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

Welcome to the first BUZZ of 2010.

* I love Prof Jim Maule’s bottom-line comment on the NJ State legislature in his post “Tax Ignorance: Legislators and Lobbyists” at MAULED AGAIN. In it he asks a question that could apply to any legislature – local, state or federal.

“It boils down, once again, to a legislature being quick to dish out tax breaks, quick to spend money, but slow to take on responsibility for its actions, slow to keep track of what it does, yet quick to ask others to do its work. Ought not legislators be held to the same standard of expertise that applies to people working in other occupations and jobs? Do not the taxpayers deserve better?”

* And speaking of Jim Maule, he started the year off with another excellent quote about our representatives in Washington in his post “A Zero Tax, A Zero Congress” about the expiration of the federal Estate Tax –

“What I can offer is my condemnation of the Congress for putting America into yet another economic mess. Several commentators have noted, cynically perhaps, that members of Congress benefit from having the estate tax issue held open because it encourages lobbyists for the various positions to rustle up more cash for the campaign coffers of members of Congress. Far be it for me to criticize a cynical observation. Truth be told, I think these commentators are making a valid point. It's not unlike members of Congress to put personal objectives, including raising re-election funds and grabbing power, ahead of what needs to be done for the national economic good. One look at the bribery involved in crafting a health care bill tells us quite a bit about the value system in play on Capitol Hill.”

* Check out Russ Fox’s “2009 Tax Offender of the Year” to find out who wins the prize.

“To be considered for the Tax Offender of the Year award, you must do more than cheat on your taxes. It has to be special; it really needs to be a Bozo-like action or actions.”

I love the #2 choice – “the 1st session of the 111th United States Congress”.

“This Congress, dominated by Democrats, managed to take the art of spending to new heights of lowness. Budget sanity? Who needs that! Our children, grandchildren, and great-grandchildren will be paying for Congress’ largess.”

If you ask me, Congress is the biggest tax offender of just about any year!

* TAXGIRL Kelly Phillips Erb’s list of “Most Popular Posts of 2009” (based on page views) included an excellent “Ask the taxgirl” post on “Payments Made Under the Table”.

She makes several good points –

“It’s important to remember that your employer is not your friend. An employer who suggests that you might be paid ‘under the table’ is definitely not your friend, for about a million reasons.”

And – “just because you weren’t having taxes withheld does not mean that they were paying you under the table. If you were, in fact, properly classified as an independent contractor (and not an employee), the employer would not have been required to withhold taxes.”

Read the entire post. It concerns a person who collected unemployment while being paid, presumably, “under the table” who got upset when the company that paid her wanted a Social Security Number to report the income on a Form 1099.

As Kelly points out, much more tactfully then I would, the questioner (1) committed unemployment fraud and (2) must provide her Social Security number to the “employer”.

* And one more from Kelly – she answers the question “The Cost of Kids Getting Better: Is It Deductible?”, drawing on her own recent experience.

Kelly, we hope Amy is doing ok. And, as a resident of the Garden State, I agree with your “shudder” when stating “And if I lived in NJ. . .”. With my father’s passing on New Year’s Day I now need to rethink my residence situation.

* Kay Bell tells us what she considers to be the “top five federal tax developments over the last 10 years” in her post “A Look Back at the Decade in Taxes” (my 4th decade in taxes) at DON’T MESS WITH TAXES.

I am certainly on board with her first three picks. She hit the nail on the head in her summation of “Rebates, Rebates, Rebates” –

“In all these cases, the rebates were relatively minimal, especially when compared to the large amount of confusion, frustration and anger they generated.

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Here's hoping this rebate mania will soon fade and be replaced with legitimate tax reform.”

And as for the cafones in Congress –

“Perpetual Congressional lateness in approving these extenders, the technically temporary tax breaks that are renewed for one or two years at a time, is a real pain. Over the years, the delays have led to filing and planning problems, not only for us taxpayers {and tax preparers – rdf} but also for the IRS."

* Oops! Sorry, Kay. I missed the Tax Carnival again! I have got to pay better attention. Anyway – check out “Tax Carnival #62: Happy New Tax Year!” at DON’T MESS WITH TAXES.

* Mary O’Keeffe shows us why timing is important in her post “Last Baby of the Old Year or First Baby of the New Year?” at BED BUFFALOES IN YOUR TAX CODE.

* Stacie Clifford Kitts writes about a sorry taxpayer in “Joe Schmo Didn’t Think He Needed Any Tax Planning” at STACIE’S MORE TAX TIPS (in it’s new location with a great new look).

The story of JS is, sadly, a familiar one to us tax preparers.

* Trish reports on a little surprise that taxpayers who have used a “credit counseling agency” to “settle” or reduce credit card debt will be receiving in “Tax Surprise - 1099C”.

Cancelled credit debt is taxable income – unless the taxpayer was insolvent.

* Bill Perez adds his voice to those of us who warn taxpayers “not to file a tax return using the information from your last paystub of the year” in his post “How Soon Can You File a Tax Return?” at WILLIAN’S TAX PLANNING BLOG.

Bill tells us that –“the IRS is on the look out for people who file only using their paystub”.

* Joe Kristan reports on a report that is just “A Polite Way of Saying 'It Was Just a Big Waste of Money'” (the First Time Homebuyer’s Credit that is) at the ROTH AND COMPANY TAX UPDATE BLOG.

“The Congressional Research Service says lower prices, not the homebuyer tax credit, have gotten houses selling again.”

* Let me end on Joe Kristan’s bottom line comment on the just released IRS report on tax preparer regulation –

“The only sure way to improve tax compliance is to simplify the tax law and eliminate the most egregious opportunities to cheat, like refundable credits. Since that isn't going to happen, the IRS will saddle the innocent with paperwork that won't solve the problems.”

TTFN

A COMMENT FROM THE E-MAIL BOX

Here is a comment I just received on my New Year’s Eve post.

"Hi Robert,

It's Mary O'Keeffe from the Bed Buffaloes blog.

I was thinking about you this morning. I woke up and checked my email and was greeted by a friendly reminder from Bank of America, which handles the payroll for the Schedule C business my husband runs (and for which I work also.) It was reminding me that I need to review and file the W-2s as well as the other end of year and end of quarter paperwork. (Fortunately, they make that easy and cheap, as long as all employees have their paychecks direct deposited in Bank of America checking accounts, which are also free.)

Anyway, as I reviewed and printed out my own W-2, I reflected on the fact that it seems so early to be doing W-2s.

But I'm glad to be able to get dealing with all of that year end/quarter end paperwork out of the way, even though I will be way too busy to prepare my own tax return until probably late March.

All of that is prologue to my actual comment on your blog.

You mentioned that you were spending New Year's Eve typing out W-2s.

That also seems early. I wondered if you do that earlier now than you used to years ago because your clients' employees are eager to efile and get their refunds quickly these days?

Or if you have always it done it early, just to "clear the decks" so you'll have time for all the work that will be coming your way when your clients start bringing you the data you need to prepare their returns.

Thanks,

Mary"

And my response -

Mary:

Typing W-2s on Christmas Eve (if possible – my big client has a bi-weekly payroll on 3 companies and one, a union, pays monthly on the first of the month) and New Year’s Eve is a long-standing tradition of well over 20 years.

This annual custom has absolutely nothing to do with my clients’ employees being eager to “e-file”. For the most part, while the W-2s are typed before January 1st, they are not mailed or handed out to the employees until at least mid-January. I have found over the years that if mailed out too early they have a tendency to get lost, and I was often contacted during the tax season, when time is precious, to provide a replacement.

As you suggest, I type W-2s on the holiday eves to “"clear the decks". It is one less thing I need to deal with in January. Besides, as I have posted I have not gone out on NYE in 30 years - so it seems a good a time as any to do this task.

You may know that I personally do not “e-file” the federal returns of my clients (although I do e-file NJ state returns when appropriate) because I cannot do so totally free of charge. I do not use flawed tax preparation software to prepare tax returns – I do all my returns manually – and I am not about to waste thousands of dollars to purchase such software just to be able to electronically file federal returns.

I am curious to see how the IRS will respond to the new electronic filing requirement for tax preparers for 2010 returns. Will they provide a totally free method to e-file at www.irs.gov or allow taxpayers to “opt-out”?

BTW – what do you think about the IRS “Tax Preparer Review” recommendations?

And I love your idea, suggested in today’s “New Reality TV Show” post at BBIYTC, to have tax cheats Chuck Rangel and Tim Geithner appear as contestants on a TV show called "Are you smarter than a VITA volunteer?"

RDF

PS - Thanks for the message of condolence.

THE TAX COURT AND CELL PHONES

When it comes to tax deductions - some deductions require special recordkeeping. This is true with what is called “listed property”.

In 1984 Big Brother, via the Tax Reform Act of 1984, decided to restrict the depreciation deduction for the business use of items “lending themselves easily to personal use”, which were labeled “listed property”. Included on the “list” were –

* Passenger automobiles.

* Property of a type generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video recording equipment.

* Computers and related peripheral equipment

In 1989 cellular telephones and “similar telecommunication equipment” were added to this “list”.

Internal Revenue Code Section 274(d) (4) requires that you keep detailed records to document the business use of “listed property”.

With a cell-phone your log would indicate the date, number called, person called, business purpose (or “personal”), and length of call. If the bill listed each call separately you would indicate the cost for each call on the log. If you pay a flat fee for unlimited minutes you would need to do a calculation for each monthly bill.

David Mellem, EA, of Ashwaubenon Tax Professionals, and former Director of Research and popular seminar instructor for the National Association of Tax Professionals, provides special email alerts on tax issues to tax pros. A recent email dealt with court cases concerning the deductibility of cell phone usage.

Here are the court cases discussed by David in his email alert -

* TC Summary Opinion 2009-97 - The deduction for cell phone usage was denied because the taxpayer couldn’t substantiate his business use of the phone. The Court felt the taxpayer did use his cell phone for business purposes, and the taxpayer conceded that he used his cell phone to make personal calls (i.e. call his wife while he was away from home). The taxpayer produced copies of cell phones bills but was not able to show which calls were business and which were personal. As the taxpayer did not provide the substantiation necessary for listed property the Tax Court was required to deny the deduction.

* Philip Jay Berg, 103 AFTR 2d 2009-249 – The taxpayer attempted to claim a deduction without documentation under the famous “Cohan Rule”. But the Tax Court’s decision stated “The Cohan rule does not apply to certain expenses, such as cell phones, automobiles and trucks, which are governed by the strict substantiation requirement of §274(d).”

* T.C. Summary Opinion 2009-81 – The Tax Court denied the deduction for cell phone usage. The taxpayer indicated that his employers suggested that drivers might find cellular telephones useful but did not reimburse its drivers to have a cellular telephone. He used the cell phone to contact other truckers, shippers, and receivers to discuss such things as the best routes for his particular destination and load type, load weight, and vehicle size. This information is not readily available from typical road maps. These were clearly genuine business calls. The taxpayer also used the phone for personal calls. He did not keep a log of his calls, and estimated that 80 percent of the calls had a business purpose. The Tax Court pointed out that for listed property the taxpayer is required to have adequate records or corroborative documentation. Since the taxpayer relied only on estimated use and did not have the required records or evidence, Tax Court was required to deny the entire deduction.

David tells us that the deduction was also denied in T.C. Summary Opinion 2008-101 and T.C. Memo 2008-280.

The bottom line – if you use a cell phone for business you must keep a log identifying business usage.

FYI - a Cell Phone Log is one of the forms, schedules and worksheets included in “THE WANDERING TAX PRO’S DOCUMENTING 2010 DEDUCTIONS”.

TTFN

THIS JUST IN – IRS RECOMMENDATIONS FOR REGULATING TAX PREPARERS

The IRS just released its report on the “Return Preparer Review” with recommendations of a number of steps that it plans to implement for future filing seasons, including:

"• Requiring all paid tax return preparers who must sign a federal tax return to register with the IRS and obtain a preparer tax identification number (PTIN). These preparers will be subject to a limited tax compliance check to ensure they have filed federal personal, employment and business tax returns and that the tax due on those returns has been paid.

• Requiring competency tests for all paid tax return preparers except attorneys, certified public accountants (CPAs) and enrolled agents who are active and in good standing with their respective licensing agencies.

• Requiring ongoing continuing professional education for all paid tax return preparers except attorneys, CPAs, enrolled agents and others who are already subject to continuing education requirements.

• Extending the ethical rules found in Treasury Department Circular 230 — which currently only apply to attorneys, CPAs and enrolled agents who practice before the IRS — to all paid preparers. This expansion would allow the IRS to suspend or otherwise discipline tax return preparers who engage in unethical or disreputable conduct."

If you followed my “coverage” of the issue in 2009 you know I am disappointed that –

(1) attorneys and CPAs who prepare 1040s are not required to take a competency test or to satisfy the mandatory continuing education in taxation requirements, and

(2) there is no mention of a “grandfathering” exemption from the required competency test for non-initialed preparers.

When I get a chance I will review in detail the entire report and provide my comments in a future post.

HERE WE GO AGAIN

It is time once again for me to point you to my “suite” of year-beginning posts. In these posts I tell you how to start the year off right and how to get ready for your annual tax appointment.

As you would expect, the various amounts for exemptions, standard deductions, etc in these posts apply to tax year in which they were written. You can find the appropriate 2009 amounts here at WHAT’S NEW FOR 2009.

The “Most Important Advice You Will Receive This Tax Season!” remains the same as last year. Even more so this year.

STARTING THE YEAR OFF RIGHT –

Regarding item #2 – click here to check out “THE WANDERING TAX PRO’S DOCUMENTING 2010 DEDUCTIONS”.

You should be very careful about item #5. I only recommend this if you have sufficient financial discipline. While this is solid tax advice – it could have disastrous results.

If you’ve changed your name in 2009 (for example due to marriage or divorce) remember mismatched names and SSNs on your tax return can delay your refund. Click here to find out what to do.

GETTING READY TO PREPARE YOUR RETURN –

The deadline for sending out certain information returns has been pushed back beginning this year. The real deadline is Feb. 16 (February 15th is a legal holiday). The affected forms are:

* 1099-B (Proceeds from Broker and Barter Exchange Transactions)
* 1099-S (proceeds from Real Estate Transactions), and
* 1099-MISC (Miscellaneous Income) if any substitute payments in lieu of dividends or tax- exempt interest, or payments to attorneys are reported on the form.

The February 16 mailing deadline also applies to “Consolidated Reporting Statements” issued by brokerage houses that include the information for all types of Form 1099 on one statement.

And speaking of brokerage “Consolidated Reporting Statements” - because of the rules and rates for “qualified” dividends that have been in effect since 2004, you may again this year receive at least one “Corrected” 1099 statement. Wait a few weeks after receiving the original 1099 information before giving your “stuff” to your preparer.

A bank may issue one Form 1099-INT for all the accounts – savings, money market and CDs – that belong to the same name and Social Security number. There may be 6 or 7 accounts listed on a 1099-INT. It is important to verify each account listed on the form to make sure all of them belong to you. One of my clients received a 1099-INT last year with someone else’s account, that earned $300+ interest, included in the listing! Had he not carefully checked the form he would have paid close to $100.00 in unnecessary federal and state income tax. If you find an error on a Form 1099-INT go to the bank immediately and request a corrected form.

Another reminder – According to Internal Revenue Service Revenue Ruling 69-184 you cannot be both a partner in and an employee of the same partnership. A partner cannot receive a salary from the partnership, and should not be given a W-2. If you are a partner who received “guaranteed payments” in 2007 but you receive a 2007 Form W-2 from the partnership you should go to the partnership’s accounting firm, tell them that they FU-ed. Check out my January 2006 post “EMPLOYEE OR PARTNER – THAT IS THE QUESTION”.

WHAT TO GIVE YOUR TAX PREPARER- PART I and PART II -

FYI there is a new online location for my WHAT I NEED Page

Social Security and Railroad Retirement recipients need to tell their tax pro if they received the $250 “Economic Recovery Payment” (ERP) in 2009 (probably early May). If your monthly benefit check is directly deposited to your back account so was the ERP.

Retired Policemen and Firefighters need to provide your tax pro with the amount withheld from your pension for the year for health insurance premiums. This was new for 2007 and still applies for 2008.

If you purchased a personal residence in 2009 give your preparer a copy of both sides of the Closing/Settlement Statement. You may be entitled to a special refundable tax credit of up to $8,000. If you purchase a residence in early 2010 you can claim the credit on your 2009 Form 1040, so send your tax pro copies of the Closing Statement if you bought in 2010.

Tax benefits for college expenses have been expanded for 2009 to include required “course materials”, like books, as “qualified expenses”. If you have kids in college, or you were a college student yourself, in addition to the Form 1098-T and Burser’s statements from the school(s) you must also tell your tax pro the amount that was spent in 2009 for books and other “course materials”.

It is especially important to let your tax preparer know if you purchased a new car in 2009. And the energy credit is back for 2009 – and better than before - so give your tax pro the receipt and “manufacturer’s certification” for any energy efficient purchase or improvement for your primary residence.

SOME ADVICE FOR PREPARING YOUR TAX RETURN

This advice, for 2007 returns, still applies to your 2009 Form 1040.

By following the above advice you will make your tax filing “less taxing”, and make sure that you pay the absolute least amount of federal, state and local income tax possible for your unique situation for 2009.

TTFN

HAPPY NEW YEAR!

HAPPY NEW YEAR !!!

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WELCOME TO 2010 !!!

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Bob Flach - The Wandering Tax Pro

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A WHITE NEW YEAR'S EVE

My window on Thorne Street (not exactly Main Street) reveals that it is snowing as the end of 2009 approaches. A White New Year’s Eve!

This has indeed been a sad year for me and many friends and clients.

My mother went to her final audit in April. Three long-time friends and clients also lost their mother in 2009. One long-time friend and client lost his wife and another long-time friend, who as a result became a client, lost her husband. With one exception I knew well the departed relatives.

Let us hope that 2010 will be a better year for all – although it looks like my father will be joining my mother soon. It will certainly be a year of changes for me.

As is my custom I will be typing W-2s today. I had hoped to have most of them done on Christmas Eve, but I ran out of ribbon and did not have a replacement on hand. It has been difficult finding a compatible ribbon online and at local office supply superstars, but I found one at Office Depot yesterday.

While I did do 3 years in Times Square in the mid-1970s, I have not been out on New Year’s Eve in 30 years. As another friend and client says, it is “amateur night”.

I will be dining at home on “hors d’oeuvres” – a custom that began years ago when I lived with my “ex-wife” in the “country” – Temptee Whipped Cream Cheese and Ritz Crackers, pigs in a blanket, and pizza rolls. I will, as usual, be celebrating with Nosey (my cat), Jack (Daniels), Dick (Clark) and some cheap cigars!

This year I will add to the list Kenny (Rogers), as I will be watching a rerun of one of the Gambler mini-series (#4 – my favorite because it features guest spots by fictional tv Western characters from the 50’s-60’s) on the Encore Westerns cable channel before joining Dick.

I know where one of my clients will be tonight. The same place he is every New Year’s Eve. He is the person who operates the machine that actually drops the ball at One Times Square in NYC at midnight. As I “tweeted” earlier today – who else, except for Congress, would be paid for regularly “dropping the ball”?

I hope you have a “successful” New Year’s Eve and a “less taxing” 2010!

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

Welcome to the final BUZZ of 2009.

* I liked TAXGIRL Kelly Phillips Erb’s Christmas Day tax quote –

“Christmas is the time when kids tell Santa what they want and adults pay for it. Deficits are when adults tell government what they want and their kids pay for it.” - Richard Lamm

* TAX PROF Paul Caron reports on the release of the IRS Fiscal Year 2009 Enforcement Results, and tell us “IRS Releases 10-Year Enforcement Data: Business Audits Down, Individual Audits Up”

* The PTB (powers that be) in New York State are real MFPs (this does not stand for “mighty fine people!”).

First they decide to no longer accept Copy 2 of Form W-2 attached to the state income tax return as verification of withholding. They require us to fill in the information from each W-2 on a Form IT-2, which wastes a lot of my time during tax season.

Then they decide not to send out tax forms and instruction packages to taxpayers and make me pay to get NY state tax forms.

And then they decide that pretty much any tax preparer who prepares NY State income tax returns must pay them $100, regardless of where they are located and even if they have absolutely no physical presence in New York State.

Now fellow tax blogger John Sheeley has told me, via a “tweet”, that NY State is no longer mailing out Form 1099-G - Statement for recipients of State Income Tax Refunds – to report the amount of NY state refund received in 2009. You have to go online to download the form. More time wasted.

The MFPs!

* Trish McIntire, and other sources, has reported what she calls “Bad News Before Christmas” at OUR TAXING TIMES. This is one area where Trish and I disagree – because I consider it good news.

Trish tells us –

“On December 24th, Pacific Capital Bancorp announced that they want to sell their tax business to a private equity fund because regulators have barred it from originating any Refund Anticipation Loans in 2010. The thrust of the article is the impact on Jackson Hewitt which relies on Pacific Capital's tax business (Santa Barbara Bank and Trust) for 75% of their RAL funding. Beside Jackson Hewitt, SBB&T has a large part of the independent RAL market.”

I join many consumer protection organizations in saying that Refund Anticipation Loans are bad and that tax preparers should not be allowed to offer such a product. See my posts “One More Reason to Avoid H+R and Their Ilk” and “Testimony from the Consumer Federation of America”.

God forbid Jackson Hewitt should have to rely on its ability to prepare competent and accurate income tax returns, instead of offering usurious loans, to earn a profit – it would certainly go bankrupt. No great loss if that happens.

I see that fellow tax blogger Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG shares my opinion (great minds do think alike!) –

“While I fully support the right of consenting adults to engage in finance, however foolishly they may do so, I can't help but smile at reports that Jackson Hewitt customers may lose the opportunity to engage in some of the most expensive borrowing out there -- and that the franchise tax prep firm's stock is taking a beating as a result.”

I do somewhat agree with Trish’s point that some tax preparers feel they must offer RALs to clients in order to remain competitive. However if the only reason a taxpayer chooses a tax preparer is because he/she offers RALs, that taxpayer may not be the type of client you want.

The solution to the issue Trish raises is to ban all tax preparers from offering RALs – or better year force RALs to carry reasonable fees and interest rates so that it will no longer be attractive for any bank to offer the product.

* New Jersey taxpayers - be sure to check my post “What’s New for New Jersey State Income Tax For 2009” over at the NJ TAX PRACTICE BLOG.

* The December 23rd edition of THE KIPLINGER TAX LETTER tells us that “a group wants a court to void the tax exclusion for parsonage allowances and the deduction for real estate taxes and mortgage interest that is available to recipients of these allowances”.

Currently the Tax Code allows ministers to “double dip”. The can exclude from federal income tax the parsonage allowance that they are given by their congregation and they can claim an itemized deduction for real estate taxes and mortgage interest that they pay using the tax-exempt parsonage allowance money.

The group appears to be the Freedom from Religion Foundation (protecting the constitutional principle of the separation of state and church and working to educate the public on matters relating to nontheism), and the case, which “will require the district court to uphold or nix the breaks” is Freedom From Religion Foundation v. Geithener, D.C., Calif.

* A while back a visitor to TWTP asked me if I knew of any tax blogs that dealt with Canadian taxes.

If you are still out there I just came across one – CANADIAN TAX RESOURCE (Canadian Tax Help and Financial Planning Resources) - written by a new twitter “follower

* Russ Fox continues to keep us up-to-date on the issue of gambling losses, reporting on a recent Tax Court case in his post “A Loss for the Taxpayer but a Win for Gamblers” at TAXABLE TALK.

The decision upholds the concept that I have discussed in a couple of earlier posts here at TWTP.

While I have also said this in my gambling posts – Russ’s bottom line bears repeating -

“You need good records. By far, the lack of backup documentation is what trips up most gamblers in audits.”

* Over at the Tax Policy Center’s TAX VOX blog Howard Gleckman provides a glimpse of what we have to look forward to tax-wise in 2010 in “2010: Get Ready for a Tax-a-palooza”.

I will be addressing this topic in an upcoming post here at TWTP

* Kay Bell tells us that “Girls Gone Wild Founder Sues IRS” over at DON’T MESS WITH TAXES.

Arsehole Joe Francis committed tax fraud. As Kay reminds us – “This fall, Francis pleaded guilty to two misdemeanor counts of filing false tax returns. The plea deal also mandated that Francis pay back taxes and interest totaling $249,705, as well as a $10,000 fine.”

But he avoided the opportunity to play “who’s got the soap” in a prison shower because “a judge sentenced him to the time he had served while waiting for resolution of the case”.

The IRS apparently froze Francis’ bank account to make sure they would get the approximately $260,000 to which they are entitled, and which Francis has apparently not yet paid – so he is suing the IRS claiming they are “just irked that he got off so lightly in connection with the false returns case”.

He did the crime, but didn’t have to do the time. He should pay-up and get it over with.

TTFN

PS – Best wishes for a “successful” New Year’s Eve!

2009 - THE TAX YEAR IN REVIEW – PART II

Congress passed three (3) tax Acts in 2009 –

• The American Recovery and Reinvestment Act of 2009 in February, referred to as “the most sweeping economic recovery package in the nation’s history”.

• The Consumer Assistance to Recycle and Save Act of 2009 in June was not really a tax Act, but it did create the temporary “Cash for Clunkers” program. The program was extended by Congress in August.

• The Worker, Homeownership, and Business Assistance Act of 2009 in November, which extended and expanded the First-Time Homebuyer Credit originally created in 2008 and enhanced in the American Recovery and Reinvestment Act.

The House passed the Tax Extenders Act of 2009 in December, which extended the usual popular but temporary tax breaks through December 31, 2010, adding the limited additional standard deduction for real estate taxes (God, and Congress, only knows why), but omitting the annual dreaded Alternative Minimum Tax (AMT) patch, but the Senate did not pass an “extenders” bill in 2009. The House also passed an Estate Tax bill, but again the Senate was too busy to get to it. Senate leaders have promised to deal with these issues in early 2010.

Both the House and the Senate passed separate health care “reform” bills before adjourning for the year. But no more action can be taken until Congress returns in 2010.

I like Kay Bell’s description of Congressional behavior in 2009 from her Christmas Day post “Congressional Tax Wrap-Up” –

“Overall, the House did a better job of at least getting something done. Whether you like or dislike what Representatives did, at least they passed legislation.

The Senate, on the other hand, got bogged down in bitterly partisan battles that slowed every piece of legislation, with many measures coming to a grinding (halt).”

The Worker, Homeownership, and Business Assistance Act (WHABAA) included a provision that requires any tax return preparer who prepares more than 10 individual income tax returns during a calendar year (this includes returns for estates and trusts) to electronically file all such returns. This requirement is effective for tax returns filed after December 31, 2010. So it does not apply to the upcoming tax filing season. It will start in 2011 for the filing of 2010 returns.

While it was a common belief among tax professionals that such a requirement was coming, it was not expected to come so soon. We all thought that this mandate would be included in the eventual legislation that would require the IRS regulation of all paid tax preparers.

I have no problem with filing returns electronically. However if I am required to do so I must be able to do so free of charge, without having to buy expensive and flawed tax preparation software, via the IRS website, similar to NJWebFile, and clients must be able to “opt-out” of electronic filing if they so choose.

NATP has reported that – “At this time, there is no guidance on how clients can 'opt out' or otherwise file their returns on paper”. There is no information other than the basic requirement. We will need to wait for the IRS to issue proposed regulations.

In June IRS Commissioner Douglas Shulman announced that “by the end of 2009, he will 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”.

The topic of regulating tax professionals was nothing new. As fellow tax blogger Trish McIntire pointed out, “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.”

The IRS held a series of public forums on the issue, soliciting testimony from a wide variety of sources, including the NATP, NSA, AICPA and ABA membership organizations, commercial and independent tax preparers, tax preparation software companies, federal and state government agencies, and consumer agencies. I reported on the testimony at these forums here at TWTP (do a search for “Testimony” above) The Service also put out a call for comments from the public, and I responded (see my post “Dear IRS”).

Several states also took up the issue of regulating tax professionals. In Maryland “all persons offering individual tax preparation services must become licensed with the State Board of Individual Tax Preparers by June 1, 2010”.

In New Jersey State Senator Barbara Buono of Edison has a bill calling for the licensure of paid tax return preparers throughout the state. This bill establishes licensing requirements for tax preparers that prepare only individual income tax returns (i.e. NJ-1040 and NJ-1040NR). It exempts Circular 230 practitioners, presumably CPAs, EAs and lawyers, requires 60 hours of up-front education, passing an exam, a high-school diploma or equivalent (first time I have heard of this as a requirement for licensure), but, unlike other recently-introduced state licensing bills, does not allow for “grandfathering” of long-time preparers. The NJ legislature is currently out of session, and the proposed bill will not be forwarded to the appropriate committee until it reconvenes in 2010.

The DFBs (while the clean version is Damned Fool Bureaucrats, that is definitely not what I mean) in Albany passed a law that now requires all individuals who will prepare New York State individual income tax returns in 2010 as a tax return preparer, or help to issue or administer a refund anticipation loan or refund anticipation check, to register with New York. Tax preparers who were paid to prepare 10 or more New York State individual tax returns in 2009 and will prepare at least one personal income tax return in 2010 must also pay a $100 fee. This applies regardless of where your practice is located, even if you have absolutely no physical presence in the State of New York. A tax preparer that lives and works in Alaska will have to register and pay the fee if he/she prepares New York State individual income tax returns!

Certified Public Accountants and attorneys, regardless of location, Public Accountants (PA) currently licensed in New York State, employees who are preparing tax returns under the direct supervision of a CPA, attorney or PA licensed by New York State, and volunteer tax preparers are exempt from registering and paying.

As far as I know none of the membership organizations, like NATP, NSA or NAEA, plan to contest in court New York’s authority to charge a fee to preparers with no physical presence in the state because it would be too expensive, although the NY State Society of Enrolled Agents is campaigning to have New York based EAs exempt from the law.

Speaking of New York State, this year it decided not to send out forms to resident or non-resident filers – forcing me to purchase bulk copies. I am still mad at NY for making me write the information from W-2s on its IT-2 form instead of just attaching a copy of the W-2 to the return, as every other state and the IRS does.

As for my practice, I ended the season with 32 federal GD extensions filed, and 2 state returns waiting for additional information. About 2/3 of the GDEs were either specifically requested by clients who needed more time to get their “stuff” ready, or returns that were not “in my hands” by March 31st, or returns that needed more information to properly complete. A dozen were received by March 31st, but either arrived during the last week of March or close thereto.

I made it a point this season to finish all returns received in February, for which I had all the information necessary to complete the returns, before beginning any of the returns received in March. I completed returns as they were received, instead of putting off more involved ones until the end of the season and then finding I had to file a GD extension because I did not have enough time to properly devote to them. I finished “red-filed” (need more information) returns as soon as the missing information became available, so there were no returns “hanging over my head” throughout the season. And I strictly enforced my “read my lips – no new clients” policy this year, although I did accept two “lost lambs” back into the fold.

While the filing of federal returns went relatively smoothly, it was “déjà vu all over again” with the NJ Division of Taxation this year! Back in 2006 all of my clients whose 2005 NJ-1040 I had filed via NJWebFile with a balance due, and who had paid the balance due by the April deadline using the payment voucher that NJWebFile had provided, were billed by the NJ Division of Taxation in September for the tax they had already paid plus penalty and interest. It seems that the NJDOT applied the 2005 payment to tax year 2004.

Guess what? It happened again this year! NJDOT applied the payments for all of my clients for whom I filed a balance due 2008 Form NJ-1040 via NJWebFile were billed for the tax they had already paid in July and August.

This time I was prepared. I contacted a person at NJDOT who had spoken at the NJ-NATP January seminar and reported the problem. He was very helpful and the matter was promptly resolved. I even got the NJDOT to issue letters of apology to my clients!

I also emailed the Executive Director of NJDOT, Cheryl Fulmer, about the problem – and, to my complete surprise, she promptly responded! She explained what had happened -

“It seems that neither the software vendor nor my staff realized that the scan band had not been corrected to reflect the new tax year. The consequence was payments being applied to the prior year. I've been assured that this error will not occur again, we hope.”

You can be sure that I will not be filing any balance due 2009 Form NJ-1040s via NJWebFile in 2010!

Such was the tax year in review. Did I forget anything important?

TTFN

2009 - THE TAX YEAR IN REVIEW – PART I

As we count the days until the end of 2009 it is once again time to look back on the year in taxes. .

..
Luckily Congress had passed its “extender” bill early enough in 2008 so that there were no unnecessary delays in processing income tax returns, as there had been in past years. We must be thankful for small favors.

The last few years Congress has provided us with special tax “gimmicks” which have required those who do not normally file a tax return to do so in order to get a special refund or rebate. This year’s “gimmick” was a “second chance” at last year’s George W Bush “stimulus” rebate fiasco via the refundable “Recovery Rebate Credit”.

The rebate checks sent out in 2008 were based on information reported on the 2007 tax return. If an individual or couple’s situation changed for 2008 – i.e. the birth of a child, a reduction in Adjusted Gross Income, or an increase in taxable income that resulted in a positive tax liability – it was possible to add an additional rebate amount in the “Payments” section of the tax return and either increase the 2008 refund or reduce the 2008 balance due. I had several clients who were able to take advantage of this “second chance” for all of the named reasons.

Last year an IRS representative reported that the economic “stimulus” rebate check program had overwhelmed every aspect of the Service. Because of the rebate checks everything that would normally have taken the IRS 60 days would take 120 days. It appears that there is still some “hangover” from the rebate mess. Almost every inquiry I sent to the IRS in 2009 regarding a client return or issue still received as the first response, on average 2 months later, a form letter stating that the IRS needed more time to research the issue and that they would get back to me in 45 days. When the 45 days had passed a second letter arrived saying exactly the same thing!

In a 2008 guest post at another tax blog I said of the Economic “Stimulus” Rebate -

"I can guarantee that after all is said and done when I write about the affect of the 2008 economic ‘stimulus’ checks I will be once again saying, ‘These checks cost the IRS a fortune, created tons of confusion, and resulted in millions of errors on 2008 tax returns! And it is doubtful that they did anything to stimulate the economy'."

A 2009 TIGTA report on “Evaluation of the Planning, Computation, and Issuance of the Recovery Rebate Credit” proved me right. According to the report summary –

“However, taxpayer confusion in calculating the recovery rebate credit and programming errors presented significant challenges. Despite education and assistance efforts by the IRS, taxpayer confusion in computing the recovery rebate credit resulted in a significant number of errors. Of the 114.3 million tax returns processed as of April 17, 2009, 16.7 million (14.6 percent) included at least 1 error that needed to be addressed by the IRS Error Resolution function (8.4 million had a recovery rebate credit error).”

And –

“We identified 399,099 tax returns (0.4 percent) for which our calculation of the recovery rebate credit and the IRS’ calculation did not agree. Our analysis indicated that 258,850 taxpayers did not receive $84.6 million to which they were entitled and 140,549 taxpayers received $60.6 million more in credits than they were entitled to receive.”

And one more –

“Finally, legislation did not provide the IRS with math error authority {allowing the IRS to systemically disallow certain taxpayer claims at the time a tax return in processed – rdf} to prevent individuals without valid Social Security Numbers from receiving the recovery rebate credit. . . As a result, the IRS erroneously provided more than $27 million in recovery rebate credits to more than 44,000 taxpayers who did not have a valid Social Security Number.”

TIGTA did give the IRS credit for doing a good overall job – “the IRS successfully planned for the implementation of the recovery rebate credit”. The Service certainly did rise to the occasion and do a relatively good job in dealing with the excessive job thrust upon it without much notice. The problem is, as usual, with the cafones in Congress who initiated the rebate checks, and the recovery rebate credit, in the first place.

Another kind of “gimmick” for 2008 returns was the refundable “First-Time Homebuyer Credit” of up to $7,500. It was not really a true credit but really an interest-free loan, as it had to be paid back over an extended period of time beginning in two years. I had four clients who took advantage of this “gimmick” – two on the same property (non-married co-owners). The credit was enhanced and improved effective for new home purchases which closed between January 1 and November 30, 2009 in February, and expanded and enhanced again in November, but those who purchased in 2008 were stuck with the old rules.

I also took advantage of the weird one-time only additional standard deduction of $500 or $1,000 for real estate taxes paid on quite a few returns. As I predicted in most cases this added deduction benefited retired taxpayers.

In March Obama appointed Paul Volcker, of the President's Economic Recovery Advisory Board, to head a panel that will make recommendations for reforming our tax laws. The panel was charged 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." It was scheduled to make recommendations to the President by December 4th, 2009.

You may recall the last time we had a Presidential 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 Dubya’s short attention span, because the Panel did not suggest what he wanted to hear, or because more important things began to occupy him, the recommendations were totally ignored by the President and the Panel just faded away.

The Volcker Panel called for suggestions and recommendations on how to “reform” the Tax Code from the public, and I answered the call.

Days before the December 4th deadline, Volcker reported that the panel needed more time to review the over 500 public comments that had been submitted. So we will have to wait until 2010 to hear the panel’s report. Let’s hope that they have some good ideas, and, if so, that they will be listened to and acted upon.

It appears that, according to the Tax Foundation, TAX FREEDOM DAY 2009 - April 13th - occurred before TAX DAY 2009 (April 15th). Unfortunately I was too busy to stop and celebrate. It was eight (8) days earlier than 2008, when TAX FREEDOM DAY was April 21st, and two weeks earlier than 2007. There are two reasons for the earlier celebration - (1) the recession has reduced tax collections even faster than it has reduced income, and (2) the stimulus package includes large temporary tax cuts for 2009. Nevertheless, Americans still pay more in taxes than they do on food, clothing and housing combined.

New Jersey’s TAX FREEDOM DAY was April 29, 2009 – more than 2 weeks after the national day. NJ is #2 (appropriate) on the list of most taxed states – behind Connecticut, whose TAX FREEDOM DAY was only one day later.

As I had said in last year’s tax year in review post by the fall of 2008 the economy had become a real mucking fess, with banks and brokerages failing left and right and bankruptcy threatening the big three automakers. There were calls for a second “stimulus” package, which was passed in 2009.

While one could say there has been progress, 2009 will end with the economy still “shaky.

To be continued . . .

TTFN

FYI – Part II will be posted tomorrow (Wednesday). The BUZZ will appear on Thursday this week. There will be no BUZZ this coming Saturday.