IT’S BACK! CHOOSING A TAX PROFESSIONAL – DON’T ASSUME

It is that time of year again! Time for one of my favorite all-time posts – and one of my most commented-upon – the one that tells you not to make assumptions when looking for someone to prepare your tax return.

As usual, I begin with the episode of the ODD COUPLE television series where Felix explains to Oscar what happens when you assume (you make an ass out of u and me), and tell you that making false assumptions when choosing a tax preparer can be costly

1) Don't assume that because a person has the initials "CPA" after his name he is an expert when it comes to federal and state income taxes!

The CPA designation means that a person passed a very difficult test at the beginning of his career, possibly many, many years ago. Only a very small part of this test dealt with federal income tax, and usually with “entity” tax issues (corporate, partnership, estates and trusts) and not 1040 issues. It is certainly no guarantee that he/she is competent or current on federal and state individual income tax law, or that he/she has actually prepared a Form 1040 for a client since passing the test.

Whenever I would get a new client (which I do not anymore – as I do not accept any new 1040 clients) I ask to see his/her last three (3) years’ tax returns, to make sure I do not miss any carryforwards and, more important, to see if there are any errors that I could correct on an amended return. In my 39 years of preparing tax returns I have found more mistakes on 1040s prepared by CPAs than by any other class of preparer, including the taxpayer himself.

Some 30 years ago I was a "para-professional" in the Small Business Services Department of one of the then "Big Eight" CPA firms (Deloitte Haskins + Sells). While reviewing the prior year's federal and state tax returns of a client whose current returns I was preparing I found a very obvious error on the state tax return that caused the client to pay more tax than necessary. Under the firm's policy, the return, which had been originally prepared by a CPA, was reviewed by his "manager" (also a CPA), and signed-off on by the head of the department (a CPA) and a member of the Tax Department (a CPA). Not one of these CPAs picked up the obvious error!

A student in one of the tax planning/preparation courses I taught at local suburban adult schools many years ago asked me what was the difference between a tax return prepared by a CPA and one prepared by me (I am obviously not a CPA). My answer was "at least $100.00" (that number needs to be seriously adjusted for inflation!). I have often said that having initials after one’s name often causes one to charge twice the price for half the service.

CPAs have higher overhead costs than most currently “unenrolled” preparers, for malpractice insurance for example. These higher overhead costs usually apply to their audit work, but are still passed along to 1040 clients.

There has been some concern in the past about the practice of CPA firms “outsourcing” the preparation of 1040s to India. This should not be a cause for concern. Between you and me - you are much more likely to have your 1040 prepared properly and accurately by a contracted preparer in India than by a CPA here in the United States!

Many of my fellow tax bloggers, who happen to be CPAs, will tell you that what I say in this post is correct. I will be glad to provide online references. For example, in discussing the IRS decision to exempt CPAs and attorneys from testing and continuing education requirements in its proposal for regulating the tax preparation industry, a CPA tax blogger said –

“Being a licensed CPA or attorney is no guarantee of tax expertise. The licensing examinations do not emphasize tax law. Plus, neither is required to take any tax related continuing education to maintain their licenses. Truth is many CPAs and attorneys have little tax experience. I should know. I prepare tax returns for them.”

The post ends with - “Virtually every new client I get is an amended tax return waiting to happen. Guess who prepared the returns I’m amending…mostly CPAs!”

I have said it time and again – just because a person has the initials CPA after his/her name does not mean that he/she knows his/her arse from a hole in the ground when it comes to preparing 1040s.

The only initials that have any meaning when it comes to tax preparation are "EA" - Enrolled Agent (I am also not an “EA”). The name is misleading. An EA is not an agent of the Internal Revenue Service, but a private tax professional who is "enrolled" to act as a taxpayer's "agent" in proceedings with the IRS and in Tax Court. To become an Enrolled Agent one must pass a difficult test that is 100% federal tax law. In order to maintain their enrolled status, EAs must have a mandatory number of continuing education credits in taxation each year. Both the initial competency test and the CPE requirements are more strict than those that will be required of the new Registered Tax Return Preparer.

While the IRS was right to exempt Enrolled Agents from the testing and CPE requirements of the new regulation regime, it was dead wrong to exempt CPAs (and attorneys). The higher ups at the IRS know full well that the initials CPA (or JD) have nothing to do with competency in federal income tax matters, but feel they are statutorily restricted from placing additional requirements on those with these initials.

2) Don't assume that H+R Block will charge a low, or even reasonable, fee for preparing your tax return!

When my mentor and I got a hold of the H+R Block fee schedule back in the late 1980s we were in complete shock - Henry and Richard ain't cheap!

They, and others of their ilk, are very expensive, especially considering the quantity and quality of the service they provide. They charge fancy restaurant prices for fast food service! Plus they will attempt to squeeze even more money out of you by trying to push you into unnecessary, but profitable to them, products like a usurious “Refund Anticipation Loan”, a high-fee H+R debit card, or a Block-sponsored high-fee, low-yield investment that is practically guaranteed to lose money.

While, like anything else, the market affects the price of tax preparation, the major factor affecting the fees charged is overhead. Let’s look at the overhead of these “fast food” chains.

Because the storefronts where these chains are located are usually in high traffic commercial areas, and often shopping malls, the rent is generally very high. And an important factor – H+R and Liberty and Jackson Hewitt storefronts are only open during the tax filing season, yet they must pay rent on the property for the entire year.

These chains have excessive advertising budgets during the season, spending millions of dollars on constant tv and radio spots as well as print advertising telling you not that they competently prepare accurate tax returns but simply to come into their office and walk out with a check. Hey, doesn’t H+R advertise during the Super Bowl.

H+R Block et al are corporations, and have highly compensated upper level corporate officers and employees with generous employee benefits. A while back the Associated Press reported that “H&R Block Inc. CEO Russell Smyth received compensation valued at $5.3 million in fiscal 2009, the year he took over leadership of the nation's largest tax preparer”.

And, most notable of all, Henry + Richard, Jackson Hewitt, and Liberty need millions of dollars for legal fees and the settlement payments for the many, many lawsuits for deceptive advertising and other unethical business practices, most of which result from their usurious Refund Anticipation Loan offerings.

With commercial preparation chains I expect that the actual cost of preparing the return - salaries paid to the seasonal preparers and the training of these preparers - is one of the least expensive items in the budget.

Returns prepared by the employees of Henry and Richard are second to CPAs in terms of errors I have discovered on 1040s over the years. My mentor always said that he wished H+R Block would move next door to our office - we would make a fortune fixing their mistakes!

A few years ago the Government Accountability Office (GAO) conducted a study which resulted in a report to Congress titled “Paid Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors”. The GAO sent undercover agents with two different tax scenarios to a total of 19 offices of 5 “fast-food” commercial tax chains, including H+R Block, in a metropolitan area. In only 2 instances was the correct refund calculated, but all 19 returns contained errors.

Some of the more serious errors included –

• not reporting self-employment income in 10 of the 19 cases,
• claiming an Earned Income Tax Credit on an ineligible child in 5 of the 10 applicable cases,
• not claiming the education benefit (credit or deduction) that resulted in the least tax in 3 of the 9 applicable cases, and
• not claiming all available itemized deductions, or not itemizing at all, in 7 out of the 9 applicable cases.

I was told by the GAO that not one of the 19 preparers in the study had asked to see the undercover taxpayer’s prior year’s return!

The GAO agents also discovered unethical sales practices related to Refund Anticipation Loans (RALs). The annualized interest rate for the RALs offered to the “taxpayers” ranged from 380% to 470%. Henry and Richard have been sued repeatedly throughout the US because of these RALs, and have paid millions of dollars in settlements (probably why they are so expensive – they need to cover their legal and settlement costs).

Other undercover operations, by TIGTA, local tax agencies, and consumer protection organizations, have found similar results.

When looking for a tax professional, as with any other professional, it is best to get a referral from a trusted friend or relative.

As always, I must be perfectly fair. Over the years I have come across CPAs who were extremely competent and current in 1040 matters, and even some who charged reasonable fees. But this is not a “given” based on the initials only. And I am sure that there are probably some competent, current, ethical and professional H+R Block preparers out there somewhere (though you couldn’t prove it by me).

While it may actually be possible that the best tax preparer, at the best price, for your particular situation is either a CPA or an H+R Block, or other fast-food chain, employee, this is only because of the education, experience, ability, temperament, and other factors that are specific to that individual preparer.

So bring on the comments!

TTFN

YOUR W-2s AND 1099s

You should start to receive your 2010 information returns (W-2, 1099, 1098) within the next few weeks. Most of these forms must be mailed out to you by January 31, 2011, although some 1099 forms have until mid-February to get them in the mail.

If you have not received all your W-2s, 1098 and 1099s for bank interest and non-employee compensation by February 6th, or other information returns by February 20th, contact the employer, bank, broker, or whoever and arrange to receive a duplicate copy.

And, to repeat what I tell you each year at this time, taxpayers with brokerage accounts will probably receive at least one “Corrected” 1099 statement. These corrected statements often do not arrive until March. It would be a good idea to wait a few weeks after receiving the original 1099 information before having your return prepared. You may want to contact your broker and ask him or her if and when any corrected statements will be sent out.

When you receive your W-2s for 2010 you should carefully compare the gross federal and state wages, federal, state and local income tax withheld, and Social Security and Medicare taxes withheld numbers on your W-2s to the amounts on your pay stubs or other records. Also verify that the Social Security numbers on the forms are correct. If you find an error or discrepancy, contact the appropriate employer or financial institution for an explanation or a corrected copy.

If the federal and state wages are not the same I always attempt to reconcile the numbers. My home state of New Jersey does not allow a deduction from state wages for contributions to pension or deferred compensation plans other than a 401(k), or for employee contributions to flexible spending accounts for insurance premiums, medical expenses and dependent care. Third-party disability pay, which is usually at least partially taxable for federal purposes, is exempt from NJ state income tax and will not be included in the state wages amount.

You should also check to see if the box for “Retirement Plan” in Box 13 is “x-ed”. If it is, and you were NOT an active participant in an “employer plan” during 2010, you should contact the employer immediately and request that a corrected copy be issued to both you and the Social Security Administration. Your participation in an employer plan can affect the deductibility of any traditional IRA contributions you may make for the year.

This advice is especially important for trade union employees. I refer you to the situation discussed in my post A TRUE STORY. This issue was eventually resolved when the taxpayer was able to get the “offending” employers to reissue a corrected W-2 (via W-3c and W-2c).

If you do not receive a W-2 from a job you had in 2010 and you cannot contact the employer because it has gone out of business or disappeared all is not lost. You can use your pay stubs or other records to reconstruct the various items of income and withholding and file Form 4852 “Substitute for Form W-2 Wage and Tax Statement” with your federal and state tax returns. In such a situation I recommend that you consult a tax professional.

You should do the same with 1099s you receive. Check the income reported on these returns to your own records, and make sure that, if interest for several accounts are included on one Form 1099-INT, all the accounts listed actually belong to you.

A word to the wise – just because you have not received a Form 1099 does not mean that you do not have to report the income. If income is taxable it is taxable whether or not you receive a Form 1099. And just because you have not received a Form 1099 does not mean that one has not been issued. The form could have gotten lost in the mail or sent to an old or wrong address. But while your copy was lost chances are that the one sent to the IRS made it.

Here is another heads up - Insurance and telephone company dividend checks mailed out in December or January often have a Form 1099-DIV attached. Do not separate the check and throw out the 1099-DIV by mistake thinking it is merely a check stub. Also check any 1099-DIV you receive from an insurance or telephone company to see if there is a dividend check attached. I can’t tell you how many times I have found checks attached to 1099s given to me by clients at tax time.

And finally, 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 2010 but you receive a 2008 Form W-2 from the partnership you should go to the partnership’s accounting firm and tell them that they goofed.

TTFN

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

* Did you see my second column of “year-beginning” tax tips at MAINSTREET.COM – “Keep Good Records”?

* Paul Caron, the TAX PROF, takes us to a story from Time Magazine that tells about a Swiss village where tax collectors tell a delinquent “Pay Your Taxes or We'll Kill Your Dog”

* FYI, In his first State of the State address on January 11, 2011, New Jersey Gov. Chris Christie called for "comprehensive tax reform" for corporation business and gross (personal) income taxes, and said his fiscal year 2012 budget would not include any tax increases. Christie feels the state needs to reform the taxes placed on business and individuals and begin to roll them back. Gov. He will propose the initial installment of a reform package in his budget, which will be presented next month.

* Kay Bell reminds us not to “double dip” in her post “Haiti Earthquake Anniversary and Charitable Deduction Reminder” at DON’T MESS WITH TAXES. The highlight below is mine -

If “you made a cash contribution to Haitian earthquake relief efforts between Jan. 12 and Feb. 28, 2010, and you deducted that amount on your 2009 return last year, be sure you don't deduct it again on your 2010 return”.

* And Kay also tells us the details of “New Federal Tax Refund Debit Cards for Taxpayers Without Bank Accounts”.

*However, Trish McIntire (who you read about in yesterday’s TAX BLOGOSPHERE BUDDY installment) tells us the debit card offering is “Too Late, Try Again Next Year” at OUR TAXING TIMES.

“The problem is that they are too late for this program to be effective this year.”

* The Tax Foundation’s TAX POLICY BLOG reports on a great idea in “Pawlenty Proposes Making Congressmen Do Their Own Taxes”.

* Stacie Clifford Kitts rants about another reason I do not use tax preparation software in her post “Here’s A Lesson In Questionable Customer Service – Don’t Mess With Someone Who Has A Blog That People Actually Read” at STACIE’S MORE TAX TIPS.

* The “Cohan Rule” is alive and well! The Small Business Taxes and Management site tells how this rule was applied to moving expenses and a casualty loss deduction in its January 14th news item headed “Documentation is essential in securing any deduction, but you may be able to convince the Court to give you at least a partial benefit”.

* Joe Kristan reports on the wife of a Congressperson who got only slightly more punishment than Chuck Rangel for tax fraud in “Mrs Congresscritter Gets 30 Days for Tax Cheating” at the ROTH AND COMPANY TAX UPDATE blog. Both she, and certainly Chuck, deserve a more appropriate sentence.

BTW - I agree, as does Joe, with how the prosecutors characterized her husband. As Joe says, “When you see the work they do, it's hard to argue with that".

* The top item on the MONEY section of Friday’s USA TODAY was “Use Smartphone App to File Taxes”. It seems that TURBO TAX has an “app” that allows you to file a Form 1040EZ using their cell phone – for $14.99. I have rarely even looked at a 1040EZ over the years, but from what I recall it is so easy that even a Congressperson could prepare it. Why pay $14.99? And what about the state return. Hey, I don’t have a cell phone anyway.

Inside the same section was an item touting the IRS Free File program. As the article states, when you use the IRS Free File program you still involve a third-party tax preparation or tax software company in the process. So you are subject to the third-party’s advertising and sales pitches. It is not a way to file your return directly with the Internal Revenue Service. And I do believe that, while the federal filing is free, you may have to pay for filing your state return.

* We (tax bloggers) have all been telling you about the “raise in pay” resulting from the 2% reduction in Social Security withholding for 2011. However some taxpayers are actually taking home less money. TAXGIRL Kelly Phillips Erb explains why in “Ask the taxgirl: Screwy Withholding”.
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* The RED TAPE CHRONICLES from MSNBC is reporting “Tax Refund Loans Disappear, Now, More Fees”.

Henry and Richard are not offering RALs this tax season – but that hasn’t stopped them from looking for other ways to screw clients with high fee (and high profit) products. The item tells us -

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“H&R Block Chief Executive Alan Bennett has vowed to create ‘other financial products’ to fill the void -- speculation has centered on other high-cost, short-term loan products.”

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And -

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“Trainees who attend H&R Block employment sessions are being instructed to upsell short-term loans called 'Emerald Loans' offered by H&R Block Bank, according to people familiar with the training.”

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TTFN

TAX BLOGOSPHERE BUDDIES - TRISH MCINTIRE

Today’s blogosphere buddy is Trish McInture, EA of the McIntire Tax Center in Arkansas City, Kansas, author of OUR TAXING TIMES. Trish often writes very specifically about the tax preparation business. While she does not post as regularly as my other “buddies” (I try for at least one post per day Mon-Sat – except during the tax season hiatus), when she does publish she usually has something good and interesting to say, and I often find myself saying “Right on, sister!”. A fellow lover of the American Musical Theatre, Trish is very involved in her local theatre group.
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(1) How did you become interested/involved in preparing tax returns or teaching taxes? .
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I was trying to stockpile some money for grad school and saw an ad for a tax school. The hours would work into my full time job. A few years later, the job market for theatre grads died. By then, I had started to build my own client base and liked the extra money.

(2) How were you educated/trained in preparing tax returns?

Like many general preparers, I took the HRB tax school. First the Basic class, then other advance classes as they were offered. I was lucky that the owner of the franchise (my mentor) insisted that if we had a question that we researched it before coming to him. That in itself was a great learning experience. As was studying for the EA exam.

(3) When and why did you decide to write a blog on tax issues?

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Early in the history of the internet I started playing with writing the code for websites. Soon, I was doing my own and a few for other businesses. I took an online class on blogging because this was a new internet trend. Part of the class was to write a blog, and I continued on once the class ended. This was in 2004 and at the time I could only find one other tax blog (class assignment) and soon they stopped posting.
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(4) How has blogging helped your business?

I can’t say that blogging has helped my business financially. My clients know I write a blog, it’s in my newsletter, but I don’t think they are that interested in following tax info. New clients come mostly from recommendations from existing clients. The business help I have received is from keeping current with issues and thinking them out enough to write about them. Also, the attention I have been getting lately is great for my confidence.

(5) What do you consider the “best tax advice” you can give anyone?

Take responsibility for your taxes and return. Too many taxpayers don’t look at their return. I review the return with clients and too many tell me to skip to the refund/balance due. They won’t tax plan and then whine and grip when they don’t get the results they wanted.

(6) Do you think the regulation of tax return preparers is a good thing?

Yes!!! There are a lot of good, honest people in the profession who are competing against “preparers” who are not following the rules or don’t have basic tax knowledge. Look at the ads and you see the offices who are offering to file a tax return based on the last pay stub or other illegal practices. If you follow a public tax bulletin board or forum, I am sure you will see some “paid Preparers” asking simple questions because they didn’t take any type of class and are relying on their software. The licensing should give the IRS the ability to track the problem preparers and I am hopeful that the taxpayer education will wake most taxpayers up. Taxpayers tend to assume that a paid preparer knows what they are doing and end up getting hurt. We will never see all the bad preparers leave the field but I think the new rules will make it harder for them to operate.

(7) Do you think CPAs and attorneys should be exempt from testing and required CPEs in taxation?

If the CPA or Attorney is signing returns, I don’t see the problem with them having to pass the basic tests and keep up on the CPEs in tax. To be honest, I bet most of them are already meeting the standards. My issue is the audit CPA who thinks he can do returns or help a friend with a tax audit because he has the letters CPA after the return. My sister-in-law is a prosecutor but that doesn’t mean she has any business doing taxes. She would be the first to admit that but some let their ego get ahead of what’s best for the client.

(8) What is your favorite Broadway musical – and why?

That’s a hard one. I boiled it down to 2. One everyone does the other you seldom see. But which one to mention . . .

Into The Woods – Great story and music. It’s one I’ll watch on any level from High School on up. The music is all over my iTunes. Not just from the production but covers by other artists. I love the way it plays homage to folk tales but at the same times says that these are stories not real life. Real life is relying on yourself and making hard choices.

My “buddies” all have good advice. I agree with Trish that too many clients are only interested in the “bottom line” and do not take the time to actually read the 1040. I try to emphasize in the cover letter than is included with the finished return that even though my signature appears on the return they are legally responsible for everything that appears on the return, and that they should contact me immediately if they find something that they do not understand.

To be fair, while Henry and Richard’s actual tax preparation leaves much to be desired, I have heard that their tax courses are very good.

A good Broadway selection, as was the other musical she considered (I asked). Careful what you say - children will listen.

Next week we meet Mary O’Keeffe of BED BUFALLOES IN YOUR TAX CODE.

TTFN

THE NEW JERSEY PROPERTY TAX RELIEF PROGRAMS – PART II

OK – so back to the presentation on the NJ property tax “relief” programs made by NJDOT’s Jacob Foy at this past Saturday’s NJ-NATP state tax seminar. We have covered the NJ Homestead Benefit program, so it is on to the Property Tax Reimbursement program.

I feel I must begin with a caveat – what I will be discussing in this post is how things are under current law. Things may change when the cafones in Trenton pass the new fiscal year budget in probably June.

FYI, the PTR-1 and PTR-2 blue-covered application packages should be going out in the mail by mid-February. I expect the initial filing deadline will again be June 1, 2011, but, based on past history, this deadline could be extended through the end of 2011.

You qualify for a 2010 property tax reimbursement if -

• as of December 31st of both 2009 and 2010 you, or your co-owner spouse, was age 65 or older or receiving federal Social Security disability benefits, and

• you lived in New Jersey, as either a homeowner or tenant, continuously since before January 1, 2000, and

• you owned and lived in the home for which you are claiming a reimbursement of the property tax increase since before January 1, 2007, and

• you paid in full the total amount of property tax due on your home for 2009 by June 1, 2010, and for 2010 by June 1, 2011, and

• your gross income for 2009 and 2010 was $80,000 or less.

For purposes of the 2010 application, the income limitation for 2009 and 2010 is $80,000. It is $80,000 for 2009 and $80,000 for 2010. If you otherwise qualify for the reimbursement, but either your 2009 gross income or your 2010 gross income (which includes just about everything – including 100% of Social Security and Railroad Retirement benefits, unemployment, lottery winnings, etc and NOT just your NJ Gross Income) is over $80.000, you are out of luck.

For the 2009 Property Tax Reimbursement, even though you qualified for the reimbursement and filled out an application (PTR-1), you did not receive a reimbursement check in 2010 if you did not receive a reimbursement check in 2009 (for tax year 2008).

If you did indeed qualify and complete a PTR-1 application last year - while you did not get a reimbursement check you did establish your “base year” for the program. So when you submit your application for 2010 your “base year” will be 2008. You should receive a PTR-2 application in the mail next month.

As part of the PTR-2 application you must verify that you have paid in full all of the 2010 taxes assessed on the property (on the PTR-1 you must prove that you paid all of 2009’ and 2010’s property taxes) either directly, via mortgage escrow, or by a senior or veteran’s credit. The best way, and the way that the State of New Jersey prefers, is to include the PTR-1A or PTR-2A form with the application. This is a form that you take to the Real Estate Tax office of your local municipality to have filled out and stamped.

For the information of my clients - I do not prepare the Property Tax Reimbursement applications (PTR-1 or PTR 2). However I will, if requested, provide the appropriate income information for the back of the application form based on your 2010 federal income tax return.

One problem with being a tax preparer - clients, and the public, assume that because you are proficient in completing one type of federal and state form (the individual income tax return) you are proficient in filling out all federal, all state and various other forms and applications.

I prepare federal and certain state individual income tax returns for a fee because I have the training and experience, and desire, to do so. I, and probably your tax professional, have absolutely no training or experience in preparing student financial aid applications, census forms, state senior citizen prescription or utility assistance applications, mortgage applications, etc, etc, etc. Nor do I, and perhaps your tax pro as well (although some do), have any desire whatsoever to learn how to prepare these forms and applications. As I tell clients who ask – it is not that I don’t want to help, but I do not know any more about these forms or applications than you do, and perhaps actually less, and I don’t want to risk your potential benefits by filling them out incorrectly.

Back to the NJ Property Tax Reimbursement program – you can get more information on the program at the NJ Division of Taxation website. Click here.

TTFN

HERE WE GO AGAIN

I have begun my tax season long Tax Tip column at the MAINSTREET.COM “Tax Center”– and have started out by telling you to “Start Your 2011 Return Now”.

The first series of columns will discuss “year-beginning” tax planning.

The column will appear twice a week – Tuesday and Thursday – thru the second week of March, and will turn daily (Monday-Friday) from March 14-April 18.

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

Some good news! I had seen conflicting stories about whether or not blank federal income tax forms would be available at local Post Offices this year. When at my PO branch to send off my client mailing I saw three piles of forms out on the counter – Schedule B, Schedule M, and 1040EZ! I expect the 1040s, 1040As and Schedule As will follow. They are out early this season. I will still make a couple of runs to the IRS office on Rt 22 in a week or so and sneak out handfuls of other oft-used forms and schedules (you are supposedly only allowed 10 forms at a time).

* Guess who made the list of “50 Fantastic Accounting Blogs” at ONLINE ACCOUNTING DEGREE?

“The Wandering Tax Pro: Ever wish that you could just bump into someone, randomly on the street, who could help you file your taxes perfectly this year? Here's your best shot.”

The list was alphabetical; the blogs were not listed in order of “fantasticness”.

Thanks, guys!

* Over at the IRS PROBLEM SOLVER BLOG attorney Darren Mish lists the “Top 20 Celebrity Tax Debtors (Part I and Part II)” of 2010

“A look back at 2010 reveals 20 celebrities who hogged the limelight for all the wrong reasons – their tax debts to the IRS.”

Showing my age, and tastes, – I have not heard of several of the “celebrities” on the list.

* The latest in the series of IRS “Tax Tips” - IRS Tax Tip 2011-06 – lists “Points to Keep in Mind When Choosing A Tax Preparer”.

The points are all good. I was surprised when I came to #10 - “Make sure the preparer signs the form and includes their PTIN”.

This is a very important point, and should be included probably as worded, but I was expecting the IRS to put as the #1 point – “Be sure the preparer has registered with the IRS and has a PTIN. Only those individuals who have registered with the IRS are permitted to prepare federal income tax returns for a fee” – or something to that effect The IRS missed an excellent opportunity to begin its promised public education campaign for the new preparer registration regime.

The tip does make a good point –

"Remember, no matter who prepares a tax return, the taxpayer is legally responsible for all of the information on that tax return."

* Dianne Kennedy tells you what you can’t do with your IRA in “Avoid These Prohibited Transactions with Your IRA” at the US TAX AID blog.

* A “tweet” from MISSOURI TAX GUY Bruce led me to “The Smart Way to Use a Credit Card For Your Business” at the INTUIT SMALL BUSINESS BLOG, which has some good advice. Thanks, Bruce!

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* Some great advice from EZEE TAX blog – “Avoid Refund Anticipation Loan This Year”!

The ads have begun – and it appears that Henry and Richard will be offering RALs this year. An H+R ad tells you to come into their office and walk out with a check for up to $9999 – with no “out of pocket” cost to prepare your return. This is truly misleading. Of course there will be excessive costs for both preparing the return and getting the RAL – much more than you should be paying for either “service” – which will come out of your refund and reduce the amount of the check you walk away with. {Mea culpa - apparently Henry and Richard are not offering RALs this year - I misunderstood the ad. See the first comment below.}
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* Stacie Clifford Kitts is back and having a little fun with IRS advice in “Picking Apart the IRS’ Top 10 Tax Time Tips”

* TAX PROF Paul Caron tells us some of the findings of the IRS Oversight Board’s 9th Annual Taxpayer Attitude Survey of 1,000 respondents in “IRS Releases 2010 Taxpayer Attitude Survey”.

Click here to view the report.

* Kelly Phillips Erb lists the various disaster areas in the US for which “Disaster Relief Available for 2010 Tax Year” at TAXGIRL.

* ACCOUNTING TODAY reports that “At Least 20 IRS Contractors are Tax Delinquents”.

“The Internal Revenue Service does not verify that government contractors have paid federal taxes, despite a presidential directive last January that contractors with serious tax delinquencies not receive new work from federal agencies, and at least 20 contractors for the IRS owe a total of approximately $5.2 million in unpaid taxes, according to a new government report.”

The report that the item refers to is “Federal Guidelines Do Not Prohibit the Awarding of Contracts to Contractors With Delinquent Tax Liabilities” (2010-30-120) from the Treasury Inspector General for Tax Administration (TIGTA).

According to the report Highlights-

“From a review of 135 contractors with an award equal to at least $250,00, TIGTA identified 20 (15%) with delinquent tax liabilities totaling $5.2 million.”

All the IRS has to do is withhold the delinquent tax liability from the payments it makes to the contractors. What is so hard about that?

* Sorry – I couldn’t resist. Slut and “author” Snookie from THE JERSEY SHORE read David Letterman’s TOP TEN list on Monday (I obviously did not watch). I was shocked to learn that she could count to 10 (or that she could read cue cards)! FYI – I have nothing specific against Spookie or THE JERSEY SHORE (other than that the show is among the worst of the worst). I find the participants on such crap as THE BACHELOR and just about anything on MTV or VH1 or E! (except, of course, THE SOUP), and the shows as well, equally excremental.

TTFN

THE NEW JERSEY PROPERTY TAX RELIEF PROGRAMS – PART I

This past Saturday I attended, as I do each year, the annual State Tax Seminar run by the NJ chapter of the National Association of Tax Professionals.

This year the entire day was devoted to state tax issues. The morning started off with an introduction to the new Acting Director of the NJ Division of Taxation, Michael Bryan. Let me say that for the first time in many years I have hope for the NJ Division of Taxation. Mr. Bryan was followed by brief presentations on tax law changes for NJ’s neighbors – Pennsylvania, Delaware and New York – followed by a panel discussion where each state, NJ included, described how it would handle specific client tax situations.

The afternoon was devoted to New Jersey corporate and individual taxes and the state’s “property tax relief” programs – the annual “Jim and Jake Show”, so-called because of the two excellent NJDOT speakers Jim Gordon and Jacob Foy who have been a fixture, and usually the highlight, of the NJNATP annual state tax seminars for quite a few years now.

For a complete “review” of the day check out my Monday post “1” at THE NJ TAX PRACTICE BLOG.

Perhaps the most important item of the Jim and Jake show was the explanations of the New Jersey Homestead “Benefit” (no longer Rebate) and New Jersey Property Tax Reimbursement (aka “Senior Freeze”) programs for 2011.

FYI, NJ homeowners and tenants did not receive any Homestead rebate or benefit in calendar year 2010. Senior and disabled tenants who did not have to file Form NJ-1040 for 2009 did receive a $50.00 check in 2010 – but this was a payment of the “Property Tax Credit” and not a tenant rebate.

First off – there is no more tenant rebate or “benefit”, regardless of age or health. Tenants will get no “benefit” in 2011. As was the case in 2010, senior and disabled tenants who do not file a 2010 NJ-1040 will receive a $50.00 “Property Tax Credit” check if they file the new NJ-1040-H form that is included in the 2010 NJ-1040 package (replacing the TR-1040 form).

Qualified homeowners under age 65 and not disabled won’t receive a benefit in 2011 if their 2009 NJ Gross Income (Line 28 on the 2009 NJ-1040) was over $75,000. Those age 65 or older and/or disabled get no benefit if their 2009 NJ Gross Income is over $150,000.

The NJ Homestead rebate check of past years has been replaced with a credit against the actual tax bill issued by the qualified homeowner’s municipality. The credit will appear on the municipal tax bill for the 2nd quarter of 2011 – the bill whose payment is due on May 1, 2011. Municipalities will be mailing out corrected 2nd Quarter 2011 tax bills to homeowners sometime before May.

This idea was, I believe, first proposed by former Governor Corzine at the beginning of his tenure, before he lost his testicles and sat back and let the ethically-challenged state Democratic Party leaders continue to run the show. I am very pleased to see Governor Christie decided that this method of delivery is the proper way to go.

From a federal income tax point of view this way of distributing the “benefit” is “more better”. When a taxpayer receives a refund of an item that was deducted on the previous year’s tax return, such as with a state income tax refund or the former Homestead Rebate, the refund is reported as income on Page 1 of the Form 1040. There is a specific memo from either the IRS or NJDOT that indicates this is the proper treatment of the NJ Homestead Rebate check.

Reporting a rebate or refund as income on Page 1 increases the taxpayer’s Adjusted Gross Income (AGI) and can therefore reduce a multitude of deductions and credits that are phased-out or eliminated based on AGI, and can also cause more of a retiree’s Social Security or Railroad Retirement benefits to be taxed.

If the benefit is provided as a credit against actual real estate tax billed and paid during the year, the taxpayer simply claims the reduced amount paid as a deduction on the current year’s Schedule A. The taxpayer’s AGI is not increased – his/her net taxable income is.

Jacob Foy explained how the “benefit” qualified homeowners will receive in 2011 will be calculated.

The benefit to be distributed in 2011 is actually the 2009 NJ Homestead Benefit. The application forms were sent out in September 2010 and the deadline for submitting the application was eventually extended to January 3, 2011. The benefit for 2011 is based on where one lived on October 1, 2009.

Step One - You begin with the tax assessed - and paid - on the property that you owned and lived in on October 1, 2009 for calendar year 2006, whether or not you actually lived in that house in 2006. If the house you owned and lived in on October 1, 2009 was not built in 2006 the state will estimate the tax that would have been paid on the home based on the property’s current assessed value and the municipality’s 2006 property tax rate.

The property tax is capped at $10,000. If the 2006 tax on the qualifying property was $11,500 the benefit is based on $10,000.

Step Two- Multiply the 2006 property tax by a percentage – depending on status and income.

For those age 65 or older and/or disabled if 2009 NJ Gross Income was -

Not over $100,000 = 20%
Between $101,001 and $150,000 = 10%

For those under age 65 and not disabled –

Not over $50,000 = 20%
Between $50,001 and $75,000 = 13.34%

Step Three - The amount of 2009 NJ Homestead Benefit you will receive as a credit on your May 1, 2011 tax bill is one-fourth (1/4), or 25%, of the amount determined in Step Two.

Let us say you are not 65 or older or disabled. Your 2006 property tax was $4,200 and your 2009 NJ Gross Income was 63,700. Your 2009 NJ Homestead Benefit, the credit that will appear on your revised property tax bill, will be $140.07, determined as follows –

$4,200.00 x 13.34% = $560.28 x 25% = $140.07.

The maximum 2009 NJ Homestead Benefit is $500.00 ($10,000.00 x 20% = $2,000.00 x 25% = $500.00).

Some people will actually receive a “benefit” check in the mail, or via direct deposit, in 2011. You will get a check if –

(1) You are a qualified homeowner who lived in a co-op or continuing care retirement community on October 1, 2009 (where the actual tax bill is sent to the co-op association or community and the owners pay their share of the tax, based on their individual unit of ownership, to the co-op association or community), or

(2) You indicated on the 2009 NJ Homestead Benefit application that you no longer own the qualifying property.

If you sell the qualifying property after submitting your benefit application and before paying the 2nd quarter tax bill you are somewhat screwed. If you indicated on the application form that you still owned the property the credit will stay with the property.

Let’s say you submitted your 2009 application back in October of 2010 and indicated that you still owned the property. In February of 2011 you sell the property. The Homestead Benefit to which you are entitled will still appear as a credit on the 2nd Quarter 2011 property tax bill from the municipality – so the new owner will get your benefit. Do you think that the new owner is going to send you a check?

In such a situation you should be sure to include an adjustment on the Closing Statement for the 2009 NJ Homestead Benefit that you, the seller, are entitled to but will not receive. If, as in the example from above, you are entitled to a $140.07 benefit you should receive an additional $140.07 from the buyer at closing.

Information on the 2009 NJ Homestead Benefit is available on the NJ Division of Taxation website. Click here.

Any questions?

The 2010 NJ Property Tax Reimbursement, to be paid in 2011, which is for qualified homeowners age 65 or older or disabled only, is even more complicated. I will discuss this here at TWTP on Thursday.

TTFN

MY PERSONAL EXPERIENCE

The IRS recently issued regulations that, while they must register with the IRS, pay the fee, and receive a PTIN, employees of CPA firms, who are “supervised” by a CPA, that work on, but do not sign, a federal income tax return are exempt from the competency test and CPE requirements.

As I mentioned in a recent BUZZ installment, Trish McIntire of OUR TAXING TIMES takes exception to this regulation in her post “No! Bad IRS!” at OUR TAXING TIMES, and I agree with Trish’s opposition to the policy.

As I quoted Trish –

“First, since CPAs are not subject to the testing, how does the IRS know they are qualified?”

And -

“My second issue is the supervisory question. I am sure there are firms with serious documentation and review procedures in place. The CPA signer makes sure the return is correct. But how many firms just give the returns a look over, especially the easy(?) parts, and slap a signature on the return. After all they can charge more if the CPA signs the return than if the intern does.”

Many, many years ago I was one of these individuals employed by a CPA firm, Deloitte Haskins + Sells (one of the then “big eight”), as a “para-professional”, and “supervised” by CPAs, who prepared 1040s for the firm’s small business clients. I was obviously not a CPA, and I was also did not have a college degree in Accounting or Finance. To be honest it was so long ago that I do not remember if I personally signed the returns I prepared, or if they were signed by the “supervisory” CPA.

In applying for the position I had to take a very brief and basic test in bookkeeping and accounting (I was told that I had the highest score of any applicant at that time). I do not recall if there were any 1040 questions on the test. I was not provided any other training or instruction in any aspects of bookkeeping, accounting or tax return preparation (1040, 1065 or 1120) during my employment. Yet I was expected to prepare 1040s.

None of the 1040s I prepared were corrected or adjusted by any of the reviewing CPAs, I expect as they were correct as originally prepared, so I had no indication of the extent of the “review”. As far as I knew the reviewng CPAs merely “signed off” on the return.

Luckily I knew what I was doing, having prepared federal income tax returns for several years. Actually, because of my knowledge and experience in individual income tax preparation, it was the CPAs who came to me with their 1040 questions instead of the other way around. And I found errors in prior year returns that had been prepared by a CPA and “reviewed” by several additional CPAs.

I am not writing this post to “toot my own horn” – but to show that I did not have to prove to my employing CPA firm via testing that I had any knowledge of the Tax Code, I did not receive any training from the firm in tax preparation, and I was not required by the firm to take CPE in anything. Yet I prepared “substantially all” of several federal and state income tax returns.

To be fair this was truly many, many years ago. I have no knowledge of the testing or training requirements of similar employees of Deloitte Touche, or any other CPA firm, today. But I doubt if there have been any changes.

TTFN

A RAISE IN PAY!

Did you notice an increase in your first paycheck of the year?

No – your boss did not decide to give you a raise. Congress did! The Tax Hike Prevention Act passed in mid-December gave all workers, both employed and self-employed, a 2% raise.

The Act reduced, for 2011 only, the employee share of the Social Security component of the FICA tax by 2%, from 6.2% to 4.2%.

If you earn $1,000 a week your Social Security withholding had been $62.00. For 2011 it will be $42.00.

Social Security withholding stops when your wages for the year reach $106,800. So the maximum you can save is $2,136.00. The maximum amount of employee Social Security withholding for 2011 is $4,485.60.

If you have more than one employer in 2011 and the total amount withheld for Social Security by all employers exceeds $4,485.60 you can get a refund of the excess withholding when you file your 2011 Form 1040.

The employer share of Social Security remains unchanged. Your boss will continue to pay 6.2% of your earnings, up t $106,800, into Social Security.

Self-employed individuals pay into Social Security via the “self-employment tax”. They also get the 2% savings. The Social Security component of the self-employment tax for 2011 drops from 12.4% to 10.4%.

If you did not notice the 2% increase in your first paycheck it may be because your employer’s payroll software has not yet been adjusted to reflect the change. The reduction is required to be in place by January 31, 2011. You must get a “catch-up” adjustment for any over-withholding no later than March 31st.

This 2% reduction in payroll taxes replaces BO’s “Making Work Pay” credit, which replaced Dubya’s disastrous rebate checks. While the MWP credit maxed out at $400.00 ($800.00 for a married couple), as I mentioned above this method can put a maximum of $2,136 ($4,272 for couples) in your pocket! However those who earn $10,000 per year will only get $200, where under Making Work Pay they got $400.

This tax cut is projected to cost $120 Billion.

TTFN

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

* Oi vey! Kay Bell tells us that “Romanian Witches Face Curse of Taxes” at DON’T MESS WITH TAXES.

How are the witches reacting to this?

“Witches who must pay an income tax for the very first time are planning to use cat excrement and dead dogs to cast spells on the president and government officials.”

If it works for the witches in Romania maybe we should try it here.

* The IRS HITMAN has some good advice in his post “The Top 5 Ways to Save on 2010 Tax Filings”.

My only exception to what he has to say comes in item #4 “Get Help If Needed”. Hitman says, “Use a tax program or a reliable professional”. My advice – skip the tax program and go directly to a reliable professional.

As I always say at this time of year – no tax software package is a substitute for actual knowledge of the Tax Code, and no tax software package is a substitute for a competent tax professional.

* This is nothing new – but it is the first I have heard this idea mentioned in a while. Jonathan Berr puts forth “A Modest Proposal: A (temporary) IRS Amnesty” at 24/7 WALL STREET. It is good to see this being discussed again.

I proposed a federal TAX AMNESTY program years ago. See “Tax Amnesty”. I even wrote to my “representatives” in Congress about it. See “Hey, a Politician Actually Responded to My Letter!”.

Here is Berr’s plan.

“Under the 24/7 Wall St. plan, individual and business taxpayers who owe less than $100,000 in back taxes would be able to come clean with the IRS and not be subject to penalties. Those above that threshold would see their additional costs for compliance cut in half. They would still owe the taxes, which they would be able to pay off over time. Anyone under civil and criminal investigation would not be eligible. It would last for about a month.”

The objection to such a program in the past has been concerns that amnesty would ultimately hinder tax collection and reduce net revenue - individuals would become less likely to pay their taxes in future years, perhaps in expectation that the government would once again write off interest and penalty fees.

I deal with this objection in my above referenced posts.

* Not that I would ever suggest that you should use tax preparation software if you do not know what you are doing – or use it as a substitute for going to a tax pro (see my comment on the IRS HITMAN post above). But if you are interested in free tax software you may want to participate in the “Tax Trivia Giveaways” conducted by Kelly Phillips Erb (the subject of yesterday’s TAX BLOGOSPHERE BUDDIES installment) at TAXGIRL.

“I have 20 access codes for free CompleteTax online tax prep software to give away to taxgirl readers, thanks to the good folks at CCH. Each code is good for online tax preparation and filing for one 2010 federal and one 2010 state tax return using CompleteTax’s top-level Premium MVP.

And here’s how the giveaway will work. Over the next several days, I will randomly post 15 tax trivia questions. The first reader to submit the correct answer wins.”

For the complete rules check out Kelly’s post.

* As I reported yesterday, the Taxpayer Advocate is looking for suggestions on how to reform the Tax Code. Jeff Beckley CPA of Texas kicks off his new THE TAXX MAN blog with a “Quick List of My Proposed Changes to the Tax Code”.

Welcome to the Tax Blogosphere, Jeff!

* Peter Reilly discusses the “parsonage exclusion” and related Tax Court case Philip A. Driscoll, et ux. v. Commissioner, 135 T.C. No. 27 in “Blowing My Own Horn”, a follow-up to his post “Parsonage Exclusion – Shouldn’t Enough Be Enough?”, at PASSIVE ACTIVITIES AND OTHER OXYMORONS. I need to review this issue and comment on it in a future post.

* Joe Arsenault uses an emotional personal experience to answer a tax question in “The Dependency Exception of Life” at CAFÉ TAX.

* MSNBC brings us the “11 Most Common Tax Mistakes”.

I especially like #10 – “Preparing your return yourself when it would be more efficient to hire a professional”,

* Some good news on the tax reform front. POLITICO reports “Tax Reform Jumps the Line in Senate”.

“Senate Majority Leader Harry Reid told reporters that he and Sen. Max Baucus, the chairman of the Senate Finance Committee would hold hearings on reform“very, very soon’.”

And -

“About an hour later, Senate Minority Leader Mitch McConnell said he welcomed discussions about how to improve the country’s tax code.”

And finally -

“House Majority Leader Eric Cantor told reporters that tax reform was one issue that he believes could garner bipartisan support and hopes Obama addresses it in the State of the Union Address at the end of the month.”

* As for BO, Ryan J. Donmoyer and Rich Miller report at BLOOMBERG BUSINESSWEEK “Obama in Political, Economic Quandary as He Weighs Tax Overhaul”.

“President Barack Obama and his economic team are torn over whether to make overhauling the tax system a priority or relegate it to a brief mention in his annual State of the Union address, a top administration official said.”

Don’t be such a wimp – make it a priority!

* TAX MAMA Eva Rosenberg lists some “Stupid Tax Tricks – Things Not to Do”.

* If I might be able to end on some Reality TV bashing: The title of the new book allegedly written by Snooki, the slut from THE JERSEY SHORE, is “A Shore Thing”. It is obviously a play on the phrase “a sure thing”. I expect it is a reference to Snooki’s “easiness”. Get her drunk at a local bar and she is “a sure thing”.

TTFN

THE TAXPAYER ADVOCATE SERVICE WANTS TO HEAR FROM YOU

National Taxpayer Advocate Nina Olsen believes the time for tax reform is now! (see my post on her recent report to Congress – click here). She is encouraging a serious dialog on the issue.

To help this dialogue along, the Taxpayer Advocate Service has established a vehicle to receive taxpayers’ suggestions about tax reform. You can go to the TAS website and provide your recommendations for tax reform.

“We ask that you approach this with the frame of mind that everything – even the tax breaks that benefit you or your businesses personally – should be on the table. What would you be willing to give up if you knew that others are giving up their breaks and the end result would be a much simpler system? What particular provisions of the existing tax system are especially burdensome or seem particularly unfair? So, let us know. We promise to track these suggestions and post them periodically, thereby helping to further the cause of tax reform and tax simplification.”

To submit your comments on this issue click here. Or you can submit your suggestions via email to taxpayeradvocate@irs.gov.

I will be preparing my comments and submitting them sometime in the next week, and will publish them here as well.

BTW – Here is the dedication from Nina’s recent Report to Congress -

“This year’s report is dedicated to the hardy souls who have worked actively over the years for tax reform and tax simplification, and to the busy majority of U.S. taxpayers who are cheering for them to succeed.”

TAX BLOGOSPHERE BUDDIES - KELLY PHILLIPS ERB

Today we talk with Kelly Phillips Erb, aka the internet’s TAX GIRL, from Philadelphia PA. Kelly’s blog was one of the first I started reading regularly when I discovered the tax blogospere. A tax lawyer with a Masters of Law in Tax, she has been a partner, with her husband, in The Erb Law Firm, PC for the past ten years. TAX GIRL has several cool regular features, including “Ask the Tax Girl” and “Fix the Tax Code Friday”. In addition to her popular blog Kelly also writes on tax issues for WALLET POP.

1. How did you become interested/involved in preparing tax returns or teaching taxes?

In my first year of law school I announced to my entire section that I was never taking Baby Tax (what we called basic income tax). The idea of it completely bored me. Then, through an odd series of events, I ended up in a Federal Estate and Gift Tax class and absolutely loved it. It was like a crazy puzzle. I signed up for at least one more tax class per semester after that. Ironically, when I was about to get my tax degree, we realized that I still hadn’t taken Baby Tax - I had to go back and take it after taking all of these upper level classes. My lesson? Never say never.

2. How were you educated/trained in preparing tax returns?

Law school played a huge role initially. I took a number of tax classes while getting my law degree (JD) and then continued my education by getting my Masters of Law in Tax (LLM). While in law school, I also had the opportunity to clerk in the estates tax division at IRS so I was exposed to the IRS side of returns (and audits) first hand.

In private practice, I’ll still never forget the first tax return I ever prepared - it was a 706. I sat through the client meeting, taking notes. After the client left, my supervising attorney tossed me the case file and said, “Here, do the return.” No handholding, no real instructions. But I did it. I felt pretty confident about my understanding of the basics of the return before I even got started but there’s still something daunting about signing as a preparer for the first time.

3. When and why did you decide to write a blog on tax issues?

In 2004, while updating the static web site for my law firm, I began to wonder if there was a better way to quickly get information to my audience (at that time potential clients). I started poking around the internet and was intrigued by this idea of a blog. Reading and writing about tax had always intrigued me and was something that I felt I was good at. On a whim, I signed up for a free Blogger account and started writing under the moniker “taxgirl” which I took from my firm email address; I had used the nickname since law school. In 2006, I bought the domain taxgirl.com and the rest is taxgirl history.

4. How has blogging helped your business?

Blogging is a great leveler in the legal world because you can get similar exposure to attorneys at bigger firms without a huge advertising budget. I’ve been lucky because my blog has been recognized by some wonderful media outlets which has given me some great opportunities to appear on TV and radio as well as contribute content as guest posts or interviews to publications like Forbes, The New York Times, Inc. Magazine and Esquire. Most recently, I was nominated by the ABA Journal as writing one of the top 100 legal blogs for the 3rd year in a row. That kind of recognition has been a great basis for growing my profile and as a result, my law business.

5. What do you consider the “best tax advice” you can give anyone?

Find a good tax professional (even if you do your own taxes) before you think you’ll need one.

6. Do you think the regulation of tax return preparers is a good thing?

Absolutely. Almost every service professional has some level of regulation, why not tax return preparers? It’s especially important given that the stakes are so high to the government and to taxpayers.

7. Do you think CPAs and attorneys should be exempt from testing and required CPEs in taxation?

I’m torn. I think that CPAs and attorneys are tested and “educated” enough as it is through entrance exams and continuing legal education (CLE) requirements. Imposing another layer of testing and education would be overly burdensome. That said, there’s nothing in place currently that requires attorneys (CPAs may be different and I can’t speak to their educational requirements) to stock up on tax CLEs if they focus on tax law in their own practice - and I do believe that staying on top of tax laws and tax procedures is important. I don’t know how it would work administratively but it would be great to see some kind of “exemption” based on tax or tax-related CLEs rather than a blanket exemption.

8. What is your favorite Broadway musical – and why?

Mary Poppins for purely selfish reasons... When I was a little girl, I was in a pageant and my talent was singing “Supercalifragilisticexpialidocious” - with a lisp. It has remained my favorite song ever since. Beyond that, the musical has such joy. How could you not love it?

More good tax advice.

As for the issue of exemption for attorneys - “another layer of testing”, in this case a one-time probably half-day test, would be no more burdensome for attorneys (or CPAs) then it would be for a similarly experienced previously unenrolled preparer like me. And if the attorney is specializing in taxation I would expect that he/she is already taking significant CPE in federal taxation as part of the CLE regime – so no additional burden here.

I have not seen the Broadway production of MARY POPPINS, so I cannot properly critique her choice. What I have felt about similar Broadway “adaptations” of classic movie musicals, like SINGING IN THE RAIN and most recently WHITE CHRISTMAS (unlike the “musicalization” of non-musical movies like THE PRODUCERS), is why would you spend over $100.00 to see the show when no production could ever be better, and no stars more better, than the original movie, which you can see on tv for free or via Netflix for a few bucks? Although I do recognize the great value of a live production, and MARY POPPINS would be a great way of introducing a youngster to Broadway (my introduction was THE MUSIC MAN at age 5).

Next week Trish McIntire of OUR TAXING TIMES.

TTFN

NATIONAL TAXPAYER ADVOCATE’S REPORT TO CONGRESS

Yesterday (January 5th) National Taxpayer Advocate Nina E. Olson released her 10th annual report to Congress (click here), identifying the need for tax reform as the number one priority in tax administration.

Federal law requires the National Taxpayer Advocate to submit an Annual Report to Congress that identifies at least 20 of the most serious problems encountered by taxpayers and makes administrative and legislative recommendations to mitigate those problems. Overall, this year’s report identifies 21 problems, provides updates on four previously identified issues, makes dozens of recommendations for administrative change, proposes 11 recommendations for legislative change, and analyzes the 10 tax issues most frequently litigated in the federal courts

Nina adds her voice to that of many others lately, myself included, by stating –

“The most serious problem facing taxpayers – and the IRS – is the complexity of the Internal Revenue Code.”

She goes on to explain –

“Perhaps most troubling, tax law complexity leads to perverse results. On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them to either overpay their tax or become subject to IRS enforcement action for mistaken underpayments. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities. Taxpayers have developed a sense of cynicism about the tax system, and compliance takes a hit.”

Nina suggests –

“The most prominent approach would involve reducing tax preferences (often referred to as “broadening the tax base”) in exchange for lower rates.”

And warns –

“If tax preferences are to be eliminated in order to reduce tax rates, we cannot pretend that broadening the tax base means eliminating someone else’s tax break while preserving our own. Everything must be put on the table, and we must understand that, in exchange for lower rates, some tax breaks will be eliminated immediately and others will be phased out. If tax reform proceeds on a revenue neutral basis, however, the average taxpayer’s liability will not change, and we will end up with a tax system that is simpler, more transparent, and easier and cheaper for taxpayers to navigate.”

The bottom line –

“The National Taxpayer Advocate recommends that Congress substantially reform and simply the Internal Revenue Code.”

The #2 problem presented by Nina concerns the Service’s “Increasing Responsibilities for Administering Social Benefit Programs” like the Earned Income Credit.

In discussing this situation Nina says -

“Running social programs through the tax system is beneficial in several respects {FYI, I do not at all agree – rdf}. These benefits include the potential ability to reduce the burden of the application process (via return filing), direct access by the administrator to eligibility data relating to income, and the relative efficiency of the IRS as a payment processor. The benefits also come with a cost to both the IRS and taxpayers. As discussed in detail below, Code-based social programs can undermine the IRS’s ability to perform its core function of collecting taxes. Further, the current enforcement culture of the the IRS may not be optimal for the administration of social benefits.”

She does make the observation –

“The administration of social programs diverts IRS resources away from the agency’s core revenue collection function and can diminish taxpayer service.”

Some of Nina’s legislative recommendations (in addition to simplifying the Tax Code) that “promote taxpayers’ rights” include –

• Repeal or index the dreaded Alternative Minimum Tax (read my lips – repeal, repeal, repeal),

• allow self-employed taxpayers to deduct health insurance premiums for purposes of self-employment tax (as was permitted for 2010 only), and

• improve the accessibility of the Offer in Compromise program.

How will the idiots in Congress respond to the report? Let us hope they listen carefully to Nina and take some of the actions she is recommending.

TTFN

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

Welcome to the first BUZZ of 2011!

* On New Year’s Eve Russ Fox announced the “2010 Tax Offender of the Year” at TAXABLE TALK.

Wesley Snipes came in at #3. For my money the #2 offender was the #1 offender (highlights are mine) –

“Coming in second for the second straight year was the 111th Congress. I’m trying to think of something they did right, but I’m having trouble doing so. Yes, they passed an AMT patch, and yes, they finally addressed the Bush Tax Cuts, but there was no need to wait until December and cause at least one-third of individuals to be unable to file their tax returns until late February. As for the negative actions of the 111th, they are so numerous that I’m convinced this Congress will go down in history as one of the worst ever.”

I do find it appropriate calling the idiots in Congress number two.

Want to know who was the biggest bozo tax offender of 2010? You will have to read Russ’ post.

* Let us sincerely hope that Howard Gleckman is wrong when he writes “Tax Reform Won’t Happen in 2011 (or 2012)” at TAX VOX.

Howard himself says – “I dearly hope I’m wrong”.

Let us do whatever it takes to get the idiots in Congress off their arses and seriously working for substantial tax reform in 2011.

* The TAX POLICY BLOG reminds us of the few provisions of BO’s health care “reform” bill that will take effect in 2011 in “Health Care Tax Changes Starting in 2011”.

The most important item –

“HSAs, Archer MSAs, FSAs, and health reimbursement will no longer cover over-the-counter drugs. These accounts must conform to the definition of the itemized deduction for medical expenses (excluding over-the-counter medicines prescribed by a physician).”

* Kay Bell tells it like it is in “Volunteering is Laudable, But It’s Not Tax Deductible” at DON’T MESS WITH TAXES.

* Kay started the year off with “Tax Carnival #78: Happy Tax New Year!”. I have got to be more attentive – I missed being in it again.

Be sure to check out the entry “Energy Tax Credit 2011 – Not What It Used to Be” from DARWIN’S MONEY. I like what Darwin said in his comments on the revised credit (highlight is mine) -

“The credit, as it is constructed now, is utterly stupid, like most things Congress has been enacting.”

* MISSOURI TAXGUY Bruce starts the year off with some good New Year’s resolutions for all of us in “Forward-Thinking and Feasible Personal Finance New Year’s Resolutions”.

* Speaking of the MISSOURI TAXGUY - Did you catch “An Interview With The Wandering Tax Pro”?

* Trish McIntire of OUR TAXING TIMES suggests that you resolve to “Take Control of Your Taxes” in 2011 and gives you some good advice. Her bottom line –

“As 2011 begins, take control of your taxes. If you don't understand something, ask your preparer or do the research. You might not like the answer but it sure beats wondering if there is something else you could do. Wondering never solves the problem.”

* Trish echoes my sentiments in her post “No! Bad IRS!”.

I like Trish’s two objections to the IRS position (highlights are mine) –

“First, since CPAs are not subject to the testing, how does the IRS know they are qualified?”

And -

“My second issue is the supervisory question. I am sure there are firms with serious documentation and review procedures in place. The CPA signer makes sure the return is correct. But how many firms just give the returns a look over, especially the easy(?) parts, and slap a signature on the return. After all they can charge more if the CPA signs the return than if the intern does.”

* Prof Mary O’Keeffe has been running lots of good informative posts at BED BUFFALOES IN YOUR TAX CODE lately – mostly, I expect, directed toward her VITA volunteer tax preparers. Her “Ages When Taxpayers and/or Dependents Turn Into Pumpkins” tells how various ages affect your Form 1040.

TTFN

FARENHEIT 451

The teaser in the upper right-hand corner of today’s USA TODAY announced “Snooki’s an author”.

Yeah, right. If Spooki is an author I am the new quarterback for the NY GIANTS!

Some, I expect uncredited, “collaborator” hack most likely spit out the garbage in a few hours one afternoon.

Spooki can hardly put two sentences together properly. I didn’t know she could read, let alone write.

Those of you who “get” the title of this post know what I think should be done with this book.

In order to write a book one needs some kind of knowledge. The only knowledge associated with Snooki, and her “co-stars” on THE JERSEY SHORE, is carnal. I can think of some handbooks she might write.

Snooki recently joined a new trade union created for “stars” of MTV, E!, and VH1 reality shows and network shows like THE BACHELOR and THE BACHELORETTE – the National Association of Reality Television Sluts and Skanks (NARTSS). Hey – they don’t belong in AFTRA!

YOU LIKE ME! YOU REALLY LIKE ME!

I was honored to be interviewed in depth by fellow tax blogger Bruce McFarland, the MISSOURI TAXGUY (complete with picture – my only digital one). Check out “An Interview with The Wondering Tax Pro”.

Bruce was the subject of my first TAX BLOGOSPHERE BUDDIES series. Click here for my mini-interview with the MISSOURI TAXGUY.

I have also been honored by the National Association of Tax Professionals as the Member of the Month for January 2011!
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From the NATP press release-

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“Robert D Flach, of Taxpro Services Corporation in Jersey City, was recently named NATP Member of the Month for the month of January 2011. To achieve this honor, NATP members are nominated by their peers and selected based on their steadfast commitment to continuing education in the tax field, solid business practices, and volunteer efforts with NATP and in their own communities”

NATP has 20,500+ members.

2010: THE YEAR IN TAXES – PART II

The new “gimmick” for 2009 tax returns filed in 2010 was BO’s “Making Work Pay” credit, which replaced George W’s “rebate” checks. While a step in the right direction, this credit turned out to be, like Dubya’s rebates, more trouble than it was worth.

The credit was based on 6.2% of earned income – W-2 wages and net earnings from self-employment – up to a maximum of $400.00, or $800.00 for a married couple filing jointly. The 6.2% rate is equal to the Social Security tax.

BO chose to make MWP an advance on a Form 1040 credit and issue it by FU-ing with the federal income tax withholding tables. As a result many retirees ended up being under-withheld, as pensions also use these tables to determine withholding. So did taxpayers with more than one job, married couples in general, and working dependents who did not qualify for the credit.

There was much confusion regarding the MWP credit – both by taxpayers and the IRS. According to the Treasury Inspector General for Tax Administration – “TIGTA auditors analyzed 2010 filing season results as of the first week of March, 2010. As of that time, the IRS had paid some $24.2 million in erroneous Making Work Pay and Government Retiree Credits”.

The Making Work Pay credit expired on December 31, 2010, and has been replaced in the Tax Hike Prevention Act (for tax year 2011 only) by a 2% reduction in the employee share of the Social Security component of FICA payroll taxes. This comes out to a maximum of $2,136 per person.

This wasn’t the only tax credit that caused problems in 2010. TIGTA also discovered -

“While the IRS received about 132 million individual income tax returns and issued approximately 101 million refunds totaling $291.7 billion through May 28, 2010, those returns contained nearly 23.7 million errors, an increase of 7.1 percent over the same period last year. TIGTA identified inadequate controls and incomplete and inaccurate programming resulting in 125,762 individuals receiving nearly $111.4 million in erroneous Recovery Act-related tax benefits, including:

• 10,581 individuals claiming $65.6 million in erroneous First-Time Homebuyer Credits (IRS prevented 2,363 of them from receiving some $11.3 million in credits);

• 5,345 individuals erroneously claimed $15.6 million in plug-in electric vehicle credits; and

• 171 individuals claimed $453,220 in erroneous non-business energy property credits."

Regarding the First-Time Homebuyer Credit claims TIGTA reported that 1,300 prison inmates – including 250 serving life sentences – received $9 million for homes that they could not have purchased while they were behind bars. Another 10,000 people received credit for homes that were also claimed as a first-time purchase by another taxpayer. In one case, 67 people used the same house as their qualifying purchase.

Another 2010 TIGTA report stated –

“The EITC was created in 1975 to offset the impact of Social Security taxes for individuals who work but have low incomes. The refundable nature of the EITC and the complexity of eligibility requirements increase the likelihood of taxpayer error and fraud. The IRS estimates that between $11 billion and almost $14 billion in erroneous EITC claims are paid annually. For Tax Year 2008, individuals claimed $49.2 billion in EITC; 66 percent of the returns were prepared by tax return preparers.”

All more proof that refundable tax credits = an open call for tax fraud.

Several tax reform reports were issued in 2010, all beginning by stating the obvious – the current federal Tax Code is too complicated and convoluted and needs to be fixed – and discussing suggestions, considerations and proposals for serious tax reform.

The first came on August 27th when the President's Economic Recovery Advisory Board (PERAB) released its report (originally scheduled to be presented to BO by December 4, 2009). FYI, I was listed in the Appendix of the report as a source of public comment presented to the Board.

As happened with the report issued by Dubya’s 2005 tax reform panel, the board was told thanks for your hard work and the report was totally ignored, sent to gather dust on the shelves of the federal archives.

On November 10th the co-chairmen of President Obama's National Commission on Fiscal Responsibility and Reform published a discussion draft of another BO requested tax reform report.

Later in November the Bipartisan Policy Center’s Debt Reduction Task Force issued “Restoring America’s Future”, still another comprehensive plan to solve debt crisis, create jobs, simplify taxes, and fix Social Security, this one by a non-BO created non-profit organization.

On December 1st The National Commission on Fiscal Responsibility and Reform issued its final report titled “The Moment of Truth”. The commission co-chairmen didn’t change their basic framework from what they unveiled in the draft report, but rather refined it to be more specific and realistic.

House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid promised to bring the recommendations up for a floor vote, but only if the proposal got the support of 14 of the 18 commission members. Only 11 members voted to accept the report, so nothing happened.

BO and incoming chairman of the House Ways and Means Committee Republican David Camp have promised to begin a serious discussion of tax reform in early 2011. BO indicated that Democrats and Republicans should begin a conversation next year about a broad overhaul of the U.S. tax code that would involve lowering rates while eliminating tax breaks for favored groups, Camp has said, "I think we have to reform our complex, burdensome tax code. It's 10 times the size of the Bible with none of the good news." Let us pray that they keep their promises.

In addition to the Tax Hike Prevention Act Congress passed the following tax bills in 2010, further complicating the mucking fess that is the US Tax Code -

• The Hiring Incentives to Restore Employment Act of 2010 – March 18, 2010,

• The Patient Protection and Affordable Care Act – March 23. 2010 (BO’s health care “reform” bill),

• The Homebuyer Assistance and Improvement Act of 2010 - July 2, 2010, and

• The Small Business Jobs Act of 2010 – September 27, 2010

As for my own 1040 practice I again found myself with too many GE extensions on April 14th, some of which were not completed until the end of the year. I have vowed “nevermore” and will institute changes to my policies and procedures in 2011 to reduce GDEs to only those that are absolutely necessary. Wish me luck!

I have been a published author for quite some time now, but in 2010 I became a paid author, writing 90 items on taxes for MAINSTREET.COM, including a daily week-day tax season column. I will continue to write for MAINSTREET.COM in 2011, but the tax season series will appear only twice a week in January and February, going daily in March through the end of the season in April.

So that was 2010 – the year in taxes. Did I forget anything important?

TTFN

2010: THE YEAR IN TAXES – PART I

As 2011 begins let me take some time to look back on the year in taxes for 2010.

Perhaps the biggest tax story of 2010 was the total irresponsibility of the idiots in Congress (lately I have not referred to our elected representatives in Washington without including the word “idiots” – I will continue to do so until they can prove to me that they are not). Once again they waited until literally the last minute to pass needed tax legislation to extend expiring and expired tax breaks via The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (aka the 2010 Tax Relief Act and the Tax Hike Prevention Act of 2010), signed into law by BO on December 17, 2010.

The idiots have known for the past ten years that the so-called “Bush” tax cuts would “sunset” (i.e. disappear) on December 31, 2010. And they have known for more than two years that certain favored tax breaks, including the annual Alternative Minimum Tax (AMT) patch, expired on December 31, 2009.

While attempts were made to address the expiring and expired during the year, Congress could not get much of anything done during the first 50 weeks of 2010. As I pointed out in my post “Are They Smarter Than A Fifth Grader” -

“Correct me if I am wrong, but it seems to me that lately Congress is more dangerously partisan than ever before. With only the most minimal of exceptions, Republicans will only vote for bills introduced by Republicans, and Democrats will only support legislation introduced by their party. A Republican could introduce a bill that would guarantee world peace, and the Democrats would vote against it because it was not introduced by a Democrat.”

When the idiots finally did decide to act they really did not act. While extending the tax breaks and AMT patch that had disappeared on December 31, 2009, Congress basically just postponed action on the “Bush” tax cuts for another two years.

The results of the irresponsibility of the idiots in Congress will be felt during the upcoming filing season, as many 2010 tax returns, including those containing itemized deductions, won’t be able to be processed until at least the middle of February.

During 2010 the idiots also proved that (1) they do not read in full the bills they are voting on, and (2) they cannot do anything simply.

Snuck in at the tale end of BO’s health care “reform” Act was a provision that requires nearly 40 million U.S. businesses to file 1099-MISC forms for every vendor that sells them more than $600 in goods beginning in 2011

As CNN MONEY explained back in May –

“Section 9006 of the health care bill -- just a few lines buried in the 2,409-page document -- mandates that beginning in 2012 all companies will have to issue 1099 tax forms not just to contract workers but to any individual or corporation from which they buy more than $600 in goods or services in a tax year.”

This new law is a potential nightmare creating tons more paperwork for small businesses. The biggest problem is not that they will have to issue many more 1099s each year, but that they will have to get the Tax ID numbers (Employer Identification Numbers) for every single vendor to whom they expect to pay more than $600.00 during the year.

A multitude of small business organizations, and many tax bloggers (myself included) came out against this nonsense, and the idiots realized that they had FU-ed. The Democrats and Republicans are united in their opposition to this new requirement – but they can’t simply write a bill that says in effect “the new 1099 filing requirements are repealed” and pass it. At least 3 attempts to do this have been unsuccessful. And, of course, the idiots were not smart enough to include the repeal in BO’s year-end compromise Tax Act.

The members of Congress are lazy, self-absorbed idiots incapable of independent thought or action whose main goal, motivation and function upon being elected is getting re-elected and not the proper representation of their constituents or administration of the government.

Before I leave the idiots who “represent” us in Washington, 2010 was the year that justice was finally meted out to long-term tax cheat Congressman Chuck Rangel, who used to chair the committee that wrote tax law. His punishment? He had to stand up in front of the “class” while “teacher” said he was a naughty boy. Wesley Snipes cheats on his taxes and he gets sentenced to jail. Charlie Rangel cheats on his taxes and is called a bad boy and told not to do it again.

The number two tax story for 2010, perhaps the number one story for us tax preparers, was the implementation of the new IRS regulation regime. All individuals who want to prepare federal income tax returns for a fee, or who will substantially contribute to the preparation of a return prepared for compensation, must now register with the IRS, pay a nominal fee, and be issued (or re-issued) a “PTIN” identification number. Beginning with the 2010 returns filed in 2011 only those who have registered with the IRS will be allowed to prepare federal income tax returns for a fee.

Eventually all registered tax return preparers, except for CPAs, attorneys and Enrolled Agents, must pass an initial competency test and attend at least 15 hours of IRS-approved continuing professional education (CPE) in federal taxation each year. 3 of the required 15 credit hours must be in “tax updates” and 2 must be in “ethics”.

I have been a vocal supporter of the regulation of tax return preparers, although I am very much against exempting CPAs and attorneys from testing and required CPE in taxation. I am also disappointed that some kind of “grandfathering” for long-time proven tax professionals, like me, was not included in the regime. I also think that making preparers sit through 2 hours of ethics each year is a waste.

The online PTIN enrollment at the IRS website began at the end of September. As with any new system expected to accommodate perhaps over 1 million applicants there were many problems with the process. I was unable to complete my application online and resorted to filing a paper application, which was eventually accepted. I do believe that most of the problems that applicants encountered with the online process have since been fixed.

Regulations for the various components of the new regime continue to be issued. Just last week the IRS provided details of Notice 2011-06, which will officially be released in mid-January.

While individuals who assist in the preparation of all or substantially all of a tax return will be required to register, pay the fee, and obtain a PTIN, they will be exempt from the testing and CPE under the following conditions -

• the individual is supervised by an attorney, CPA, Enrolled Agent, Enrolled Retirement Plan Agent, or Enrolled Actuary authorized to practice before the IRS under Circular 230,

• the supervising attorney, CPA, enrolled agent, enrolled retirement plan agent, or enrolled actuary signs the tax returns or claims for refund prepared by the individual,

• the individual is employed at the law firm, CPA firm, or other recognized firm of the tax return preparer who signs the tax return or claim for refund, and

• the individual passes the requisite tax compliance check and suitability check (when available).

to be continued . . . .

TTFN

HAPPY NEW YEAR!

HAPPY NEW YEAR!