Friday, December 27, 2013
2013: THE YEAR IN TAXES – PART ONE
2013 continued the ongoing saga of the irresponsibility of the idiots in Congress, which shows no sign of ending soon.
The year very literally began with a prime example of this irresponsibility. In the early hours of January 1st the fools in Washington finally passed the “American Taxpayer Relief Act of 2012”, which
· made permanent the various “Bush tax cuts” and the dreaded Alternative Minimum Tax (AMT) “patch”,
· temporarily extended the other “extenders”, the American Opportunity Credit for qualified tuition and other post-secondary education expenses and the enhanced provisions of the Child Tax Credit and the Earned Income Credit, but not the expired 2% reduction of the employee’s share of Social Security Tax withholding and corresponding reduction in the Self-Employment Tax,
· brought back the PEP and Pease AGI-based reduction of personal exemptions and itemized deductions, and
· created a new top “regular” and capital gain tax rate.
Perhaps tied for the top tax story of the year (with the death of DOMA, which I will discuss later) is the David-versus-Goliath victory of three independent tax return preparers who felt the cost of the IRS mandatory RTRP tax preparer regulation regime, especially the annual CPE requirement, was “prohibitive” for their small practices and joined with the Institute for Justice to challenge the licensing program in federal court in Loving v IRS.
On January 18th Judge James Boasberg of the U.S. District Court for the District of Columbia pleasantly surprised all of us in the tax preparation industry by deciding for the plaintiffs in Loving v IRS and shutting down the mandatory regulation regime. The Court ruled that the IRS did not have the legal authority to regulate tax return preparers. The Service could continue to require tax preparers to register and receive a PTIN (Preparer Tax Identification Number) but it could no longer require preparers to complete a competency test or maintain CPE to be able to prepare tax returns for compensation. The IRS requested a stay of the injunction pending appeal, but the Court just said no.
I did not find the CPE requirement “prohibitive” (extensive CPE in taxation is truly a necessary business expense for all serious tax preparers), but agreed with the IFJ that the IRS did not have the authority to regulate all paid preparers in this way. FYI, I was referenced in a footnote to the brief opposing the IRS request for a stay of the injunction submitted by the Institute for Justice.
The IRS appealed the decision, and on September 24th a three-judge panel of the U.S. Court of Appeals for the District of Columbia heard oral arguments from Dan Alban of the Institute for Justice and the IRS. After the hearing Dan Alban told me that the judges “seemed rather skeptical of the IRS’s arguments and generally receptive to our position. They seemed focused on the meaning of the statutory language, and also noted the significance of the long period of time (130 years) that it had taken for the IRS to suddenly ‘find’ this new power in the statute (31 U.S.C. 330).”
As of this writing a decision on the appeal has not been issued, but just about everyone in the industry, and the press, agrees that the IRS did poorly in presenting its case and believes that the Court will deny the appeal and uphold the original decision, putting the final nail in the coffin of the mandatory RTRP program.
The Court said the IRS could continue to offer the RTRP credential on a voluntary basis, and I have suggested, in a TAXPRO TODAY editorial and a letter to the new IRS Commissioner, that the Service do just that with a two-tiered program that includes the existing Enrolled Agent designation, with EA replaced by a better name.
As a result of the last minute legislation the 2013 tax filing season got off to a late start for many tax preparers. The IRS announced that it would not be able to begin processing either paper or electronically filed 2012 tax returns until January 30th. And returns with certain forms and schedules, including those involving depreciation and amortization, education and energy credits, and passive losses, would not be able to be processed until late February or early March.
There were additional delays during the season for some returns claiming an education credit on Form 8863. Tax refunds for about 600,000 taxpayers who used fast-food tax preparation chains, like Henry and Richard, to prepare their returns were delayed due to a “software glitch”. Just one more reason not to use fast-food chains to prepare your returns.
But, because for me the tax filing season does not officially begin until February 1st, and I do not, and never will, use flawed and expensive tax preparation software, I experienced no delays in starting the tax season on time.
This was the first tax season in my new home in a new state. I lost only a handful of clients because of the move, which is ok as I am trying to “thin the herd” anyway.
2013 was the second year that brokerage houses and mutual fund companies had to report cost basis information for certain investment sales on Form 1099-B, and preparers and taxpayers had to enter investment sale transactions on as many as three separate Form 8949s, carrying over the totals to Schedule D. While there was inconsistent treatment of 2011 Form 1099-B reporting among the various houses, resulting in extra work, things were better, and reporting was more consistent and easier to follow, on 2012 statements.
The only new wrinkle to 2012 returns was the added “due diligence” requirements for tax professionals who prepare returns claiming the Earned Income Credit. I had announced that I would not prepare any 2012 returns that included a claim for the EIC - but I ended up breaking this promise. All but one of the very, very few 2012 returns with EIC that I did prepare involved clients (all long-time) without children. The one that did involve a dependent child was a single mother whose returns I have been preparing since before the child was born. How could I tell her I would not be doing her return this year? The child involved was in college, so my “due diligence” consisted of looking at the Form 1098-T.
It was a “traditional” season – ending on April 15th (or for me April 14th). No extra days. I ended the season with about 40 GD extensions, most for returns that were received by me after March 15th. The increased number really had nothing to do with IRS processing delays, or even with the lack of extra days, but was the result of choices I made because of my move. I will do things a little differently next year.
To be continued . . . . .