioner of the IRS Small Business/Self-Employed Division which appears at the beginning of the report.

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“In February and March 2008, TIGTA (Treasury Inspector General for Tax Administration) auditors posed as taxpayers in a large metropolitan area and paid to have 28 tax returns prepared at 12 commercial chains and 16 small, independently owned tax return preparation offices. Auditors paid commercial chains approximately $2,800, averaging $234 per return, and independently owned offices approximately $2,100, averaging $132 per return.

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The preparers were unlicensed and unenrolled. That is, they were not practitioners (attorneys, certified public accountants, enrolled agents, or enrolled actuaries). Preparers made substantial errors when completing tax returns and correctly prepared only 11 (39 percent) of the 28 tax returns (i.e., the tax returns showed the correct amount of taxes owed or refunds due). Of the remaining 17 tax returns that were prepared incorrectly:

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· 11 (65 percent) contained mistakes and omissions that auditors considered to have been caused by human error and/or misinterpretation of the tax laws.

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· 6 (35 percent) contained misstatements and omissions that auditors considered to have been willful or reckless.

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If these incorrect returns had been filed, the net effect to the Federal Government would have been $12,828 in understated taxes (the amount is the net effect because there were instances in which tax liabilities and tax refunds were both overstated and understated).

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We recommended that the Commissioner, Small Business/Self-Employed Division, develop and require a single identification number to control and monitor all paid preparers.”

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The study used 5 scenarios with income ranging from $16,000 to $85,000 using filing statuses of Single, Married Filing Joint and Head of Household. These scenarios included a wide variety of tax law topics related to income, deductions and credits. Detailed information on the scenarios is included in the report.

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Six (6) of the returns that were prepared in the study included business expenses. According to the report none of these 6 returns were prepared correctly.

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The report also states that six (6) preparers acted “willfully or recklessly during the preparation of the five scenarios. These preparers added or increased deductions without the auditors’ permission and in some situations after the auditors had questioned whether they were entitled to receive the deductions.”

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The TIGTA operation is very similar to one conducted by the Government Accountability Office (GAO) a few years ago which resulted in a report to Congress titled “Paid Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors”. The GAO sent undercover agents with two different tax scenarios to a total of 19 offices of 5 “fast-food” commercial tax chains, including H+R Block, in a metropolitan area. In only 2 instances was the correct refund calculated, but all 19 returns contained errors.

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The first thing that I noticed is that the TIGTA undercover “auditors” paid on average $100.00+ more per return to the commercial chains than they did to the independent tax preparers ($234 vs $132)! Of course this did not surprise me – it is a known fact that Henry and Richard and their ilk overcharge.

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Unfortunately I could not find anywhere in the report a breakdown of how the errors made applied to commercial preparation chains vs independent preparers or how the 6 “willful and reckless” preparers fell into these two categories.

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Click here to download the complete report.

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This report echoes the concerns of Congress, fueled by the earlier GAO study, that all paid tax preparers be registered or licensed. Bills have been introduced in both houses to regulate paid tax preparers.

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I, too, am in favor of having the IRS register “unenrolled” tax preparers. I would also welcome the creation of a “Licensed Tax Preparer” (LTP) status. There is already in place the beginnings of a registration process – the IRS currently issues to preparers a special “Preparer Taxpayer Identification Number” so we will not have to reveal our individual Social Security Numbers when we sign tax returns we have prepared for compensation.

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My only concern is that all of the legislation so far has required that registrants pass a test, similar I would expect to the EA exam in order to be allowed to practice.

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For one thing, it would be very literally impossible for the IRS to properly test the probably more than a million current “unenrolled” preparers. They had enough problems administering the EA enrollment exam, with only a few thousand participants each year, and have “outsourced” the EA exam to a private company.

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More important – I have been preparing 1040s for over 35 years without any problems with the IRS. At this point in my career I have absolutely no intention of taking a test to prove that I know what I am doing. While I am not against some kind of competency exam for new preparers, any legislation requiring the registration of tax preparers must include a “grandfather” clause.

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I would suggest that all current tax preparers – for example who have prepared at least fifty (50) 2007 federal individual income tax returns – who have been preparing tax returns consistently for at least five (5) years, and who have earned a minimum average of 20, or even 40, hours of continuing education credits per year for the past five years, be exempt from any kind of test and “grandfathered” in.

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In closing I should point out that I do agree that incompetent and unethical tax preparers are not limited to employees of Henry and Richard and their kind – there are indeed these type of preparers among the unenrolled “independents”, as well as the “enrolled” preparer community (remember all the accounting “ethical improprieties” involved with Enron and other such companies were made by CPAs). I have discussed the issue in my post “Let the Client Beware”.

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So what do you think?

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TTFN

ANOTHER ONE BITES THE DUST

I have decided to “lay to rest” THE FLACH REPORT, my blog of tax planning and preparation advice and information for Schedule C filers. I do not have the time to devote to properly maintaining this blog in addition to TWTP and the NJ TAX PRACTICE BLOG.

In the future I will include posts on Schedule C issues here at TWTP.

I will keep the “archives” of THE FLACH REPORT available. Sole proprietors and one-person LLCs who file a Schedule C can find valuable information in the archives.

Thanks to the regular visitors to THE FLACH REPORT. I hope you have found the information I have provided helpful.

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TTFN

FROM THE “I COULDN’T HAVE SAID IT BETTER MYSELF” FILE

Yesterday’s post from Kay Bell at DON’T MESS WITH TAXES came to my attention after I had published WHAT’S THE BUZZ. It is a post that deserves serious attention.

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The post reports “44% of U.S. Taxpayers Could Owe $0” and discusses a recent Fiscal Fact from the Tax Foundation titled “Both Candidates' Tax Plans Will Reduce Millions of Taxpayers' Liability to Zero (or Less)”.

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Kay quotes the TF FF as calculating -

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“If all of the Obama tax provisions were enacted in 2009, the number of nonpayers would rise by about 16 million, to 63 million overall, or 44 percent of all tax returns.

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If all of the McCain tax proposals were enacted in 2009, the number of nonpayers would rise by about 15 million, to a total of 62 million overall, or roughly 43 percent of all tax filers.”

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The growing number of “tax non-payers” is a topic that has concerned the Tax Foundation, and myself as well, for some time now. The Foundation points out that based on IRS statistics for 2006 45.6 million tax filers, which is about one-third of all filers, had no tax liability after claiming all their allowable credits and deductions. "For good or ill this is a dramatic 57 percent increase since 2000 in the number of Americans who pay no personal income taxes." Who says that Dubya's tax breaks were only for the rich?

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Kay speaks for me as well when she comments on the current state of the federal Tax Code -

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“Right now, it's a big political goody bag instead of a sensible method to fund a country's operations.

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Dubya deserves credit for appointing the President's Advisory Panel on Federal Tax Reform {about the only thing he did right in his 8 years- rdf} that came back with some interesting ideas about how to truly reform our tax system. Too bad no one had the political stomach to even give the Panel's suggestions a second look.”

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I agree with the Tax Foundation when it says, "It is time for a serious public discussion of whether it is desirable to have so many Americans disconnected from the cost of government and what the consequences are of using the tax system as a vehicle for social policy."

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A while back I had proposed a different kind of “minimum tax”. I suggested that every American over the age of 18 who is not claimed as a dependent on another return should pay a minimum tax of $100.00. What do you think?

WHAT’S THE BUZZ? TELL ME WHAT’S A HAPPENNIN’

* “5 More Reasons Why To Track Expenses” by Kacper Wrzesniewski at kacperwrzesniewski.com continues where the earlier post “Track Your Expenses” ended. Kacper reports, “At the beginning of September I decided to run a 30-days trial and track my expenses. Currently, after nine days, I pretty much enjoy this new habit. I see some benefits and I know I’m learning something new about money.”

As a somewhat obsessive-compulsive (or is that anal-retentive) accountant (I confess that I at times combine the qualities of both Felix and Oscar) I have been tracking my daily expenses for quite a while now. I know exactly to the penny what I spend on what each year.

* Bruce the TAX GUY started the week off with a listing of “Items to Bring to Your Individual Tax Preparation Appointment”.

While it is still a long way off to tax time - unless you waited to literally the last minute and need to get to your tax preparer ASAP so you can file by the October 15th extended deadline (if so – shame on you) – this post provides a good idea of what information you should be saving.

* Bruce ended the week by introducing an ambitious series of guest posts on the topic “Mistakes Made When Choosing A Paid Tax Preparer”. As Bruce rightfully puts it, “CHOOSING THE RIGHT TAX PROFESSIONAL IS A VERY IMPORTANT DECISION!"

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Among the guest posters will be fellow tax-bloggers, myself included. Bruce begins with an introduction and a reference to his post on “Choosing a Tax Preparer” – and the series begins on Monday.
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Bruce invites his readers to submit guest posts on this subject.

* Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG also writes regularly for the IOWA BIZ blog. His post there “Home is Where the Job Is” gives an interesting point of view on Sarah Palin’s recently uncovered “alleged” tax FU.

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* And at the ROTH ETC blog Joe reports on an interesting, albeit illegal, scheme used by a California CPA to have his clients, and himself, avoid self-employment tax in “Tax Man, Heal Thyself”.

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* Thanks to Russ Fox of TAXABLE TALK for the kind words in “Another Tax Blog”, and for including me in his “blogroll”. Check out Russ’s blog when you get a chance.

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* Kay Bell of DON’T MESS WITH TAXES keeps us up-to-date on the energy tax bills, which include an extension of the 1040 energy tax credits, here and here. Now if only Congress would extend the AMT patch.

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* The NATP weekly email newsletter reports “The Treasury Department and Small Business Administration (SBA) announced the launch of a new website to help small business employers determine whether to offer health savings accounts (HSAs) to their workers. The new website compares HSAs to other health care coverage options and provides general information to help employers and individuals determine whether to enroll in HSA-eligible coverage.”

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* Pete Pappas of THE TAX LAWYER’S BLOG brings our attention to another’s blog posting on “Seven Profiles of Tax Cheats” in his post “Bird Flippers More Likely to Cheat on Taxes”. What do you think of the suggestion in my comment?

I found another interesting “profile” of tax cheats in the referred to post – it appears “Educated Women Tend to Cheat More”. Kelly, Gina and Kay (intelligent women all) – what do you think!

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* Hey look – a trio of alleged “tax preparers” from Jersey City have made the news – “Three Members of Jersey City Family Sentenced for Their Roles in a $573,000 Bogus Homestead Rebate Applications Scam”.

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* It seems that Congress finally listened to me and took up the “extenders”. However there seems to be a problem – and a possible veto from Dubya.

I first received an email from Beanna Whitlock, ED of NSTP, which included a 9/16 press release that began – “Senate Finance Committee Chairman Max Baucus (D-Mont.) and Ranking Member Chuck Grassley (R-Iowa) today announced an agreement with the Senate's Democratic and Republican leadership to move legislation accomplishing the Finance panel's remaining major objectives for the year: passage of clean energy tax incentives, the protection of millions of Americans from the alternative minimum tax (AMT), and extensions of expiring family and business tax cuts.” The release stated that is was hoped the extenders could be passed by the end of week.

However, Friday’s CCH daily tax email newsletter included the item “Tax Extenders Face Veto; White House Resists ‘Depression’ Label”. The item states, “As the Senate on September 18 remained deadlocked on a motion to proceed to an approximately $150- billion tax extenders bill, a White House spokesman said that President Bush would veto tax extenders legislation that is funded by tax increases.”

Oi vey!

* Beanna also emailed an article from the New York Daily News on “a different type of amnesty program for tax cheats” – the New York State Voluntary Disclosure and Compliance Program.

* From the “Always Leave Them Laughing” department - TAX GURU Kerry Kerstetter always seems to find a good political cartoon or comic strip. Check out this one and see if you can “Spot The Economic ‘Expert’”. Funny – but also sadly true!

TTFN

FROM THE HORSE’S MOUTH

Yesterday (Thursday) I attended the NJ chapter of the National Association of Tax Professionals’ Annual Meeting and Conference. Kudos to the chapter for an interesting mix of topics.

I just had to report to you what was stated by Lyle Lauterbach, the head of the NJ office of the IRS Taxpayer Advocate Service, in his presentation.

Lyle said that the economic “stimulus” rebate check program “has overwhelmed every aspect of the IRS”. He reported that so far 30,000 cases have been submitted to the Taxpayer Advocate Service regarding the economic “stimulus” payment (“ESP” as it is referred to by the IRS) and pointed out that because of the ESP, “everything that would normally take 60 days will now take 120 days”.

He did have some possible good news for those who, like my clients discussed in an earlier post, were “Royally Screwed”. The IRS has been dealing with the problem of a non-matching name and Social Security number as it relates to the economic “stimulus” rebate and expects to have a solution by October – so those who had been RS-ed could possibly receive a rebate check in November.

Lyle also told us what the initials IRS really stand for – “It Really Sucks”!

TTFN

THIS JUST IN – THE CHECK IS IN THE MAIL!

State Treasurer David Rousseau has announced that eligible non-senior, non-disabled homeowners (under age 65 and not disabled as of December 31, 2007) who filed an application for the NJ Homestead Rebate by August 15 can expect to receive their 2007 rebate checks in a mailing that went out yesterday (Sept 15).

Those who requested direct deposit will have their rebates deposited directly into their bank accounts.

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Homeowners with incomes of $100,000 or less will receive 20 percent of the first $10,000 of property taxes paid in 2006; those whose incomes are between $100,001 and $150,000 will receive 10 percent of the first $10,000 of property taxes paid in 2006. Those with income over $150,000 are not eligible for the rebate this year.

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The Treasurer also noted that applications for the NJ Homestead Rebate are still being accepted.

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“Homeowners and tenants who still have not applied for the rebate have until October 31, 2008, to file their applications. The clock is winding down, so anyone who has not yet filed should do so quickly.”

Applicants who have already filed can check the status of their rebate check by calling 1-877-658-2972, or online at-

www.state.nj.us/treasury/taxation/homestead/hrintro.htm.

TTFN

JUST A BRIEF NOTE. . .

I just had to briefly put off my week-off to report that my post on Tax Amnesty is included in “Carnival of Personal Finance #170 – Famous Last Sentences Edition” at THE PERSONAL FINANCIER written by Dorian Wales.

Once again, like Oliver Twist I am last on the list – as Taxes is the last category.

This Carnival is chock-a-block with posts. I especially recommend “Ten Tips You Should Consider to Protect Your Online Financial Transactions”, a very good list on an important subject under Economy and Finance.

Speaking of Tax Amnesty – check out my newly created website for Americans for Federal Tax Amnesty, a work in progress.

Now on to the GD extensions!

TTFN

JUST SAY NO

Since I no longer have the blog ANYTHING BUT TAXES I have decided to save my non-tax ramblings for posting on Sundays.

The NON SEQUITUR comic strip by Wiley often comes up with a real gem. Last Thursday’s strip showed a couple standing on a street corner looking at a sign that read “NO UNICYCLES BEYOND THIS POINT”. The husband comments, “Y’know…up until now I never had the urge to ride a unicycle.”

This same quirk of human nature is the basis for the long-running off-Broadway musical THE FANTASTIKS, which I produced in Hudson County NJ years ago. As the fathers sing in an Act One song –

“Why did the kids put beans in their ears?
No one can hear with beans in their ears.
After a while the reason appears.
They did it cause we said no.”

How true this is – and I have proof.

Many, many, many years ago during my early college days, before we began to rent summer houses in Belmar at the Jersey shore, my friends and I would often spend week-ends at The Whitfield Hotel in Ocean Grove.

After checking in on our first group week-end stay we were told two things by the hotel’s owner –

(1) “Keep off the 4th floor” (this is where many girls who worked as summer waitresses at various local restaurants stayed), and

(2) “Don’t piss in the sink!” (most of the rooms in the hotel did not have a private bathroom – just a sink; one had to go “down the hall” to use the shower or jake)

Up until that point in time it had never occurred to me to relieve myself in a sink. However from that day forward I have pissed in many a hotel room sink when I did not have a private bathroom!

TTFN

FYI – This coming week I will be going to NYC for my first selection in the New York Musical Theatre Festival, attending an all-day seminar sponsored by NJ-NATP, and visiting my folks in assisted living on two separate days (one to take my mother to a doctor’s appointment) – and I must put in some work on the GD extensions. As result I will be taking a hiatus from posting. I will return with my weekly WHAT’s THE BUZZ next Saturday.

WHAT’S THE BUZZ? TELL ME WHAT’S A HAPPENNIN’

* William Perez of WILLIAM’S TAX PLANNING BLOG at about.com William's Tax Planning Blog reminds us that the third quarter federal and state “Estimated Tax Payments Due September 15th”.

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* Madame X, a 30-something single woman living in Brooklyn, NY, gives some good advice in her post “Do It Now” at MY OPEN WALLET. I made sure I took care of all these items before moving my parents into an assisted living facility.

* I mentioned this post in an earlier posting on my recent Blog Carnival inclusions, but it bears repeating. Mr ToughMoneyLove suggests “Let’s Make the Politicians Take Economics 101” at, where else, his TOUGHMONEYLOVE blog. Mr TML says “politicians just don’t know anything at all about economics”. As I told him in my comment politicians also don’t know anything at all about taxes.

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* Peter Pappas, who helps us to make taxes less taxing at THE TAX LAWYER’S BLOG, has a good point in his post “Flip Flop or Change of Mind: Obama May Defer Rescission of Bush Tax Cuts” – “We simply must learn to honor and reward politicians who are willing to regularly review their policy positions and change them if necessary based on current circumstances”.

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I agree with Pete when he asks, “do we want leaders who stick to positions that prove to be unwise? Do we want leaders who fail to recognize that facts and circumstances dictate policy? A tax increase might be wise in one circumstance and unwise in another. Nation building might be wise in one circumstance and unwise in another.”

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My concern is with a politician how can you tell if the position change is indeed a heartfelt one based on an honest review of the situation or just, as Pete puts it, “based on which way the political winds are blowing” and done simply to avoid losing votes.

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* Peter took time off from “Making Taxes Less Taxing” to provide some alternative interpretations to Shakespeare’s famous line “The first thing we do, lets kill all the lawyers” in his post “Did Shakespeare Really Hate Lawyers?”.

This has always been one of my favorite quotations from the bard, along with “brevity is the soul of wit” and “neither a borrower nor a lender be”. I thought it to be a find sentiment, and a good suggestion on how to cure many of the ills of society. However over the years I have softened a bit – perhaps not all the lawyers!

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* And before I leave Pete, the “newbie” offers some kind words for some fellow tax-bloggers in “The Tax Lawyer Says Thanks to Joe Kristan, Robert Flach and Bruce “the tax guy”. Thanks for the thanks!

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* Here’s a new one – WALLY’S WORLD OF TAXATION. It is one of the growing number of tax blogs by preparers connected to Effectur, which appears to be a tax representation company dealing with IRS collection issues. Wally provides a series of posts on the topic of IRS Appeals.

* The National Society of Tax Professionals has published its 2008 Tax Professionals Survey. Under the question “Do You Use Tax Preparation Software?” the answers were YES = 99.7% and NO = 0.3%. I am in the .3% - I don’t know how many others are in there with me. I have never used tax preparation software, and never will – unless the IRS provides it to me for free. As, as it would naturally follow, I am also in the 11.7% of paper-only (non-electronic) filers.

* Last Tuesday I commented on the tax proposals in the official Democratic and Republican platforms in “Dueling Tax Planks”. The Tax Foundation provides a “Presidential Candidate Tax Plan Comparison” tool for all of the Presidential candidates – including the Libertarian and Green Parties and perennial spoiler Ralph Nader.

* And the Tax Foundation’s TAX POLICY BLOG provides more examples of how politicians continue to showcase their ignorance of tax law in the back-and-forth of the campaign here and here. One wonders - if they are this uninformed when it comes to basic tax policy how ignorant are they on every other item they legislate?

* Joe Kristan sets us straight on just who to blame for the deficit in his post “They’re Both Right” at the ROTH AND COMPANY TAX UPDATE BLOG.

* TAX GIRL Kelly Phillips Erb provides the correct answer to a oft-asked question in her post “Ask the Taxgirl: School Uniforms” – and then goes on to show a “back-door” way to get a partial tax benefit for an otherwise non-deductible item. Good work, Kelly!

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* Bruce THE TAX GUY provides a good review of "Are You Eligible to File Form 1040A?"

* AccountantsWorld.com had an article on Congressman Rangel’s tax troubles. The Chairman of the tax-writing House Ways and Means Committee failed to report $75,000 in rental income from his villa in Punta Cana in the Dominican Republic.

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The article, titled “Rangel Cites Language Barrier on Unpaid Taxes”, states that Rangel had trouble getting detailed financial statements from the resort's managers in the Dominican Republic, saying, ''Every time I thought I was getting somewhere, they'd start speaking Spanish”.

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Pardon my French, but what pure horseshit! For one thing, do you think Rangel actually prepares his own tax returns? I am sure he has an expensive CPA firm (is there any other kind?) on retainer to handle his finances and tax filings.

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Besides, who cares about the financial statements of the resort. He was not reporting partnership income but rental income. Rangel, or his accountants, certainly would know how much money he received from the resort and how much he paid out in maintenance fees and other expenses. They certainly should know that such activity was a taxable event.

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Either Rangel thought because the source of the money was offshore he would not get caught or his accountants are incompetent.

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One would expect that the chairman of the committee that tells the average American how to report income and expenses and pay taxes would make damned sure that his own tax returns were letter perfect!

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TTFN

A POPULAR POST

My post on “demutualization” is still making the rounds of Blog Carnivals. Yesterday it appeared in “Finance Fiesta #15~The Patriot Day Edition” at ON A QUEST TO BE DEBT FREE (Digging my way out of debt, one day at a time) by Anna. I head up the extensive “Other” category.

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And while I am "tooting my own horn" - you will notice that my Sitemeter has passed the 80,000 mark!

S’WONDERFUL, S’MARVELOUS

Wednesday afternoon I ventured into “the City” (NYC) to see a matinee performance of THE MARVELOUS WONDERETTES upstairs at the Westside Theatre on 43rd Street between 9th and 10th Avenues (as someone sitting behind me observed before the show began “not a bad seat in the house”). The show was 3:00 pm, not the traditional time for a matinee, but then this was off-Broadway. I was pleased that my “schlep” was minimal and that there was a cool breeze on both sides of the Hudson.

The first I heard of THE MARVELOUS WONDERETTES was when I received a promotional flyer in the mail advertising a “limited-time offer” (available online, by phone or at the box office) for $39.00 tickets (regular price $75.00). Of course the $39.00 ticket actually cost me $46.00 after adding the various processing fees – but still a nice discount.

The flyer described the show as “a cotton-candied, non-stop musical blast from the past! Featuring your favorite songs from the fifties and beyond, THE MARVELOUS WONDERETTES takes you to the 1958 Springfield High School prom where we meet the Wonderettes, four girls with hopes and dreams as big as their crinoline skirts and voices to match!”

The show does indeed begin at the 1958 senior prom (theme = Marvelous Dreams) held in the gym of Springfield High School (“go chipmunks!”). The Wonderettes are four members of the school’s award-winning glee club who have joined together at the last minute at the urging of their faculty advisor to replace the original entertainment for the evening – the Crooning Crabcakes – when the lead Crabcake (a son of a preacher man) is expelled for smoking behind the girls’ locker room.

Included in the playbill is the prom program, reminiscent of the days of mimeograph (now there is a word that I haven’t heard in close to 30 years). The four girls in the group are also each vying for the title of Prom Queen, along with another student who has been excused from attending the prom due to a doctor’s appointment. The program included a ballot and we were each given a small #2 pencil so we could vote for our selection for the queen near the end of Act One (although I doubt our votes were actually counted).

Farah Alvin, Beth Malone, Victoria Matlock, and understudy Melissa Robinette were Wonderettes Missy, Betty Jean, Cindy Lou, and Suzy. A member of the audience was coaxed onstage to portray glee club faculty leader Mr. Lee being sung to by the girls. They harmonized well as a group and each also shined in their solo numbers, performing popular juke box hits of the day like “Mr. Sandman”, “Mr. Lee”, “Secret Love”, “It’s My Party” and “Lipstick on Your Collar” – the song often reflecting the character’s “back story” (especially in the 2nd Act).

The set was wonderful – a high school gymnasium full of banners exclaiming the achievements of the school’s various “extra curricular” clubs and activities, including the Chess Club and Future Farmers of America.

While both the playbill and the pre-show announcements made mention of an intermission, the story of the 1958 prom seemed to run its course and ended as the lights went up. What would be in the 2nd Act, I wondered. It turned out that Act 2 took place in 1968 at the 10-Year Reunion of the Springfield High Class of 1958, with the Wonderettes reunited to once again be the evening’s entertainment. The banners that decorated the gym during the prom were replaced with ones that read “Welcome Back Class of 1958”. We learned what had happened to the girls since graduation while they sang popular songs of the 1960s – “Wedding Bell Blues”, “R-E-S-P-E-C-T” and “Son of a Preacher Man” included.

To some degree a sort of female version of FOREVER PLAID, as suggested in one of the rave reviews quoted in the publicity, THE MARVELOUS WONDERETTES was originally created by Roger Bean, who also directed the NYC production, for the Milwaukee Repertory Theatre. It had a successful run in LA before coming to New York.

All in all it was a very entertaining afternoon – with great music and humorous antics. And to top it off the price was right, the theatre close to the bus station, and the weather cool. Two thumbs up!

The special discount ticket price offer is good for performances through December 18th. You can order online at www.broadwayoffers.com or by phone at 212-947-8844. The code is MADRM01.

Next week is my first selection of the New York Music Theatre Festival.

TTFN

THREE CHEERS FOR THE IRS!

Dealing with the Internal Revenue Service on an individual 1040 issue continues to quite often be a long and frustrating process.

However I do believe in giving credit where credit is due. The IRS certainly deserves kudos for how it has responded to problems and challenges thrust upon it by the cafones in Congress over the past few years.

In 2006 Congress waited until after the IRS had to go to press with the final 2006 tax returns and instructions before it passed an “extender” bill. The Service had to create and publicize special rules for how and where to report such popular tax adjustments and deductions as educator expenses, tuition and fees, and the option do deduct state and local sales tax instead of state and local income tax, and deal with the multitude of resulting errors and omissions.

In 2007 Congress sat on its collective hands again, this time until the day after Christmas, before passing the annual AMT “patch”, which held up the processing of many 2007 individual income tax returns.

And then in 2008 Congress, having seen what a mucking fess mailing out rebate checks resulted in the first time they tried it, decided in their infinite wisdom that it would be a good idea to do it again!

In all three situations the Internal Revenue Service took on the unnecessary (if Congress had any brains) additional workload and truly shined. And they did so with minimal affect on the normal IRS functions – except in the case of the recent economic “stimulus” rebate check program when they were forced to take personnel away from the collection function to deal with the mess, ultimately costing the US Treasury hundreds of millions of dollars in uncollected back taxes.

Congress is back from its summer recess, a brief return before another recess so they can go out and campaign. Let us hope they do not repeat prior year FUs and pass an extender bill and an AMT patch before returning home. The IRS will already have its hands full next tax season with the no doubt millions of errors on 2008 tax returns it will have to deal with because of the “stimulus” rebate credit.

ECONOMIC “STIMULUS” UPDATE

It has been a while since I reported on the government’s apparently failed economic “stimulus” check program.

The IRS has released IR-2008-103 to provide additional guidance on the payments.

Here are some highlights from the information release:

* “The most common question posed to the IRS is from people wondering when they will receive their stimulus payment. The question can be answered easily by going to IRS.gov and using the ‘Where’s My Economic Stimulus Payment?’ web tool.

* Some people who have either small amounts of tax liability or no tax liability are getting smaller stimulus payments than they expected or none at all. Generally, the law provided for a maximum stimulus payment of $600 ($1,200 for married couples) or an amount equal to a taxpayer’s tax liability, whichever was less. Tax liability is the net amount of federal income taxes paid after deductions and credits. If people had no tax liability but had at least $3,000 of “qualifying income” from specific sources, they would be eligible for $300 ($600 for married couples.) There also is a $300 payment for each qualifying child.

* Generally, people cannot file an amended return solely to get an economic stimulus payment unless they are a retiree, veteran or have other ‘qualifying income’. While amended returns will be processed to correct the income, deductions and income tax as appropriate, the economic stimulus payment amount will not be adjusted based on an amended return. If people do not receive a payment this year, they can claim it when they file their [2008] tax return in 2009. [I had been told that a client who did not receive a check because the spouse reported her married name on the Form 1040 but had not changed her name with the Social Security Administration should file an amended return to get the check – apparently this would do no good.]

* People must use their most current address in order to receive a timely payment. People who change addresses after filing should complete Form 8822 and a change of address card with the U.S. Postal Service. If the postal service is unable to deliver the payment, it is returned to the IRS.

* People must file a 2007 tax return by October 15 in order to receive the economic stimulus payment this year, even if they normally do not have a filing requirement because their income is too low or not taxable. The IRS already has issued 90 percent of the economic stimulus payments but will continue to issue payments through December.

* People who do not file a tax return by October 15 can still obtain their economic stimulus payments when they file their 2008 tax return. If they wait until next year to file, their payments will be based on their 2008 income and personal situations rather than on 2007 information”.

TTFN

WHEN DISASTERS STRIKE SIMULTANEOUSLY

No talk of taxes today – just a plea for help for the oft forgotten victims of natural disasters.

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A 4-month-old Siberian husky is found -- along with nearly 400 other maltreated animals -- during an animal seizure at a private residence in Denver, N.C. His paws are swollen so badly from an untreated virus he can barely stand or walk.

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Nearly 850 miles away, at an emergency animal shelter in Shreveport, La., several motherless puppies fight for their lives during the Hurricane Gustav evacuation.

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Meanwhile, Gulf Coast residents nervously watch weather reports tracking Hurricane Ike, an extremely dangerous storm that has already taken scores of lives in Haiti. Many people anticipate evacuating along with their beloved pets, hoping that emergency shelters will be equipped to take them all.

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American Humane’s Red Star Animal Emergency Services™ unit -- along with local, county and state agencies participating in the seizure -- was there for the Siberian husky, helping nurse him back to health. He and the hundreds of other neglected animals involved are now safe, awaiting placement into new, loving homes.

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A second team of American Humane responders was there for the puppies in Shreveport, lovingly bottle-feeding them during the Gustav evacuation. The puppies were among approximately 1,100 pets that we and several other animal welfare organizations successfully sheltered, cared for and then reunited with their owners after the storm had run its course.

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And, with assistance from caring donors like you, we will be there when animals and their families need us again -- even if it’s as soon as this week.

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Donate now to help animals during what could become one of the worst hurricane seasons on record.

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Thank you from The Wandering Tax Pro! And remember – if you itemize your contributions is tax deductible!

TTFN

MORE BLOG CARNIVALS!

My post “The Feeling is Demutual” is still making the rounds of Blog Carnivals. Check these out –

* “142nd Festival Of Frugality” at FRUGAL BABE (a rich life without a lot of money). It’s under Taxes, of course, which also has Bruce THE TAX GUY’s guest post at SAVING TO INVEST. This Carnival, or Festival, has lots of entries in a variety of categories.

* “The Carnival of Money Stories”, the first Blog Carnival to appear at THE COPY EDITOR’S DESK. While I did not make it to “Masterpiece Theatre” I am under the category of “Courtroom Drama” (well the post does concern a court ruling).

I like how FMF’s daughter described taxes in the Masterpiece Theatre post “My Kids Tell Me Why We Pay Taxes”. As the Copyeditor says, “out of the mouth of babes . . .”

* Tomorrow (Wednesday) I will be in the “29th Carnival of Money Hacks” at LIVING ALMOST LARGE, the blog of a 20-something DINK searching for true financial freedom {note – link not good until 9/10/08).

DUELING TAX PLANKS

Now that the conventions are over and the official party platforms have been approved and published let’s tax a look at the two tax planks.

As I have mentioned before here at TWTP, the Democratic Party platform includes a great statement – “We must reform our tax code. It is thousands of pages long, a monstrosity that high-priced lobbyists have rigged with page after page of special interest loopholes and tax shelters.” But that being said it goes on to add pages and pages of complexity to the Code.

The Democrats want to “eliminate all income taxes for seniors making less than $50,000 per year”. How is the $50,000 to be determined? Will it be federal AGI or total income before “adjustments”? Will it include 100% of Social Security or Railroad Retirement benefits? Will it include tax-exempt municipal income? An AGI, or even total income before adjustments, of $50,000 does not mean that a person made $50,000 that year. Why should seniors be singled out? If you want to reduce the tax burden on senior citizens you should revise the formula for determining taxable Social Security and Railroad Retirement benefits. This is clearly a ploy to “buy” votes and makes no sense otherwise.

They want to expand existing refundable credits and create new ones. You know how I feel about refundable credits.

The platform says “we will dramatically simplify tax filings so that millions of Americans can do their taxes in less than 5 minutes”, but does not say how. I think this refers to Obama’s ridiculous proposal “to direct the IRS to send pre-filled tax forms to 40 million workers who take the standard deduction and have a bank account. They would simply have to sign and return it”. My post “A Very Bad Idea” explains why this is indeed a very bad idea on so many levels.

While I have not found it yet in my reading of the Democratic plank, Obama as a candidate has called for increasing the current special tax rate on capital gains and qualified dividends. I firmly believe that a low capital gains tax rate results in increased taxable income, as has historically been the case.

The Republican tax plank also has a strong statement – “The Republican Party will put a stop to both social engineering and corporate handouts by simplifying tax policy, eliminating special deals, and putting those saved dollars back into the taxpayers’ pockets.”

In this regard the Republicans make a good point. They say that “Today’s Democratic Party views the tax code as a tool for social engineering” and this should not be. As I and other tax bloggers have said in the past the Tax Code cannot be used to cure the ills of society. The Republican platform does, and correctly so, state that the Code should be used to encourage economic growth and encourage savings.

Among the positive positions in the Republican tax proposals are –

* “The Alternative Minimum Tax, a stealth levy on the middle class that unduly targets large families, must be repealed.” It had been said that while the Republicans publicly speak out against the dreaded AMT they secretly really don’t care because it is the blue states that are hardest hit by this tax. It is good to see the AMT’s repeal as an official plank.

* "Over the long run, the mammoth IRS tax code must be replaced with a system that is simple, transparent, and fair while maximizing economic growth and job creation.” Where we part company is that the party calls for “giving all taxpayers the option of filing under current rules or under a two-rate flat tax with generous deductions for families”. There is no need for two tax systems. If the “two-rate flat tax” provides the same revenue as the “current rules” with none of the complexity why not just replace the “current rules”.

* “We support a tax code that encourages personal savings. High tax rates discourage thrift by penalizing the return on savings and should be replaced with incentives to save.” Increased savings not only benefits the individual saver but also the economy in general by increasing the pool of funds available for investment in growth.

* “Republicans support tax credits for health care and medical expenses.” While I am against refundable credits, as I posted last week the only exception I would accept is one for health insurance premiums, as has been proposed by McCain.

While in just about everything else, especially foreign policy, I tend to support the Democrats, when it comes to taxes and the economy I must side with the Republicans.

TTFN

CONGRESS – GET OFF YOUR FEKKING ARSE!

Kay Bell reminds us in “Tax Extenders, AMT Patch Welcome Congress Back” over at DON’T MESS WITH TAXES that is high time Congress, especially the Senate, got off their arses and passed the appropriate extenders bills before we are faced with the same problems as last year and the year before, when Congress waited until after the IRS went to press with the tax forms to enact legislation.

Kay points out that “Congress is scheduled to adjourn again the end of September so most members can return home to make the case they should keep their jobs” so time is wasting. If these idiots do not pass at least the AMT patch before going out to campaign they do not deserve to keep their jobs!

BLOG CARNIVALS

My post “The Feeling is Demutual” has recently appeared in the following Blog Carnivals –

* “Carnival of Financial Learning #15 - Google Timeline Edition” at Faron Benoit’s FINANCIAL LEARN blog. I have the honor of being the first of the Editor’s Picks!

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While there you should check out “Let’s Make the Politicians Take Economics 101” by Mr. ToughMoneyLove under Economics. Mr. TML says “the hard truth is that our politicians just don’t know anything at all about economics”. Based on recent statements by the candidates and actions by Congresspersons I could add to that politicians know nothing at all about taxes.

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* “Carnival of Financial Planning - September 6 2008 Edition” at THE SKILLED INVESTOR. I am toward the end - the first of two entries under "Taxes".

* “Simply Investing Carnival 9/8/08 Edition” at A SLACKER’S QUEST FOR HIS FIRST MILLION. I “anchor” the Carnival. You know what they used to say in show biz – if you can’t get top billing than last is good.

Check out Ben Dinsmore’s entry “Contributing More to Your 401k Is Not as Difficult as You May Think” from TREES FULL OF MONEY.

TAX AMNESTY

A blogger calling himself the IRS HITMAN, “Your Friend, Your Hero, Your Hope”, of the “Tax Defense Network” has made an interesting suggestion in his post “IRS Penalty Relief Bill of 2009."

HITMAN discusses the problem that the IRS has collecting back taxes. He points out, “the reason is because someone may actually only owe about $10,000 dollars, but because of interest and penalties the IRS claims they owe $50,000 dollars!”

His solution – “if the IRS can’t collect because we can’t pay, and we can’t pay because the debts are too high due to penalties and interest, why doesn’t the IRS remove the penalties and interest?”

This does make some sense. However, the IRS could never permanently remove penalties and interest. If they did taxpayers would have no motivation to file and pay their taxes on time.

The IRS did make a concession in this area several years back by reducing the penalty on “late payment” of tax to .5% (1/2 of 1%) or the outstanding liability per month. This is a big difference from the penalty for “late filing”, which is 5% per month – or ten times more. So if you cannot pay the total amount of the tax due by the April 15th deadline, but you file a timely extension request, or actually file the return on time without a full payment, you are not hit too hard.

What I do believe would be a great help to the IRS, and generate millions and possibly billions of dollars in a short period of time, is to have a federal “Tax Amnesty” program similar to those that have been offered by many of the states over the years.

Here is how this would work –

The IRS would begin with the outstanding tax due only (no accrued interest and penalties would be included) on all previously filed federal tax returns (all types of federal tax - individual, corporate, income, self-employment, and payroll) that are not currently part of a criminal prosecution. From this they would deduct all amounts applied to date against this open liability from taxpayer payments, “garnishments” of subsequent federal and state tax refunds and rebates, other federal offsets, etc. (in my scenario no prior payments would be applied against previously assessed penalty and interest – they would all be used to reduce the original “principal”) The taxpayer would have until a specified future date – i.e. 3 or 6 months after the initiation of the amnesty program – to pay this amount without any penalties and interest.

At the same time individuals who have not filed tax returns could do so during the amnesty period and pay only the tax due, with no penalty or interest assessment. So if you did not file your 2005 (or 2002 for that matter) Form 1040 (or appropriate business or payroll return) at all because you owed $2,000, you could do so now and pay only the $2,000.

The IRS would mail to delinquent taxpayers an itemized “bill” for outstanding tax due under Amnesty based on their records, so it would be clear just what needed to be paid.

The way most amnesties work is that if the tax liability is not satisfied in full, or the delinquent returns not filed, during the term of the program a higher penalty and/or interest rate would apply to the outstanding liabilities – a further incentive to pay up.

The states have had great success raising substantial amounts of money, often more then anticipated, using a Tax Amnesty program. Besides the IRS already does forgive accrued penalty and interest to a degree as a part of its Offer In Compromise program.

After writing the first draft of this post (several days ago) I noticed that IRS HITMAN had changed his tune somewhat to conform with an Amnesty program rather than just doing away with penalties and interest altogether.

I call on my fellow tax professionals to spread the word about a Federal Tax Amnesty Program. Join me in writing to Congress. In addition to all the benefits to the US Treasury, the IRS and American taxpayer it certainly wouldn’t hurt our business!

TTFN

CONFIRMATION THAT I KICK ASS

THE WANDERING TAX PRO has been added to the Taxes page of Alltop.com.

Alltop is sort of a “digital magazine rack” of the Internet”. It provides categorized selections of links to blogs and other web resources that make it easy to scan a lot of news on a particular subject. For example the Taxes page lists many tax blogs with links to the most recent posts. Alltop is a valuable resource for anyone wanting to research, or just keep up on, a certain subject or industry.

Click here for more information on Alltop.

WHAT’S THE BUZZ? TELL ME WHAT’S A HAPPENNIN’

* Bruce THE TAX GUY’s weekly “Passing The Week. . .” post “turned me on to” the post “How To Deal With Higher Taxes” by Andy at SAVING TO INVEST. He offers some good ideas on various ways on how to deal with what he thinks will be inevitable higher taxes. As he points out, “some of these strategies are plain good practice even in the current investment climate”.

I am a big fan of the ROTH investment, be it an IRA or a 401(k), if available, or both, for younger taxpayers just starting out in the workplace. It is a great opportunity to grow a tax-free nest-egg. Those just starting out should be able to contribute to both the IRA and the 401(k), if a ROTH 401(k) is available, before their income becomes too high for the IRA and before they need additional cash-flow for home and family expenses.

Older workers, who are just now being offered the ROTH 401(k) as an alternative, have probably become reliant on the “pre-tax” nature of traditional 401(k) contributions, and cannot afford the additional tax cost of changing over to the ROTH alternative. And, at least in my neck of the woods, they probably have too great an income to be able to make a full contribution to a ROTH IRA.

* Kay Bell of DON’T MESS WITH TAXES reports on a taxpayer who went “postal” (I shouldn’t pick on postal employees, at least those who work the window at the local offices - if I had to deal with the “great unwashed masses” day-in and day-out all year round I would probably “go postal” myself - dealing with them for 2½ months during the tax season was more than enough for me!) on a local IRS office in “Man Rams Alabama IRS Office With Car”.

As Kay points out there are better ways of dealing with the frustrations of the IRS – for example contacting the Taxpayer Advocate Service. I have used the TAS myself several times in the past and, despite a few glitches that were eventually resolved, I have had excellent and quite satisfactory responses (especially for my clients) from this Service.

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* Kay also discusses another in a series of recent FUs by Congresspersons regarding tax law in “Property Problems for Charles Rangel”

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Kay echoes the conclusion of other tax bloggers, Jim Maule and myself included, - “That's got to make you wonder just how many other things about the tax code do all our Representatives and Senators not know or understand?”

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* Trish McIntire of OUR TAXING TIMES discusses the new IRS CP2057 “Automated Soft Notice” in her post “There Is No Such Thing as a Soft Audit”. I agree with Trish’s comments, and also want to know “what triggers the computer to include a taxpayer in the audit” and “what happens next”.

* The MDTAXES Network September newsletter discusses “Tax Breaks For Lost Deposits at INDYMAC and Other Banks That Fail”. Good reading.

* Another blog list! Jim at BLUEPRINT FOR FINANCIAL PROSPERITY lists “5 Reasons You Should Donate Your Car”. I do agree with much of Jim’s logic.

However, while Jim is usually pretty much “on the money”, his reason #2 here is somewhat wrong. A few years back Congress made it a little bit less of a Wonderful Deduction, as mentioned in one of the post’s comments (someone beat me to it). For more information on the current rules for donating a car to charity check out my post “1040 FYI: Donating a Car to Charity”.

* As you would expect TAX PROF Paul Caron brings us the words on “Sarah Palin and Tax Policy” and follows up with “Tax Planks in the 2008 Republican Party Platform”.

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* The NATP weekly email newsletter reports that - “The General Services Administration (GSA) announced per diem rate adjustments for fiscal 2009. Starting October 1, employees traveling to about 400 locations in the continental United States will receive a per diem that is higher than the national standard rate, which is $70 for lodging and $39 for meals and incidental expenses. The standard rate remains unchanged from this year.” Click here to find the GSA domestic per diem rates.

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* I know this has nothing to do with taxes, and is not even a real BUZZ item, but since I ended ANYTHING BUT TAXES I have nowhere to properly vent. FYI, I recently send the following comment to Regis and Kelly’s IN BOX. .

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“I realize that network-required cross promotion forces talk shows like yours to book participants and contestants of so-called “reality tv” programs like The Bachelor, The Hills, and the like – individuals with no real talent who have become celebrities merely by embarrassing themselves in front of millions of people.

I wish a talk show host would ask one of these individuals, who are basically famous for being an idiot, a real question like – “What was it exactly that caused you to completely abandon all self-respect and decide to make a total fool of yourself on national television?”

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I wonder if they will respond to it on the show.

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TTFN

I GUESS THERE IS ALWAYS AN EXCEPTION

I suppose this falls under the category of “Never Say Never”.

According to an article at AccountantsWorld.com titled “McCain's Economic Plan Aims for Tax Changes”, Republican presidential candidate John McCain “seeks to eliminate the tax break workers who receive job-based health insurance currently enjoy and replace it with a flat refundable tax credit of $2,500 for individuals or $5,000 for families with which to purchase their own insurance.”

As you well know, especially from yesterday’s post, I am strongly against refundable tax credits (including the current refundable Earned Income Tax Credit). However this one makes some sense.

Many of the “uninsured” individuals have lower incomes, and a large percentage either pays a minimal amount of federal income tax or does not pay any income tax at all. So deductions and “normal” (non-refundable) tax credits for health insurance premiums would be of no, or a very limited at best, benefit to these people.

The only way to encourage the purchase of health insurance is by actually giving the uninsured cash to pay for the premiums. And one of the only ways to do this (I can’t offhand think of a better way to handle this issue – other than enacting a direct government payment to insurance companies of the first $X,XXX of premiums for every household) is with a refundable credit.

Similarly, many uninsured are self-employed persons who, while paying no or minimal income tax, do pay self-employment tax. A refundable credit would offset the cost of the self-employment tax, while still continuing the benefit of contributing to one’s Social Security account, and could still provide some additional cash in hand.

I am not against doing away with the “pre-tax” status of employee payments for health insurance premiums, or even doing away with the tax-free status of the value of employer-paid health insurance, and would actually support a refundable credit for health insurance premiums paid. My concern is that the amounts of the credit that McCain has proposed are way too small for taxpayers in “my neck of the woods”. The amounts may be ok for Arkansas or Kansas (I just picked names out of a hat), but certainly not for New Jersey, which is especially known for its excessive health insurance costs.

My self-employed clients are paying $14,000 per year for family coverage! And in my case, even with a $10,000 deductible, $2,500 would not cover half of the actual cost (cost = $5,900+ or $9,075 with a $5,000 deductible).

Yet I do suppose that a monthly net “out of pocket” of about $290 is still better than $490+.

As I mentioned above the only alternative to using a refundable tax credit, with the downside that a person would have to pay the premiums first and wait until tax time to get the money, is for the government to send the money directly to the insurance company.

How would this work? I would go to the Horizon Blue Cross and Blue Shield website, for example, and apply for health insurance. After entering my information and choosing the coverage and deductible I would receive a quote. If I chose to enroll the annual premium would be reduced by the amount of the government credit ($2,500 or $5,000 proposed by McCain), and my monthly premium would be determined accordingly.

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Or coverage would begin immediately, but monthly premium payments would begin once the credit amount was used up (i.e. the credit would pay the first three to five months of premiums). At some point the insurance company would apply to the federal government for direct payment of the credit amount.

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Of course there would have to be a system to determine if any portion of the credit amount had previously been used by the insured during the appropriate calendar or fiscal period (it would have to be decided if the credit amount is applied on a calendar year or policy year basis).

So what do you think?

TTFN

NO MORE REFUNDABLE TAX CREDITS!

As I previously mentioned in a WHAT’S THE BUZZ posting, the official Democratic Party Platform plank on tax policy begins with the statement, “We must reform our tax code. It’s thousands of pages long, a monstrosity that high-priced lobbyists have rigged with page after page of special interest loopholes and tax shelters.” An excellent sentiment, and one with which I agree. But having made that fine statement the plank goes on to call for tons more complexity to be added to the Tax Code!

Much of the added complexity called for by Barack Obama and the Democratic Party comes in the form of refundable tax credits. Much like the current Earned Income Tax Credit, which has become probably the most abused provision of the Code (studies have suggested that close to 30% of all EITC claims are erroneous). One such credit is the “American Opportunity Tax Credit”.

According to Barack Obama’s website - “This universal and fully refundable credit will ensure that the first $4,000 of a college education is completely free for most Americans, and will cover two-thirds the cost of tuition at the average public college or university and make community college tuition completely free for most students. Obama will also ensure that the tax credit is available to families at the time of enrollment by using prior year's tax data to deliver the credit when tuition is due.” The official Democratic Party Platform adds, “In exchange for the credit, students will be expected to perform community service.” Specifically they will be required to perform 100 hours of community service during the year.

Professor Jim Maule discusses this proposed Credit in two posts to MAULED AGAIN, “Does It Make Sense to Overload the IRS and the Tax Code?”, posted back in March, and the recent “Proposed Tax Credit: Noble Concept, Practical Problems”. Jim has rightfully commented, “There is a problem with using taxation to control behavior. For example, the Internal Revenue Code is overloaded with credits and other provisions dealing with energy conservation, energy production, adoption of children, and other issues better handled more directly. Everyone complains about the complexity of tax laws, yet too many people jump on the bandwagon of proposals that contribute to that complexity.”

While I agree that it is a good idea to encourage both higher education and community service, just as it is a good idea to provide assistance and encouragement to the working poor, and that the government should provide incentives to these ends, I do not think we should do this by adding more and more pages to the already humungous Tax Code, and creating more potential for tax fraud. As the Professor has said, these issues are “better handled directly”.

The Earned Income Tax Credit is basically a welfare program, another form of Aid to Families with Dependent Children. Let the government expand this program if that is its wish. Regarding Barack’s proposed credit, as Jim says, “If the goal is to reward college students for providing services, why not simply issue a check to the student?”

Professor Maule correctly points out that this new credit will create an administrative nightmare for all involved -

“Will the taxpayer be required to list the organizations for which the service was performed? Will the taxpayer be permitted to write something along the lines of "picked up litter in neighborhood park every Saturday for 1 hour"? Will the taxpayer be required to obtain letters or other documents from a supervising agency? Will the taxpayer be required to attach those documents to the return? Will states and localities be compelled to organize entities to issue those documents, thus formalizing what now transpires as informal contributions of time to public service endeavors?”

Politicians must realize that the Tax Code should not be used to solve all of the ills of society. But then, as Grouch Marx once said, "Politics is the art of looking for trouble, finding it, misdiagnosing it, and then misapplying the wrong remedies."

IT'S CARNIVAL TIME

Kay Bell, the Yellow Rose of Taxes, may be two days late, but she certainly is not two dollars short with “Tax Carnival #40: Late Labor Day” over at DON’T MESS WITH TAXES. My post “1040 FYI: Charitable Contributions – What Is and Is Not Deductible” is one of Kay’s “Tasty Tax Treats”.

The same 1040 FYI post was also in the “Carnival of Financial Learning #14” this past week-end over at Faron Benoit’s FINANCIAL LEARN blog (under Taxes).

At the Carnival of Financial Learning check out the first of the “Editor’s Picks” – “Will Eat for Money: 100 Ways to Make Your Living as a Professional Eater”. I didn’t know there was so many ways to make a buck this way. I especially liked #44 – in England a man paid the equivalent of about $14.00 per hour plus expenses for someone to be his elderly father’s drinking companion at a local pub. I have been looking for a way to make money after the tax season (blogging certainly ain’t filling my coffers), and this is a job for which I have lots of experience!

TTFN

ASK THE TAX PRO – REVISING YOUR INCOME TAX WITHHOLDING

Q. I've been a taxpayer doing my own returns now for over thirty years, and it's getting to be a drag.

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But that's not my question.

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It's the end of August and I stare at my and my spouse's pay stubs thinking, "I think they're taking out way too much". What is the best way to correct the W4 mid-year and still minimize tax liability without having a big refund?

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I already checked out the neat tool at www.paycheckcity.com that you recommended on your blog, but it doesn't have a box that says, "and from your pay stubs, how much have they already carved from your hides?" entry. Barring disaster, our incomes are predictable, as are our itemized deductions, number of kids, and unearned income (interest, etc.).

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In the past I've tried tinkering mid-stream, but - as has happened this year - I forgot to reset come January. So, to be specific, I have a W4 that says, "Exemptions/Allowances - US: 9 $280". Yes, 9 plus an additional $280 bi-weekly.

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For 2007 I got back over $1000 from the Feds, and owed about that much to my state (which is not NJ, so I won't trouble you with that). I suppose the meta-question might be: why do we play with this exemptions/allowances number instead of a fixed number of $ - or a fixed percentage - to withhold?

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In these tight times I am trying to keep good cash flow while still meeting the IRS requirements. It's tricky. Any thoughts you can offer are most welcome.”

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A. A few items first –

(1) Withholding has absolutely nothing to do with tax liability. Your tax liability is the tax calculated on income, deductions and credits. Withholding is used to pay your tax liability.

(2) Claiming 9 withholding exemptions plus having an additional $280 withheld makes absolutely no sense. The only time you should request an additional $ amount to be withheld is if you are claiming “0” withholding allowances.

(3) The more withholding exemptions you claim – the less the federal income tax withholding. To have additional monies withheld you would not add a $ amount, you would reduce the number of exemptions.

(4) To avoid incurring a penalty for “underpayment of estimated tax” you must have either 90% of the final current (2008) tax liability, or 100% of the prior year’s (2007) tax liability (110% if your 2007 AGI was more than $150,000), paid in during the year, either by withholding or quarterly estimated taxes.

(5) Withholding is assumed by the IRS to be made evenly throughout the year regardless of when the money is actually withheld – unless you wish to show the actual withholding per quarter when attempting to avoid the penalty for underpayment of estimated tax by “annualizing” your income.

It appears that you want to pretty much “break even” with Sam (and I expect your state as well) when you file your 2008 Form 1040. Here is what you should do –

Using the 2007 Form 1040 as a formatting guide, and the information for 2008 deductions, etc. available on the “What’s New for 2008” Page at my website, prepare an estimated 2008 income tax return. You indicate “our incomes are predictable, as are our itemized deductions, number of kids, and unearned income”, so that should not be difficult. You want to come up with an estimated 2008 tax liability (my “What’s New” page also has the 2008 tax rate schedules).

Now take your latest pay stub(s), with cumulative year-to-date information, and determine the total federal income withheld to date. Subtract this number from the estimated 2008 tax liability – this is the amount of federal income tax you need to have withheld from your wages for the rest of 2008.

Next divide the balance of the tax withholding needed for the year by the number of remaining pay periods and you will come up with the amount that you need withheld from each check. Remember that once you submit a revised Form W-4 to your employer it will probably take one or two pay periods for the change to “kick in”.

Click here to download the 2008 IRS “Employer Tax Guide”, which has the various federal income tax withholding tables (Pages 40-59) based on pay period (I assume bi-monthly in your case) and withholding status. If your pay is the same each paycheck you will be able to determine the correct number of withholding allowances to claim so that the proper amount of federal income tax is withheld.

You should also be able to use the tool you mentioned at PayCheckCity.com to determine the number of allowances with this information.

If you are claiming “Married” on your W-2 you should be aware that you can have your withholding done under the Single tables by claiming “Married – but withheld at the higher Single rate” on your W-4.

For 2008 each withholding allowance you claim is the equivalent of $3,500 (the amount of a personal exemption) in additional deductions. So if you are in the 25% tax bracket each withholding allowance represents $875 in federal income tax for the year – or about $33.65 per each bi-weekly pay period.

Of course if you increase your number of exemptions for the last months of the year by submitting a revised Form W-4 don’t forget to submit a new Form W-4 at the end of December so you “go back” to normal in 2009. Ideally you will want to determine the correct number of withholding for the year from day one so you do not have to change your W-4 during the year.

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As for “why do we play with this exemptions/allowances number instead of a fixed number of $ - or a fixed percentage - to withhold?” – good question. Withholding on pensions often uses a flat % method.

BTW – if doing your own tax returns is getting to be a drag why not use a competent tax professional!

I hope I have been of help.

TTFN

AUDITS

This post is the first in a periodic feature of compatible/complimentary posts on the same topic with Bruce, aka THE TAX GUY, of L and R Tax Preparation. Today’s post at THE TAX GUY is titled “Everybody Hates An Audit”. Check it out!

In my 35+ years in “the business” I expect I have prepared at least 10,000 sets of tax returns. During these 35+ years I can count on the fingers of my two hands the number of traditional IRS office audits I have had to deal with – none of which have been in the past 10 or so years.

I am not talking about “correspondence audits” – i.e. a CP-2000 notice. I have dealt with hundreds of these over the years. They generally involve simply writing to the IRS and explaining their error.

I never had to deal with the old nightmare TCMP (Taxpayer Compliance Measurement Program) audit (aka the Audit From Hell) – in which literally every line on the Form 1040 had to be documented – but I remember one of my mentor Jim Gill’s clients discussing his experience with TCMP some 20+ years ago. I seem to recall the client telling us that he even had to produce a marriage certificate to document his filing status!

I did, however, have one of my clients chosen for the recent less intrusive incarnation of the TCMP audit - the National Research Program (NRP) – which were conducted on 2001 and 2006 federal income tax returns. My experience was during the first wave of NRP audits. These audits were known as the Audit From Purgatory.

As I wrote in a 2007 TWTP post discussing the experience – “the IRS couldn’t have made a better choice if they had asked me which of my clients I would want to be selected. They chose a client whose entire life is well documented via computer and hard copy back-up. We didn’t even go to the audit. I prepared a huge mailing of copies of all the requested documentation and mailed it to the auditor. Needless to say there was ‘no change’. I think the volume of my mailing intimidated the auditor. In gathering the information for the review we discovered a $25.00 error which I disclosed in my cover letter – but this was not indicated in the final audit report.”

In one audit 20+ years ago it just happened that the client, the IRS auditor and I were all of German descent (the client was first-generation American – I seem to recall that his father came to the US after WWII to work on the Manhattan Project or something similar). The first thing the IRS auditor told us after introductions were made was that he had just returned to work after having undergone brain surgery. We spent about 20 minutes on the actual audit – “no change” I believe – and 40 minutes listening to the auditor’s thoughts on Nostradamus and Biblical prophesies involving Germany and the US!

At another audit – also 20+ years ago – I asked the auditor why the client had been chosen for review. I was told that it was the IRS policy to audit returns of persons in the medical professions who reported large gross income. I told him that it would be more productive if the IRS would audit medical professionals who report little income. I do believe that audit also resulted in “no change”.

It is funny that the IRS audited my doctor client with high gross and net income on the Schedule C, but never audited one particular client of my mentor, a waiter whose W-2 income barely exceeded the total of his real estate tax and mortgage interest. You would think the IRS would want to know how he fed his wife and two kids!

Here is some advice to follow if your return is one of the few that are chosen for review –

* If the return was prepared by a tax professional contact him/her immediately. Except in the simplest of cases you should not go an IRS office audit by yourself. Your preparer will either accompany you to the audit or attend the audit in your place as your legal representative under a Power of Attorney (I will go with the client if needed – but will not go without the client). Be aware that there will be additional charges for the his/her time to prepare for and attend the audit.

* Bring to the audit all the items requested by the IRS (i.e. documentation of the specific items of income, deduction or credit that the audit letter tells you are in question) – but nothing more! If the auditor wants to see additional items that were not identified in the initial letter tell him/her you will have to return with the appropriate documentation at a later date. The auditor, eager to close the review promptly, may decide that producing the additional information will not be necessary after all.

* Similarly, answer all questions posed by the auditor to the best of your ability - but do not “volunteer” any additional information. Don’t discuss aspects of your personal life with the auditor in an attempt to make small talk or become his/her “friend”. Just like the cops quote on tv – “anything you say can be used against you”. If you tell the auditor in passing that you like to go fishing on week-ends on your new boat you may be asked how you can afford a boat on your modest income!

* Never leave original documentation with the auditor. Bring the originals with you, but also bring copies for the auditor, or have the auditor make photocopies of what he wants while you wait and return the originals to you.

* If the auditor tells you something is so in the Tax Code ask him to show you exactly where it is in the Tax Code. In the past IRS auditors have quoted “tax law” to taxpayers that simply does not exist.

* If you do not agree with the initial finding of the auditor ask to see his/her supervisor. You can work your way up the IRS “chain of command”.

Any questions?

TTFN

HAPPY LABOR DAY

As is my custom I will be laboring away today on the GD extensions.

September will be a busy month. The New York Musical Theatre Festival begins and I have booked three of the shows so far for September. FYI, tickets for NYMF offerings are now on sale to the general public. I have also booked a ticket for THE MARVELOUS WONDERETTES (as opposed to the Wondrous Marvelettes), a new off-Broadway offering, via broadwayoffers.com (code MADRM01), and expect to be returning to Hawley for an overnite to see another silly farce at the Ritz Company Playhouse. And then there is the NJ chapter of NATP’s seminar on September 18th.

I vow that next year all the GD extensions will be completed, or red-filed (and hopefully even all red files will be completed), well before Labor Day!

TTFN