Tuesday, December 30, 2014

THE YEAR IN TAXES 2014


For another year the lyrics “piddle, twiddle, and resolve – not one damn thing do we solve” from the Broadway musical 1776 served as the perfect description of the current idiot-filled Congress.

The 2014 tax filing season (for filing 2013 returns) once again got off to a late start – also once again caused by the actions of the idiots in Congress.  This time the delay was a result of the October 1 – 16, 2013 government shutdown.  The IRS needed “time to program and test tax processing systems following the 16-day federal government closure”.  The Service announced it “would start accepting and processing 2013 individual tax returns no earlier than Jan. 28 and no later than Feb. 4”.

And, once again, the delay did not affect me one bit.  For the past 40+ years the tax filing season has always started for me on February 1st.  And, as you should know by now, I prepare all my federal returns manually, so delays in processing electronically-filed returns don’t mean anything to me.

There was not much new that affected the 2013 Form 1040.  Most of the few new wrinkles concerned taxpayers who are considered to be “wealthy”.  These included the higher capital gains and top tax rate, the return of PEP and PEASE (at much higher levels), and the new Obamacare surtaxes – the additional .009 Medicare surcharge and the 3.8% tax on net investment income.

The bulk of my clients can be classified as “average middle class taxpayers”.  However I did have 6 clients who were hit by one or more of the new punishments for ambition, success, and entrepreneurship.  While the cost was not what I would consider substantial – it did add over $2,000 to the tax bill of some of these clients.

Generally I found overall 1099-B reporting by brokerage houses continued to be much more consistent and easier to follow, making things a bit easier.

As usual, I ended the tax season with too many GD extensions.

For the third time during a tax filing season in the 21st century the NJWebFile generated payment voucher code apparently identified the year for which the payment was being made as the prior year and not the current year.  Although the voucher itself clearly said “2013 Payment Voucher” the payment was applied to 2012 and not 2013.  As a result, taxpayers who made a full and timely payment of the balance due on their NJWebFile submitted 2013 NJ-1040 erroneously received underpayment notices for the previously paid balance due on their 2013 return, plus interest, in the fall. 

Applying the 2013 payment to 2012 would create an overpayment on the taxpayer’s 2012 tax account.  If there was an overpayment on a federal return tax year account the Internal Revenue Service would promptly send the taxpayer a notice identifying the overpayment and asking for an explanation of the payment or if the taxpayer wants the amount refunded.  One would think that the NJ Division of Taxation would do the same thing.  It certainly has a fiduciary responsibility to do so.  But, of course, the NJDOT remains silent and gladly accepts the overpayment unquestioned.

The last time this happened I was able to get the NJDOT to issue an actual letter of apology for the FU – a true rarity.  This time around there was no apology, or even an acknowledgement that an error occurred.  The response simply stated that based on the correspondence received (from me) there was no additional amount due.

On February 11th the US Court of Appeals put the final nail in the coffin of the IRS mandatory RTRP regulation regime.  In a unanimous ruling, a three-judge appellate panel upheld the lower court's January 2013 decision that the Internal Revenue Service does not have the power to impose test-taking and continuing education requirements on hundreds of thousands of “unenrolled” tax-return preparers.

"We agree with the District Court that the IRS's statutory authority ... cannot be stretched so broadly as to encompass authority to regulate tax-return preparers.”

The IRS decided not to take the case to the Supreme Court, suggesting that it might create a voluntary tax preparation credential.

But instead of doing what I suggested in my ACCOUNTING TODAY editorial “What the IRS Should Do About the RTRP”, Commissioner John Koskinen announced a new voluntary “Annual Filing Season Program” for tax return preparers at the end of June.

The Annual Filing Season Program does not issue to participants an actual identifiable credential or designation, like “Registered Tax Return Preparer”. Those who meet the program requirements will be issued a “Record of Completion” certificate and be added to “a database on IRS.gov that will be available by January 2015 to help taxpayers determine return preparer qualifications”.

The IRS explained that the new database will include information about those who have been awarded a record of completion and “practitioners with recognized credentials and higher levels of qualification and practice rights”, such as “attorneys, certified public accountants (CPAs), enrolled agents, enrolled retirement plan agents (ERPAs) and enrolled actuaries who are registered with the IRS”.

In order to receive a Record of Completion currently unenrolled preparers must complete 18 hours of continuing professional education (CPE) classes annually from approved education providers.  The CPE must include:

  6 hours of a federal tax filing season refresher course,
  2 hours of ethics, and
  10 hours of other federal tax law topics.

The program does not require an initial competency test.  Participants are, however, required to pass a comprehension test upon completion of the filing season refresher course each year.

For the initial 2015 tax filing season preparers will only need to complete 11 hours of CPE in calendar year 2014, including the full 6-hour refresher course and 2 hours in ethics.

Preparers must also consent to the “duties and restrictions relating to practice before the IRS in subpart B and section 10.51 of Treasury Department Circular No. 230” before receiving the record of completion.

Under the new program, only preparers who have been awarded a record of completion (and, of course, EAs, CPAs, and attorneys) “will be permitted to represent taxpayers before the IRS during an examination of a return that they have signed or prepared”.

I discussed the flaws in this new voluntary program in my editorial “There Are So Many Things Wrong with the Annual Filing Season Program” at ACCOUNTING TODAY.

The AICPA filed a federal lawsuit challenging the legality of the program.  But D.C. federal Judge James E. Boasberg, the same judge who issued the initial decision in Loving vs IRS, dismissed the suit, stating “. . . the AICPA didn’t have the authority to sue the authority because it was not harmed by the Program”.

Judge Boasberg recognized the AICPA’s true motivation for filing the lawsuit -

. . . the crux of [the AICPA’s] concern is apparent:  its membership feels threatened by the specter of increased competition from previously uncredentialed tax return preparers who choose to complete the program.”  

The AICPA filed an appeal of Judge Boasberg’s decision with the DC Appellate Court.

Despite all the talk about the need for true tax reform in 2013 and 2014 the idiots in Congress did absolutely nothing about the federal income tax in 2014.  The tax reform debate limited its focus to corporate tax reform as the year progressed, with the issue of “tax inversions” taking center stage. 

The Tax Foundation did a good job of explaining just what a “tax inversion” is –

In its simplest form, an inversion is simply the process by which a corporate entity, established in another country, buys an established American company. The transaction takes place when a foreign corporation purchases either the shares or assets of a domestic corporation or a when a U.S. corporation purchases the share or assets of a foreign corporation. Some inversions involve the purchase of both the shares of ownership and the corporate assets. The shareholders of the domestic company typically become shareholders of the new foreign parent company. In essence, the legal location of the company changes through a corporate inversion from the United States to another country. An inversion typically does not change the operational structure or functional location of a company.

The change in legal residence from the United States to another country allows the company to take advantage of the more favorable tax treatment of the new home country.” 

In September the Treasury Department took action to make inversions harder and less profitable, removing some of its appeal.

The tax inversion controversy brought attention to the fact that the US has one of the highest corporate tax rates in the world and calls for reducing corporate taxes.

In early December retiring Senator Tom Coburn’s added fuel to the tax reform debate by issuing “Tax Decoder”, a report that revealed more than 165 “giveaways” worth over $900 billion in 2014 and more than $5 trillion over the next five years.

Coburn agreed with me that Congress should “. . . throw out the entire tax code and start over”.

The most popular topics at 2014 CPE offerings were the new IRS repair and capitalization regulations, issued in the fall of 2013, and the Obamacare individual mandate.  Both are complicated PITAs, and are expected to create havoc with 2014 tax returns filed in 2015.   

We had the opportunity to “vote the bastards out” in November, when all 435 seats in the House of Representatives were up for grabs.  I once again urged voters to “get a GRIP” (Get Rid of Incumbent Politicians), but my plea was ignored as, for the most part, the same idiots who have done nothing but take up space in Washington were re-elected.  I guess the voters felt “the idiot you know is better than the idiot you don’t”.  So the 114th Congress will be no better than the 113th Congress, which, if not the worst, was certainly the least productive Congress in history.

Once again the year ended with the idiots in Congress waiting until literally the last minute to pass an extension of all of the expired “tax extenders”.  However they were extended through December 31, 2014 only.  President Obama signed the bill into law on December 19th. 

So, also once again, thanks to the irresponsibility of our elected officials in Washington next year’s tax filing season will very likely have a late start, although the IRS Commissioner has said it would not.

And 2014 ends just like 2013 – with the status of the “tax extenders” for the coming year up in the air. 

TTFN

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