Saturday, June 30, 2012

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

* SMARTMONEY.COM’s Bill Bischoff, aka The Tax Guy, lists “The 5 Best Tax Changes We Won't See”.

Bill starts out by identifying the obvious problem -   Our 4,000-page (and growing) Internal Revenue Code is a horrible mess that needs to be cleaned up”.  And then goes on to offer “five changes I believe would be huge steps in the right direction -- and the reasons why I doubt we will see them anytime soon”.

He is spot on, and I agree 100%, with numbers 2 through 5.  I am not against eliminating the taxation of Social Security (I do not believe there is double taxation of SS benefits, as Bill asserts) – but I would have benefits taxed the same as any other pension to which employees contribute after-tax dollars.

Regarding eliminating refundable credits Bill hits the nail on the head when he says –

If Congress wants to create welfare programs without any monitoring, that is a political decision that the populace can take into account when they vote. But Congress should not be allowed to sneak welfare payments through the tax system. That's deceptive and non-transparent.”

And he correctly identifies the various “phase-out” rules for certain deductions and credits as - “disguised tax rate increases that Congress never has to admit to”.

He correctly goes on (highlight is mine) –

If higher tax rates are deemed necessary, the politicians should raise them in a straightforward and transparent way. Of course, many probably fear that such transparency would hurt their re-election chances. They might be right about that, but it's no excuse. Deception and lack of transparency make for horrible tax policy and, unfortunately, elected representatives won't change their behavior until voters make them.”

* Bruce, the Missouri TAXGUY and host of the weekly “McTax Hangout” show, has a guest post by Jonathan of mydefaultedloans.com on “The Helping Hand of the Student Loan Assistance”.

While you are there be sure to check out Bruce’s “store”.

* And Bruce himself discusses “Hiring the Right Accountants for Your Business”.


The tax agency says that its latest offshore voluntary disclosure program, or OVDP which is the term the IRS prefers instead of tax amnesty, has pushed the amount collected in all its efforts to more than $5 billion.”

Hey, if they did so well with this tax amnesty – how about a general federal tax amnesty program like those successfully offered by many state over the years?

* The WASHINGTON TIMES reports that “Tax Cheats Got $1.4 Billion in Stimulus Loans 

Tax cheats were given $1.4 billion in government-backed mortgage loans under President Obama’s economic stimulus, and the government doled out at least an additional $27 million in tax credits to delinquents who took the first-time-homebuyer tax break, according to a government audit released Tuesday.

Under government rules, delinquent taxpayers are supposed to be ineligible for the mortgage insurance program unless they have reached a repayment agreement with the Internal Revenue Service. But the Federal Housing Administration didn’t have the right controls to weed out bad applications, said the Government Accountability Office, Congress‘ chief investigative arm.”

* Trish McIntire reminds us that there is no such thing as a “Magic Refund Pencil” at OUR TAXING TIMES.

Taxpayers please pay attention -

When you sign your tax return, you are agreeing with what is on the return. You are the responsible party should there be problems. Take the time to review and question that return before you sign. If you see a deduction that you didn’t give the preparer or you don’t understand, ask questions. Ask why deductions weren’t used.”

* Peter Reilly was the first to tell me that the “Individual Mandate In Obamacare Is Constitutional” at his FORBES.COM “Passive Activities” blog.

According to Scotusblog the individual mandate has been upheld.  It survives as a tax.  The entire bill is upheld with some limitations on the federal government’s power to terminate state Medicaid funds.”

And according to a tweet by Dana Andrews (the EA and not the actor) –

Well, my job and many others just got reaffirmed to be even more complicated. Thanks to the Supreme Court and Obamacare.”

It didn't get more complicated - it just didn't get less complicated.

Joe Kristan’s latest Tax Roundup at THE ROTH AND COMPANY TAX UPDATE BLOG, appropriately titled the “Supreme Court Frenzy Edition” provides links to detailed coverage of the decision.

If you are a glutton for punishment you can click here to read the text of the decision.

To be honest I have nothing much to say on the subject.  It is not a new tax law – just the upholding of a previously enacted one.  Just another example of the idiots in Congress further complicating the mucking fess that is the US Tax Code to deal with non-tax social issues.

* Have you taken advantage of my "Special Summer Savings for Tax Pros" yet?

TTFN

Wednesday, June 27, 2012

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

* The Wall Street Journal’ WEEK-END INVESTOR column tells us that “IRA Rules Get Trickier”.

The government lets millions of dollars in tax penalties on IRAs go uncollected each year—$286 million in 2006 and 2007 alone for missed withdrawals and contributions that break the rules. The reasons range from bureaucratic hurdles to tax forms that don't provide enough information, according to a report by the Treasury Inspector General for Tax Administration, the federal tax watchdog.”

What’s in store as the IRS begins to investigate this potential money-maker –

The possibilities include additional paperwork that IRA owners would have to file with their tax returns and stepped-up audits, mainly matching up distribution reports from IRA custodians to individuals' tax returns.”


House Ways and Means Committee chairman Dave Camp, R-Mich., and Senate Finance Committee chairman Max Baucus, D-Mont., said Friday that the committees will hold a joint hearing June 28 to review the tax treatment of capital gains in the context of comprehensive tax reform.  Both committees have been holding a series of hearings on tax reform since last year, in most cases separately. They occasionally hold a joint hearing on matters of wide interest.”

I expect Saturday’s BUZZ installment will include an item on the hearing’s testimony.

* Bill Perez talks about the FBAR (not to be confused with FUBAR, which is the official acronym for the Tax Code) filing deadline in “Foreign Bank Account Reports Due June 30th” at ABOUT.COM-TAX PLANNING: US.

Click here for a FBAR “Decision Tree” flowchart.

* This week’s “Monday Map” at the Tax Foundation’s TAX POLICY BLOG is “State Tax Collections Change, 2000-2010” – “a map showing the changes in tax collections per capita”.

* The JOURNAL OF ACCOUNTANCY explains “IRS Suspends Issuing ITINs Without Original Documentation”.

Beginning June 22, 2012, and continuing until the IRS issues new rules (which it says it will do by the beginning of the 2013 filing season), the IRS will not issue individual taxpayer identification numbers (ITINs) unless the applicants provide original documents such as passports or birth certificates, or certified copies of those documents from the issuing agencies (IR-2012-62). Previously, ITINs could be issued based on notarized copies of the required documents. In addition, ITINs will not be issued based on applications submitted through certified acceptance agents unless they attach original documentation or copies of original documents certified by the issuing agency.”

I have never requested an ITIN for a client, and, as I do not accept new clients, do not see this as being an issue for me.  It is just FYI.

* Kelly Phillips Erb, FORBES.COM’s Taxgirl, has resurrected her weekly Getting To Know You Tuesday series. 

“In the series, I ask tax pros a series of questions, some serious, some not so serious. It’s a great way to get to know tax pros around the world and discover that we are (allegedly) human and we do (occasionally) leave the office.”

This Tuesday she interviewed “Brad Garland”.

* Tax pros – did you hear about my special summer offer?  A great savings!  Click here.

THE FINAL WORD –

Tax cheat Chuck Rangel is running for re-election again.  

While when it comes to the idiots in Congress I tend to support a general policy of GRIP (Get Rid of Incumbent Politicians) – because these idiots have done nothing to justify letting them keep their jobs.  However in the case of this crook, a proven tax cheat, it is essential that we send a message by sending him packing. 

The idiots in Congress should have sent him packing when it was determined he was guilty - instead of just making him stand in front of the class while the teacher announced that he was bad.

TTFN

Tuesday, June 26, 2012

COST BASIS REPORTING

Last week over at ACCOUNTING TODAY Roger Russell stated the obvious - “Complexity of Cost Basis Reporting Requires Tax Expertise”.

Roger identified the problem –

Every new piece of legislation meant to simplify certain tax areas generally adds complexity of one sort or another to the Code. {tax pros} often refer to new tax legislation as an ‘Accountants Full Employment Act.’

A case in point is the cost basis reporting requirement, in place during this past tax season. While complicated enough by itself, the situation is exacerbated by differences in the requirements for brokers and investors.”

As a tax professional, perhaps the biggest challenge, and time consumer, I faced during the past tax season was the new Schedule D/Form 8849 format.

Roger explained –

Beginning on Jan. 1, 2011, it became mandatory for brokers and other financial intermediaries to report cost basis information on Form 1099-B to investors and to the IRS for equities acquired on or after that date. The new requirement, spelled out in the Emergency Economic Stabilization Act of 2008, also covers mutual funds acquired on or after Jan. 1, 2012, and will cover debt securities, options and private placements acquired after Jan. 1, 2014.”

And as I explained in my post “That Was The Tax Season That Was” –

A new Form 8949 was added to report the individual short-term and long-term transactions in three separate categories – sales where the cost basis was reported to the IRS on Form 1099-B, sales where the cost basis was not reported to the IRS on Form 1099-B, and sales that were not reported on a Form 1099-B.  A separate Form 8949 was required for each of the three categories.  The Schedule D served as a summary of the 8949s.”

I went on to detail the biggest problem with this new requirement –

The various brokerage and mutual fund houses all treated the new Form 1099-B portion of the year-end consolidated tax report differently. 

For the most part this new system required some additional time, but not additional agita.  In many cases the 1099-B reporting was excellently broken down into separate categories of short-term “covered” (transactions where cost basis was required), short-term “non-covered”, long-term, and undetermined term.  And a gain and loss analysis, with cost basis for all, or almost all, transactions provided, was also included in the report in the same format. 

In some the 1099-B received by the taxpayer included the cost basis for all transactions – although you often had to read the fine print to discover if the cost basis shown had actually been reported to the IRS.

The worst cost basis reporting formats came from Morgan Stanley Smith Barney and TD Ameritrade, with TD the bottom of the barrel.  The 1099-B for these brokerages was not broken down to list different categories of transactions (as described above).  Transactions were listed alphabetically, regardless of term or coverage, with cost basis information shown only where required. 

MSSB reports included a gain and loss analysis, but it was merely broken down by short and long term, as had been done in past years.  TD did not include a gain and loss analysis in its consolidated statement.  The client had to go online to generate the analysis, also still in the short or long only format.

The additional work required for clients of these brokerages was not so bad with only one or two pages of transactions.  But several had multiple (as many as 50) pages of transactions (can you say “churning”) – making proper reporting much more difficult and time consuming than in the past.”

Requiring brokerage and mutual fund houses to report cost basis is a good thing.  In tax seasons past the biggest challenge, and time consumer, was determining cost basis for investments sold by clueless clients.  Brokers and funds were often already providing profit and loss statements with much cost basis information, which was helpful, and when this was not automatically included in a Consolidated Year-End 1099 Statement, or some cost basis information was missing, I could in many cases get the information direct from a client’s individual broker. 

Making cost basis reporting mandatory will eventually save lots of time during tax season.  However, it will take a long time to fully phase in to maximum reporting.  By the time that comes I will be retired.

And I expect we will never have 100% cost basis reporting.  What about the stock that was inherited from a relative, or was received as a gift when the taxpayer was a child?  It is easy enough to determine the cost basis for inherited investments, assuming you know the date of death, and future regulations could require brokerages to determine cost basis based on date-of-death value at the point the investment is transferred into the account.  But determining the basis of a gifted investment can be almost impossible.

In the meantime to make things a little easier perhaps the IRS could establish a required pro-forma format for all Form 1099-Bs from all brokerage and fund houses, and all houses could come to an agreement that Profit and Loss statements included in the Consolidated Year-End 1099 Statement be done in the same pro-forma format (if industry-wide agreement is at all possible). 

Ideally, all 1099-Bs (and P+L statements) would be “broken down into separate categories of short-term “covered” (transactions where cost basis was required), short-term “non-covered”, long-term, and undetermined term.” 

And, while I am as happy as a pig in reality tv transferring broker-provided profit and loss statements to Form 8849 (and in the past Schedule D) as is, how do I really know that the information provided by the broker is correct.  And what is my responsibility as a tax pro to make sure the information is correct? 

The alternative is to have all clients keep detailed, contemporaneous, and ongoing records of all investment purchases.

Oh well, I can dream, can’t I!

TTFN    

Saturday, June 23, 2012

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

* BNA SOFTWARE reports on recent testimony before the Senate Finance Committee in “Experts: Temporarily Extend Tax Cuts With 2013 Tax Reform Guarantee”. 

Some good advice was offered to the idiots on the Committee (highlight it mine) -

Rivlin {Alice Rivlin, the former Congressional Budget Office director and head of the Office of Management and Budget in the Clinton administration} and former Sen. Pete Domenici (R-N.M.), co-chairs of the Bipartisan Policy Center's Debt Reduction Task Force, urged lawmakers to temporarily extend the Bush-era tax cuts but include language with it forcing fundamental tax reform.”

The fundamental tax reform needed -

Rivlin also urged lawmakers to scrap the current Internal Revenue Code and start over by assuming that all income is taxable and then figure out which modifications and tax expenditures are absolutely essential, even though they would raise the rate.”

* Jason Dinesen of DINESEN’S TAX TIMES talks about “Being In The Tax Business and Making Mistakes”.

In a recent post at THE TAX PROFESSIONAL I addressed the subject of mistakes by tax preparers –

In the history of the US Tax Code there has NEVER been a paid preparer who has NEVER made a mistake.  The complexity of the Code and the workload demands of the limited filing season make it literally impossible for a paid preparer to complete a perfect tax return every time.”

* The TAX FOUNDATION now has a “Weekly Tax Update” newsletter. 

* The TAXPAYER ADVOCACY PANEL wants you to “Submit your comments and suggestions for improving the IRS”.  Click here to do so.

* Trish McIntire discusses an “Underpayment Catch-22” over at OUR TAXING TIMES. 

This raises an interesting point about “self-assessing” a penalty for underpayment of estimated taxes.  Be sure to see my comment on the post – and her response.  Trish and I have “agreed to disagree” on the subject.

* A post from Trish has “turned me on” to a new tax blog – TAX FACTOR by Jamaal Solomon, EA from Brooklyn NY.

Here is a post titled “Dem IRS No Worry We: EAs Are America's Tax Experts” that explains just what an EA is.     

TTFN

Friday, June 22, 2012

DON'T LISTEN TO BAD ADVICE


Just thought I would repeat some commentary from my publication THE SCHEDULE C NOTEBOOK -

I believe it is bad advice to tell ALL taxpayers who have a Schedule C business to incorporate. There is no tax advice that applies to all businesses in all situations (except don’t cheat). The decision to incorporate a business requires careful review of all the specific facts and circumstances of the individual situation. And taxes are not the only consideration. In a majority of cases it is not financially beneficial, either in the short or long term, to incorporate.

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

For one thing, like a marriage, it may be relatively cheap to "get into" a corporation, but it can be very expensive to "get out of". 

There are indeed times when it is better financially to incorporate a one-person business, especially when excessive health insurance and other employee benefit costs are involved. But certainly not in all cases.

Some say the decision to incorporate is a “no-brainer”.  There is very little, if anything, about tax law that is a no-brainer – especially when it comes to business taxes. That is why tax professionals exist.  The decision to incorporate is by no means a “no-brainer”. It involves a lot of brain work!

TTFN

Thursday, June 21, 2012

SPECIAL SUMMER SAVINGS FOR TAX PROS


To celebrate the beginning of summer I want to make a very special offer to tax professionals.

As you probably know, I have been preparing 1040s since 1972. Over the years I have developed a collection of forms, schedules and worksheets that have proven very helpful in my practice. 

Some of my “homemade” forms are given to clients to help them provide me with the information I need to properly prepare their returns. Some are used as “memos” to the client’s copy and my office file copy to back-up items reported on the returns. Others are used as attachments to the returns.

I generally offer this compilation for $6.00.  As a special summer offer you can have this forms package for only $3.00 if your order is postmarked by July 31, 2012!

The package will be sent as a “word document” email attachment, so you may edit and revise them as you see fit to personalize them to your firm, customize them be more relevant to your particular practice or clients or specific professions, or update them for annual COLAs or tax law changes.

Here is a listing of what is included in the package.

SCHEDULE A –

1. Supplement to Schedule A
2. Medical Expense Worksheet
3. Medical Expenses – Out of Pocket Anaylsis
4. Charitable Contribution Listing – for non-cash contributions
5. Charitable Contribution Record – for cash contributions (2 pages)
6. Charitable Mileage Record
7. Contribution Worksheet
8. Employee Business Expenses – generic format, can be customized 
9. Employee Business Expenses – Police Officer – example of customized
10. Conventions, Conference and Education
11. Miscellaneous Expenses #1
12. Miscellaneous Expenses #2
13. Summary of Casino Gambling Activity Log

SCHEDULE C – (some of these forms can also be used for employee expenses)

1. Allocation of Expenses
2. Automobile Expense Worksheet
3. Auto Mileage Log
4. Business Expenses of a Freelance Writer
5. Business Travel Record
6. Computer Use Log
7. Election to Deduct Organization Expenses 
8. Employee Expense Report
9. Employee Time Card
10. Home Office Deduction Worksheet
11. Cell Phone Log - in “landscape” format - sent separately.

SCHEDULE D – 1. Cost Basis Worksheet

SCHEDULE E –

1. Owner-Occupied Multi-Unit Rental Property Expense 
2. Statement of Rental Income and 
3. Statement of Rental Income and Expenses – Vacation Property
4. Multi Family Building

GENERAL –

1. Alternative Minimum Tax Worksheet
2. Does Not Have To File
3. Statement of Dividend Income
4. Statement of Pension Income – in “landscape” format- sent separately

Please be aware that these forms, schedules, and worksheets are copyrighted material, and are for your internal use only – and cannot be “shared” with other tax pros or firms.

Send your check or money order, payable to TAXPRO SERVICES CORPORATION, for $3.00 and your email address to –

TAXPRO FORMS
TAXPRO SERVICES CORPORATION
PMB 304
72 VAN REIPEN AVENUE
JERSEY CITY NJ 07306-2806

Hey, for $3.00 you can’t go wrong!

TTFN

Wednesday, June 20, 2012

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

* The blog-o-sphere’s favorite TAX GIRL, Kelly Phillips Erb, has written an e-book titled “Ask the TaxGirl: Everything Parents Should Know About Filing Taxes (Including Child Care Expenses, Medical Costs, and the Earned Income Tax Credit”.

Inside this book, you'll get the skinny on the basics like filing status, claiming dependents, and determining exemptions. You'll also find helpful information about how to deduct expenses associated with raising kids, including the costs of medical care and child care. Erb tackles a number of tricky credits and deductions including the ever popular, and much maligned, earned income tax credit.”

* CFO.COM reports on a recent survey that reinforces what we in “the business” knew full well – “Small Businesses Spend More Time on Taxes”.

Sixty-four percent of the 350 NSBA {National Small Business Association – rdf} members surveyed said they spent more than 40 hours dealing with federal taxes in 2011, including calculating payroll and self-employment tax, filing reports, and working with their accountants. Forty-six percent of respondents spent more than 80 hours.”

The article also explained –

Indeed, the majority of respondents said that when it comes to tax compliance, the administrative burden is a bigger challenge than the tax bill itself.”

And –

On the whole, respondents ranked income taxes as their most significant administrative burden, followed by payroll taxes and sales tax.”

* Bill Bishoff, SMART MONEY’s “The Tax Guy” offers good advice on “Making a Tax-Smart Family Loan”.

From my point of view, the smartest thing you can do is not do it at all.  The Bard had the right idea.

* In case you are interested, TAX PROF Paul Caron provides a map of “State Income Tax Collections Per Capita”.

* MISSOURI TAXGUY Bruce McFarland posted “A Letter From a Bookkeeper” and “How I Answered the Letter”.

I agree with most of what Bruce suggests.  I do, however, think there is no legal responsibility for a tax preparer to be a “whistle-blower” if there is no clear and identifiable presence of intentional fraud, as seems to be the case here. 

Once the preparer, or potential preparer, explains that there are errors on a return he/she has not prepared, and states that an amended return should be filed, that is as far as it goes.  The preparer, or potential preparer, has no obligation to prepare the amended returns, or verify that amended returns are filed, and no obligation to notify the IRS that amended returns should be filed.

But if, in the course of an actual audit (certified or otherwise) or detailed review of the company books, a preparer discovers actual intentional fraud or an intentional significant understatement of income that is a different story.

This example is one of the reasons I decided years ago not to accept any new "entity" business clients (partnerships, corporations).  Too much potential agita.  I am happy limiting my practice to 1040 preparation.

Bruce, what do you think?

* RGI.COM’s “Fact Checker” gives us the truth about “Obamacare Sales Tax on Houses?”.

I didn’t realize this garbage was still being circulated.     

* None of my clients experienced the FU explained by Amy Feldman of REUTERS in “Avoiding Panic from Roth Conversion Glitch”.

It appears “a glitch between some of the tax software programs and the IRS” resulted in “a lot of taxpayers who converted their traditional IRAs to Roths in 2010 receiving IRS notices that they owed more taxes (and penalties)”.

Just another tax preparation software FU that I did not have to deal with – since in 41 tax seasons of preparing 1040s I have never used flawed and expensive tax preparation software.

Sorry – I couldn’t resist.

* George M Cohan does it again.  Ken Berry, I expect not the actor, wants you to “Give Your Regards to the 'Cohan Rule'” in a piece at ACCOUNTINGWEB.COM.  He refences a recent Tax Court decision that proved this 80+ year rule, from Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), is alive and well.

I have discussed George’s rule here at TWTP on several occasions in the past.  As Ken explains – “In the landmark decision, Cohan was permitted to deduct certain business expenses, even though he didn't have all the receipts needed to back up his claims”.

However, a “talking point” within the item is important to remember.

There's no substitute for accurate recordkeeping. Good records can ensure that you're able to deduct all the expenses that you're legitimately entitled to claim.”

* Senator Orin Hatch of Utah is taking a poll at his website.  He wants you to “Please tell me your thoughts about tax reform.”  Click here to respond.

* Check out an online live interview with the yellow rose of taxes – Kay Bell of DON’T MESS WITH TAXES.  Click here to watch.  And click here to see my comment on one aspect of the interview.

* This week’s “Monday Map” from the TAX FOUNDATION shows “State Government Spending Growth from 2000-2010”.

New Jersey was #3 on the list with a 62% spending growth.  Surprisingly Oklahoma was #1 at 74%.  New York and California were in the mid-teens with 41% and 42% growth.

* Be sure to check out Bruce McFarland’s weekly “McTax Hangout” – which turned out to be an interview with Seth David of Nerd Enterprises.

THE FINAL WORD:

A review by Claudia Puig in Friday’s USA TODAY of Adam Sandler’s latest time waster “That’s My Boy” excellently describes pretty much all of the actor’s movies, and, unfortunately, many of the so-called comedies produced today.

“’That’s My Boy’ is puerile, mean-spirited and charmless.  The laughs are almost always at someone’s expense or involve incredibly vulgar jokes about bodily functions.”

Wit, and true humor, is indeed rare in today’s comedies.

I completely avoid anything starring, or produced by, Adam Sandler.  Actually I find it a good policy to avoid any movie that stars anyone who has been a regular on “Saturday Night Live” – except for the original cast of the first two seasons and, occasionally, Eddie Murphy.

TTFN

Tuesday, June 19, 2012

A TAX PRO TALKS - TRISH MCINTIRE

I had originally planned to post a series of interviews with representatives of the four “initialed credentials” that are permitted to prepare income tax returns under the new IRS regulation regime – JD, CPA, EA, and RTRP - based on a discussion over at Bruce (THE MISSOURI TAXGUY) McFarland’s YouTube “McTax Hangout” a few weeks ago, on the differences between the included the differences between the designations and the exemption from proving competence and currency (i.e. taking the initial competency test and maintaining annual CPE in taxation) given to attorneys and CPAs, as well as other current tax topics. 

While not yet endowed with the RTRP initials, I planned to represent the previously unenrolled preparer.

As of this writing only the Enrolled Agent – Trish McIntire of the McIntire Tax Center in Arkansas City, Kansas – has responded to my interview questionnaire.  Trish writes the blog OUR TAXING TIMES.  She often writes very specifically about the tax preparation business.  She usually has something good and interesting to say, and I often find myself saying “Right on, sister!”. A fellow lover of the American Musical Theatre, Trish is very involved in her local theatre group.

There is constant confusion among the taxpayer public as to just what is an Enrolled Agent is.  An Enrolled Agent is not an agent, employee or representative of the Internal Revenue Service. An EA is an independent, private tax professional who is “enrolled” to act as a taxpayer’s “agent” in proceedings with the IRS.  An Enrolled Agent is “enrolled” to “practice before the IRS” by virtue of taking the Special Enrollment Examination and maintaining a required amount of CPE credits in the specific area of taxation (and, of course, 2 hours per year in ethics).  Both the competency exam and the continuing education requirements for EAs are more extensive than those for RTRPs.

(Q) Explain the difference between an RTRP, an EA, a CPA, and a tax attorney – and in what instances a taxpayer would need each with regards to a 1040.

(A) RTRP, EA. CPA and Attorneys are groups that can, with a valid PTIN, prepare tax returns for compensation. There isn’t a special IRS designation for “Tax Attorney.” The IRS gives the same rights of representation to all attorneys in good standing with their state boards. So my brother with his brand new law degree has the same privileges before the IRS as an experienced tax attorney. But I wouldn’t let him handle a tax case for me. Holders of the RTRP and EA designations are tested by the IRS while CPAs and attorneys are tested on the state level by their state licensing board. All have continuing education requirements which are set by the same group that tests them. All groups have the right to represent clients before the IRS but what the RTRP can do is limited by the IRS.

There is no real hierarchy in the designations for a taxpayer when it comes to tax preparation. The ability and interest to do a type of return depends on the preparer and their practice.  A RTRP might be a wiz at farms (not on the RTRP test) while a CPA doesn’t handle returns with EIC. In representation, the RTRP is restricted so any of the remaining tax pros might be a better choice. Again, other factors need to be considered in choosing a representative.

(Q) Currently CPAs, and attorneys are exempt from proving competence and currency in 1040 preparation under the IRS tax preparer regulation regime.  Regardless of your opinion on whether or not the regulation regime is a good idea – explain either why the exemption for CPAs and attorneys is appropriate (and how passing the CPA or bar exam qualifies one for preparing 1040s) or why CPAs and EAs should not be exempt.     

(A) The test for a RTRP designation is a minimum tax competency test. The same material is tested in the EA exam. The question is do any of the state tests for a CPA or attorney license cover all that material in the same depth? From what I’ve heard, it doesn’t. The other issue is that tax related continuing education is not required for attorneys and CPA. They can take tax courses but they are not required to take them. We end up with 2 standards and the groups that the public would assume to be better able to handle tax issues are the groups who have less testing and no continuing tax education requirements.

(Q) The talk of tax reform (even though only talk at this point) has turned to eliminating “tax expenditures”.  What current tax deductions and credits would you keep in a new simpler Tax Code, and what deductions and credits simply have to go?      

(A) I would get rid of all those deductions for personal expenses that most people can’t use or make them direct deductions. Employee business expenses, personal casualty and theft losses and mortgage interest come to mind. Get rid of Schedule R. Put in inflation adjustments in taxable Social Security. Something needs to be done with charitable deductions but I don’t know what.

(Q) Is the Tax Code the proper place for providing “social benefits”, such as tuition subsidy (the education tax benefits), supplemental welfare (the Earned Income Credit and refundable Child Tax Credit), and to encourage energy efficient purchases (the Energy Credit)?      

(A) My concern with a blanket removal of “social benefits” is the Earned Income Credit. If Congress wants to pass an incentive for energy, the Dept of Energy should administer it. HUD should take care of housing incentives, you get my point.  I understand the idea for doing it on taxes – it’s quicker, but that’s why we’ve had so much fraud lately. If Congress insists on using the IRS for processing, keep it separate from the 1040. Kansas has a property tax rebate that is handled by the KDOR but it has its own return and processing timetable. That way the claim can be double checked and not hold up the KS-40 refund.

That might be the answer for the Earned Income Credit. I have a real problem getting rid of this program. There is a lot of fraud but there are a lot of hard working people who need that money. It’s their cushion against medical bills and emergencies (car repairs to keep working). Yes there are a few who don’t take better work to keep their refund maxed out. But so many more would be happy to lose the EIC if their income would go up. Administering it through a Federal department might be an option as long as it stays reasonably accessible to everyone who qualifies.

(Q) Do you think you will see a true simple Tax Code in your lifetime, with truly minimal deductions, no credits, and either a flat tax or only 2 tax brackets?       

(A) No! We don’t have the people who can do that. Have you read the book “Showdown at Gucci Gulch”? It’s behind the scenes of the 1986 tax reform. We don’t have the people who are passionate about the changes or the leadership who are willing to make it work. On top of that, lobbyists are much more influential today than in 1986 and would make cutting their credit or deduction impossible.

(Q) I have suggested doing away with the tax deduction for depreciation of real property (see my post http://wanderingtaxpro.blogspot.com/2007/11/here-is-something-to-think-about.html). What do you think of this idea?       

(A) I would have a hard time explaining to a client that they can’t take any part of the new business building off their taxes.  They can depreciate the new tools but not the building. Also, the depreciation might be more necessary to the business early in the life of the building than the tax on recaptured depreciation later. And don’t forget, there is a good chance that there won’t be any recapture later because of death and the stepped up basis. I don’t see this one happening at all.

(Q) Now that the tax season is finally over, how will you be spending your summer vacation?      

(A) Still doing returns - an appointment coming in this afternoon. I’m also getting ready to direct a show and co-writing a director’s handbook for the theatre. I’m updating the theatre’s website for the new season and redoing my office site. And catching up on paperwork and filing.

Thanks, Trish!

TTFN

Monday, June 18, 2012

"SUMMER" RERUN - MY ALTERNATIVE TO THE YARD SALE

{A recent BUZZ post referenced Trish McIntire’s post on garage sales, and the Today show recently had a segment on garage sales, stating that many municipalities are imposing more regulations on such events.  Here is a rerun that discusses my alternative to the agita of having a garage sale.} 

In the summer Americans usually clean out their closets, attics, basements, and garages to get rid of “stuff” they no longer need or want.

While some items are true garbage and need to be thrown away, many others still have a useful life – and can be put to good use by someone else.

What do you do? You can have a sidewalk, yard or garage sale and try to make some extra money. Not what I would do. Do you really want the great unwashed masses tramping through your yard or garage, and possibly your house as well? This activity usually wastes a full day, is loaded with potential for agita, and in the end you never get what your stuff is really worth. During the last hour of the sale you often end up almost giving away what is left just to get rid of it.

A better idea is to donate your unwanted, but still usable, items to a church or charity. With this method you may ultimately end up with about 1/4 to 1/3 of the current market value of the stuff in your pocket (depending on your federal and state tax brackets) – which is probably not much less than you would end up in a yard sale anyway – you avoid the agita, and you get to help out a needy cause.

If you itemize you can deduct the “fair market value” of used items donated to charity. According to the IRS, fair market value is the price a “willing, knowledgeable buyer would pay a willing, knowledgeable seller when neither has to buy or sell.”

You are responsible for determining what the items you are donating are worth. The charity is not required to, and in most cases will not, provide you with a value. There are several online guides to help you come up with a number. Click here for the Salvation Army valuation guide.

Whenever you make a contribution of used items you should always make and keep a detailed listing of the items you are donating with the condition and value of each set of items (i.e. 6 pairs of men’s pants, good condition, $60.00, 5 pairs of men’s shoes, good condition, $75.00). You may want to attach a copy of the listings to your tax return.

You cannot deduct the contribution of a used item unless it is in at least "good" condition. Donations of clothing and household items with a minimal monetary value, such as used socks or underwear, are also not deductible

When using a local charity’s bin at the mall to make your donation be sure that what you are dropping off on any one day is not worth more than $250.00. If the total value of items donated to a charity in a single day is more than $250.00 you must have a written acknowledgement from the charity with its name and address, the date of the contribution, and a description of the items donated. The acknowledgement must also indicate whether you received any goods or services from the charity in exchange for the donation.

TTFN

Saturday, June 16, 2012

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

* I am quoted extensively in the item Can You Afford to Wait?: Weighing the Merits of Postponing the RTRP Exam” by Jeff Stimson over at TAX PRO TODAY.  The article also quotes Trish McIntire of OUR TAXING TIMES.

* TAX PRO TODAY also reports about a Los Angeles tax preparer who faces 150 years in prison in “Tax Preparer Pleads Guilty in Identity Theft Scheme”.

If only he had attended a required 2 hour CPE course in ethics this never would have happened!

* We have already celebrated Tax Freedom Day in the US and the UK.  Now Market Watch at THE WALL STREET JOURNAL provides the word about Canada’s celebration in “The Fraser Institute: Tax Freedom Day is June 11, One Day Later Than Last Year as Canadians Work Longer to Pay Taxes”.

The article tells us –

In 2012, the average Canadian family (with two or more individuals) will earn $94,259 and pay a total of $41,627 in taxes, for a total tax bill amounting to 44.2 per cent of income.”

The taxes included in the above figure are “all the taxes they owe to all levels of government”.

Of the many taxes Canadian families pay, the largest increase in 2012 comes in the form of social security, pension, medical, and hospital taxes-up $507 for the average Canadian family. Other notable increases: sales taxes ($297), income taxes ($283), and property taxes ($142).”

* Over at CNN MONEY Joseph Thorndike discusses “Taxing the Rich: What's Fair?

He provides us with an interesting quote –

Scottish economist J.R. McCullough made this point centuries ago: ‘The moment you abandon . . . the cardinal principle of exacting from all individuals the same proportion of their income or their property, you are at sea without rudder or compass, and there is no amount of injustice or folly you may not commit.’"

* Bruce, the MISSOURI TAXGUY, posts a worthy appeal for help for a local animal shelter in “Fox 4 Helping Me, Helping…..”.  Join me in helping out Bruce’s neighbor.

* Great advice from Trish McIntire in “Dear Client, Please Talk to Me Before...” at OUR TAXING times.

* Have you ever seen this before – the first Form 1040?  Check it out!

TTFN