A NEW DEBATE BEGINS!

Here is my response to Peter Pappas' response to my response to his post.

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I am a self-taught tax professional who has been preparing 1040s manually since 1972.

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I did not learn tax law in school. My college credentials are based on "life experience" and were acquired solely to satisfy my family.

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On my first day working for my uncle's tax preparer in February of 1972, with no previous knowledge of taxes, my employer/mentor gave me a copy of a previous year's tax return and a suitcase filled with the 1971 information and told me to "jump in and swim". I learned how to prepare 1040s by preparing 1040s.

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I am not a CPA (although I did work for one of the then "big eight" CPA firms early in my career as a "para-professional") or an Enrolled Agent. I have no desire to audit financial statements and I do not wish to represent taxpayers before the IRS, although I will assist existing clients who are being audited. My practice is currently limited to 1040 preparation, although I still do a few corporate returns for long-time clients and friends.

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I do not file federal returns electronically because it is not free so to do (as it is with NJ state income tax returns, which I do file "electronically" online whenever possible).

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I based my comments in the post "Red Flags?" on my 37 years of personal experience in "the business" preparing 1040s for individuals in all walks of life.

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With the exception of Schedule C losses, I do not believe that the mere claiming of one of Pete's "red flags" will increase one's chances of an audit. I have claimed rental losses, employee business expenses, the home office deduction, charitable contributions, and Schedule C losses for thousands of clients over the years and have had to deal with only a minimal amount of office audits - I can count the number on the fingers of both hands.

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I do agree that if a return is chosen for audit these items may perhaps receive special attention. I also agree that these items are certainly areas where errors and tax fraud are likely to exist, and areas where unethical tax preparers, and taxpayers themselves, have, as I said, inflated or just plain made up deductions in the past.

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I agree with the following statement -

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"As a citizen, you have an obligation to the country's tax system, but you also have an obligation to yourself to know your rights under the law and possible tax deductions --and to claim every one of them." - Former IRS Commissioner Donald Alexander.

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I believe that if a taxpayer has truly incurred legitimate deductible expenses, regardless of the nature, he/she should claim these deductions in full. I also believe that taxpayers should keep detailed records of all deductible expenses so their arse is covered in the case of an audit.

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I do not believe that one should be scared off from claiming legitimate deductions for fear of being audited.

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I believe that Peter and I differ in our opinions based on our individual "points of view". I am a tax preparer. I prepare tax returns. Peter is a tax lawyer. Generally taxpayers contact a tax lawyer when they are in trouble with the IRS, and after they have been selected for audit or at various levels in the audit process. I have no doubt that Pete, in dealing with clients, has encountered more taxpayer problems with the items he has listed than with any other areas of income of deduction.

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I do not believe that Pete has any more access to internal IRS practices and procedures than I have. His comments are based solely on his personal assumptions.

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When I discuss tax preparation software in my post I am referring to a taxpayer preparing his/her own return using tax preparation software, not tax preparation software being used by a paid tax professional. I have said time and again that no tax preparation software is a substitute for knowledge of the Tax Code, and no tax preparation software is a substitute for a competent tax professional. My concern is with individuals with no tax knowledge thinking that they can prepare an accurate return simply by using boxed software.

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Most tax professionals who use tax preparation software have knowledge of the Tax Code and "know what they are doing". Yet at just about every tax seminar and workshop I attend someone has a complaint about how their software handled an issue and tells how they had to "force" the software to accept the correct answer or application of tax law.

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Using tax preparation software does not guarantee an accurate return, regardless of who is using it. A tax return generated by software is more likely to me "mathematically" correct but not necessarily more likely to be "tax law" correct. The basic law of software applies here - garbage in, garbage out.

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It is not, in my opinion, "reasonable, then, for the IRS to assume that a tax return that is prepared manually is more likely to contain errors than is one that is prepared by computer".

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I agree that "it is common knowledge that sloppy returns are more likely to be audited than neatly prepared" returns. For years I have been saying, "If the IRS can read the return they are less likely to question it". But who says all manually prepared returns are "sloppy". Pete has never seen my handwriting. My handwritten returns have been called "works of art" by both the IRS and other preparers.

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I certainly agree with Pete when he says, "the odds are better that a return will be accurately prepared by someone who has more training in tax law than by someone who has less training in tax law". Hey, it is a no-brainer. But I certainly do not agree with the statement, "CPAs tend (not an absolute, Robert) to be more qualified than non-CPAs in the accurate preparation of tax returns".

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I will say it again - the mere existence of the initials CPA after one's name does not necessarily imply that one has more training in tax law than a currently "nonenrolled" preparer. There are, to be sure, many excellent and competent tax preparers who happen to be CPAs. But, as I have said in a different post, "this is only because of the education, experience, ability, temperament, and other factors that are specific to that individual preparer and nothing whatsoever to do with their designation".

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I strongly doubt that "given the choice to audit one of two identical returns, one self-prepared or prepared by a non-licensed preparer, the other prepared by a licensed preparer, the IRS will always choose to audit the former." A return is selected for audit based on the numbers entered on the return and not who prepares the return, with the exception of those on an IRS list of questionable preparers that I discussed in the post.

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And, Pete, a CPA is not a "licensed tax preparer". A CPA is a licenced accountant, authorized to certify audits of financial statements. The only current "licensed tax preparer" is an Enrolled Agent.

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I do not think that an IRS review of a return that has been "kicked out" but the DIF scoring process gives anyone the "benefit of the doubt". If the numbers on a return warrant an audit then the return will be selected for audit, whether the return was prepared by a huge CPA firm or by "Joe's Neighborhood Tax Service".

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Peter agrees with me on the subject of licensing "unenrolled" tax preparers. If this practice did indeed exist I would certainly agree that it would be "more likely that a non-licensed preparer will make preparation errors than a licensed one." Unfortunately as it now stands competent, experienced and ethical "unenrolled" preparers are lumped together with the uneducated and unethical quacks and crooks.

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I stand by my comments in my post, and especially my "bottom line". Pete and I must "agree to disagree".

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And, Pete, as I have told Joe Kristan - I was not scared by a CPA as a child!

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I would be interested in hearing from other tax professionals - CPAs, EAs and "unenrolled" preparers - on this topic.

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TTFN

THE FINAL WORD!

There has been a lot of posting throughout the "tax-blogosphere" during the past few weeks on the topic of regulating tax preparers - both pro and con. I have done my share of posting, and commenting, on the "pro" side.

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You will find an excellent "recap" of the debate at the "tax guy" blog - click here.

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Before I put this topic "to bed" let's take one last look at the arguments.

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First and foremost, it appears that everyone on both sides agrees pretty much that registering and licensing currently "unenrolled" tax preparers (like myself) will do little, if anything, to cut down on fraudulent tax returns and unethical preparers.

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Just as regulation of CPAs, lawyers, and doctors has not rid us of unethical members of these groups, regulation of tax preparers will not rid us of unethical tax preparers.

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Opponents to licensure say that we do not need an expensive and convoluted system that will place a harsh financial burden on both the IRS and the honest and ethical unenrolled tax preparer.

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Granted Congress and the federal government could "fuck up a high mass", as the saying goes. Monica Lawver, the TAX CPA, puts it a little more delicately, "In my experience, government )and the IRS in particular) does not operate efficiently."

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But if done reasonably and properly (yes I know these are two words not often associated with Congress, the federal government, or the IRS) the regulatory system does not have to be a complicated and expensive mess.

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The beginnings of registration already exist with the current PTIN registry. The application and renewal process, and accompanying fees and CPE requirements, could follow the system already used for Enrolled Agents (EAs). There would be an initial application fee of perhaps $125.00 and renewal every one, two or three (as is the case with EAs) years at perhaps $50.00 per year. EAs must earn an average of 24 CPE credits per year, with a minimum of 16 hours in any one year, to maintain their "enrollment". This sounds like a reasonable requirement for licensure.

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The IRS already offers a good source of reasonably priced CPE offerings with its annual Nationwide Tax Forums, although the price has been steadily increasing. If all tax preparers are regulated this program could be expanded to at least double the number of locations where the forum is presented.

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CPE does not have to be earned at a sit down class. There exist many opportunities, through NATP for example, for continuing education credits to be earned through "self-study" or online, making the costs of earning the required credits even cheaper.

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There does not need to be any FBI background checks or fingerprinting or any other such invasive requirement for licensure. Just pay a fee and either pass an initial at most one-day proficiency exam or be "grandfathered" in via length of service and a CPE look-back requirement, earn the required annual CPE credits, pay a renewal fee periodically, and don't break the rules.

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I expect that there would be a minimum return requirement for licensure. One would have to prepare at least 25 or so returns professionally (i.e for a fee) per year to be covered by regulation. This way Uncle Joe, a retired accountant who prepares the returns for his extended family only in exchange for dinner or gas money, would not have to face sanctions for "practicing without a license".

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The cost of administering such regulation would be covered for the most part by the application and renewal fees, which could generate $125 Million initially and $50 Million per year.

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Most people will agree that licensing accountants, lawyers, doctors, barbers, electricians, etc is better than not licensing them. And so licensing tax preparers is better than not licensing them. Currently anyone who can add can hang out a shingle as a "professional tax preparer" and there is nothing to contradict them. While it is not the best argument in the world - "it couldn't hurt" is still a valid one.

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For me the most important value would be in putting the competent, experienced, and ethical previously "unenrolled" preparer on an equal footing (a term used by one proponent) with the CPA in the eyes of the general public. It would dispel the unfounded "urban tax myth", perpetuated perhaps more by uninformed journalists and bloggers than by the CPA community, that only CPAs are tax experts.

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CPAs who want to prepare tax returns would also have to meet the annual CPE requirements in "taxation" that other newly licensed preparers would, and EAs would be automatically grandfathered in by virtue of the fact that they are already licensed tax professionals. So instead of CPAs, EAs and unenrolled preparers who prepare tax returns there would be only one category - the Licensed Tax Practitioner.

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For as long as I have been in practice, I, a competent, experienced, ethical tax preparer, have been placed in the same "category" as the individual who has read the IRS instruction booklet and done his own return a couple of years and now decides to hang a sign in the window and prepare tax returns in between haircuts at the barber shop where he works! As a Licensed Tax Practitioner I, and hundreds of thousands like me, can finally get the respect we deserve!

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It would be nice if along with licensure Congress would also forbid Licensed Tax Practitioners from offering Refund Anticipation Loans (RALs) directly to clients. Just a thought.

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But despite all the talk on the subject I expect the bottom line has been provided to me by respected fellow tax blogger Professor James Maule of MAULED AGAIN (who has not blogged on the topic but told me that he agrees with those of us who want to license tax preparers). According to Jim -

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"Ultimately I don't think anything will happen. Congress is doing other things, and yet it will find time to tell the IRS to relent on its proposals."

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If I can be permitted one last comment before I say good-bye to the subject - AccountantsWorld.com has a discussion page on the topic of licensing tax preparers with many, many comments from practicing tax professionals in all categories - CPAs, EAs, non-certified accountants, and unenrolled preparers (click here to review the comments).

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I was interested, and pleased, to find that quite a few of my fellow unenrolled preparers who posted on this message board have joined me in saying that they have found more errors on tax returns prepared by CPAs than any other category of preparer!

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'Nuff said!

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TTFN

RED FLAGS?

Peter Pappas has written a post at THE TAX LAWYER'S BLOG identifying what he considers to be "5 Slam Dunk IRS Audit Red Flags". The 5 items he says IRS examiners are trained to look for as they "indicate a high probability of error or fraud" are -

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* Home Office

* Employee Business Expenses

* Rental Losses

* Schedule C Losses

* Charitable Contributions

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I think Pete is somewhat misleading in his post. When he refers to these items as "red flags" I do not think that it is true that anyone who claims one of these items on their Form 1040 will automatically be audited - or even that their existence on a tax return will substantially increase the chance of an audit (with a possible exception discussed below).

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The mere fact that you claim a deduction for employee business expenses will not increase your chance of being audited.

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Pete correctly describes the method used by the IRS to select returns for audit - "The IRS assigns a numeric value to each tax return known as a DIF score. Returns with a DIF score higher than a pre-specified number are flagged and sent to the IRS regional examiners for further review and analysis."

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Information from your tax return is entered into a computer. The "DIF score" is based on IRS internal parameters for individual items of income and expense build into the analysis software.

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While excessive deductions claimed in any of Pete's 5 alleged red flags may increase your DIF score such that it is passed along for further review, the mere existence of these items on a return does not, I believe, increase the score (with, again, a possible exception discussed below).

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I, and I am sure Pete also, certainly would not want to scare you from claiming any legitimate deduction because it may cause your return to be audited. If you spent the money for a genuine business purpose, or made the contribution to a qualified charity (and have the required documentation), you should by all means claim a deduction.

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I do believe that these five areas are indeed "tax return items that indicate a high probability of error or fraud" and have been so identified by the IRS. And I do believe that if a return is "kicked out" by the DIF scoring process and any of these individual items show a substantial variance from IRS-considered "norms" they are looked at ore closely.

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I also agree with Pete's "common threads running through the five items" -

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"First, each of these items requires a subjective judgement to determine whether and to what extent a deduction is permitted. The more subjectivity involved, the greater the likelihood of mistake or outright abuse.

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Second, at least with respect with the first 4 items, these deductions tempt taxpayers and unscrupulous tax preparers to try to convert personal, non-deductible living expenses into deductible expenses."

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And, if I may add a third based on my own personal experience and that of other ethical tax pros, with all items these are the deductions that unscrupulous tax preparers have in the past often "inflated" or just plain "made up" to reduce a balance due or increase a refund.

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As I pointed out in my appropriately-titled post "Audits" -

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"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."

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Over the years returns that I thought would be audited because of excessive deductions, attested to be legitimate by my clients, were never chosen for review. I have never had an audit of a return claiming rental losses, a home office, or a Schedule C loss, although employee business expenses and charitable contributions have been questioned.

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After Congress came out with its strict new documentation rules for claiming a deduction for charitable contributions tax pros, myself included, anticipated a substantial increase in the number of audits of this deduction, and expected that many clients, chosen at random, would receive "correspondence audit" notices from "Sam" requesting documentation of contributions deducted on Schedule A. This did not happen.

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However, if a return is selected for audit and the return claims more than nominal charitable contributions I would expect that documentation would be requested.

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One area where I do believe that the existence of the item may be, or possibly will be, a true "red flag" is Schedule C losses.

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As far back as December of 2006 then IRS Commissioner Mark Everson said that the IRS plans to conduct more audits on individuals with sole proprietorships. The IRS strongly believes, and frankly so do I, that a sizable portion of the "Tax Gap" (the difference between the taxes the government actually collects and what it thinks it should collect) is attributable to unreported income by self-employed persons.

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When Everson introduced his plans Schedule C returns were already being audited more frequently than "non-Schedule C" returns. As budget deficits continue to soar Congress and the IRS will be taking more action to reduce the Tax Gap and generate more federal income - and Schedule C returns with consistent losses is one area where the IRS will be concentrating its efforts.

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The post correctly observes that - "The mere reporting of business operations on Schedule C rather than a separate corporate tax return increases a taxpayer's chances of being audited 50 fold." Regardless of Tax Gap considerations, one of the reasons has always been to do with level of income. The greater one's "gross income", from whatever source, the greater the choice of an audit. A gross income, before expenses, of $250,000 reported on Schedule C is high when compared to the total 1040 "population", but minuscule when compared to the 1120 (corporate income tax return) population.

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Pete says, "Because there is so much abuse in the Schedule C loss area, we have adamantly recommended that taxpayers who are conducting a legitimate, for-profit business incorporate that business or form an LLC."

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While incorporating will certainly reduce one's 1040 audit risk, it is more often than not not the best idea for the average sold proprietorship. Incorporation can generate much more paperwork, recordkeeping, federal and state tax filings, costs, and general all-round "agita" than it is worth.

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Like a marriage - it may be relatively cheap to "get into" a corporation, but it can be highly expensive to "get out". A Schedule C filer who is considering incorporation should review very carefully all the consequences of such an action and do a detailed cost benefit analysis.

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I also recommend that all Schedule C businesses become an "LLC" - but it has nothing to do with taxes. Doing so adds an extra degree of liability protection.

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If you have a legitimate ongoing Schedule C business you probably should consult an accountant (not necessarily a CPA) instead of just a basic tax return preparer on a year-round basis. Some tax professionals are also available to provide excellent accounting services for small businesses throughout the year, while others, as I currently do, limit their practice to 1040 preparation. You can use the accountant for year-round accounting, bookkeeping, and payroll services and still have a separate tax pro prepare your 1040. The accountant can provide a "profit and loss" statement for use by the tax pro in completing the Schedule C.

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Pete provides the following "final thoughts" for those with potential "red flags" -

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"If you do decide to take one or more of the above deductions, there are several things you can do to dilute their red flag status.

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1. Timely file our return;

2. Use a recognized software program to prepare and print your return;

3. File the return electronically;

4. Have a respected CPA, tax lawyer or IRS Enrolled Agent sign your return as tax preparer; and

5. Attach explanatory statements to your return where necessary."

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I do not agree with most of these thoughts.

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1. The only one with which I concur. You should always, whenever possible, timely file your return. It is an "urban tax myth" that extending your return will reduce your chances of audit.

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2. You should never use a "box" to prepare your return unless you know what you are doing. It is more cost effective in the long run to use a competent tax professional.

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3. I do not think this makes any difference.

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4. In my 37 years in "the business" I have never come across anything that would lead me to believe that the "designation" of a tax preparer is a factor in audit selection. Returns prepared by CPAs, lawyers, and EAs are audited just as often as those of "unenrolled" preparers. And the IRS knows full well that there are incompetent and unethical CPAs, lawyers, and EAs, just as there are incompetent and unethical "unenrolled" preparers. The IRS does not say, "If the return was prepared by a CPA it must be accurate". That is utterly ridiculous. The IRS does have a list of "red-flagged" preparers, of all "designations", who are suspected of unethical practices, and the returns of these preparers are reviewed more closely than those of the average preparer.

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5. There are two schools of thought on this issue. Some tax pros feel that the more explanatory documentation you attach to a return the less likely the chance of any questions. Others feel that "less is more" - only attach to the tax return items that are absolutely necessary and do not clutter the form with unrequested or unnecessary schedules and attachments. I tend to lean more in the "less is more" direction, although I do believe that you should attach explanatory statements when appropriate. For example, in most cases if I claim more than $5,000 for cash contributions I will attach a statement listing the various charities by amounts (i.e. St. Mary's Church $2,500, Columbia University $1,000, Hurricane Victims Fund $1,000, United Way $650, Other Church and Charity $150). I do not, however, attach copies of receipts, acknowledgements, or documentation for the actual contributions.

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My bottom line - if you have a genuine home office that meets all the requirements in the Tax Code, or have legitimately incurred out of pocket "ordinary and necessary" expenses in connection with your job or profession, or have made contributions to church and charity, etc. do not hesitate to claim these deductions on your Form 1040. Do not omit them because you think they will cause your return to be audited. However, as with any business or personal deduction, make sure you have adequate documentation to substantiate the deduction.

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TTFN

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

Lots of excellent BUZZ this week - be sure to check them all out.

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* Nothing to do with taxes exactly - but JibJab, who had so much fun with W's presidency, has a new parody on BO - "He's Barack Obama".

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* The tax pro licensing debate continued in the tax-blogosphere.

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Another one for my side! "Opinion - Certifying Tax Preparers" by G Christopher Wright, a CPA from Virginia who writes THE TAX LAW REPORT blog.

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And Joe Kristan responded to Pete Pappas in "Wasting Money: What's the Big Deal".

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* Roni Deutch reports "4th of July Tea Parties Planned" at her TAX LADY blog.

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* The Summer 2009 edition of the Tax Foundation's TAX WATCH newsletter is available to download. Click here.

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Included is an article which discusses a new poll that indicates 4 out of 5 adults feel the Tax Code is too complicated and needs to be completely overhauled.

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* Speaking of the Tax Foundation, the TAX POLICY BLOG tells us that "Oregon Senator Proposes Breastfeeding Tax Credits". The post makes an excellent point -

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"This is another example of why our tax code is so complex and difficult to navigate. No doubt breastfeeding has supporters who think its a good idea. But rather than relying on persuasion, or even direct spending programs that have to prove themselves each year, many special interests resort to using the tax code to encourage or discourage their vision of the world. Subject to less oversight and scrutiny, credits clutter up the tax code and distort decision-making."

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* Frankly there are few things about which I could care less than the marital problems of a reality show couple who decided to ruin their lives, and potentially that of their children, for money by filming their life for television.

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Any idiot who trades self-respect and privacy for cash and 15 minutes of fame to be on a so-called reality show deserves all the bad things that happen to him/her. It is unfortunate that, in this case, the innocent "eight" will also suffer because of their parents' selfishness.

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Perhaps the only good thing that has come from this reality show (a phrase that cannot be used for any other show of this genre) is that is "inspired" Kay Bell to write the post "Jon and Kate Plus 8 Divorce Tax Tips" at DON'T MESS WITH TAXES, a good compilation of tax planning tips for those in the process of divorcing. One of her tips includes a link to a TWTP post!

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* Peter Pappas of THE TAX LAWYER'S BLOG provides us with an interesting post titled "The Myth of the Evil Rich: I'll Believe in Winged Steeds First!".

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While I do admit that there are those among the rich who have amassed their fortune in a less than ethical or moral manner, and that there are those in the lower income brackets who have been faced with more than average disadvantages and obstacles, I do strongly agree with the bottom line of Pete's post -

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"People who fail to succeed in life - however they define success - do so largely because of their own prior bad choices and not because, as the collectivist left would have us believe, that the rich conspired to keep them down."

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Basically - we make our own beds. Each individual is responsible for his/her own current financial situation.

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And I also very much agree with Pete's comments on the dangers of the Myth of the Evil Rich.

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*Babyboomer provides some good advice for individuals who live in areas with potential for hurricane damage in the post "Safeguarding Tax Records for Hurricane Season" at TAX RESOLUTIONARIES.

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* Kathleen Webb discusses a timely topic in "Summer Nannies & the Nanny Tax" at her NANNY TAX AND PAYROLL UPDATES blog.

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* The National Association of Tax Professionals (NATP) weekly email newsletter reports that -

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"On July 24, 2009, the federal minimum wage for non-exempt employees increases from $6.55 per hour to $7.25 per hour. This is the final phase of the wage increase that was enacted under the "Fair Minimum Wage Act of 2007".

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Employers of tipped employees are still only required to pay $2.13 per hour if that amount plus tips received equals the federal minimum wage and:

• The employer informed the employee that the tip credit is being taken;
• The employee keeps all tips unless they participate in a tip sharing arrangement;
• The employee customarily and regularly receives more than $30 per month in tips.

The youth minimum wage also remains the same. Employees under 20 years of age may be paid $4.25 per hour during their first 90 consecutive days of employment."

* Another victory in the battle against usurious Refund Anticipation Loans (RALs) pushed on clients by fast food tax preparation chains! This time is wasn't against Henry and Richard. WebCPA reports that "Liberty Tax Services Loses Deceptive Ad Suit."

According to California Attorney General Jerry Brown-

"Liberty Tax Service lured cash-strapped Californians into paying for high-cost loans, when they could obtain tax refunds free from the IRS just weeks later. This ruling bars Liberty from deceptive advertising that blurs the line between IRS tax refunds and pricey loans."

The article states that -

"Liberty Tax Service's print and television ads misled customers by promising 'Most Refunds in 24 Hours', according to Brown. In reality, Liberty was selling refund anticipation loans, not a tax refund. Customers had to pay an upfront fee of about $30 plus interest, at a rate that could be as high as 395 percent annually. According to the IRS, refund anticipation loans target low-income taxpayers, especially those who receive the Earned Income Tax Credit. Approximately 70 percent of Liberty's refund anticipation loan customers in 2006 and 2007 received this credit."

The ruling requires Liberty to pay $1.16 Million in civil penalties, $135,886 in restitution, and the Attorney General's costs.

Brown had reached settlements with Jackson Hewitt in 2007 and with Henry and Richard in 2009 over RALS.

Right on, Jerry!

* A "tweet" from NATP "turned me on to" this website on the new Car Allowance Rebate System (CARS) - aka the Cash for Clunkers program - which was recently signed into law by BO.

TTFN

NJ PASSES BUDGET – TAXPAYERS SCREWED AGAIN

According to the New York Times, "New Jersey lawmakers passed a $29 billion budget largely along partisan lines on Thursday night that will increase taxes by almost $1 billion, eliminate property-tax deductions for the wealthiest citizens and pare billions from health care, higher education and other programs".

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Taxpayers get higher taxes and less services while the bloated politicians continue to wallow in pork.

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Here are some of the highlights, based on what I have read so far this morning -

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* A one-year state income tax increase on individuals making more than $400,000 a year, moving the top tax rate to 10.25%.

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* At least for a year taxpayers with incomes of more than $250,000 a year will no longer be able to deduct their property taxes. Those making between $150,000 and $250,000 will be able to deduct a maximum of $5,000.

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* Individuals who win $10,000 or more in the NJ State Lottery will be taxed on the winnings (previously NJ Lottery winnings were exempt from NJ state income tax).

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* Limiting the NJ Homestead Rebate to households earning less than $75,000, and eliminating altogether tax rebates for renters (like me) - except, presumably, seniors and the disabled.

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* Taxes will go up by 12.5 cents per pack on cigarettes and 25% on hard liquor and wine.

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Republican State Senator Christopher Bateman of Somerset County summed up the new budget excellently - "This is only going to add additional pain to the taxpayers, who are suffocating now with taxes".

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Pennsylvania looks more attractive every day!

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TTFN

MONEY HACKS CARNIVAL

Just found out that my post on "What Happens in an IRA Stays in an IRA" appears in the "Money Hacks Carnival #70" at BLOGGING BANKS.

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It is the "editor's pick" in the TAXES category!

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Check out the Carnival - it has lots of interesting stuff.

IF YOU WILL INDULGE ME A LITTLE LONGER

I don't mean to do to the topic of regulating tax preparers what David Letterman does with a lame comedy bit - beat it to death. I promise that, with the possible exception of a final summary post, this will be my last commentary on the subject for a while.

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Opponents of regulating tax preparers continually mention the great "burden" that this will put on the honest and ethical preparer. I am at a loss to figure out what they mean.

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I am an honest and ethical "unenrolled" tax preparer. If I were required to be registered and licensed to continue to practice what would happen?

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(1) I would need to fill out an initial application form, which would certainly not be done during the tax filing season. How long could this take - an hour or two?

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(2) I would need to pay an initial registration fee of, say, $125.00 with the submission of my application form. Hardly a financial hardship.

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(3) While there could be an initial proficiency test, I expect that I would be exempt under some kind of "grandfather" clause which must be part of any licensure legislation, for practicality sake if nothing else.

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(4) I would be required to earn a minimum number of CPE credits during a period of time, which would probably average at least 24 hours per year. That comes to three 8 hour days of continuing education in a year. I already average more than that per year. No additional cost of time involved, at least for me.

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(5) I would have to reapply every 1, 2 or 3 years. I would have to fill out a form reporting my CPE hours earned for the period - one hour tops - and pay a renewal fee that would probably be no more than $50.00 per year. Big whoop!

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So where is the great "burden"?

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The newer or just starting out preparer who would be required to take an initial proficiency test would need to, perhaps, spend some time and money on a review course - 1 or 2 days and maybe $500.00 out of pocket. And then spend a day taking the test.

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And those who do not average 24 hours of CPE credits per year would have to spend a little more time and money. But, as I have said before, if a tax preparer is not spending at least 3 days a year on continuing education he/she should be, license or not.

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Still no great burden.

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And, besides, the cost of all this would be tax deductible as an ordinary and necessary business expense.

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So I ask those who oppose regulation - where is the great burden that would be placed on honest and ethical tax preparers?

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TTFN

AND THE BEAT GOES ON

Regulation of unenrolled tax preparers has certainly become a hot topic among tax bloggers. Here are some more posts on the topic -

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* Pete Pappas adds to the debate with a direct response to one of Joe Kristan's posts on the subject in "Tax Preparer Regulation: A Response to Joe Kristan" at the TAX LAWYER'S BLOG. Pete joins me on the pro-regulation side of the issue. Joe Kristan has promised that his return volley is forthcoming.

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* Bruce the taxguy also throws in his 2 cents in "Tax Preparer Registration", also joining me on the pro side. This post is a good source of links to most previous blogs in the debate.

* While not directly responding to the issue of regulating unenrolled preparers, Monica Lawver, THE TAX CPA, comes to the conclusion that "we can regulate behavior, but not motivation" in "Regulation Won't Work".

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Have any Personal Finance bloggers weighed in on this topic? I would be interested in hearing a "consumer's" point of view.

THE DEBATE CONTINUES . . . COMMENTS ON A COMMENT

While I had expected more response from the CPA community to my Friday post, I did get one comment from CPA, and new tax blogger, Jeff Beckley - aka the Tax Man.

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"You make some very good points about the 'urban tax myth' that CPAs, and only CPAs, are tax experts. I agree that you don't have to be a CPA to be qualified to prepare a tax return.

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But, we must keep in mind that many returns are prepared by unlicensed preparers and tax software. If all preparers are required to be licensed, the cost for professional tax preparation will increase and many will turn to self-preparation through software thereby increasing the risk of error. I don't see how requiring tax preparers to be licensed serves the consumer any better.

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The AICPA's position is clearly not an attempt to monopolize the tax preparation industry. 'The AICPA believes the IRS already has the tools necessary to ensure reduced-error tax returns and proper registration methods and should resist overburdening tax preparers with redundant and potentially costly regulation requirements.'

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In reality, this proposal is an attempt by the IRS to further impose taxpayer and preparer penalties that add no value to the tax prep industry. We should stick together on this issue and petition against adding further bureaucracy and expense to our industry and the taxpayers we serve."

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First of all I agree 100% with the argument that regulation of unenrolled preparers will not, as Commissioner Shulman put it, ensure, "high ethical standards of conduct for tax preparers."

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Whether licensed or not, unethical individuals will continue to be unethical. No lofty "standards of practice" or required hours of CPE in "ethics" will automatically turn a dishonest person honest. The regulation of the CPA industry, with its Code of Professional Conduct and "enforceable" Statements on Standards on Tax Practice, did not prevent ENRON and similar fraud.

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In many cases preparers of fraudulent returns do not sign the tax return and would continue to prepare fraudulent returns even if not licensed.

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And I agree that there already exists within Circular 230 provisions for penalizing unethical behavior by tax preparers.

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I do not see how regulation of unenrolled preparers, if properly done, will materially increase the cost of tax preparation, or add substantially to the IRS budget.

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While licensure may require an initial proficiency exam, any reasonable legislation must include a grandfather clause that exempts most "experienced preparers. I have suggested that those who have been preparing tax returns consistently for at least five (5) years, and who have earned at least 60 hours of CPE credits in taxation in the past two years, would be exempt from any initial exam.

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Such "grandfathering" must be part of the legislation, as it would be literally impossible for the IRS, or any outside vendor, to properly test the more than 1 Million unenrolled preparers. And for the same reason there obviously cannot be an annual test to maintain one's license. Besides, I know of no other regulated profession that requires annual testing for renewal.

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Licensure would definitely require a minimum number of annual CPE credit hours in "taxation".

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Currently the IRS charges Enrolled Agents an initial application fee of $125.00 to take the enrollment exam. EAs must renew their "license" every three (3) years by submitting a simple form (no additional testing), on which they report their CPE credits for the period, and paying a fess of $125.00.

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I would expect licensure of unenrolled preparers would have similar nominal fees. All unenrolled preparers would probably pay a similar initial registration fee, whether or not they are exempt from the test. This could generate $125 Million plus toward the cost of administering the program.

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If I were to pass this $125.00 fee along to my clients - at about 400 returns prepared annually it would be 32 cents per return.

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Even if licensure required an annual renewal fee, with a charge of say $50.00 each year (generating $50 Million plus in annual income to the IRS), I would only have to increase my base fee by 13 cents.

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In my case I believe that I already earn at least, if not more, CPE credits each year then would be required by licensure - so I personally would not be incurring any additional annual costs for continued education. I do agree that there are many unenrolled preparers who would not normally earn the newly required annual minimum number of credit hours and would need to spend, what, about $500 more per year (on the high side). Passed along to clients this would be $2.00 to $3.00 per return.

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EAs are currently required to earn 72 CPE hours in a three (3) year period (average 24 hours per year) - with a minimum of 16 hours per year. This is certainly reasonable. And frankly, if a tax preparer is not taking at least 24 hours of CPE credit annually he/she should be. Additional continued education makes a better tax preparer and therefore provides more value to his/her clients.

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I have said that CPAs who wanted to prepare tax returns would also be required to meet the minimum CPE in taxation requirements for a "licensed tax preparer". This would not be a burden. CPAs are already subject to annual minimum CPE requirements to maintain their certification - if they want to prepare tax returns they would just have to take the credits in taxation and not general accounting.

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So you can see that licensure would at most increase the cost of the average tax return by a few bucks. Hardly enough to cause masses of clients to turn to self-preparation via tax software. Tax preparation fees as they now exist are certainly, from a strict dollar point of view only, more expensive than buying a "box", although using a paid preparer also certainly provides much more value in the long run.

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I cannot see how licensure would result in, as Jeff quoted the AICPA, "overburdening tax preparers with redundant and potentially costly regulation requirements".

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And I do not understand how he feels "this proposal is an attempt by the IRS to further impose taxpayer and preparer penalties". I expect the same preparer penalties that currently exist would remain as they are. The only additional penalties would be assessed to unlicensed preparers who continue to prepare returns.

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Regulating unenrolled preparers, if done properly (unfortunately the operative word here - and Congress does not have a good track record at doing things "properly"), would certainly not eliminate fraudulent returns or close the Tax Gap - but it "couldn't hurt".

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I still believe that it would add an extra layer of protection for the average taxpayer - and it would put all licensed tax professionals, CPAs and previously unenrolled preparers alike, on an equal footing in the eyes of the general public. Hey, CPA Jeff admits the existence of the "urban tax myth" about CPAs being the only tax experts.

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And while I have been told by another respected CPA, "I don't think the AICPA is trying to protect the CPA franchise. That gives them too much credit." - I still feel that the main reason the AICPA is against regulating unenrolled preparers is that it wants its members to keep their unfair and unwarranted advantage.

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TTFN

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

* Accountants who rap? Twit follower/followee Rick Telberg brings us “Rappin’ CPAs: The Tax Men - Tax Dat A$$” at his CPA TRENDLINES blog.

“No need to worry, my accountant handles that!”

* I join Pete Pappas of THE TAX LAWYER’S BLOG in questioning BO’s commitment to closing the Tax Gap (not a store selling jeans with 1040 emblems) in his post “Tax Gap Closer Obama Appoints Native American Woman with No Tax Experience to Head Up DOJ Tax Division”.

Pete suggests, and I have no reason to disagree, that the reasons for appointing Mary Smith (real name?) as head US Tax Attorney at DOJ is –

1. Ms. Smith was a partner in women-owned law firm; and
2. She is a Native American.

If the only reason for appointing Ms Smith is that she is a Native American isn’t that discrimination, however reverse? And isn’t discrimination in federal hiring illegal?

* In a later post Pete provides us with a lesson in taxation on the 7 most important “ubiquitous tax concepts” in his post “7 All Time Tax Concepts”.

* Kristine McKinley is back with a new blog – YOUR GUIDE TO SOCIAL SECURITY RETIREMENT INCOME. “It's my goal to make this blog your ultimate guide to understanding Social Security retirement benefits.” Check it out.

* Richard Close, the IRS HITMAN, dispels some “urban tax myths” concerning deductible medical expenses in his post “IRS Tax Issues: Medical Deduction Myths to Avoid, Stay out of Trouble With the IRS”

* Be sure to provide your comments to TAXGIRL Kelly Phillips Erb on her Friday question – “Fix the Tax Code Friday: What About Amnesty?”

TTFN

I KNEW I READ IT SOMEWHERE

For some time now when discussing the Earned Income Tax Credit I have mentioned that I read a survey somewhere that about 1/3 oF all EITC claims were fraudulent - but I could not remember where I had read it.

The AICPA issue briefing “Federal Regulation of Tax Preparers” that I mentioned in this morning’s post included the following item –

“An 1RS study of 1999 tax returns suggests that - out of the $31 billion in EITC claims by taxpayers that year - between 27 and 32 percent of those claims were erroneous.”

If that was the number back in 1999 I can imagine what it is today!

SO WHY DOES THE AICPA OPPOSE REGULATION OF UNENROLLED PREPARERS?

There has been much discussion lately, to which I have added several cents worth myself (see my post “License and Registration, Please”), on the regulation of “unenrolled” tax preparers, resulting from IRS Commissioner Doug Shulman’s recent comments.

I have come across comments and statements from state CPA organizations and the AICPA itself (i.e. AICPA issues briefing on “Federal Regulation of Tax Preparers”) that, while supporting “the implementation of high professional standards for tax practitioners”, they are basically against government registration and regulation of unenrolled practitioners. The AICPA briefing mentioned above states “we are not convinced that Congressional proposals calling for the regulation of unlicensed tax practitioners will accomplish the stated objectives advanced by the proponents of such proposals”.

One wonders why the AICPA would be against the regulation of unenrolled preparers.

There is a serious misconception among the general public, and especially, it seems, among journalists, that only CPAs are qualified tax professionals. This is seen in print during tax season and throughout the year when “CPA” is used whenever the term “tax professional” or “qualified tax professional” or “competent tax professional” would be more appropriate.

When discussing tax issues we are told to “check with your CPA first”, or “be sure to consult with your CPA”, or “see a CPA” when what is actually meant, or should be meant, is “check with your tax professional first”, or “be sure to consult with your tax professional”, or “see a tax professional”.

To be sure just because a person has the initials CPA after his/her name does not mean that he/she is a tax expert. As I have said time and again - in my 37 years in “the business” I have seen more errors on tax returns made by CPAs than by any other “class” of preparer.

If unenrolled tax preparers are required to be registered, licensed, and regulated, with required initial proficiency exams and annual minimum CPE credit hours, the result would be a “licensed tax preparer” or some similar federal designation. And, presumably, only “licensed tax preparers” would be allowed to professionally prepare tax returns.

Now I am not talking about practice before the IRS. “Licensed tax preparers” would be permitted to prepare tax returns only. Practice before the IRS, I expect, would continue to be limited to EAs, CPAs and attorneys. And I also expect that EAs, CPAs and attorneys would be automatically “grandfathered” in as “licensed tax preparers”.

However, while CPAs would be exempt from any initial proficiency test, those who want to be able to prepare tax returns should be subject to the same annual CPE credit requirements as the newly enrolled practitioners. If “licensed tax preparers” are required to take 30 CPE credits in “federal income taxes” each year to maintain their status, then CPAs who want to prepare tax returns should be required to take the same credits in federal income tax topics, and not just general accounting.

Enrolled Agents already have strict CPE requirements in federal taxation. And, to be honest, I doubt very many individuals have their 1040 prepared by a lawyer – who could afford it? Tax lawyers are generally used by individual taxpayers when it comes to the area of “problem resolution” – dealing with problems resulting from faulty, or considered faulty, 1040s or collection issues.

It is my firm belief that one of the main reasons why CPA organizations are against the creation of a “licensed tax preparer” designation, via the regulation of unenrolled tax practitioners, is that this will once and for all do away with the misconception that only CPAs are qualified tax preparers. Now journalists will be saying “check with your licensed tax preparer” and “be sure to consult with your licensed tax preparer” and “see a licensed tax preparer”.

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CPAs do not want the competition - they want to continue to have the unjustified "upper hand" with the public in terms of erroneously perceived tax expertise that they now enjoy.

I have read credible opinions on both sides of the issue by individual CPAs, attorneys, CPA-Attorneys, Enrolled Agents and unenrolled tax professionals, and do not doubt one bit that the individuals expressing these opinions are sincere and not just self-serving. There are legitimate arguments both pro and con.

But one thing I do know is that if all tax preparers were regulated via a “licensed tax preparer” designation it would rightfully put all qualified and competent tax professionals on an equal footing in the eyes of the public, and do away with the erroneous “urban tax myth” that CPAs, and only CPAs, are tax experts.

TTFN

RECOMMENDATIONS FROM TIGTA

According to its website, “The Treasury Inspector General for Tax Administration (TIGTA) was established under the IRS Restructuring and Reform Act of 1998 to provide independent oversight of IRS activities. TIGTA promotes the economy, efficiency, and effectiveness in the administration of the internal revenue laws. It is also committed to the prevention and detection of fraud, waste, and abuse within the IRS and related entities.”

In some respects TIGTA is like the “Internal Affairs” department of the IRS. It also issues reports and makes recommendations to both the IRS and Congress, and, like the Taxpayer Advocate Office, submits a semi-annual “Report to Congress”.

In one recent report TIGTA made the following suggestion to the IRS -

“The Internal Revenue Service (IRS) should increase its efforts to educate elderly taxpayers about potential exemptions from withholding tax on certain retirement payments in order to reduce unnecessary tax return filings, according to a new report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).

While the IRS' public website, www.irs.gov, instructs taxpayers on how to determine whether to file a Federal tax return and if income tax withholding is necessary, printed publications, such as the instructions for filing IRS Form 1040, do not expressly state whether taxpayers should continue to have income tax withheld on Social Security, pension and annuity payments.

In August 2007, TIGTA issued a report examining the characteristics of unnecessarily filed individual income tax returns (Reference Number 2007-40-130, August 17, 2007). That report found that more than 8 million tax returns were unnecessarily filed in 2003, 2004 and 2005. Eighty-five percent of those returns were filed to obtain a refund of taxes withheld.”

Basically the report says that 8 Million + unnecessary tax returns with no tax liability are filed by senior citizens each year, most of which are simply to get a refund of federal income tax withheld from pensions.

This is similar to the fact that there are also many unnecessary tax returns filed by dependent children simply to get a full refund of federal income tax withheld. I discussed this issue in some detail back in 2007 in my post “Dependents and Income Tax Withholding”.

I also agree that many seniors should also refrain from having federal income taxes withheld from pension income if they consistently have “0” tax liabilities on the Form 1040 (or 1040A) each year. However I also realize that there are seniors who would rather be “safe than sorry” and have tax withheld as an arse-covering measure “just in case” so they will not have to write a check to their Uncle Sam at tax time.

I do advise clients who do not need to have tax withheld from pensions and annuities to stop doing so, but do not make an issue of it if they want to cover the arse. The problem I have is not with senior clients who have tax withheld from such income unnecessarily – but with those with tax liabilities who do not have any, or enough, federal or state tax withheld.

In another report TIGTA told the IRS that changes should be made in the layout and typeface of 1040 individual tax forms, including more use of boldface, colors and explanations, to help reduce taxpayer errors.

According to the report, each year the IRS sends out more than 7 Million notices to taxpayers informing them of math errors on their tax returns. TIGTA thinks that more than 2.3 Million of those errors could have resulted from unclear or inadequate forms and instructions. An analysis of taxpayer errors on 2005 tax returns identified three areas where modifying the 1040 and its instructions could reduce errors - computing the deduction for personal tax exemptions, the omission of dependent Social Security numbers or Individual Taxpayer Identification Numbers, and children claimed for the Child Tax Credit who exceeded the age limit.

The report says that taxpayers made more than 210,000 errors computing their exemption amounts. Another 170,000 taxpayers failed to include their dependent’s SSN or ITIN on the 1040, and approximately 137,000 taxpayers were denied the Child Tax Credit in 2006 because the child’s age exceeded the age requirement.

TIGTA recommends that the IRS use improved labeling and include the use of bold type to draw attention to instructions. Other suggested changes to the Form 1040 include adding language explaining the purpose and description of the exemption line, a statement that a SSN or ITIN is required for each dependent claimed, and the inclusion of the qualifying age requirement necessary to claim the Child Tax Credit. TIGTA also recommended that the IRS seek Congressional approval to use additional colors on tax returns and instructions to highlight important warnings and information.

I don’t know – a multi-color 1040? I am used to the light blue color of the form, just as I am comfortable with the red color of the NJ-1040 (appropriate – considering NJ’s financial situation). While I would agree that in some cases IRS instructions and “prompts” could be improved or more effectively highlighted I don’t think I would want a “more colorful” 1040.

TTFN

ASK THE TAX PRO - EXCESS TAX CREDITS

Here is a question I got via email from a long-time friend and client.

Q. This may be a stupid question, but I just want to be sure. Between the $1,700 tax credit for the hybrid I will receive, as long as it is delivered by 9/30/08, and the sales tax credit of about $2,900 I will exceed my total tax liability for the year. In addition, because of my medical expenses, and I am having dental work done now also, property taxes, new home equity interest, and the usual I will have lots of deductions. If I exceed my tax liability will I still receive the balance of the tax credits as a refund? If not, I could always cash in some more bonds.

A. There is no such thing as a stupid tax question – only stupid taxpayers (who don’t consult a competent tax professional)! The question actually brings up an excellent tax-planning point.

First of all, the “sales tax credit of about $2,900” to which he refers is not actually a credit (a credit is a dollar-for-dollar reduction of tax liability). He is talking about the “above the line” tax deduction for sales or excise taxes paid on the purchase of a new automobile. His Adjusted Gross Income (AGI), and not his tax liability, will be reduced by $2,900. He also mentions excessive medical expenses, so the $2,900 “above the line” deduction will increase his allowable medical deductions by $218!

He is basically asking if the $1,700 energy tax credit for purchasing a hybrid car reduces his tax liability to below “0” will he be able to receive a refund of the unused credit. The answer is no.

Most tax credits are not “refundable”. Only the Earned Income Credit, BO’s new Making Work Pay Credit, a portion of the new American Opportunity Credit for tuition and fees, and possibly the Child Tax Credit are “refundable”. By “refundable” I mean they are treated as additional withholding and can be applied against “other” taxes, such as the self-employment tax and the penalty for early withdrawal from a pension account, and ultimately added to the taxpayer’s refund.

In the case of my friend – he is single with no children, recently retired (late 2008) - though not receiving Social Security or Railroad Retirement - and will be reporting some nominal net earnings from self-employment for 2009. The only “refundable” credit to which he will be entitled is the Making Work Pay credit, which is based on 6.2% of his self-employment income. The MWP credit can be applied against his self-employment tax for the year.

However with reduced income due to retirement and excessive deductions due to special situations it is very possible that the $1,700 hybrid credit will exceed his federal income tax liability. In such a case the excess hybrid credit would be lost.

In this particular case the taxpayer has a large “inventory” of US Series E savings bonds, both purchased and inherited, that are still earning interest. He plans to cash in a certain amount each year, determined by tax planning, to supplement his income until Social Security kicks in. He has already cashed in the bonds scheduled for 2009.

What we will do is prepare a “preliminary” 2009 tax return in late November or early December as part of regular year-end tax planning. If at that time we determine, based on year-to-date information, that his tax liability before the hybrid credit will be less than $1,700 he will cash in enough additional savings bonds to generate the amount of taxable interest income needed to use up the excess credit. By doing this the additional savings bond interest will be totally tax free (US savings bond interest is already tax free on the NJ-1040)!

FYI, my friend and client uses the Savings Bond Wizard software available online to properly “inventory” his bonds so that he knows how much interest each bond will accrue for the year.

TTFN

WHAT HAPPENS IN AN IRA STAYS IN THE IRA

While it has taken years, I have finally trained many of my clients to provide me with both the purchase and sale “confirms” of investments they have sold during the year. Unfortunately, others just give me the purchase and sale confirms they actually received during the calendar year – as if I magically know the cost of any stock sold. At least it is something, and I keep the purchase confirms in their “file” so I will have them in the future when the investment is sold.

Several clients also give me the purchase and sale confirms for investments bought and sold within their IRA account. I always return these with the note – “don’t need”.

During times of market distress, like our current situation, I will also be told, “I lost $20,000 in my IRA last year” – as if I can deduct this loss on their current 1040.

I must tell my clients that I do not need to know if they bought or sold investments in their IRA, what they earned in interest and dividends in the IRA, or whether or not the account lost or made money. While I very much want to know the specific details of what has happened in “normal” brokerage or mutual fund accounts, I do not care what has happened in IRA accounts.

Truly, just like Vegas, for income tax reporting purposes – what happens in an IRA stays in the IRA!

It is the same with 401(k)s, 403(b)s, 457s, SEPs, SIMPLEs, and any other employer or self-employed pension plan. This past tax season, as was the case at several times in the past during my long career, clients told me “I lost $50,000” or “I lost $200,000” in their 401(k). But other than sympathize with their plight there is absolutely nothing I can do about it on their 1040.

The only thing I want to know with any of these accounts is if you received a distribution did you “take the money and run” or did you “rollover” the money into another IRA or retirement account.

If you “took the money and ran” from a traditional IRA account I may want to know the balance in all your traditional IRA accounts on December 31st. This is needed if there is a “tax basis” (resulting from non-deductible contributions). In the case of NJ state income taxes all traditional IRAs have a “tax basis”, as contributions to a traditional IRA are not deductible on the NJ-1040.

An IRA, or any retirement account, is a separate legal entity. It is a tax exempt trust. While the activity of the account may need to be reported to the IRS or others by the trustee (i.e. Form 5500), “beneficiaries” of the trust do not report internal retirement account activity on their individual federal or state income tax returns.

I must point out that there is a way to get a tax benefit for losses in an IRA – but only if you withdraw all the monies in all your IRA accounts in one year and the total amount of what you get out is less than what you put in over the years. But that is the subject for another post.

TTFN

A COUPLE MORE CENTS

I just wanted to add a few more cents to my earlier post on the registration/licensure of tax preparers.

There is no doubt that any registration/licensure legislation will require at least 2 hours of CPE credits in “Ethics” each and every year.

Currently just about every single state and federal tax update class I attend has 2 hours devoted to “Ethics”, as the annual requirement apparently applies to CPAs and EAs. That means two hours less of actual tax knowledge being presented at each offering. If I am paying for 8 hours of CPE I am actually only getting 6 hours (or really 5 hours as a CPE hour = 50 minutes).

In many cases the topic is either first up in the afternoon or the last of the day – so I can either take a longer lunch or leave early. Other times I just zone out.

I have been preparing tax returns for about 38 years, without incident. If I do not have ethics by now sitting through 2 hours ain’t going to make me ethical. If I am so inclined to be unethical in my practice listening to a speaker tell me what is wrong is not going to make me “see the light”.

I do listen to one of the presentations maybe every other year to see if there are any new wrinkles.

I do believe that there should be some questions on ethics in any initial proficiency examination required of new preparers. And perhaps a requirement of 1 hour of CPE credit on ethics every other year as an update couldn’t hurt.

If tax preparer organizations and other CPE providers must offer 2 hours on ethics annually please limit it to the year-end update class. Don’t take 2 hours away from real learning at each and every offering!

LICENSE AND REGISTRATION, PLEASE

My recent wanderings around the blogosphere indicates that one of the biggest topics of the day involves IRS Commissioner Douglas Shulman’s recent announcement of plans to “propose a comprehensive set of recommendations to help the Internal Revenue Service better leverage the tax return preparer community with the twin goals of increasing taxpayer compliance and ensuring uniform and high ethical standards of conduct for tax preparers”. He was talking about what Trish McIntire of OUR TAXING TIMES calls “the regulation that Congress can't seem to pass” – the licensing and registration of “unenrolled” (not EAs, CPAs, or lawyers) tax preparers.

As Trish points out in her post “It’s Back Again” there is, “nothing new there. Nina Olson, the National Taxpayer Advocate, has been recommending licensing for years now. In fact, there have been bills before the last 3 Congresses which would require licensing. They have all died when that Congress ended because there were other more pressing issues distracting lawmakers.”

Many of my fellow tax bloggers, who are also tax professionals, have weighed in on the question. While there are bloggers on both sides of the question, it seems the consensus of these posts is that some kind of regulation is needed.

I have blogged, commented, and written about this topic at various places and to various individuals and organizations in the past. But perhaps in light of this resurgence of interest in the topic it is time again to post my thoughts and comments on the subject.

First of all, I am not a big fan of excessive government regulation of anything. However I do feel that there are times when government regulation if necessary to protect the public from unethical practices.

I am not calling for regulation of tax preparers, and would not complain if there were none, but I do not object to the idea – and actually support it. I am an ethical tax professional – so any reasonable (always the operative word) form of regulation should not adversely affect my 1040 practice.

The reason to regulate/license “unenrolled” tax preparers is because, as I have stated in the past, any cafone can hang out a shingle as a “professional tax preparer”. Currently there are very few states that actually regulate or license individuals calling themselves tax preparers. There is no standard to assure that a person who calls himself/herself a “tax preparer” actually knows his arse from a hole in the ground when it comes to the Tax Code.

One morning, not too long ago, while walking on Central Avenue here in Jersey City I saw a sign in the window of a barber shop that read “tax returns prepared here”. You could apparently get a haircut and a manicure and have your 1040 prepared all in one sitting! Many years ago, before I had my own office, I had considered renting a desk in an insurance or real estate office – it never occurred to me to rent a chair at a barbershop.

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Early in my career, when I was working with my mentor Jim Gill at Journal Square (where the “Jersey Bounce” started), I came across a near-vacant room in the corner of the old bus station with large storefront windows. Inside the room was a person sitting on a folding chair at a card table with an adding machine – there was no other furniture or fixtures in the room. A hand-printed cardboard sign in the window advertised “Tax Returns Prepared Here”. What was sad was that I once actually saw a person in the room getting his return prepared.

To be honest the only way a taxpayer can be assured that a potential tax preparer has any actual knowledge of federal income taxes is if he/she uses an Enrolled Agent (EA). FYI, I am not an EA. Even the initials “CPA” do not automatically indicate that the person whose name precedes them is a tax expert.

The name EA is misleading. While certified by the IRS, an EA is not an employee or representative or “agent” of the Internal Revenue Service. An EA is a private tax professional who is "enrolled" to act as a taxpayer's "agent" in proceedings with the IRS and in tax court. To become an Enrolled Agent one must pass a difficult test that is 100% federal tax law. In order to maintain their enrolled status, EAs must have a mandatory number of continuing education credits in taxation each year.

Another reason that the IRS and Congress are concerned about regulating tax preparers is that there are many, many so-called “tax pros” out there who purposely prepare fraudulent tax returns, both known and unknown by the taxpayer client, to increase or create tax refunds, often charging the client a percentage of the refund. Most of this fraud occurs through the use of “refundable” tax credits such as the Earned Income Tax Credit.

Back when I started out in the business (before the EITC) my mentor told me the story of a local tax preparer that had been used by many police officers and other municipal employees in the area. You would bring your “stuff” to this person. He would ask how much you would like to get back. He would have you sign the Form 1040 in blank and basically make up enough deductions so that you would get the refund amount that you had asked for. If you asked for a refund of $5,000 your 1040 would indicate an overpayment of $5,087 or a similar number. This person was eventually caught.

A third reason involves recent government studies that have called into question the competence and ethics of the average “unenrolled” preparer.

A few years ago a Government Accountability Office (GAO) study 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 in a metropolitan area. In only 2 instances was the correct refund calculated, but all 19 returns contained errors, many of them serious. In several instances the errors caused the “taxpayers” to pay more federal income tax than necessary.

To some degree tax professionals are already registered with the Internal Revenue Service via the issuance of a “Preparer Tax Identification Number” (PTIN).

When I prepare a 1040, or just about any other tax return, I am required to sign the return and indicate a personal identification number (originally my Social Security number) as well as the name and address of my business and its federal “Employer Identification Number” if applicable. The PTIN is a number issued to paid tax preparers for use when signing a tax return - in lieu of one’s Social Security number. So a tax pro does not have to make his/her Social Security number “public” and risk identity theft or other “financial casualties”.

I also have a “CAF” (Centralized Authorization File) Number for use when a client/taxpayer elects to have me designated as a “authorized representative” (sort of like a limited Power of Attorney) when dealing with the IRS. While I expect that at this point every “legitimate” paid tax preparer has a PTIN, not all preparers have a CAF number.

It would be easy to build the IRS licensure/registration procedure on the existing PTIN registry.

Most of the bills regarding tax preparer licensure that have previously been introduced in (but not acted upon by) Congress have called for mandatory annual CPE (continuing professional education) requirements, similar to requirements for an Enrolled Agent (EA) or other professional licenses and designations (i.e. CPA and attorneys), and a mandatory initial proficiency test which one must pass to be able to prepare or continue to prepare 1040s (similar to the EA enrollment exam). Some proposals call for an annual test.

I wholeheartedly support the requirement for a specific amount of annual CPE credits per year as a condition of maintaining one’s ability to prepare tax returns. I attend many federal and state tax update seminars, workshops and conferences during the year – and I expect that I already earn more CPE credits each year than the requirement that would be set by legislation.

However I am firmly against a mandatory initial, or annual, test for ALL current and future tax preparers.

For one thing – I have been preparing tax returns professionally, and ethically, for 38 years. I have absolutely no intention of taking a test this late in my career to prove that I know what I am doing.

Secondly, and perhaps most important, it would be literally impossible for the Internal Revenue Service, or any outside contractor, to properly administer an initial, or annual, proficiency test to the current 1 Million + “unenrolled” preparers out there. It just cannot be done. The IRS has enough problems administering the EA exam, with only a few thousand tested each year.

I insist, and have urged NATP to do the same, that any tax regulation/licensure legislation must include some kind of “grandfather” clause for existing long-time tax pros.

Here is my proposal –

Every current tax preparer that has been in “the business” for at least five full years (60 months) and who has taken a minimum of 60 hours of continuing education in taxation during the past two years (24 months) would be exempt from taking an initial proficiency examination. These “grandfathered” preparers would be subject to the same annual continuing education requirements as those who had to take the competency exam to maintain their status. There would be no annual testing – only the initial exam.

While I support the registration/licensure of all tax preparers I do not believe that such a practice will eliminate, or even substantially cut down on, the number of unethical preparers or overall tax cheats. As long as the tax system is the convoluted mess that it currently is people will continue to cheat on their taxes, either on their own or with the help of unscrupulous preparers.

The most that registration/licensure can do is to provide some degree of protection to the taxpayer-consumer when it comes to choosing a tax preparer. I agree with Trish McIntire when she says, “Congress needs to allot money for a good, intensive education campaign about licensing and why taxpayers need to look for licensed preparers”. Registration must be followed by public education on the fact that taxpayers should use only registered/licensed preparers to complete their tax returns.

As Trish suggests, penalties should not be limited to non registered/licensed preparers. If registration/licensure is required for all paid tax preparers, taxpayers who use non registered/licensed preparers should also be penalized to some degree.

I must point out two more things before I end the post –

(1) This whole interest in ethics among tax preparers actually began with the ENRON scandal. The illegal and unethical practices of ENRON were perpetrated by CPAs – members of a very highly regulated group.

(2) The tax preparers “caught” in the GAO study of a few years ago that I mentioned above were all employees of fast food chains such as Henry and Richard and Jackson Hewitt, and not independent tax professionals such as myself. It is certainly no surprise, at least to me, that H+R Block and Jackson Hewitt tax preparers are incompetent.

So there you have my word on the subject of regulating the tax preparation industry. What do you have to say on the topic?

TTFN

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

* Bruce, the taxguy, is back! He provides some good advice in his post “Why, Eckhardt, You Oughta Think About the Future.”

* Roni Deutch provides a good overview of estimated taxes in her post "The Truth About Estimated Quarterly Tax Payments" at her TAX HELP BLOG.

* Speaking of Estimated Taxes – Kay Bell reminds us that it is “Estimated Tax Time Again” at DON’T MESS WITH TAXES.

* Kathleen Webb of HomeWork Solutions explains why “Nanny Tax Cheating Hurts the Nannies and Housekeepers - and the US Treasury” at her NANNY TAX AND PAYROLL UPDATES blog.

* Trish McIntire discusses some “Assumptions” that get taxpayers in trouble (remember, when you assume you make an ass out of u and me). There are different from the assumptions that I warn about when choosing a tax preparer.

Trish warns against what is perhaps the most widely made “tax myth” assumption – the “If I don't get a W-2/1099, I don't have to report it assumption”. As Trish rightly reminds us, “If it is taxable income, you have to report it whether you receive the form or not”.

* Where will it end? Bloomberg.com reports that “Senators Want Homebuyer Tax Credit to Rise to $15,000”. I have mixed feelings about this credit.

* Kelly Phillips Erb’s Friday post at TAXGIRL tells us, not surprisingly, that “NJ Taxes On the Rise”. Be sure to read my comment.

TTFN

THIS JUST IN

The IRS has just issued a “Draft” of 2009 Schedule M – to be attached to the 2009 Form 1040, 1040A or 1040NR. This new form will be used to calculate BO’s “Making Work Pay and Government Retiree Credits”.

The form uses “earned income” (to be described in the instructions), which apparently includes nontaxable combat pay, to calculate the Making Work Pay Credit. The credit is based on 6.2% of “earned income” up to a maximum of $400 or $800 if married filing jointly.

The form also calculates any “phase-out” of the credit based on excess AGI.

If taxpayer(s) received an “Economic Recovery Payment” (ERP) check of $250 (each) in 2009 this payment is subtracted from the Making Work Pay Credit.

The new Schedule M is also used to report the $250 “Economic Recovery Payment” (ERP) to which a person who receives “a pension of annuity in 2009 for services performed as an employee of the US Government or any US state or local government from work not covered by social security” is entitled.

The total allowable credit is carried forward to Line 63 on the 2009 Form 1040, Line 40 of the 2009 Form 1040A, or Line 60 of the 2009 Form 1040NR.

Click here to download the form.

DO NOT TRY THIS AT HOME!

During the tax filing season, when I took my annual hiatus from blogging or reading blogs, twit follower/followee Chad Bordeaux ceased writing his blog PERIODIC RAMBLINGS OF A CPA and moved, in partnership with his wife and fellow CPA Donna, as I recently discovered, to BEANCOUNTER RAMBLINGS.

Donna’s post “What Do You Do With IRS Notices?” basically tells you what I have been saying for years – when you get a notice in the mail from “Sam” (or your state tax authority) send it to your tax professional immediately (unfortunately as she is a CPA she says “fax it to your CPA” instead of the more appropriate “fax it to your tax professional”, perpetuating the fallacy that only a CPA can prepare taxes).

However her post goes into detail on why you should not take matters in your own hands and call the IRS yourself to respond to the notice –

“The IRS has two sets of phone lines — one for taxpayers and one for practitioners. Can you guess where they put their slower less experienced staff? I don’t even need to answer that one. I have had clients call the 800-829-1040 number and get the biggest load of bull I have ever heard. One was told the IRS had to receive her extension by April 15, and the postmark date did not matter. My client believed them until I told them otherwise. The representatives on the practitioner line are typically more knowledgeable and able to get things faster and easier and you won’t need to waste your time. Lower your blood pressure and talk with your CPA {she did it again - it should say talk with your tax professional! - rdf}.”

I have also had clients who called the NJ Division of Taxation to inquire about a notice – or to ask about the status of their filed NJ-1040 – and were told, as Donna put it, “a load of bull” that had nothing whatsoever to do with reality.

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Do not automatically accept as true anything that you are told by a representative of the IRS or a state tax authority - check its veracity with a tax pro before acting on it!

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As I have said many times before, in my experience more often than not a notice from the IRS or state tax authority is incorrect!

FYI

I just wanted to let you know –

(1) I am available to write a regular column or specific article or series of articles on 1040 issues for your, or your organization’s, print or online newsletter or magazine – for a fee, of course. The column or article(s) can be tailored to your unique audience. You can name the type of column (i.e. Q+A) or the specific topic(s) of the article(s). Just send me an email with your request/requirements and your payment schedule.

(2) I am available to write a “guest post” for your blog on a 1040 topic of your choosing – no charge.

(3) I welcome the submission of guest posts on tax-related topics for publication here at TWTP from fellow bloggers. I would like to develop an “inventory” of guest posts to use when I am “wandering” or too busy to post

You can email me at rdftaxpro@mail.com.

TTFN

THE LAST PLACE TO GO TO FOR MONEY (WELL ALMOST THE LAST PLACE)

Years ago, in the late 80s or early 90s (I don’t recall exactly when), the construction industry in New Jersey was going through what the entire country is going through now.

My mentor’s office, which eventually became mine, was located across the street from headquarters of the Ironworkers Union Local, and we had several union members as clients.

Because of the dire economic situation many of the ironworkers were forced to dip into their union pension and annuity fund to make ends meet. Of course they wanted as much cash in hand as possible, so they had minimal (10%) or no federal and state income tax withheld from the pension withdrawals.

As a result at tax time they were hit with huge balances due to both “Sam” and the State of New Jersey. When the 10% premature withdrawal penalty was added to the ordinary federal and state tax rates, and you factored in the affect the increased AGI had on various deductions and credits, the total effective tax cost was 40-50% of the gross distribution!

In order to pay the tax due to their “uncles” they had to take more money out of the plan, and incur more tax and penalty the next year. It was a vicious cycle.

Similarly, over the years many young couples have taken withdrawals from their 401(k)s or IRAs or other pension plans during the year to get the money for the down payment on a home – and were in shock when I told them what they owed their “uncles”.

While, in the long run, the couple would receive substantial tax savings from owning a home - just like with the ironworkers the initial tax cost of taking money out of their pension was truly excessive.

The couples usually had 10% or 20% in federal income tax withheld from the withdrawals, but no state income tax. When they told me, “But we had the tax taken out before we got the money” I had to counter with, “THE tax was not withheld – only a small portion of the tax was taken out”.

Plus, many couples think that once they buy a house they will automatically get tons of money back in tax refunds each year – and are surprised when they see their first 1040 as homeowners. The later in the year the home is purchased, the smaller the tax savings realized. A home purchased in the fall or winter often does not yield any first-year tax savings.

So in these bleak economic times learn a lesson from the NJ ironworkers and young first-time homebuyers. Your 401(k) or traditional IRA or any other pension or annuity plan should be the very last place you turn to get cash for any reason – pretty much just before visiting the local loan shark.

As discussed above – depending on your various tax brackets, when you take money out of these types of plans you will be giving up to half of it to the federal, state and, in some cases, local governments!

Often you can borrow from your 401(k) plan – up to a maximum of 50% of your account balance. Depending on how the plan is written the borrowing may only be permitted for specific reasons – so you should check out the specific details of your plan. In such a case you have not received a taxable distribution from the plan.

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Of course, as with any other loan, the money must be paid back, often within 5 years. You must be careful - if you default on the loan, or terminate your employment before the loan is paid back in full, you will be taxed, and subject to the 10% penalty, on the remaining loan balance.

You can not borrow from an IRA, but you can take a withdrawal and avoid tax and penalty if you put the money back into an IRA within 60 days of the date of the distribution (that is 60 calendar days and not 60 business days). So you can, in effect, take a truly short-term loan from your traditional IRA.

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The full amount of the distribution must be "rolled over" within the 60 day period. If you take out $10,000 and $2,000 is withheld for federal income tax you must roll over the full $10,000, and not the net $8,000, back into an IRA. You must find the $2,000 from another source or you will pay tax and penalty on $2,000.

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Money taken from a ROTH IRA is first treated as a return of “after-tax” contributions – so you will not be taxed or penalized until you begin to withdraw actual earnings.

TTFN

ASK THE TAX PRO - MISSED CAPITAL LOSS

Q. We had a $20,000+ capital loss in 2004 that was not claimed on our 2004 Form 1040. Can we still claim this loss?

A. Generally you have three (3) years from the due date of the return to file an amended return to get an additional refund.

The 2004 Form 1040 would have been due on April 15, 2005. So you would have until April 15, 2008 to amend your 2004 return. At this point in time 2004 and 2005 are considered “closed” years and cannot be amended to claim the loss deduction and get a check from Sam.

However, according to TC Memo 1983-318, a taxpayer can claim a capital loss carryover deduction in open years for a loss that occurred in a closed year but was not claimed in that year. You must, of course, adjust the carryforward for any losses that would have been used up in the closed years.

The maximum net capital loss deduction allowed is $3,000 per year. You would begin with tax year 2004. If you had no other capital gains or losses in 2004 you would reduce the loss by the $3,000 that would have been allowed and carry $17,000 forward to 2005. If the original 2004 Form 1040 had shown a net capital gain of $5,000 the $20,000 would first be used to wipe out the gains and only $12,000 would be carried forward to 2005.

The procedure is repeated for tax year 2005. If there are no gains or losses reported $3,000 is deducted from the carryforward from 2004 and the balance is brought forward to tax year 2006. You can file an amended 2006 Form 1040 to claim the loss carryforward deduction.

If the 2005 return reported a net $5,000 loss the 2004 carryover would be added to the $2,000 unused 2005 loss and the total carried over to 2006.

If there were no other gains or losses reported in either 2004 or 2005 the capital loss carryforward deduction on the amended 2006 Schedule D would be $14,000 – the forgotten $20,000 loss less $3,000 each year for 2004 and 2005.

TTFN

FINE WHNE!

I am sick and tired of aggressive marketing. Two cases in point –

(1) I call up to activate a credit card. I can understand why, for security reasons, the bank would want one to call in from a home phone instead of activating the card online. But all I want to do when calling is answer the security questions so I can activate the card for use.

However, even after my initial polite “not interested”, the person on the phone, apparently in India, continues – “while we are waiting let me tell you about this service” or “ would you be interested in transferring a balance” or “we have a great new offer for cardmembers”.

I eventually end up yelling, “I don’t want to be sold anything. Don’t waste my time or yours. All I want to do is activate the fekking credit card!!!”

In the future I will begin my call by saying, “All I want to do is activate my card and nothing else, so please do not waste my time or yours by trying to sell me something”, not that I expect it will do any good.

(2) I went into my bank yesterday to make a deposit to my business checking account and a credit card payment. While on line an officer came up and said, “I can help you with that,” and led me to his desk. I assumed that he was not busy and would process my transactions instead of my having to wait for the next teller to be free.

Instead he gave my transactions to a teller and said, “While we are waiting let me check to make sure all your information is up to date” as he called up my account on his computer.

After telling him that I was pleased with my business account and had no questions or concerns he said, “I see you do not have a personal checking account with us.” I acknowledged that the statement was correct – but he couldn’t leave it alone.

“Why not?”

I do not have a personal checking account – I pay bills by cash and money order. And it is nobody’s GD business why I so choose (trust me, it is not to avoid paying tax on my income).

Despite, again, my initial polite “not interested at this time” he kept on. “We can offer you a totally free checking account”, “When we complete the conversion to Chase we will not be able to make this offer – which may be any day now”, “I can open the account for you now for only $25.00”.

No, no, no, no, no – I am not interested at this time. Are you deaf or just stupid!

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Of course I did not actually say that. When the teller came back with my receipt I grabbed it, said, “I don’t have the time to waste right not” and walked out.

I can somewhat understand that these people are only trying to do what they have been told to do my superiors – but don’t they understand the excessive ill will that their continued nagging on the subject creates? Just like when on a date - NO means NO!

Thank you for allowing me to rant.

THREE CHEERS FOR THE IRS!

Say what you will about the Internal Revenue Service. If they have money for you, you can rest assured they will send it to you.

If, on the other hand, the State of New Jersey has excess tax money that is due to you they will keep it a secret and hope you do not find out about it - so they can keep the money to use to continue to fatten the State’s politicians and their “cronies” and supporters.

I recently learned of a situation – but first some background reminders:

As you know, in 2008 the resources of the IRS were pushed to the limits in sending out George W’s “stimulus” rebate checks.

The checks were based on information taken from the 2007 federal income tax returns.

The minimum rebate was $300 per person ($600 for a married couple) and the maximum was $600 per person ($1,200 for a married couple).

The rebate was a refund of federal tax liability, after all credits except the Child Tax Credit. If your tax liability as a married couple for 2007 was “0” the most you would have gotten was $600. If a couple’s 2007 tax liability was $5,000 they would have received a $1,200 check.

You would also receive $300 for each dependent child under age 17.

And, as with most tax benefits these days, the amount of the check was reduced based on AGI.

The 2008 check was actually an advance on a refundable tax credit on the 2008 federal income tax return. The actual credit was determined based on the 2008 tax information. If the check you received was more than you were entitled to you got to keep it (What a Country!). If the check you received was less than the actual credit allowed you could use the difference to reduce your 2008 balance due or increase your 2008 refund.

If you were entitled to $1,200 but got only $600 you would enter $600 to the bottom of Page 2 of the 1040 (or 1040A) - which was treated as additional tax withholding or payments.

So here is the situation –

A married couple, retired and receiving Social Security benefits, had a 2007 federal tax liability of ”0”. They received a $600.00 “stimulus” check from George W in 2008.

For 2008 their tax liability was $17,000+, due to substantially increased taxable income from an excessive IRA withdrawal. However, they did not claim the $600 additional “recovery rebate credit” to which they were entitled on their 2008 Form 1040. There was a balance due on the return, which was paid in full by the April 15th deadline.

The couple just got a check in the mail from the IRS for $600 – which represents the additional “stimulus” rebate amount to which they were entitled. They received this separate check even though they did not request the additional $600 on their 2008 Form 1040!

So it appears that if, for some reason, you, or your tax preparer, did not claim any additional “recovery rebate credit” to which you were entitled on your 2008 tax return Sam will send it to you anyway!

Kudos to the IRS! The NJ Division of Taxation should be so ethical.

TTFN

OH SAY CAN YOU SEE MY EYES? IF YOU CAN THEN MY HAIR’S TOO SHORT!

This past Saturday evening, after a delicious dinner of Veal Bolognese at La Rivista on Restaurant Row, I enjoyed the current Broadway revival of the rock musical HAIR – and watched it win a Tony Award for Best Revival of A Musical on Sunday night.

When I was 5 years old my Uncle Ted, my father’s bachelor brother, took me to see my first Broadway musical – THE MUSIC MAN with Robert Preston. It was a Saturday matinee and we sat in the first row of the Mezzanine. From age 5 through my college years Ted continued to take me to just about every Broadway musical that was “age appropriate” – with few exceptions always a Saturday matinee sitting in the center of the first row Mezzanine (at the revival of A FUNNY THING that starred Phil Silvers we sat next to the star’s sister).

When I was 8 years old my father took me to my first football game – a Rutgers college game I believe. By then I had already seen MY FAIR LADY, CAMELOT, DESTRY RIDES AGAIN (with Andy Griffith), WILDCAT (with Lucille Ball), FLOWER DRUM SONG, THE SOUND OF MUSIC, and others. I was totally bored at the football game. Where is the music? Where is the dancing? To this day I have always been glad that my uncle got to me first.

Unfortunately, because of the brief full frontal nudity that closed the first Act (and still does in the current revival), HAIR was not considered “age appropriate” for a 16 year old – so I did not see the original Broadway production (although we did see several of the forgettable rip-offs that followed during the late 60s and early 70s, including DUDE from HAIR creators Gerome Ragni and Galt MacDermot). I did, however, play my uncle’s Original Broad Cast Album of HAIR constantly during my high school years – so much that I almost wore down the grooves in the record. I finally did get to see a production of HAIR, complete with Act-closing nudity, at Convention Hall in Asbury Park in the early 1970s.

Other than the Asbury Park production I had never seen or heard of HAIR being revived or done by a regional professional or amateur theatre (although there was apparently a 1977 Broadway revival at the Biltmore that ran from August 3rd to November 6th and more recently a special one-night benefit, concert at the New Amsterdam Theatre on September 20, 2004). So I was “pleased as punch” when I heard that the Public Theatre’s Theatre-in-the-Park production would be coming to Broadway.

HAIR, The American Tribal Love Rock Musical, was originally conceived by actors James Rado and Gerome Ragni. They got the idea for the title of the show from a painting of a comb and a few strands of hair on a blank canvas by Jim Dine titled "Hair" in a Whitney Museum exhibition. Rado and Ragni were hooked up with Canadian composer Galt MacDermot when they brought their drafts of the show to producer Eric Blau.

Joe Papp of the New York Shakespeare Festival chose HAIR to open the Festival’s new Public Theater in New York City's Greenwich Village. The musical was the Festival’s first non-Shakespeare offering. HAIR next had a brief run at “The Cheetah”, a discothèque at 53rd Street and Broadway, before being totally overhauled for its move to Broadway. FYI, There was no nudity in either the Public Theater or Cheetah production.

HAIR was a reflection of the hippie counter-culture and sexual revolution of the 1960s, As described in Wikopedia, it “tells the story of the ‘tribe’, a group of politically active, long-haired ‘Hippies of the Age of Aquarius’ fighting against conscription to the Vietnam War and living a bohemian life together in New York City. Claude, his good friend Berger, their roommate Sheila and all their friends struggle to balance their young lives, loves and the sexual revolution with their pacifist rebellion against the war and the conservative impulses of their parents and society. Ultimately Claude must decide whether or not to resist the draft, as his friends have done.”

The main characters of Claude and Berger were autobiographical, Rado's Claude being the pensive romantic and Ragni's Berger the extrovert, and R + R played these roles in the original Broadway production. Also appearing in HAIR during its original Broadway run were Melba Moore, Ronnie Dyson, Diane Keaton, Ben Vereen, Keith Carradine, Barry McGuire, Ted Lange (the Love Boat bartender), Meat Loaf, and Heather MacRae.

The original Broadway production ran for 1750 performances at the Biltmore Theatre, from April 29, 1968 through July 1, 1972. It was nominated for TONYs for Best Musical and Best Director (Tom O’Horgan – who went on to direct LENNY and JESUS CHRIST SUPERSTAR), as was the revival, but lost out to 1776 in both categories.

There was a film version of HAIR in 1979 directed by Milos Forman and starring John Savage, Treat Williams, and Beverly D'Angelo. Rado and Ragni were quite upset by the film and never approved of it.

In 1990 Ragni, Rado, and MacDermot, with Steve Margoshes, collaborated on an environmental musical called SUN, also known as YMCA, which I saw as part of a series of staged readings of new works at the New Amsterdam Theatre (before it was refurbished). It never got to Broadway. Ragni died of cancer in 1991 before he and Rado could begin work on their planned musical sequel to HAIR.

Saturday’s performance did not disappoint. It was indeed a wild production, with the cast running up and down the aisles and truly interacting “in your face” with the audience, much like the cats of CATS. It was one occasion when I was glad my seat was mid-row on the side instead of on the aisle! The energy that I expect was present during the original 1968 production was certainly onstage Saturday night.

The tribe, led by the excellent Berger and Claude, were great, giving voice to the sentiments of the youth of the late 60’s on war, drugs, sex, pollution, etc. A black member of the “tribe” described the war as “the white man sending the black man to fight the yellow man to defend a land stolen from the red man”.

All the songs I revered as a teenager were there – “Hair”, “Aquarius”, “Let The Sun Shine In”, “Good Morning Starshine”, “Easy To Be Hard”, and “Where Do I Go”, as well as lesser known favorites “Sodomy”, “Colored Spade”, “Initials” (“LBJ took the IRT Down to 4th Street USA. When he got there what did he see? The youth of America on LSD!”), “Black Boys” and “White Boys”.

After the curtain calls the audience flooded the stage to join the cast in a rousing chorus of “Let the Sunshine In”. One sight that would have not been present at the original production – young audience members onstage taking pictures of those who remained in the audience with their cell phones.

Go see HAIR at the Al Hirschfield Theatre on 45th Street. Whether you are a child of the 60s or a member of the current generation you will enjoy it.

FYI, in my early years of Broadway theatre-going with my uncle a ticket for front row Mezzanine was $12.50. My Orchestra ticket for Saturday’s, after the various service fees were added, was $130.00!

This coming Saturday afternoon I am returning to NYC, as part of my "lusty month of ME", to see the comedy DON’T LEAVE IT ALL TO YOUR CHILDREN!, and next Monday night to Town Hall for a revue of the BROADWAY MUSICALS OF 1970 – both tickets purchased through TDF.

HERE WE GO AGAIN!

Bill Perez reports in his post “A New Federal Tax Reform Panel” at WILLIAM’S TAX BLOG that –

“Obama has appointed Paul Volcker to head a panel that will make recommendations for reforming our nation's tax laws. Volcker is also the head of the President's Economic Recovery Advisory Board.

The advisory panel will consider ways to simplify the tax code and reduce tax evasion, and will make recommendations to the President by December 4th, 2009, according to a White House briefing.”

As Bill points out in his post, the last time we had a panel to investigate how to “reform” the Tax Code was in 2005. That panel made some drastic, and by the way very good, recommendations on how to truly simplify our current system. However, either because of GW’s short attention span, because the Panel did not suggest what GW wanted to hear, or because more important things began to occupy GW, the recommendations were totally ignored by the President and the Panel just faded away.

In announcing the new Panel during the above referenced White House press briefing OMB Director Peter Orszag said -

“We are also forming and tasking the Volcker board, the PERAB, with three tasks: one is tax simplification; the second is closing tax loopholes and reducing tax evasion; and the third is reducing corporate welfare. And it's worth noting that with regard to that first category, one of the key things that the Volcker board will be examining is ways of unifying, streamlining, making more consistent the various credits that are out there: Making Work Pay, the Earned Income Tax Credit, the Child Tax Credit, and what have you. And in addition, with regard to the tax gap, there are hundreds of billions of dollars in uncollected taxes each year.

The Task Force on Tax Reform that will be formed by the Volcker board will be examining ways of being even more aggressive on reducing the tax gap, which could provide funding for tax provisions, including an extension of the Making Work Pay tax credit.”

While “tax simplification” is the first goal, the above comments seem to indicate that the Panel is not completely free to review and consider all possibilities and come up with a recommendation for the best tax system that it can, as GW’s Panel was supposedly created to do. It must come up with suggestions that maintain BO’s pet ill-conceived “Making Work Pay” credit and other fraud-encouraging refundable tax credits.

Once again I expect that if the Panel recommended anything that did not conform with BO’s pre-determined plans it will be ignored.

Forget the President. Such a Panel should be created with no pre-conceived notions or restraints to be free to consider all possibilities and present recommended alternatives for tax simplification directly to Congress for action.

I do not have high hopes for true and effective tax simplification during the Obama years.

TTFN

ON THE ROAD AGAIN

I had been working on 1040s continually since the end of January and I was tired of looking at them. I needed a “totally 1040-free getaway”. What better place than Beach Haven on Long Beach Island?

Actually my choice of location was the result of an email I received from the Surflight Theatre (“Broadway on the Beach Since 1950”) announcing its 60th Anniversary season. I had missed the opening production – “Nunsensations the Vegas Review!” – but the second show was “Lady Be Good”, a 1924 musical that was the first collaboration of the Gershwin brothers, George and Ira. The original 1924 Broadway production starred brother and sister Fred and Adele Astaire.

I researched lodging online and settled on the Coral Seas Oceanfront Motel (on the Beach at Coral Street), run by the Kelly family, which still had reasonable “low-season” rates through June 11th. I discovered upon arrival that the motel was only three (3) blocks from the theatre.

Prior to this trip my visits to Jersey shore communities had been limited to traditional “boardwalk” beach locations. With the exception of Wildwood (once), Cape May and Atlantic City, I had never stayed south of Belmar (I did make two day trips to Seaside Heights with friends in the summer of 1971). This would be my first stay at a Jersey shore town without a Boardwalk.

Beach Haven is one of the communities on Long Beach Island – known as LBI. While truly long (18 miles) it is also narrow, and got narrower the farther south one drove. Where I stayed on the Island someone in better shape, and with less girth, could easily walk from Ocean to Bay.

It was starting to rain as I finished breakfast at the 4-Star Diner in Union City. Within two hours I had crossed the Dorland J. Henderson Memorial Bridge, known locally as "The Causeway", and was heading south on Long Beach Boulevard, under clear sunny skies, through Surf City (I wondered if this one also had “two girls for every guy”), Ship Bottom, Brant Beach and Spray Beach on the way to Beach Haven (“the Queen City” – hopefully so-named for not an obvious reason).

My motel was, as the name suggested, on the oceanfront. I had a room on the ground floor with the front entrance by the pool and an enclosed small private terrace in back. A large dune blocked the view so I could not actually see the beach and the ocean from my terrace, but I could hear the waves crashing on the shore and the occasional seagull stopped by to visit. A few steps from the motel was a walkway to the beach.

On the Sunday before my trip the Travel Section of the Sunday News had an article on the Jersey shore – selecting three good stops north, central and south. North turned out to be Ocean Grove and south was Wildwood. The central stop was LBI and specifically Beach Haven, with the “Where to Stay” being the Coral Seas Oceanfront Motel! It looks like I had done good.

I don’t fish (I tried once as a boy on a YMCA day camp outing – got the hook caught in my hand and that was the end of that) and I haven’t swam (in ocean nor pool) or sunbathed in almost 35 years. When at the shore I prefer to relax in the shade, a cocktail and cigar in hands, reading a murder mystery (in this case “Murder at the Opera” by Margaret Truman) and watching or listening to the waves – which took up most of my time during the day while here (I waited till mid-afternoon for the cocktails).

I did explore Bay Avenue (which Long Beach Boulevard becomes upon entering Beach Haven), mostly residential with some beautiful new houses south of Coral and chock-a-block with restaurants, shops and attractions north of Coral. Not far north is the Fantasy Island Amusement Park and the Watersport Park. I stopped to walk through the Schooner’s Wharf and Bay Village malls next to Fantasy Island on Bay Street – though most of the stores were closed.

The timing of my stay was perfect. For the most part the town, and especially the motel and the beach, was empty. I guess the season does not really get under way until at least mid-June (which is when the motel’s rates begin to go up).

I had dinner at Tuckers on the Bay side on Tuesday night (word of caution – I had expected the Crab Chowder to be creamy, but it was instead Manhattan-style). The crab cake, while very good, was just one cake on a bed of lettuce. The highlight was the Apple Cobbler desert.

Wednesday’s pre-theatre dinner was at The Engleside Inn, next door to my motel on Atlantic Avenue and on the way to the Surflight Theatre (which is on Engleside Avenue). I had checked out the Inn online when first looking for a motel and found the room rates about twice as much as at the Coral Seas. The lobster bisque was super-creamy (I should have had a bowl, but I had been burned at Tucker’s) and the Caesar Salad was a meal in itself. The Chicken Parmagian was good. No room for dessert this night.

Breakfasts were at Fred’s Diner on Bay Avenue on Wednesday and the Dockside Diner on Long Beach Boulevard (on the way back to the Causeway) on Thursday, both traditional diners with a counter. I was drawn to the Dockside Diner because of its advertised “Breakfast Cristo Sandwich” (an excellent Monte Cristo sandwich).

The Surflight Theatre was somewhat smaller than I had expected – and the performance was not sold out (the audience was, for the most part, older). My seat was in the center of the 5th row – I couldn’t have asked for better.

While the show was, as mentioned in the publicity, pure fluff, typical for musicals of the period, the production was professional in all aspects, with an excellent cast and great choreography. The two “comic relief” male roles (lawyer Watty Watkins and bon vivant Bertie Bassett) were stand-outs. Unlike the also Gershwin scored “Crazy for You”, only two songs were memorable, and have stood the test of time – the title number “Lady Be Good” and “Fascinating Rhythm”.

In addition to musicals and, in the fall, plays, Surflight also has a “Concert Series” and Children’s Theatre. Mickey Rooney appears in two show of his “Let’s Put On A Show” cabaret act tomorrow (Monday, June 8th). The Kingston Trio will appear in late August and the Coasters, Marvelettes and Platters together in November.

Other major productions of the summer include “Ragtime”, “Hairspray”, “Little Shop of Horrors” and “The Buddy Holly Story”.

I plan to return to Surflight in September for the “1940s Radio Hour”. I expect I will once again stay at the Coral Seas Oceanfront Motel, as it proved to be a great value.

I truly enjoyed my visit to LBI – and don’t know why I hadn’t come sooner.

TTFN

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

* TAXGIRL Kelly Phillips Erb reports that, like NJ, “CT and MD Offer Tax Amnesty”.

* And speaking of the TAXGIRL, Kelly answers a true “frequently asked question” in her post “Ask the taxgirl: Cancellation of ‘Debt’”.

My comment on the post tells how the mucking fess described in the question could have been avoided altogether.

* Yellow Rose of Taxes Kay Bell tells us that homebuyers are using the $8,000 “gift” from Sam as a down payment on a home in her post “Housing Credit Becomes Down Payment” at DON’T MESS WITH TAXES.

Kay also tells us “FHA loans will continue to require a minimum 3.5 percent down payment”.

If all you have to put down on a house is the $8,000 credit or 3.5% you shouldn’t be buying a house!

As I say in my comment – “This kind of nonsense caused the current financial mucking fess in the first place".

BTW, Trish McIntire also discusses this issue over at OUR TAXING TIMES.

* Speaking of Trish McIntire – a word to Kansas taxpayers. Trish tells us of “Kansas Tax Refunds Delay – Again”.

“Looks like Kansas has put a hold on tax refunds again. Tax revenues are down due to the economy. Current estimate is about a month delay.”

* And, speaking of Kay Bell’s post on FHA loan requirements, Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG seems to agree with me – as per his post “Governmental Dimentia”.

* The latest tax FU tied to a Democratic legislator or appointee concerns the John Kerry for President Campaign. Most of the tax blogs discussed this issue, including Peter Pappas in his post “IRS Files $800K Lien Against John Kerry for President Campaign” at THE TAX LAWYER’S BLOG.

Peter also received a personal response to his post from John Kerry’s press secretary, Whitney Smith, which he provides in a follow up post “John Kerry Responds, Says Tax Problems Due to IRS Glitch”.

I can certainly understand a politician or legislator making a FU when it comes to taxes. They have proven time and again, with foot firmly in mouth, that they don’t know their arse from a hole in the ground when it comes to tax law (and a lot of others things, too). But you think that they would be smart enough to hire a competent tax professional to handle these matters properly.

* And while we are thinking about politicians and taxes, self-proclaimed TAX GURU Kerry Kerstetter has posted a cartoon with shows exactly what was the first question on my mind when I first heard of BO’s appointment to fill a gap on the Supreme Court.

* Roni Deutch tells us “Everything You Need to Know About Taxes After Death” at her TAX LADY blog. Well, obviously, not everything – but it is a good overview of the topic.

Roni had sent me a complimentary copy of her book “Beating The IRS” during the season. While recuperating in Beach Haven I just about finished my latest Margaret Truman mystery. I think I will begin Roni’s book next.

* Dan Meyer reports on IRS Commissioner Doug Shulman’s call for “a new set of regulations by the end of 2009 to assure ‘uniform and high ethical standards of conduct for tax preparers’ as a tactic to increase tax compliance and decrease the ‘tax gap’” in "IRS Ready to INCREASE (?!) Regulation on Tax Preparers (Be Scared, be very scared)" at TICK MARKS.

Click here for the official IRS news release.

Dan points out that “Shulman stated that tax preparers should be ethical, qualified and provide good service” (are you listening, H+R?).

While Dan comes out against IRS regulation of the tax preparation industry, saying that Shulman’s proposal “looks like an insult to the large majority of honest, hard-working tax preparers”. But I do favor some kind of “registration” of and minimum continuing education requirements for “unenrolled” preparers. Nowadys anyone can hang out a shingle as a “tax professional” without any kind of training or credentials or ethics.

My only concern with past Congressional proposals has been the requirement that all existing preparers take a competency test to be able to continue to practice. There must be a “grandfathering” of long-time tax pros like myself. For one thing, after 38 tax seasons without incident I have no intention of taking a test to prove that I know what I am doing. And for another, it would be literally impossible for the IRS to administer such a test to the humongous number of current unenrolled preparers.

My suggestion, presented on several occasions here at TWTP, is – “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.”

* Case in point about anyone hanging out a shingle – “Jersey City Man Sentenced to 8½ Years in State Prison for $573,000 Homestead Rebate Scam” (it ain’t me!). Hey, would you trust a guy called “Butz” to prepare your tax returns?

TTFN

ALMOST SUMMER RERUN

While I am heading south to Beach Haven (on Long Beach Island) I thought that, while it is not yet summer, I would provide my readers with a “rerun” of a previous post – appropriate for the time of year.

Here is an “almost-summer” rerun of “1040 FYI: SUMMER DAY CAMP AND THE CHILD CARE CREDIT” from July 2008 –

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If both you and your spouse work, or if you are a working single parent, the cost of sending your dependent child under age 13 to a summer day camp is eligible for the Credit for Child and Dependent Care Expenses.

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Only day camp expenses qualify for the credit. The cost of an overnight/sleepover camp does not qualify.

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If you have one qualifying child you can claim the credit on up to $3,000.00 in expenses. For two or more qualifying children the maximum is $6,000.00.

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The amount of child care expenses eligible for the credit is further limited to the earned income of the taxpayer or spouse. If one spouse earns $50,000.00 and the other $2,500.00, only $2,500.00 of expenses is eligible for the credit.

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If one spouse works and the other is disabled or a full-time student, the non-working spouse is "deemed" to earn $250.00 per month if there is one qualifying child or $500.00 per month if there is more than one. This applies to only one spouse per month. If both spouses are full-time students during the same month, only one is "deemed" to earn the $250.00 or $500.00.

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The amount of credit allowed depends on your Adjusted Gross Income. If your AGI does not exceed $43,000.00 the credit ranges from 35% to 21%. The credit is 20% if your AGI is more than $43,000.00.In most cases, if you are married you must file a joint return to be able to claim the credit.

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The credit is allowed for a dependent who is under age 13. However, you can claim the credit on expenses you have incurred up to the child's 13th birthday. If your child will turn 13 this November you can still claim the credit on any day camp expenses incurred during the summer.

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Day camp costs also qualify for reimbursement under an employer-sponsored "pre-tax" Dependent Care Benefit plan. In most cases you will receive a greater tax benefit by running the day camp costs through your employer's "flexible spending" dependent care program than if you claim the credit.

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If you will be claiming the credit on payments made for a summer day camp, be sure to get the name, address and Employer Identification Number of the camp when registering. You will need this information to complete Form 2441, the IRS form used to claim the credit.

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Some states, such as New York, also allow a Child Care Credit on the state income tax return.

“Talk” to you when I get back!

TTFN

TAX CARNIVAL

Nothing on the tube. Why don’t you check out “Tax Carnival #54: June Bug Tax Jottings” over at DON’T MESS WITH TAXES?

A few newbies this month, including THE SMARTER WALLET, who contributes “Does Your Estate Plan Expect You To Die Broke?”. My mentor, a confirmed bachelor, had a good estate plan – you should die with just enough money in the bank to pay for your funeral.

My post Here’s “Something To Think About” appears.

WHERE THE FAKAWI? – TRA LA! IT’S ME! THE LUSTY MONTH OF ME!

Yesterday was the last day of the month of MAY. Today is the first day of the month of ME!

I have been working on 1040s since the end of January – non-stop 12+ hours a day 7 days a week from February 1 through April 14, and continuing at a much more realistic pace through the end of May. As Barbra Streisand and Donna Summer sang – “Enough Is Enough”.

I am pleased to say that all 1040 GDEs that could be done have been done! I am left with only “red files” (need more info). The balls are no longer in my court.

I am also pretty much up-to-date on my corporate/business work. I am waiting for some more info for my one 1120S GDE, the work for which is almost all done, and will need to work on two FYE June 30th 1120s in late July. And quarterly payroll tax and sales tax filings are not due until at least mid-July.

So I plan to devote most of June to ME! I will "sleep in" till 8 or 9 AM, do some traveling, see some shows (Broadway and NJ regional), attend parties, dine out leisurely, watch tv and Netflix DVDs, and clean and organize my apartment.

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My first trip, to Beach Haven and the Surflight Theatre, begins tomorrow! I will post a trip narrative probably next Sunday.

I will continue to post to THE WANDERING TAX PRO and the NJ TAX PRACTICE BLOG, and will spend some time updating my websites.

But 1040 activity will be kept to a minimum! Of course I will respond to IRS and state tax correspondence for clients as they are received, and probably do some 1040 GDEs if missing information is received. I may even catch up on some amended returns and other 1040 housekeeping items if I feel so inclined. But all at a very leisurely pace!

TTFN