THE REPORT ON TAX REFORM OPTIONS

In a meeting yesterday afternoon (Friday, August 27th) the President's Economic Recovery Advisory Board (PERAB) released its report, summarized their concerns, and voted to send the report to President Obama for review. This is the report that was originally supposed to be presented to BO by December 4, 2009.

Unlike George W’s earlier panel, which made specific recommendations for serious tax reform, the PERAB was unfortunately limited by some specific instructions from the White House. Although, as the preface to the report states, “some members of the PERAB believe that such {broad tax} reform will be an essential component of a strategy to reduce the long-term deficit of the federal government”, the panel made no recommendations at all. The report merely outlines general options for change and indicates both the benefits and disadvantages of each option.

Here is how Howard Gleckman excellently describes the panel’s report in his post “Obama’s Tax Reform Panel: A Missed Opportunity” at TAX VOX, the Tax Policy Center blog -

“You buy what you think will be a state-of-the-art GPS device to give you driving directions. The gizmo was designed by a committee of the nation’s smartest highway engineers. But instead of telling you to turn right now, the e-voice says something like this: ‘You could turn right now. It would be better than going straight, which is a really bad choice but, on the other hand, the road might be a little bumpier and besides, you could also get where you want to go by turning left three blocks from here. So I’m not actually recommending what to do.’”

Howard goes on to explain the missed opportunity –

“Obama might have used this exercise to jump-start a debate over fundamental tax reform. Instead, the report does nothing to fill the policy vacuum that is being filled by an argument over what to do about the decade-old Bush tax cuts."

PERAB was originally created by BO back in June of 2009. It was charged with considering ways to simplify the tax system, improve taxpayer compliance with existing laws, and reform the corporate tax.

The Board was told to exclude options that would raise taxes for families with incomes less than $250,000 a year. According to the report’s preface – “We interpreted this mandate not to mean that every option we considered must avoid a tax increase on such families, but rather that the options taken together should be revenue neutral for each income class with annual incomes less than $250,000.”

And, as per the original press briefing that introduced the Board back in June of 2009, the PERAB was also instructed to examine “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.”

The meat of the report begins with a simple, but obvious, statement – “The tax code is complex”.

The introduction to the Simplification Options section goes on to explain why, including the following paragraph (the highlight is mine) –

“The complexity of the tax code is partly the result of the fact that new provisions have been added one at a time to achieve a particular policy goal, but with inadequate attention to how they interact with existing provisions. This results in duplicative and overlapping provisions, multiple definitions of concepts like income and dependent children, differences in phase outs, and differences in the timing of expiring provisions. Between 1987 and 2009, the instruction booklets sent to taxpayers for the Form 1040 increased in length from 14 pages to 44 pages of text. The tax code has become more complex and more unstable over the last two decades in part because legislators have increasingly used targeted tax provisions to achieve social policy objectives normally achieved by spending programs. There have been more than 15,000 changes to the tax code since 1986, and a current JCT pamphlet lists 42 pages of expiring provisions.”

The report covers the three areas it was formed to investigate – simplification, compliance, and the corporate tax. The Simplification Options cover Simplification for Families, Simplifying Savings and Retirement Incentives, Simplifying Taxation of Capital Gains, Simplifying Tax Filing, Simplification for Small Business, and The (dreaded) AMT.

Most of these options concern simplifying and consolidating various similar tax credits and benefits. The report points out, for example, that – “The tax system includes at least 18 different provisions benefiting taxpayers with educational expenses.”

Simplification Options include-

* Consolidate the dependent exemption, standard deduction, and Child Tax Credit into a “Family Credit” available to all taxpayers, and replace the EITC and refundable portion of the Child Tax Credit with a “Work Credit”, eliminate the dependent Care Benefit and replace tax benefits for higher education with a generous extended family credit for full time students under age 22.

* Replace the large number of subsidies that exist to help taxpayers pay for current education expenses with one or two alternatives.

* Simplify the “Kiddie Tax” by raising the standard deduction for dependents and eliminating the interaction of the dependent’s income with a parent’s tax rate and with siblings’ income.

* Eliminate the Head of Household filing status entirely and require all unmarried taxpayers to file as Single.

* Eliminate the ability of divorced or separated parents to exchange the dependency exemption.

* Consolidate all employer-based defined contribution plans into one work-based retirement account, all individual plans into one individual retirement account, and all special purpose savings accounts (i.e. ESA, HSA) into one account for non-retirement savings.

* Allow all workers to contribute to either or both an IRA and an employer-sponsored plan irrespective of income (thereby eliminating nondeductible IRAs).

* Eliminate minimum required distribution (MRD) rules for individuals with retirement assets below an income threshold.

* Simplify the calculation of Social Security benefits.

* Require the use of the Average Cost Method to determine cost basis for the sale of all mutual fund shares.

* And it seems everything old is new again – Replace the various capital gain tax rates with a 50% capital gain exclusion.

The report also brings up BO’s proposal of “The Simple Return”. Taxpayers would be sent a pre-filled return with the information from the IRS matching program and the previous year’s return and a preliminary calculation of tax liability. An alternative would be to allow taxpayers and preparers to download the information from the matching program. I have always been against this idea – see my post “A Very Bad Idea”.

Regarding the dreaded Alternative Minimum Tax (AMT), option 1 in the report is to Eliminate the AMT.

Many of the options discussed in the report are similar to or the same as recommendations of Dubya’s panel, and the report so states.

While there is really nothing new in this report or, due to the restrictions given to the Board by BO, any serious suggestions for reform, it should be reviewed seriously by the Administration and Congress, and not just filed away somewhere for posterity.

In a letter to the Treasury Secretary the committee said, "The effort to reform the tax code is noble in its purpose, but it requires political willpower." Perhaps this was a reference to the fact that the recommendations of Dubya’s 2005 tax reform panel were totally ignored.

Congress must do something to reform the mucking fess of a Tax Code in 2011!

FYI – I (Robert D Flach of Taxpro Services Corporation) am listed in the Appendix of the report as a source of public comment presented to the Board.

TTFN

I MUST DO WHAT MUST BE DONE

Enough is enough. I cannot put it off any longer. I must conquer my bout with “mañana” disease and avoid looking for excuses to put off finishing the GD extensions!

While I have unsuccessfully attempted to do so in the past – this time I truly must lock myself “behind closed doors”, hide myself away from potential distractions and “get ‘er done”!

So I will be unavailable and inaccessible for the rest of the week. This means I will not be “wandering” the internet for BUZZ, and I will not be checking and responding to emails, and, as my Vonage phone system is still not properly connected, I will not be recording phone messages, and I will not be watching HGTV or the Travel Channel.

There will be no posting at TWTP (no time for re-runs or guest posts), which means no Wednesday or Saturday BUZZ installments, this week. I will attempt to “catch up” next week.

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I see that Joe Kristan has “returned the volley” in our online discussion of the new tax return preparer regulation regime (click here) – but my response will have to wait until I have the time to properly and carefully prepare one.
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Quoth the tax pro, “NEVERMORE!” I vow that this will never happen again. There will be some changes to my policies and practices next year to make sure that all returns, with only minor exceptions (i.e. those waiting for K-1s that will not arrive until September), are done before the end of April.

Thanks for your patience and understanding. “Talk” to you next week.

TTFTW

HE TOOK THE WORDS OUT OF MY MOUTH

Since this is Sunday I am allowed to post on “Anything But Taxes”. Here is a “reprint” of my Friday post over at the NJ TAX PRACTICE BLOG -

I realize that this post may not be strictly tax-related – but I could not help but pass along the great insights of Bob Ingle’s POLITICS PATROL column from Wednesday’s ASBURY PARK PRESS.

Titled “Teachers Unions Ignore Lessons of L.A. Study” the column discusses the findings of a report that appeared in the LA Times.

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According to Bob – “The newspaper obtained seven years if math and English test scores from the school district and rated teachers on their students’ progress on standardized tests from year to year, then compared each student’s performance with his or her past years.”

The report concluded –

“Most districts act as though one teacher is about as good as another. As a result, the most effective teachers often go unrecognized, the keys to their success rarely studied. Ineffective teachers often face no consequence and get no extra help.”

It goes on to say –

“In Los Angeles, and across the country, education officials have long know of the often huge disparities among teachers. They’ve seen the indelible effects, for good and ill, on children. But rather than analyze and address these disparities, they have opted mostly to ignore them.”

Bob also quotes Jeanne Allen, president of the Washington-based Center for Education Reform, who responded to the report by saying –

"Path-breaking analysis ... confirms without a doubt that teacher effectiveness is not related to their tenure, seniority or pay grade. Great teachers help their students achieve at significantly high rates as a result of knowing the subjects they teach.”

And –

"The new data underscores why policymakers must implement reforms that make teacher quality the single factor that drives pay and contracts. The union rejects the conclusions ... saying that the data ignores the ‘complicated and creative process of teaching’. Fortunately, the public now understands that teaching isn't about process at all, but about producing real education value in our schools."

Bob takes the words out of my mouth when he sums up the problem here in New Jersey (the highlight is definitely mine) –

“When you have a school system dominated by teachers' unions, like the New Jersey Education Association, the NJEA, you have misplaced emphasis. The NJEA is like any other industrial union. It is not about educating kids, it's about perpetuating itself and collecting dues to buy off lily-livered politicians more interested in getting re-elected than education.

The union doesn't like merit pay based on performance because it maintains all teachers are equal at the same experience and education level. That's absurd on its face. Tenure also is a problem. Guaranteed job protection after three years practically assures a job for life. Job security and pay then are based on seniority, not performance.”

The NJEA’s domination of NJ’s school systems is one reason why we have the highest property taxes in the country. Thank God Gov Christie is not afraid of the NJEA and is apparently willing to take it on.

It is not just the NJEA. The primary goal and underlying motivation of any organism is to survive – to continue to exist. This is true for an organizational entity as much as it is for a biological entity.

There was a time in our history when unions were necessary and important. But with all the local and federal labor laws and protections on the books today the continued need for unions is in question, and they can often do more harm than good to the economy. However, a union is an organizational entity and will never say, “We have accomplished our purpose of protecting the American worker and can now dissolve.” The number 1 goal and motivation of a union is not to protect and serve its membership, or to benefit society, but to continue to exist.

Similarly, the main goal and motivation of any politician at any level is not to protect and serve its constituents, but to get re-elected.

In defense of unions my labor lawyer friend pointed out, and rightfully so, that there is nothing wrong with a union asking for the moon for its members, whether or not it is deserved, feasible, practical, or appropriate. In theory the purpose of the union, second to continuing to exist, is to get as much as it can for the worker, without regard to the consequences to “management” or shareholders or, in the case of a municipal, state or federal employee union, the general taxpaying public.

Frankly nothing can be said in defense of politicians.

TTFN

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

* A great post from TAX MAMA (aka Eva Rosenberg) that points out “The Sheer Genius of Politicians” (the highlight is mine) -

“In a bid to stem taxpayer losses for bad loans guaranteed by federal housing agencies Fanny Mae and Freddy Mac, Senator Bob Corker (R-Tenn) proposed that borrowers be required to make a 5% down payment in order to qualify.

His proposal was rejected 57-42 on a party-line vote because, as one Senator explained, ‘passage of such a requirement would restrict home ownership to only those who can afford it.’

I can’t add anything to this.”

What a concept – buying only what one can afford!

A major reason for the mucking fess of our economy is that Americans purchased homes with only 5% down. Need I say it - Congress is full of idiots.
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* The Tax Foundation has updated its 2011 INCOME TAX CALCULATOR so that you can calculate your anticipated 2011 tax liability under all of the following scenarios –

1. All the tax cuts expire completely at the end of this year;
2. All the tax cuts are extended into 2011 or made permanent;
3. Obama's budget is adopted, which would allow the tax cuts to expire for families making over $250,000 a year (singles making over $200,000), extend some stimulus measures and impose new limitations on itemized deductions; and
4. Congressional Democrats' recent proposal is adopted, which is similar to the Obama plan but does not extend stimulus measures or include additional limits on itemized deductions.

* The TAX GIRL has put out an open call for guest posts in “Call for Guest Posts: Bush Tax Cuts”.

Kelly explains – “As last year, I’ll be turning over the reins at taxgirl.com to my readers for the last week in August. This year, I’m offering you the chance to speak your mind about the proposed Bush tax cuts.

I’ll take guest post submissions for publication the week of August 29. You can take any position that you want but the post must focus on the Bush tax cuts in some way. Your post can include throwing them out, keeping them all, keeping them only for the middle class, federal estate tax repeal, marriage penalty provisions, etc., but anything that’s clearly meant to be an “issue piece” about something other than taxes (i.e. abortion, gun control, same sex marriages) will be disregarded.”

Check out her post for the guidelines.

* The Tax Foundation calculates TAX FREEDOM DAY each year. And Americans for Tax Reform calculates COST OF GOVERNMENT DAY. TAX GIRL Kelly, writing FOR WALLETPOP, tells us in “Cost of Government Day 2010: How Much of Your Taxes Go to Run the Country?” that -

“Aug. 19 marks this year's "Cost of Government Day." The date, calculated by the Americans for Tax Reform, signals when the average American finishes paying off his or her respective share of federal, state and local taxes, and the cost of implementing government regulations. This year, that means a whopping 231 days -- or almost 2/3 of the year -- are spent paying to keep the country going.”

* I recently came across “How Will Healthcare Reform Affect MY Taxes?” at PRO-TAX that seems to do a good job of answering the question.

* The TAX FOUNDATION tells us that TN, CA, AZ, LA & WA have highest combined state & average local sales tax rates in US. Want to learn where your state ranks? Check out the Foundation’s Fiscal Fact #240 - “State and Local-Option General Sales Tax Rates”.

FYI, New Jersey is #19 (total = 7%; there are no local sales taxes – yet).

* Fellow tax pros may want to check out my post “Update on NYS Tax Preparer Registration” over at the NJ TAX PRACTICE BLOG.

TTFN

THE COST OF TAX RETURN PREPARER REGISTRATION

The IRS had previously announced that the registration fee for tax preparers under the new regulation regime would be $50.00, which would go to the IRS to cover the costs of the program, plus a “service fee”, which would be paid to the outside contractor who would administer the program.

Now they have identified the contractor – Accenture – and announced that the service fee would be $14.25. So the total cost of registration would be $64.25 per year.

Before going any further I must ask why the IRS needs an outside contractor to “administer” the program. I have concerns with an outside profit-making organization being involved with tax administration. I was very much against the IRS using outside collection agencies, which it apparently no longer does.

What is Accenture going to do that the IRS could not do internally – probably better and at less cost (as was the case with collections)?

That said – I would like to address continuing comments, some from legitimate, informed and competent sources, that the cost to the tax preparer of the new regime will cause the cost of tax preparation to materially increase.

My fellow tax blogger Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG, a proven competent and knowledgeable tax professional with sincere concerns about the new regulation, has said in his recent post “Shulman Power Grab To Be Paid for by $64.25 Charge Per Practitioner” that -

“It will also increase the cost of getting a tax return prepared without a corresponding increase in the quality of the work.”

Let’s look at the new requirements from the point of view of my one-person tax practice.

I currently prepare about 400 “sets” of returns (a “set” could be anything from a New Jersey homestead rebate application for a senior tenant – a NJ TR-1040 - to a federal Form 1040 and several resident and non-resident state returns) each year. If I am required to pay $64.25 per year to maintain my status as a “Registered Tax Return Preparer” that works out to an additional 16 cents per set.

I will also be required to take a one-time initial competency test, and pay a one-time fee to do so. The cost of taking the test is currently unknown, as the details of the testing are not yet worked out. As I said this will be a one-time fee and I expect it would in my situation work out to less than $1.00 per “set” of returns.

The final requirement of the process is 15 hours of annual CPE credits in taxation. So far this year I have already earned over 25 hours, and I will add 8 hours with the annual NATP year-end tax update in November. I also have another 8 hours of state income tax CPE. I currently earn much more than the minimum 15 hours per year – I expect an average of 24 per year - so this requirement would not add one penny to my annual expenses.

And, as I have said all along, if a serious tax preparer is not already taking at least 15 hours of CPE in taxation per year then he/she certainly should be – regulation or not. Hey – that is just 2 days.

The only additional cost that the CPE requirement may create for me involves the mandatory 2 credits per year in ethics. However, as this may be automatically built in to normal CPE offerings, such as the annual update class, it may not result in additional costs – just less actual tax knowledge for the same money.

I have also said all along that if I am not already an “ethical” tax preparer having to sit through 2 hours of ethics training each year ain’t going to magically turn me honest. At most an ethics update of 1 hour every other or every third year would be much more appropriate.

So at the very most I may increase my fee per “set” of returns by $1.00 per year, which would more than cover the added costs to me of the new regime. Big whoop - hardly a "material" increase!

Bigger firms with a hundred of so tax preparers on payroll will have much more additional costs – but these firms have many, many more clients than I do to spread the costs amongst. So I see no real problem here.

I would like Joe, and others who feel the same way, to give me real specifics of how the new regulation regime will add substantial costs to a tax preparation practice.

Joe says that the increased cost will not come with a corresponding increased qualify of service. If a tax preparer must spend more money each year on CPE, which would result in an increased fee, then one would expect his/her tax knowledge to be enhanced, which would certainly benefit the client.

What Joe does get right in his post is his bottom line. Here we have always agreed.

“The only way to really improve the quality of tax return preparation is to drastically simplify the Byzantine tax law. That's not in the proposed regulations.”

As an afterthought aside – it may seem contradictory that I accept an additional $64.25 fee to be regulated by the IRS but am vocally against paying New York State $100.00 per year to be able to continue to prepare NY resident and non-resident individual income tax returns.

The comparison is clearly apples and oranges.

The IRS regulation regime is a clear attempt to make sure individuals who prepare federal income tax returns (except for CPAs and attorneys) are minimally competent and keep up-to-date on federal tax law. This benefits tax administration, the individual taxpayer client, and the tax preparer. The registration and testing fees are used to administer the program.

The State of New York extortion of tax preparers has been instituted solely for the purpose of raising money for the State Treasury. It involves registration only. There is no concern that those who register are competent – no testing or CPE requirements or any other standards for registering preparers. And the State of New York oversteps its authority by imposing the fee on all tax preparers – even those who have absolutely no physical presence in the State of New York. A tax preparer whose office is located in Alaska, who never sets foot outside of the state of Alaska, must pay NY the $100.00 fee if he has clients who have moved to Alaska from NY during the year or who otherwise need to file non-resident NYS income tax returns.

The NYS annual registration fee benefits only the NYS Treasury. It does not provide any benefits whatsoever to New York taxpayers or to the tax preparers who are forced to pay the extortion.

REAL ESTATE IN AN IRA

I recently received an email from a long-time client, who is retired, asking whether he can buy an investment property with funds from his IRA.

According to the Tax Code the only thing that you cannot invest your IRA money in is “collectibles”. Real estate is not considered a “prohibited investment”.

IRS Publication 590 (Individual Retirement Arrangements) tells us -

“If your traditional IRA invests in collectibles, the amount invested is considered distributed to you in the year invested. You may have to pay the 10% additional tax on early distributions, discussed later.

Collectibles. These include:

• Artworks,
• Rugs,
• Antiques,
• Metals,
• Gems,
• Stamps,
• Coins,
• Alcoholic beverages, and
• Certain other tangible personal property.

Exception. Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.”

It goes on to discuss what you cannot do with your IRA (aka “prohibited transactions) -

“Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person.

Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).

The following are examples of prohibited transactions with a traditional IRA.

• Borrowing money from it.
• Selling property to it.
• Receiving unreasonable compensation for managing it.
• Using it as security for a loan.
• Buying property for personal use (present or future) with IRA funds.”

In doing some brief research before answering the email I came across a good article on the subject by Kaye A. Thomas titled “Real Estate in Your IRA: Self Directed or Self-Destructed?” in The Tax Guide for Investors at FAIRMARK.COM. The following is from that article -

“Prohibited transactions:
A prohibited transaction occurs when you interact with your IRA in certain ways. Here are some of the things you aren't allowed to do:

 You can't sell property to your IRA, or buy property from your IRA.
 You can't loan money to your IRA, or borrow money from your IRA.
 You can't use the account, or any part of it, as security for a loan.
 You can't receive goods or services from your IRA, or provide goods or services to your IRA.

You aren't allowed to do any of these things directly or indirectly. That means you can't avoid this rule by having your IRA deal with a company you own, or with a family member. And these are outright prohibitions: they aren't allowed even if you do everything in a fair and reasonable manner.

Violations:
Looking at the list above, you can see how easy it would be to violate the rules if you hold real estate in your IRA. Even if your IRA purchases the property from an unrelated party, you'll have a prohibited transaction if you provide services to the IRA.

Suppose you have your IRA buy a broken-down property and fix it up so the IRA can sell it at a profit. That seems like a great way to add value, but if you personally do the remodeling work, or do it through a relative or a business you own, the IRS may say you've made a prohibited transaction because you're providing services to the IRA.

Suppose you have your IRA buy a rental property. Who is going to find tenants, collect rent and perform other management services? If you do this, or have a related person or business do it, here again the IRS may say you have a prohibited transaction.”

There are other reasons not to own investment real estate in your IRA. Because an IRA is treated as a tax-exempt trust, as I pointed out in an earlier post here at TWTP, like Vegas, “What Happens in an IRA Stays in the IRA”.

A real estate investment held inside an IRA will not allow you to take advantage of the potential tax benefits of –

(a) depreciation deductions,
(b) special lower capital gain rates on the gain from the sale of the property, and
(c) stepped-up basis to beneficiaries.

My bottom line to the client was – I do not recommend buying investment real estate property in an IRA.

Any comments or questions?

TTFN

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

* Right on, sister! Trish McIntire tells it like it is in her post “Please Explain To Me . . .” at OUR TAXING TIMES.

What is she talking about?

“I'm sure most tax people know by now that last week the AICPA conned a bunch of Congress people to send a letter to Secretary Geithner about the upcoming tax preparer licensing.”

All CPA firms – and all CPAs – should be subject to the exact same rules and regulations as any other tax preparer. This includes making all CPAs who want to prepare 1040s, and their underlings who in most cases actually prepare the 1040s, take the same competency test as everyone else and be subject to the same required CPE in federal taxation to maintain their authorization to prepare 1040s!

Unfortunately the AICPA has lots or money to buy, excuse me “lobby”, Congresspersons – so it may get its way. We poor “unenrolled” preparers, and EAs, do not have lobbyists or a pot of money to spread around.

If these Congresspersons are concerned about the ability of the IRS to test so many preparers they should support a “grandfathering” measure and not call on the IRS to do away with the test altogether.

* Robin Bal gives us “Some Amusing Money Quotes For The Weekend” over at FORTUNE WATCH (“money is power”). Here are two that I especially liked -

“I made my money the old fashioned way. I was very nice to a wealthy relative right before he died.” – Malcolm Forbes

A man explained inflation to his wife thus: “When we married, you measured 36-24-36. Now you’re 42-42-42. There’s more of you, but you are not worth as much.” – Lord Barnett.

* Kay Bell breaks the news that “White House Tax Reform Panel Report to be Issued on Aug. 27” at DON’T MESS WITH TAXES. Finally! I wonder if it includes any of my recommendations.

As Kay says – “The board's report has been slower than anticipated, and we can only hope that means its findings will be worth the wait”.

But I tend to agree with Kay’s bottom line – “I don't really expect much to come of their findings”.

* In case you are interested ATLANTIC.COM lists “The Net Worth of the U.S. Presidents: Washington to Obama”. The authors have “calculated the net worth figures for each in 2010 dollars” so the comparison is apples to apples.

And - “Because a number of presidents, particularly in the early nineteenth century, made and lost huge fortunes in a matter of a few years, the number for each man is based on his net worth at its peak.”

* Holy withholding! Did you know that Saturday, April 14th was the 75th birthday of Social Security? As a Presidential Proclamation states – “On August 14, 1935, President Franklin D. Roosevelt signed into law the Social Security Act to protect ordinary Americans ‘against the loss of a job and against poverty-ridden old age’.”

For a history of Social Security click here. Click here for a table of the maximum taxable earnings and contribution rates over the years.

* MISSOURI TAX GUY Bruce includes some good items in his weekly Sunday “Reads from Last Week” that I missed in my “wanderings”.

“Understanding Annuities: Why They Should Be Part of Your Financial Plan For Retirement” from SAVING TO INVEST gives a good overview of annuities. I have always disliked this type if investment – but brokers love to sell them because they provide a big commission.

“How Credit Unions Differ from Banks and What It Means to You” at CASHMONEYLIFE does the same with Credit Unions.

You have to go to Bruce’s “Reads” to link to these posts.

* Thinking of starting a business? Check out “Starting a Business Quickly - A Short Checklist” at Jean's Business Law / Taxes: U.S. Blog.

Jean left out the most important item – consult a tax professional!

* Kelly Phillips Erb, the internet’s TAX GIRL, reports that “DC Offers Tax Amnesty”.

“Washington, DC is offering a tax amnesty program through September 30 (that means there’s just 44 days left). That means that individuals, and businesses with unpaid DC tax liabilities can receive an abatement of penalties and fees for almost all taxes. Included in the list of eligible taxes? Individual income taxes, business and franchise taxes, sales and use taxes and estate taxes, to name a few.”

Click here to go to the Capital’s amnesty website.

* Steve Trojan, of SMT & Associates, Inc. asks “Do You Qualify for an Offer in Compromise?” at his BETTER BUSINESS BLOG and proceeds to do into detail on how to do so.

The post rightfully advices (the highlight is mine) –

“Don’t be misled by those “pennies on the dollar” promotions that lead people to believe that all tax liabilities can be negotiated. The IRS adheres to their RCP guidelines and generally won’t give the store away. In fact, in the last few years, the IRS’ offer in compromise acceptance rate has been less than 25%.”

* Someone has finally addressed the issue of “regional inequality” in the federal tax rates. EXUBERANT ACCOUNTANT Scott Heintzelman tells us about the “Tax Equity Act – Making Tax Brackets Fair for All?”.

Representative Jerrold Nadler’s proposed legislation, discussed in the post, would "require the IRS to adjust tax brackets proportionally in regions where the average cost of living is higher than the national average".

The post quotes Nadler as saying - "The basic costs of life in the New York region are much steeper than in most parts the country. The reality is that a dollar in New York isn't worth nearly as much as a dollar in Spokane or Knoxville or Topeka. It's time for our tax code to take reality into account when assessing someone's tax liability."

It appears that Scott is not sold on the concept. He correctly points out that “the higher cost of living in large urban areas has a lot to do with higher sales and property taxes” and “Mr. Nadler fails to mention that the federal tax code already benefits high-cost states through the deductibility of state income, local income and property taxes”.

The issue of regional inequity has never been seriously considered. It is certainly something that needs to be included in any discussion of tax reform.

* One can never say this too much - “Keeping Good Records Reduces Stress at Tax Time”! This time it is being said by the IRS. Check out this “Summertime Tax Tip”.

* Bill Perez joins the IRS in “Saying Farewell to the Advance Earned Income Credit” over at WILLIAM’S TAX PLANNING BLOG.

In my 39 tax seasons in the business I do not ever recall coming across the Advance EIC in practice – either with a payroll client or on a W-2 from a 1040 client.

* As I have often “said” in the past – it wouldn’t be a BUZZ without an item from Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG. Joe provides a good lesson in “Why It's Tough to Have ‘Non-Passive’ Real Estate Activities”

* I began this installment of the BUZZ with a post by Trish McIntire of OUR TAXING TIMES. Let me end with another gem from Trish. Her comment policy, as outlined in “Just So You Know”, echoes my comment policy here at TWTP.

TTFN

WHAT IS WRONG WITH AMERICA?

What is wrong with America?

I just heard that reality tv skank Snookie was on the cover of the NY Times and is apparently being offered a book deal and her own tv show!

Why do we continue to reward no-talent self-important brain dead morons for rampant displays of public drunkenness, violence and promiscuity? What is the entertainment value of watching idiots behaving like idiots? Reality tv pieces of excrement like THE JERSEY SHORE, THE HILLS, REAL WORLD, BAD GIRLS CLUB (and the list goes on) have absolutely no redeeming social value.

We are telling youngsters, who are the basic audience of MTV and VH-1, that if you want to be successful and make a lot of money just throw all self-respect out the window and behave like a total arsehole on television.

I wish someone would explain to me why people watch this shit. I would especially like to hear from the idiots who actually watch these shows.

Thanks for letting me rant.

MY WANDERING MIND

I have been thinking about the new 1099 reporting requirements that will take effect in 2012.

I am not worried about anything yet. As I said, they do not take effect until calendar year 2012, for Form 1099s issued in January of 2013. And, considering recent developments, for all we know Congress will either repeal or revise these requirements before then.

I have no problem with issuing 1099s to corporations, which is new. And, although I am not thrilled about having to issue a Form 1099 to those who are paid $600 or more for the purchase of “property” (i.e. supplies and equipment, raw materials and merchandise), also new, it does not bother me. It means more work at year-end and in January – but also more billable hours.

Commissioner Shulman appears to be doing us a favor by exempting payments made by credit or debit card from the 1099 reporting requirements, as these payments will already be reported to the IRS by the banks and credit card companies. While this may actually result in additional work for some small businesses it is not an issue for me.

I use a general ledger software (no longer in available) to record cash disbursements for the very few businesses I do on a year-round basis. I enter payments made via check by vendor name, so the software can easily prepare a report of all payments made during the year to each individual vendor, which I would use to type my 1099s.

Checks to pay for credit card charges are entered using the credit card company (i.e. American Express) as the vendor. I do not record credit card payments by individual vendor name – but thanks to Doug I would not need to do so. Debit card payments are treated as if they were checks written and use the individual vendor name – but DEBIT is entered in the system as the check number, so these payments are easily identifiable on the vendor print-out. Payments made from “petty cash” are also treated the same as checks (with petty cash treated as a separate “checking account” in the system) and include a vendor name when available.

While my general ledger software program is out of print, I expect that most all GL programs operate in basically the same manner. So I do not see a problem for businesses that keep their books using GL software. Those who keep their books by hand, especially very small part-time and sideline businesses, will be the ones who will have an increased burden.

{Hey, just because I do not use tax preparation software to prepare tax returns, and at this point expect that I never will, does not mean that I do not take advantage of general ledger and payroll software – that is something altogether different.}

The only problem I anticipate in my particular situation is in getting the Employer Identification Numbers of each and every vendor that is used by my clients. The best practice is to get the numbers up front early in the year and not wait until December to see who is paid $600 or more and chase after the numbers.

If Congress is sincere about keeping the new requirements in place the easiest thing to do is to require by federal law all businesses to clearly identify their EIN on all invoices and statements beginning in January of 2012, if such a law is at all possible.

These new requirements will change the current situation regarding EINs for sole proprietorships and one-person LLCs that do not have employees. Under current law these businesses do not require an EIN – they can use their Social Security number. However with the need to give the majority of customers and clients a number for potential 1099 filings every one-person business will need to get an EIN.

I expect that I will prepare a standard form letter to vendors requesting their Employer Identification Number that I will send out with the first check payment of the year. The letter will state that subsequent payments for invoices will be delayed until a valid EIN has been provided. I have no intention of dealing with “back-up” withholding on payments to vendors - especially if I am not yet certain I will need to issue a Form 1099.

So, while I do hope that Congress will either repeal or ease the requirements, if they do not – so be it.

My final comment on the issue is a repeat. The fact that Congress now wants to repeal these new requirements is a sad but clear indication of the fact that the cafones in Washington either (1) do not take into consideration, or care about, the added burdens that specific legislation will put on affected parties, or (2) do not actually read the legislation they are voting on. I expect it is a little of both.

TTFN

IT'S NY MUSICAL THEATRE FESTIVAL TIME!

Last week I purchased my Silver Membership ($100.00 + $7.50 service charge) for the 2010 NEW YORK MUSICAL THEATRE FESTIVAL - and booked the 4 shows that come with the membership.

Inaugurated in 2004, “the New York Musical Theatre Festival provides a launching pad for the next generation of musicals and their creators to ensure the continued vitality of America's greatest art form. We discover, nurture, and promote promising musical theatre artists and producers at all stages of development, and inspire a diverse audience through vibrant, accessible, powerful new work.”

I have been attending the festival’s productions for I think 5 years now. As a Silver Member I get 4 tickets to festival musicals, early booking (I get order my tickets one month before the general public), early seating (I skip to the front of the line for pick of the best seats in the house), and member discounts (I save at area restaurants and partner events). Click here to become a member.

If you do not want to join the ticket price for each performance is only $20.00 – the best bargain in NYC!

Here are the shows I will be going to this October -

I GOT FIRED
Book, Music and Lyrics by Keith Varney

Aspiring writer Keith has been a temp in a wacky office’s soul crushing cubicle for six years. When an evil nemesis emerges to squash his coffee-stained hopes and dreams, Keith makes a decision that causes him to get summarily fired… with security escorts and everything! Naturally he retaliates by writing a musical. Based on a true-ish story. Some names have been changed to protect the guilty.

SHOW CHORUS
Book, Music and Lyrics by Donald Gaverick and Mark McDaniels

International pop phenomenon The Symphonic Sensations rose from small town high school show choir to big time show biz success with an explosion of tight harmonies and jazz hands. As the music bio TV documentary “Beyond the Façade” follows their thrilling path to fame and adoration by millions, the highs and lows of celebrity are exposed in this musical comedy exploration of America’s favorite extracurricular activity.

VOTE FOR ME: A MUSICAL DEBATE
by Drew Fornarola and Scott Elmegreen

Tea Parties, oil spills, death panels...and that's just the opening statements! VOTE FOR ME is a musicalized Presidential debate where you pick the winner. Hum along as the candidates dance and sing their way through the three-ring circus of American politics, and cast your vote to help determine the outcome of the show--and the future of America!

THE MOST RIDICULOUS THING YOU EVER HOID
Book by Andy Seiler, Jim Beckerman, and Fred Wemyss; Lyrics by Jim Beckerman and Andy Seiler; Music by Jim Beckerman - Based on the "Flywheel, Shyster and Flywheel" radio series by Nat Perrin, Arthur Sheekman, George Oppenheimer, and Tom McKnight

Who can forget Groucho, Chico and Harpo, those three mirth-makers of the silver screen? No one, that's who! But when the Marx Brothers are let loose in an unsuspecting radio studio, the airwaves will never be safe for detergent commercials again! Featuring all new songs and bursting with mayhem, it’s a laugh-filled, tune-filled, lunacy-filled extravaganza!

TTFN

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

* Joe Kristan reports that “Thirty-one Congresscritters have signed on to an AICPA effort pushing back against the IRS preparer-regulation power grab” in his post “I Hate to Say 'I Told You So'...” at the ROTH AND COMPANY TAX UPDATE BLOG.

However the underlying WebCPA article tells us that –

“House lawmakers on both sides of the aisle, including nine members of the tax-writing House Ways and Means Committee, have asked the Treasury Department and the IRS to exempt non-signing tax preparers at CPA firms — employees of CPA firms who prepare returns but do not sign them — from onerous registration requirements.”

CPAs themselves are already exempt from the substance of the “onerous registration requirements”. So why should those employees of CPA firms who most likely actually do the bulk of if not all the work on preparing client 1040s be exempt? Someone in a CPA firm should verify competence if the firm is going to do 1040s – the actual CPAs certainly do not have to.

Joe and I disagree on the entire topic of tax preparer regulation.

* The NATP weekly email newsletter pointed out that Congress is also concerned about the testing requirement –

“The Congressmen stated that the competency testing requirement may impose unnecessary burdens on the IRS’ limited resources and tax return preparers and ultimately increase taxpayers’ costs for return preparation. They also are not convinced that testing will eliminate some of the problems the IRS has identified within the tax preparation industry and they do not believe the IRS has adequately demonstrated that testing is needed. They feel that once the PTIN and registration system is operational, the IRS will have the resources necessary to track preparers and determine which ones need discipline.”

I continue to believe that most existing unenrolled preparers should be exempt from the competency test via “grandfathering”, but that there should be a competency test for “new” tax preparers. My criteria for grandfathering is – “current unenrolled tax practitioners who have been preparing federal individual income tax returns consistently for five years (60 months), who have earned 50 hours of Continuing Professional Education credit in Individual Income Taxation in the two year (24 month) period prior to registration, and who are not currently prohibited from preparing federal income tax returns because of past bad acts will be exempt from taking the initial proficiency examination.” I would be willing to reduce the 50 hour in 2 years CPE lookback to 30 or 35. I also believe that ALL PTIN holders should be subject to the minimum annual CPE credits in federal income taxation – including CPAs and attorneys.

* Before leaving Joe Kristen let me repeat Joe’s comment at “Charlie Rangel Asks For His Dignity Back” – “Good luck with the dignity thing, Congressman.” Did you see him "defending himself" before Congress? What a fool!

* Back to NATP’s TAXPRO WEEKLY – which also reported that “Actuaries with the Social Security Administration have projected that the social security wage base will remain at $106,800 for 2011”.

* Are you suited for the exciting world of taxes and accounting? Check out the “10 Ways to Know You Were Born to Be an Accountant” at the BEST ONLINE COLLEGE blog.

* As usual some good advice from Trish McIntire in her post “Taxpayer Education VIII” at OUR TAXING TIMES.

* Michael Rozbruch tells us “How to Qualify for Innocent Spouse Tax Relief” over at ASSOCIATED CONTENT.

* I join Kay Bell in her rant against the “Growing Number of Irresponsible Owners Walking Away From Home Equity Loans”.

* TAX GIRL Kelly Phillips Erb posts an interesting question in “Fix the Tax Code Friday: Filing Status” -

“What if there was no such thing as filing status? No single, no married filing separate, no married filing jointly, no head of household, no qualifying widow with dependent child. Just one taxpayer per return. What do you think?”

Be sure to check out my comment.

TTFN

THE 2010 IRS NATIONWIDE TAX FORUM

I returned to the IRS Nationwide Tax Forum at the Hilton on 6th Ave and 53rd St this year, which is finishing up today (Thursday). I did not attend the 2009 Forum.

This time I was smart and instead of trekking from 41st and 8th to the hotel in 95+ degree weather I decided to drive in. It has been a while since I have taken my car to NYC – the last time I did so the toll at the Lincoln Tunnel was $4.00 (it has doubled)! The ride in was smooth and surprisingly traffic-free – it took me about a half hour to go from breakfast at McDonald’s in JC to the Hilton (but leaving at 5PM was a different story – it took me an hour to get home). I parked in the garage behind the Sheraton (52nd-53rd St – across from the Hilton) and was truly lucky to score an early-bird special – it cost only $19 for 9 hours! This is certainly much better than the $50+ I would have had to pay for valet parking at the hotel.

For those of you who are unfamiliar with the Nationwide Tax Forums, each year since 1990 the IRS holds 3 days of educational seminars at 6 locations (Atlanta, Chicago, Orlando, the East Coast, Las Vegas, and California) throughout the US from the end of July through the beginning of September. For the past at least 6 years the East Coast location has been the Hilton in NYC (before NYC it had been in Atlantic City). My first forum was in 2005 in NYC. In 2006 I attended the forum in Chicago, returning to NYC for 2007 and 2008. About 20,000 tax professionals attend the 6 forums.

The educational sessions provide the latest word in taxes and tax administration from the IRS leadership and experts in the fields of tax law, compliance and ethics. Attendees can earn continuing professional education credits, learn about the latest IRS e-Services products and schedule a visit to the Practitioner Case Resolution Room (where each practitioner participant may present one case to IRS decision-makers who can, according to the IRS promotional literature, 9 times out of 10 resolve them “on the spot” – so far I have not taken advantage of this service). The forums also feature a two-day Expo with representatives from the IRS, business, tax preparer membership organizations and CPE providers, and finance and tax software companies offering their products, services and expertise.

While the forum is 3 days long I was able to schedule all of the educational sessions I wanted to attend in the first day. There were topics I was moderately interested in on the other 2 days – but not worth the additional subsidiary costs. As mentioned in my comment on the NATP conference in Austin, after 39 tax seasons in the business most topics become redundant. In the past, while I had planned to attend more than one day I usually gave up after the 1st due to the oppressive heat.

As usual the express check-in took about 5 seconds. Checking in, and signing in at each session, is done very efficiently by scanning one’s name “badge”.

My first session for the day was the annual overview of tax changes presented by the IRS Tax Forms and Publications division. This is usually one of the best sessions of the forum. However its content and importance depends on the actual tax law changes that are in effect at the time of the forum. Like the current developments class at the NATP conference this session was disappointing due to the minimum amount of tax changes.

While the NYC forum has always been crowded, this year was especially so. It seemed that every single seat in each session I attended was taken. Perhaps this overcrowding is the reason that the East Coast location is changing to the Gaylord National Hotel (“the largest non-gaming hotel and convention center on the Eastern seaboard”)in National Harbor, MD on the Potomac just outside Washington DC. Since I will not be attending NATP’s 2011 annual conference in St Louis I expect I will attend the IRS Forum at National Harbor.

This year’s Keynote Address was given by Deputy Commissioner for Operations Support Mark Ernst, who “oversees the integrated IRS support functions, facilitating economy of scale efficiencies and better business practices”. The speech, which earned attendees 1 hour of CPE credit, was a total waste of time. The Keynote speech is a hit and miss proposition. The best was provided by former IRS Chief Counsel Donald Korb in 2008. Korb’s presentation was followed by a lively Q+A. There was no Q+A with Ernst.

FYI, as reported by WebCPA, Ernst was “chief operating officer of H+R Block between 1998 and 2000. He was named CEO of Block in January 2001 and became chairman the following year. In November 2007 he was ousted by hedge fund manager and former SEC Chairman Richard Breeden, now chairman of the company, who criticized Block for moving away from its core tax preparation business into areas such as subprime mortgages.”

The last person I would want involved in the high-level administration of the IRS is anyone from Henry and Richard! Especially someone who was partially responsible for the mucking fess that our economy became as a result of subprime mortgages. If the IRS wants to project a consumer-friendly image why would it hire someone whose company is well-known for screwing its taxpayer clients? And it is also a true mystery why a former corporate CEO would downsize to become a civil servant. WOGK (why only God knows).

After the Keynote Address open session we have 2+ hours for lunch and to visit the Expo of vendors. I am not interested in software or RAL vendors, so I took a leisurely walk around the outside of the hotel to look for a suitable lunch spot. I went into Lindy’s (as per the “Mindy’s cheesecake” bit from GUYS AND DOLLS) on Broadway. At first I was shocked by the prices - $20+ for a sandwich. After being totally ignored for too long (no waiter taking my order or even acknowledging my presence) I walked out and continued my search. I ended up at a much “more better”, and certainly more reasonably priced, choice – the Oldcastle Pub and Restaurant on 54th Street. My second lucky break of the day.

The first session of the afternoon was “Introduction to the Decedent’s Final Form 1040” offered by the National Society of Tax Professionals, one of the “association partners” (ABA, AICPA, NAEA, NATP, NSA, and NSTP). I was pleased to learn that the presenter was Paul LaMonaca. Despite his alleged greed, which apparently led to the fall from grace of the NSTP, he is an excellent and informed instructor and did the best he could with the subject in the limited 50-minute time frame.

Next up was “Schedule C Issues” presented by NATP. Speaker Tom O’Saben is apparently a frustrated stand-up comic. He did manage to briefly cover the session topics more than adequately. It has been my experience over the years that the most substantive sessions have been those offered by the association partners.

The final session of the day was titled “What’s New for Return Preparers” presented by David Williams of the IRS. This was a reduced version of the presentation David had made to the NATP annual conference in Austin. As I mentioned in my review of that conference, David is an excellent speaker and covered the topic thoroughly and proficiently (as one would expect from a former student of Mary O’Keefe of BED BUFFALOES IN YOUR TAX CODE fame). This presentation should have been the Keynote Address of the forum – instead of the snooze inducer given by Ernst. It is certainly a topic that was of interest to everyone in attendance.

The strengths of, and my complaints about, the forum remain the same as in past years. Its main strength, from my point of view, is that the IRS lead sessions can provide an insight on Service thinking and direction on certain tax topics and issues. While the fee has certainly grown over the years (I do believe I paid only $99.00 for my first forum) it is still very reasonable when compared to similar offerings.

As for the complaints -

* First and foremost – each session is limited to 50 minutes (a CPE hour). This is certainly not enough time to properly cover just about any tax topic. It allows for only a mere overview or introduction and nothing more. There are no “Part 1 and Part II” of a topic. We are told to hold questions till the end of the presentation, and the last 5 minutes is supposed to be devoted to questions, but the presentations almost always last more than 50 minutes and there is no time for Q+A as we must scramble to the next seminar room to get a seat.

* I would have liked to see individual sessions on the more specific “who qualifies” and “how to claim” details of the only 2 real tax law changes – the FICA exemption for previously unemployed new hires (mentioned only briefly in a “Top Employment Tax Issues” session) or the health insurance credit for small businesses.

* The seminar rooms are overcrowded. There are no tables in these rooms – just rows of chairs – which makes taking notes somewhat inconvenient. Hopefully the move to a new venue will fix this next year.

* The Seminar Handbook we receive merely replicates the slides for each of the “power-point” presentations. I would very much prefer an actual written outline of each session, like the NATP and CSEA conferences and seminars provide. The value of the handbook as a reference during the year (or season) is minimal.

* There is too much time allotted for the lunch break (2 hours 20 minutes). An additional 50-minute session could be added, or additional time provided between sessions to navigate.

* Included in the package handed out upon signing in at the first forum I attended was an IRS T-shirt. An odd item to include. At the time I said I would prefer free coffee to such a useless “gift”. While T-shirts are no longer included in the registration package there is still no free coffee.

* I have always complained about the location. If the IRS wants to use an expensive midtown hotel (with a prohibitive room rate) how about the Marriott Marquis? I look forward to the new location next year (although a check of the website shows its room rates are also prohibitive). I wish the East Coast forum would return to Atlantic City.

As I mentioned with the NATP conference, the IRS Tax Forum is an excellent educational opportunity for those starting out in the tax preparation business. In a review of a previous year’s forum I said the following, which still applies –

“Obviously the IRS Forum is not a substitute for the more substantive and comprehensive seminars and workshops offered at the annual conferences of NATP, NSTP, NAEA or CSEA. The Forum should be attended in addition to one of the membership-organization offerings and primarily as a way of getting the IRS perspective on tax topics.”

There are 2 more forums this year – August 24-26 in Las Vegas and August 31-September 2 in San Diego.

David Williams mentioned in his presentation that with the phase-in of the new CPE requirements for the close to 1 Million newly registered previously unenrolled tax professionals the IRS may decide to stop offering these annual Tax Forums - since the availability is limited to about 20,000 attendees. So there may only be one or two more of these annual events left.

I welcome the comments of other tax professionals who have attended the forum in NYC or at another location.

.

One last item - I noticed that the IRS Tax Forum has a Facebook page! WOGK.

.
TTFN

.

FYI - click here for the dates and locations of the 2011 forums.

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

* From the “I couldn’t have said it better myself” department we have “Extend the Bush Tax Cuts? It’s the Wrong Question” by Howard Gleckman at TAXVOX.

The highlight in the below quote is mine-

“Washington is about to spend months trying to answer the wrong question. Instead of reprising their partisan, tiresome, and largely unproductive argument about what to do with the Bush tax cuts, President Obama and Congress ought to be asking a very different question: How do we build a tax system capable of generating the revenues we need to fund the government we want in the most efficient and fair way possible?”

* Some good news while I was away. The IRS has made it more difficult for tax preparers to offer Refund Anticipation Loans (aka RALs). Since I do not offer this questionable product I have no real idea just what the IRS has done – but it is good to see the IRS move against RALs.

TAX GIRL Kelly Phillips Erb discusses it in “IRS Changes the Way RAL Providers Will Do Business”, and Trish McIntire goes into more detail in “Hat Trick” and “It’s Not Over”.

Tax preparers should be banned from offering RALs.

* And while I was away it appears that my post “It Ain’t Necessarily So” represented Kay Bells TAX CARNIVAL in “On The Moneyed Midways” – “the best posts we found in the best of the past week's money and business-related blog carnivals” – at POLITICAL CALCULATIONS.

* Here’s a concept that seemed strange to me – “High Taxes Discourage Childbirth”. That is the title of a DON’T MESS WITH TAXES post by Kay Bell. Kay refers to a column in the Washington Post by Robert Samuelson.

“Samuelson's core argument in his ‘America's Parent Trap’ column today is that the United States' current fiscal and tax policies ‘punish parents, who are taxed heavily to support the elderly. Meanwhile, tax breaks for children are modest’."

I join Kay in her skepticism. The Tax Code is chock-a-block with tax benefits for children – the Child Tax Credit (partially refundable), the exemption for dependent children, the Earned Income Credit (partially refundable). The more kids you have the less tax you pay.

In 39 tax seasons I have never heard a client, or anyone else, tell me that they decided against having more children, or having children period, because taxes were too high.

* Joe Arsenault clears up some “60-Day Rollover Confusion” over at CAFÉ TAX.

* Bruce, the MISSOURI TAX GUY, talks about the “Form to Claim Payroll Tax Exemption for Hiring New Workers”. A timely post indeed – from my point of view. This new business tax benefit was discussed at the “What’s New” seminar this morning (Tuesday) at the IRS Forum in NYC (look for my review of the Form tomorrow) – and I made a note to look up the W-11 form and instructions.

* Professor Nellen comments on tax “Process and Policy” in a thoughtful post at 21st CENTURY TAXATION.

The Professor says – “Here, it is not only the tax system design (such as flaws with the AMT itself), but also the process that is causing complexity and some inequities”.

Troubling and odd indeed!

TTFN

ON THE ROAD AGAIN

I’m back!

My “totally 1040-free” vacation really began on Tuesday night with a trip to NYC to see “Viagra Falls” at the Little Shubert Theatre on “Theatre Row”. The show starred Bernie Kopell, the LOVE BOAT’s “Doc” and Siegfried from GET SMART, Teresa Ganzel, a familiar face from 1980s tv (still a stunner – and I was surprised to see she was so tall), and co-author Lou Cutell, with whom I was not familiar.

In the play Kopell and Cutell celebrate Cutell’s 77th birthday with the help of some black market Viagra and local “lady of the evening” Ganzel.

It was very funny, with lots of flying one-liners. Age has not noticeably slowed down Mr Kopell. I was disappointed that there were so many empty seats – although it was a Tuesday night. At the tdf (Theatre Development Fund) member price of $31.50 it was truly a bargain.

The next morning I left for my annual visit to the summer playground of my youth – Wayne and Pike Counties, the Lake Region, in PA - staying once again at the Delaware and Hudson Motel in Honesdale.

As usual the visit was scheduled around a production at Hawley’s Ritz Playhouse. The show this year was “Whose Wives Are They Anyway”, a silly farce cast with familiar faces from previous productions.

I was truly confused upon entering downtown Honesdale on Wednesday afternoon to find that the traffic pattern had totally changed - Main Street and Church Street are now one-way streets! Why is anyone’s guess. It really makes no sense to me. And it is backwards – instead of entering the downtown shopping area on Main Street, the obvious choice, one has to drive all the way up Church Street to get to Main Street to shop and dine.

I did the “usual” on my trip, visiting Beach Lake, Hawley and Honesdale while driving Routes 6, 507, 590, and 652 in PA and Lake Huntington and Narrowsburg while driving 52 and 97 in NY.

After checking in at my motel I went to the multiplex in the Route 6 mall to see “Cats and Dogs 2: The Revenge of Kitty Galore”. It was my first 3-D movie in a normal theatre (other than at an IMAX). While the 3-D process was entertaining, it really did not add much to the movie. I paid $9.50 for a bargain matinee – the most I have ever paid for a movie, again at a “normal” theatre, in my life! As you can probably tell, it has been quite a while since I have been to a movie theatre.

I spent the mornings and early afternoons reading mystery books on the Lake Wallenpaupack Observation Deck and overlooking the Delaware River at the Tusten Veterans Memorial Park. The weather was perfect – with delightful and refreshing lake and river breezes, a welcome change from the oppressive heat of NJ.

I finished the latest Margaret Truman “Capital Crimes” entry, which I began on my flight to Austin TX, and completed “The Morning Show Murders” by Al Roker (and a co-author). The book was surprisingly very good. It was totally fictional; Roker did not place himself and other real-life celebrities as characters in the book (as had been the case with the mysteries penned, or co-penned, by Steve Allen and George Kennedy). I look forward to the 2nd installment in the promised series.

{I couldn’t help including this – In the opening chapter the protagonist, a celebrity chef, restaurant owner, and morning show co-host, is shooting a pilot for a cooking-related so-called “reality tv” show. The network exec says, “I want the contestants to look like idiots during the tryouts. The dumber and more inexperienced they are, the better. If there’s one thing viewers love to watch, it’s extroverted idiots who don’t care if they look like assholes.” I expect Mr Roker stole that quote from a real conversation by a real network exec. The last sentence of the quote sums up the entire “reality tv” genre.}

I dined at regulars Cordaro’s and the Towne House Diner in Honesdale and Gresham’s Chop House across from Lake Wallenpaupack. New this year was Tony’s on the Lake in Lake Huntington NY, my mother’s home town. While it looked like a fancy restaurant from the outside I was surprised to find the menu limited to “pub food” (pizza, burgers and sandwiches), although they did have two “traditional” specials (steak and chicken).

Breakfasts were returns to Shirley’s Family Restaurant at the junction of 6 and 652 and the Country Café in Beach lake and the Whistle Stop Café in Narrowsburg, with Shelly’s Family Restaurant in Hamlin PA being a new find.

I was reminded of the tranquility and relaxation one can experience from just sitting by a body of water. It doesn’t have to be at the Caribbean or the Mediterranean or the Aegean – Lake Wallenpaupack or the Delaware River or the Atlantic Ocean will do just as well.

I was truly sorry to head back to New Jersey on Sunday afternoon. Unfortunately, although as expected, the GD extensions were still in the box when I got back home.

TTFN

ACRONYMS - A SUMMER RE-RUN

I thought I would end the week with a summer re-run from May of 2007 -

I do not “text message” – I do not even own a cell phone – but I do email and blog. However, my fascination with and use of acronyms goes back many years.

Here are some of the acronyms I use in my emails and blog postings:

SGTM – Sounds Good To Me

TTFN – of course, Ta Ta For Now, or, alternatively TAFN – That’s All For Now

FFR – For Future Reference

GD (as in extensions) – one of my clients recently asked me what GD extensions meant, and I told him “exactly what you think it means”! The GD does not stand for “government deferred” or anything like that. I could have used “MF Extensions” – but chose not to.

DFB – the "clean” version is Damned Fool Bureaucrats. It is generally used in reference to our beloved lawmakers in Trenton and Washington. You can probably figure out the real version on your own.

Nowhere in society is the acronym more widely used than in government – and taxes are certainly no exception.

The Tax Code overhaul of the Reagan years generated a ton of new tax acronyms. There was ACRS (Accelerated Cost Recovery System) – the new word for depreciation – followed by MACRS (Modified Accelerated Cost Recovery System). And then there was FACRS (Foolhardy Acts of Congress under the Ruse of Simplification), which described the entire process. Under the Reagan tax laws you needed a PIG (Passive Income Generator) to wipe out a PAL (Passive Activity Loss).

Here are some of the tax acronyms that I use most often in my postings:

AGI – Adjusted Gross Income. This is the total of your gross income less certain allowable “adjustments to income” – aka “above the line” deductions (your AGI being “the line”) – such as IRA, SEP, SIMPLE, Keogh, MSA and HSA contributions, ½ of any self-employment tax, educator expenses, qualified tuition and fees, early withdrawal penalties on CDs, student loan interest, etc. As many tax credits and deductions are phased-out, or altogether eliminated, based on your AGI, or in some cases a “Modified” AGI (see below), and several items of income are increased and some deductible losses are reduced based on AGI or MAGI, it is perhaps the most important number on your tax return.

MAGI – Modified Adjusted Gross Income. As just mentioned, certain items of income and deduction and certain credits are increased, decreased or totally wiped out based on your AGI. In many cases the AGI is “modified” in the calculation by adding or subtracting certain specific items. Different items have different MAGIs.

AMT (usually preceded by “the dreaded”) – Alternative Minimum Tax. More appropriately called the Maximum Mandatory Tax, this is a required “alternative” method of calculating your federal tax liability that is much more restrictive than the “regular” income tax. It does not allow deductions for personal exemptions, the standard deduction, taxes or miscellaneous itemized deductions, and certain other Schedule A items, and requires an adjustment to the amount of income or deduction claimed for certain “tax preferences”. You must calculate your tax under both the “regular” income tax and the dreaded AMT and pay the higher amount.

NOL – Net Operating Loss. If losses from a business activity, such as self employment or rental property, generate a “negative” net taxable income on your Form 1040 you may be able to carry back or carry forward some of these losses to apply against past or future income. You must first carry back the loss two tax years, and then can carry forward any remaining losses for 20 years. You can elect not to carry back an NOL, using it to reduce only future income.

Any questions?

TTFN

PS- I’ll be back on Monday!

THE IRS SHOULD BE JUST ABOUT TAXES!

As Rob Tueber points out in a recent post “The IRS is Not Just About Taxes” at his TAX LAW FORUM blog-

“The recent National Taxpayer Advocate’s mid-year report observes that the IRS has, over the past several years, developed into a dual role agency. The report identifies that the IRS’ roles are now:

1. To encourage tax compliance and

2. To deliver social benefits and programs”.

For years now I have been saying that the Tax Code should not be used to deliver social benefits and programs. The one and only purpose of the Tax Code is to raise money needed to pay for the government, and the purpose of the IRS is to process tax returns and collect tax. The IRS really should be just about taxes.

Having federal welfare and education and housing subsidies run through the Form 1040 totally distorts the federal budget and the federal “financial statements”.

Much has been written and said about the fact that under current law almost one-half of the American population pays absolutely no federal income tax – and many actually make a profit by filing a 1040. While this is a true statement it is misleading.

The reason almost half of the population are “tax-nonpayers” is because of credits like the Earned Income Credit, the Child Tax Credit, the recent First-Time Homebuyer Credit, and the American Opportunity Credit, all of which have refundable components.

The Earned Income Credit and the refundable portion of the Child Tax Credit is really Aid to Families With Dependent Children - or welfare. The various education tax benefits are really student financial aid. The First-Time Homebuyer’s Credit is a housing subsidy.

Here is what I wrote in an earlier post from August of last year –

Why, then, could not the U.S. Department of Education automatically apply the American Opportunity Credit, or the HOPE or Lifetime Learning Credit, towards the price of tuition, with the possibility of any remaining available credit being applied at the college book store? Then the government would be assured that the money is actually spent on continuing education. If the student “drops out” the unused portion of the “government subsidy” would be returned to the Department of Education.

And why, then, could not the First Time Homebuyer Credit be applied to the purchase of a qualifying home at the actual closing? Then the government would be sure that a primary personal residence was actually being purchased by a “first-time” homebuyer. A “Statement of Qualification” could be added to the papers filed with the purchase on which the purchaser(s) would certify, under penalty of perjury, that he/she/they qualify for the $8,000 payment.

If there are credits to be provided to cover health insurance premium purchases in any upcoming Health Care Reform bill, why not have the U.S. Department of Health and Human Services credit the amount to the price of the actual premiums? Then the government would be sure that the money is actually spent on health care coverage.

Perhaps the amount of Retirement Savings Credit allowed could be actually deposited by the government into the individual’s IRA or other retirement savings account. Then the money would actually add to and help to grow retirement savings.

And in the case of the Earned Income Credit, why not just provide the qualifying individual or family with a supplemental welfare check, perhaps through the SSI system?

Doing things in this way would be beneficial in many ways.

(1) It would be easier for the government to verify that the recipient of the subsidy or hand-out actually qualified for the money, greatly reducing fraud. And tax preparers would no longer need to take on the added responsibility of having to verify if a person qualified for government funds.

(2) The qualifying individual(s) would get the money at the “point of purchase”, when it is really needed, and not have to go “out of pocket” up front and wait to be reimbursed when they file their tax return.

(3) We would be able to actually measure the true income tax burden of individuals. No longer would about half of the American population either pay absolutely no federal income tax or actually make a profit from filing a tax return. These people would still be receiving government hand-outs, but it would not be tied into the income tax system so they would actually be paying federal income tax.

(3) We could measure the true cost of education, housing, health, welfare, etc programs in the federal budget because the various subsidies would be properly allocated to the appropriate departments and not be reported as a part of net income collected via income tax.

(4) The Tax Code would be much less complicated, the cost to the public for preparing a tax return would be reduced, and the IRS would have much less to process and to audit.

What inspired the post in which the above appeared was the “Cash for Clunkers” program. This was a targeted benefit program that was not run through the Tax Code. It had no affect whatsoever on the Form 1040. The money was applied to the qualified purchase at the point of purchase. While I have not done any special review of the program or its results it appears that it was as successful and went as smoothly as one would hope for a government-run benefit program.

Other than the fact that it is easy for these items to be run through the 1040 and the IRS (and we all know that Congress is basically lazy) I can think of no logical reason why we should continue to run social benefit programs, regardless of the appropriateness of the individual benefit or program, through the Tax Code.

Don’t get me wrong. As a tax professional I take full advantage of all the above discussed credits and deductions available to my clients when preparing my 1040s, and am happy to put the extra money in their pocket, because it is allowable under the law as written. It is just my opinion that that is not how the law should be written. I am not against my clients putting the money in their pocket – far from it. I am just against the way it is done.

As I have said 2011 is the year that Congress must sit down and totally reform the Tax Code. Removing social programs and social engineering from the tax process will go a long way to making the Tax Code much simpler and much fairer.

TTFN

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

I am off to the Lake District of PA (Wayne and Pike Counties) for my annual visit to the summer playground of my youth (and my future home). FYI – there will be no BUZZ installment on Saturday.

* Did you see my piece “Don’t Fear Home Office Deductions” over at MAINSTREET.COM?

* Joe Arsenault is almost finished with a special 5-part series of posts on “saving money, becoming solvent and debt free” at his CAFETAX blog. The series is not about income taxes, but provides good advice anyway.

It began on July 29 with the appropriately-named post “Money Saving Tip # 1” and should finish by week's end.

* Kay Bell keeps us up-to-date on the progress of the effort to repeal the new 1099 reporting requirements in her post “Efforts to Repeal 1099 Reporting Fails” at DON’T MESS WITH TAXES.

The news is not all bad. Kay tells us that – “the added 1099 rule is becoming universally unpopular on Capitol Hill. That bodes well for its eventual removal before it takes effect in just over a year and a half.”

* Now don’t forget to check out Kay’s “Tax Carnival #73: Summer Dog Days 2010”. My post “It Ain’t Necessarily So” is included.

* TAX GIRL Kelly Phillips Erb hits the nail on the head with her editorial post on the same topic titled “Repeal, What Repeal? We’ve Got Egos to Stroke! Special Interest Groups to Pacify!”.

* Don’t forget to check out MISSOURI TAX GUY Bruce’s weekly Sunday “Reads from Last Week” for tax and personal finance posts that I missed in Saturday’s BUZZ.

* I love it when the idiots who appear on so-called “reality shows” get caught being idiots. The IRS HITMAN tells us about “Khloe Kardashian's New $18,490.74 Tax Lien”.

The Hitman is correct in describing her as “famous-for-being-famous”, as opposed to being famous for being talented or for actually doing something of value or contributing something to society. This fool’s claim to fame is that her sister made a sex tape with a rapper.

And Hitman joins the TAX GIRL in hiting the nail on the head when he observes –

“It's still a mystery, how the hell do these rich celebrities who make multiple millions neglect to hire a reliable accountant? And what makes them think they'll get away with not paying the almighty tax man?”

I guess it takes actual brains to realize that one needs to consult a tax professional in such a situation – a commodity these “reality tv” arseholes are truly lacking.

* Bill Perez of WILLIAM’S TAX PLANNING BLOG reports that “California Sending out Head of Household Audit Letters”.

According to Bill -

“California's Franchise Tax Board began mailing out some 135,000 notices to Californians who claimed the head of household filing status on their 2009 California return. The letters simply ask that the taxpayer answer a few questions to confirm that they are eligible to utilize the head of household status.”

“Talk” to you when I get back!

TTFN

MAKE EM ALL PASS THE TEST!

I seem to recall back when the IRS review of tax return regulation began a year ago a fellow tax professional and, at the time, tax blogger (known as The MTBiking Tax Pro) had this to say -

“BUT if and when this comes about I want it to be across the board. I want ALL who are associated with preparing; examining, questioning, auditing, etc of individual, business, estate, etc. tax returns should have the same license or classification. Doesn't that just seem fair?

That includes CPAs, public accountants, bookkeepers, foreign country tax sweat shops, McHenry workers, tax store franchise owners, etc. Also EVERYONE that works for the IRS from Mr. Tax Cheat himself Timothy Geithner down to that lonely telephone tax answer person be required to get licensed also.”

I also believe somewhere else, perhaps in a comment to one of my TWTP posts on the subject, he added members of Congress on the tax-writing committees to the list.

It is very clear that the members of Congress do not know their arse from a hole in the ground when it comes to the details of the federal Form 1040. At times I think that this is even more so with the members of the tax writing committees. Former House Ways and Means Committee chair Chuck Rangel, for example, pleads ignorance when faced with his multiple tax error and omission FUs.

The Mountainbiker has a good point. If tax preparers must show competency via testing and continuing education (except for CPAs and attorneys – which is ridiculous) then those who audit returns and answer tax questions over the phone and who supervise these individuals at the IRS, and those who administer the tax laws at Treasury, and especially those who write the oft illogical and ridiculous tax laws should also prove that they, too, are competent in taxes by becoming the equivalent of a Registered Tax Return Preparer.

TTFN

FYI – I leave tomorrow (Wednesday) for a 5-day “1040-Free” vacation. Tonight I go to NYC to see VIAGRA FALLS starring THE LOVE BOAT’s Bernie Kopell.

SO WHAT ABOUT THE BUSH TAX CUTS?

Just about every tax blog has in one way or another recently addressed the “Bush” tax cuts that are set to “sunset” (i.e. expire) on December 31, 2010. I guess I should weigh in.

There are many provisions, or concepts, of the expiring cuts that should be continued. One of the more important concerns the “marriage tax penalty”. The expiring tax cuts attempted to address this – although the attempts made were not much more than token in nature, although good ones.

As I have said for several years now – to truly do away with the “marriage tax penalty” the Congress would have to change the rules for “Married Filing Separately” so that separately filed federal returns would be totally equal to filing as two Single taxpayers. There is also built into the table for joint filers a “marriage tax benefit” for one income couples, which I tend to recommend doing away with. The Tax Code should be “marriage neutral”.

I also like the 10% tax bracket, and the lower rates for qualified dividends, as an alternative to doing away with the double-taxation of corporate dividends, and capital gains. While I am certainly pleased with the substantial tax savings that the 0% capital gain and qualified dividend rate has provided to my clients, from a tax policy point of view I would prefer the return of the 5% rate.

Of course the alternative to the lower tax rate on qualified corporate dividends is to do away with the double taxation altogether by allowing corporations to claim a “dividends paid” deduction.

I am not a fan of the Estate Tax – but realize that its continued existence is essential if the concept of “stepped-up” basis is to be maintained. Having to use “carryover” basis for inherited property would be a disaster. I do not want the Estate Tax to revert back to what it was BW (before “W”).

When the new Estate Tax rules are finally passed I would like to make sure that the Gift Tax “unified credit” is the exact equivalent of the Estate Tax exemption. If the first $5 Million of one’s estate is exempt from the Estate Tax, then the lifetime Gift Tax exemption should also be $5 Million. For 2009 the Estate Tax Exemption was $3.5 Million but the lifetime Gift Tax exemption was only $1 Million. While the “Bush” cuts did away with the Estate Tax in 2010, it did not do away with the Gift Tax. For 2010 the Gift Tax “unified credit” is equal to the tax on $1 Million. If there is no Estate Tax there should be no Gift Tax – and if the Estate Tax is reinstated the lifetime exemption for both taxes should be the same.

But the extension of all or part of the “Bush” cuts is not the only tax matter that Congress must deal with before year-end (and hopefully, for the IRS sake, before December). There is also the “extenders” – most importantly the extension of the “patch” to the dreaded Alternative Minimum Tax.

Joe Kristan identifies the work to be done in his post “The Tax Legislation Rolling Train Wreck” at the ROTH AND COMPANY TAX UPDATE blog, adding the Small Business bill to the list of open items. As Joe puts it in his post – “Rarely have so many pieces of the tax law been up in the air”.

Joe’s post goes on to predict what he thinks Congress will do before the end of the year –

• “An AMT patch will patch in the run-up to the elections, along with some sort of 'small business' relief, including (probably) extended bonus depreciation.

• A lame-duck Congress will pass extender legislation.

• Some sort of extension of parts of the Bush tax cuts will pass, but the top rate will still rise to 39.6%. The dividend and capital gain rate will be held to 20%.

• Congress will deadlock on the estate tax, and we'll start 2011 with a $1 million lifetime exemption and a 55% top rate.”

I do agree that Congress must, and will, pass another one-year AMT patch and extend for another year the popular expiring breaks that have become known as the “extenders”. And Congress must, and will, extend for one more year pretty much all of the “Bush” tax cuts, except for bringing back the 36% and 39.6% top rates. I expect the 5% and 15% capital gain rates will remain with perhaps 20% for those in the reinstated top two rates.

I also agree that this will be done after the election. I trust the IRS will put off printing the 2010 forms until the middle or end of November. Unfortunately this may cause delays in the issuance of the first wave of 2010 refunds.

But I also expect that Congress will pass some kind of revised federal Estate Tax, even if just for one year.

What Congress must do in 2011 is totally rewrite the Tax Code, making it much simpler and more fair.

.

2012 is a Presidential election year, and we can expect that nothing of substance will be done regarding taxes. You will recall that none of the tax increases of the health care “reform” Act take place in 2012.

Will Congress rise to the challenge and fix the mucking fess that is the federal Tax Code in 2011? I can dream, can’t I? But, between you and me, I ain’t holding my breath!

TTFN