A LITTLE THIS-A AND A LITTLE THAT-A – WITH THE EMPHASIS ON THE LATTA

No BUZZ to speak of for this installment – so I go with A LITTLE THIS-A AND A LITTLE THAT-A instead -

+ Don’t forget to check out my daily tax tips columns at MAINSTREET.COM.

+ Mary O’Keeffe gives us her take on the IRS Return Preparer Review in “Who Should Be Tested On Tax Law” at BED BUFFALOES IN YOUR TAX CODE.

Mary would have every person involved in the preparation of tax returns and every person involved in the creation and administration of tax law tested, including –

“ALL employees of the IRS from the Commissioner on down”

”The Secretary of the Treasury and any Treasury Department employees whose jobs relate in any way to making tax policy”

“Anyone on the White House staff whose job relates to tax policy in a significant way” and

“All members of Congress who serve on committees that write tax laws, and their staffs”

Because Mary, as a volunteer with the IRS VITA program, must pass an annual exam she feels that all those involved with taxes should be tested annually. As she mentions in her post, I do believe it would be “impractical and unworkable to require annual testing of practitioners”. Why the IRS is going to take 3 years to administer an initial competency test to just the currently “unenrolled” preparers. Besides, annual testing would place an undue burden on members of the tax profession. No other profession – MD, CPA, JD, Architect, etc - requires annual testing to maintain a “license”.

However you can’t fault Mary’s bottom line -

“Maybe if all the government policymakers have to undergo the annual testing, they'll decide to create a simpler tax code that doesn't require large numbers of ‘rocket science’ paid tax practitioners.”

+ Ask an ye shall receive.

.

I got another email comment from Enrolled Agent Elizabeth Ruh, who apparently works for Jackson Hewitt (to be honest, I could never understand why an EA would work for one of the fast food preparation chains), with two requests -

“I would be curious to know how other tax professionals keep on top of the ever changing tax laws. (I myself attend the IRS forums and read a lot of IRS publications!). I am also curious, especially from those who think CPA’s and Tax Attorney’s should be subject to the regulating, how they got started and learned the highly unusual world of taxes? (I have several mentors who started me on this journey and continue to help me grow).”

I will provide my answers to her two questions – and then open up the “floor” for responses from other tax pros, which I will publish here in a future post.

(1) Over the years I have attended tax seminars from many different companies and organizations. In terms of cost, content, location and presentation I believe the best source of continuing professional education for tax preparers is the National Association of Tax Professionals. I have been a member now for over 20 years.

NATP offers year-end tax updates in various locations in all of the 50 states, mid-year and year-end special topics presentations at various key locations, and its annual conference with three days of CPE. It also offers a special “basic training” course for beginners, an annual fall Technology and Office Productivity Conference, this year in Atlantic City, “webinars”, and self-study.

NATP provides members with a weekly email tax newsletter and monthly and quarterly print publications (I am a frequent contributor to the quarterly journal). It also has an excellent research department that is available to answer member questions via phone or email.

Members of NATP are automatically members of the resident state chapter, if one exists for your state. The NJ chapter of NATP also offers good seminars on federal and state tax topics.

NATP offers an EA exam review course and, I expect, will be offering a review course for the initial competency exam proposed by the IRS in its Return Preparer Review.

I highly recommend membership in NATP. If you do decide to join please mention my name as the person by whom you were referred and I will get a free gift!

Another good source of continuing professional education is the California Society of Enrolled Agents, who each year in May and June offers a “Super Seminar” (3 days of great CPE) in Las Vegas and Reno.

As a tax professional, tax blogger, and tax writer I visit a variety of tax-related blogs on a daily basis (except during the tax season) and subscribe to the AccountantsWorld.com and CCH daily tax headline newsletters. These sources provide lots of good tax information as well as leads to other resources. You should visit the sites listed in my “blogroll” in the right hand margin (scroll down to end).

(2) How did I get started in “the business”? Let me quote from an earlier post -

“My first encounter with income taxes came in February of 1972, when I was in my second semester as a freshman at local Jesuit institution St Peter’s College (I am not Catholic – it had a good rep for business). I had taken the first half of Accounting 101, but had not taken any tax classes.

My uncle’s tax professional, James P Gill, would hire students from St Peter’s College during the tax season as apprentice tax preparers. During his annual visit, always on Lincoln’s Birthday (then an actual legal federal holiday), my uncle happened to mention to Jim that I had taken my first accounting course and that I was helping him with the books for the non-profit organization for which he worked. Jim told my uncle to send me in to see him – and the rest is history!”

For the rest of the story go to my post “What About Bob?”.

So there you have my answers to Elizabeth’s questions. I would love to hear the answers of my tax blogging colleagues and other tax professionals. Send me an email at rdftaxpro@yahoo.com. The responses will be complied in a post to appear at the end of next week.

TTFN

POPPYCOCK

A multi-initialed blogger (who shall remain nameless so as not to provide undue attention) responds to my annual “Don’t Assume” post by suggesting the reason why CPAs and attorneys charge more than their “unenrolled” brethren for preparing 1040s –

“Here are some overhead items that most CPA and tax attorney preparers have that unenrolled preparers generally do not have:

• Sophisticated tax preparation software, updated for the latest tax law changes
• A quality tax law library either on CD, through an Internet service, or in hard copy
• Malpractice insurance (if your tax preparer makes a mistake, you can recover the costs of that mistake through an insurance claim)
• Fellow tax preparer employees to review all tax returns before they are filed (lack of secondary review is a major contributor to the filing of incorrect returns)
• Extensive continuing tax and professional education”

My answer to this nonsense is, of course, “poppycock”. Actually I had another word in mind, but want to remain civil.

I know many, many non-CPA and non-attorney tax preparers, both EAs and the “unenrolled”, who have, if not all, most of the above items. The most important of these items is, of course, the last – extensive continuing tax and professional education.

Just a note – my experience with the then “Big 8” accounting firm, as discussed in my post, clearly indicates that item #4 does not always work. As I pointed out, a simple error on a state tax return was missed by a multitude of CPAs.

WHY YOU SHOULD CONSIDER HIRING A TAX PROFESSIONAL

{Here is a great guest post from Patrick, who writes about personal finance and career topics at Cash Money Life and military money topics at Military Finance Network. I wrote a series of guest posts on Self-Employed Retirement Plans for Patrick at CASH MONEY LIFE a while back. Links to these posts appear in the right hand margin - scroll down a bit. Thanks, Patrick! – rdf}

A couple years ago I started my own business. The first few months were underwhelming to say the least. Actually, if I were to put an hourly wage on my labor the entire first year it probably would have been on par with someone in a third world country. I probably would have been able to survive fairly well for a year in many third world countries - or possibly afford one month's rent for a one bedroom apartment in a major city like New York. As time went on I learned more about my business and I began to earn more money.

The second year I earned substantially more than my first year and I was faced with several issues I hadn't previously considered - such as forming an LLC for my company, obtaining an EIN, opening a self-employed retirement account, opening business savings and checking accounts, paying estimated taxes, depreciating company assets, and more. But by the time tax season rolled around I was drowning in a sea of paperwork.

Thankfully, I kept all my business and personal paperwork separate. I filed each pay stub or receipt from a business expense in two large manila envelopes marked "income" and "expenses." I also had an envelope for my official business papers, including my Articles of Organization for my LLC, my Solo 401k paperwork, etc. Separation and organization are paramount!

I did plenty of research before it was time to file my taxes, but all the new information and the more complicated tax situation made me want to get a second opinion. I wasn't sure if I needed an accountant or not. Honestly, I was fairly confident I could file my return and be able to withstand an audit. But I also wanted to make sure I wasn't leaving money on the table by paying more than I should or making any mistakes that could bring the IRS knocking at my door.

So I asked around and found a couple leads, then I interviewed a couple accounting firms. Lucky for me, the best mix of small business experience, specializations, and cost was also the firm that was closest to my home. But this is one case when I wouldn't mind driving across town.

I ended up hiring that firm and I dropped off my taxes (at this point I had already completed them, but I wanted a second opinion). It turns out my calculations were spot on. But I don't consider it wasted money - in fact, I was more than happy to pay. You see, they gave me peace of mind. I knew the job was done correctly, and I now had someone to back me up if I were to ever get audited. I also had several discussions with my accountant about the best way to handle my taxes in the coming year and we made a change to my filing status and a few other fun things that should save me money this year, and hopefully in future years. And that is why I wanted to find an accountant in the first place - to give me peace of mind, and save me money in the long run.

This year I will drop off copies of my papers once I receive all my 1099s and I will rest knowing that the person doing my taxes will not only be doing them more efficiently that I ever could, but is using a plan that we worked on together. The point isn't to outsource everything and never think about it again - far from it. I still go over everything and make sure I understand each line on my taxes. But I also want a professional opinion and I want to know the job is done right. Being able to call a person whenever I need to discuss a tax issue is much better than doing an online search or clicking buttons on a desktop software program.

TTFN

THE RETURN OF "CHOOSING A TAX PROFESSIONAL – DON’T ASSUME"

It is that time of year again for one of my favorite posts – the one that tells you not to make assumptions when looking for someone to prepare your tax return.

Do you remember 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)? 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 took a very difficult test at the beginning of his career, possibly many, many years ago, only a very small part of which dealt with federal income tax, and usually with “entity” tax issues (corporate, partnership, estates and trusts) and not those dealing with 1040 issues. It is certainly no guarantee that he is current on federal and state individual income tax law.

Whenever I get a new client I ask to see his or 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 38 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. 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 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!).

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 they agree with what I say in this post. I will be glad to provide online references. Recently, 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 has 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.”

He ends his post 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. You can find an EA in your area at the National Association of Enrolled Agents website.

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! In my opinion they are very expensive. 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 a usurious “Refund Anticipation Loan” or to make your IRA contribution to 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. Check out an earlier post on an operation by consumer agencies (click here).

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

To be perfectly fair, over the years I have come across some CPAs who actually knew their “stuff” when it came to income taxes, and even some who charged reasonable fees. But this is not a ”given”. And I am sure that there are probably some competent, ethical and professional H+R Block preparers out there somewhere.

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 employee, this is only because of the education, experience, ability, temperament, and other factors that are specific to that individual preparer.

I look forward to your comments!

TTFN

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

Have you checked out my column of daily tax tips at MARKETSTREET.COM yet?

* I begin this installment of the BUZZ by imploring you to follow the advice of OUR TAXING TIME’S Trish McIntire and “Be Nice to Your Tax Preparer”.

* A new tax blog written by practicing CPA Neil Johnson of Chicago – THE TAX DUDE SPEAKS – starts out with a great post of “Commentary on the IRS Announced Plans to Regulate ALL Tax Return Preparers”.

Neil tells us “As a practicing CPA, I have a real big issue with exempting CPAs and attorneys from ALL of the requirements placed on 'unenrolled preparers'”. He goes on to explain why -

“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. Frankly, any CPA or attorney in tax practice and not willing to take the IRS competency test should be ashamed of themselves.”

Thanks to Neil for “telling it like it is”! This continues with his bottom line –

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

* Bob Cusack tells us “IRS Commissioner Doesn't File His Own Taxes” over at THE HILL’s Blog Briefing Room.

According to Shulman – "I've used {a tax preparer} for years. I find it convenient. I find the tax code complex so I use a preparer."

You can be sure he doesn’t go to H+R Block. And, hey, at least he knows enough not to try it himself with Turbo Tax like his boss.

* I report the dates and locations of the “2010 IRS Nationwide Tax Forums” at the NJ TAX PRACTICE BLOG.

* Oi vey! TAX PROF Paul Caron tells us that “Rep. Rangel ‘Unsure’ if Congress Will Retroactively Reinstate Estate Tax”. My main concern about reinstating the Estate Tax is with the “stepped-up basis” rules.

* Joe Kristan, of the ROTH AND COMPANY TAX UPDATE BLOG, goes above and beyond the duty of a tax consultant and “tells it like it is” to a taxpayer posing a question about claiming her live-in boyfriend as a deposit in “Some Problems Aren't Really Tax Problems”.

Where can I find a girlfriend like Kristen?

* While 2010 has just begun, and most people are starting to think about their 2009 tax return, Kay Bell looks ahead to 2011, when all Dubya’s tax cuts suddenly disappear, and wonders “What Your Tax Rates Might Look Like” at DON’T MESS WITH TAXES. She also considers what else may happen in 2011.

TTFN

MORE COMMENTS FROM THE EMAILBAG

Looks like I published my comments post too soon. More comments have come in this morning.

Here is one from an Enrolled Agent about the IRS Return Preparer Review -

“Hi!

I’m a recent follower of your blog and have been enjoying it. I just wanted to throw out there that I think the Tax Preparer Review process that is being initiated by the IRS is much needed and welcomed! I worked hard to achieve my Enrolled Agent status and am proud of it. Nothing upsets me more than having to help my clients clean up messes from other preparers who obviously had no business preparing that return.

This will change my particular portion of the tax world immensely and I welcome it.

Thanks for your insights!

Elizabeth”

Thanks for the comment, Elizabeth. I wonder how many messes you had to clean up from other preparers were caused by CPAs?

Ask and ye shall receive! Elizabeth provided an answer (highlights are mine) –

“I have had to clean up several from CPA’s. We do have lots of good CPA’s in our town but just as many not so good ones. I clean up a lot of returns that people have decided to prepare for themselves. That is probably the majority of mistake returns I see. CPA’s are probably next. Then the H&R Block’s and Liberty returns and other Jackson Hewitt returns.”

Thanks!

I also received an email concerning the New York Department of Taxation and Finance from a colleague in NYC who tells me “This came to me indirectly from a reliable, source” –

“As we gear up for the opening of e-file, please be aware that there may be delays for some taxpayers with their NYS refunds.

Refunds for wage earners will be held until all their employers have filed their NYS-45 year end wage report. They are not sending refunds to them until they are able to verify their wages and withholding. If you have a taxpayer with several w-2s, this could take time for them to match all w-2 info on their return."

I had previously reported that New York State is already going to delay the processing of all returns that do not request direct deposit for refunds. And now this!
.

TTFN

THIS JUST IN – SPREAD THE WORD!

I just found out that my new column at THE STREET began yesterday!

It is a column of “Tax Tips” that will run every week day from now through the end of the tax filing season.

The first two columns are “Who Should You Listen To” and “Finances Come First”.

You can check out each day’s entry by going to THE STREET home page and checking out the “Main Street News” index for “Tax Tips”.

So tell all your friends. And if you like what you read please leave a comment.

I’M MAD AS HELL – AND I’M NOT GOING TO TAKE IT ANYMORE!

I have been using mail.com as my main email address for just about as long as I have been using the internet. For the most part it functioned satisfactorily, and I was pleased with it.

A few months ago mail.com decided to “upgrade” to become “new and improved”. What it did was become a GDMFPOS (I am sure that you can figure out the initials).

The system is totally unusable – it runs slow as molasses. It takes me a half-hour to do what should be done in less than 2 minutes!

The “new and improved” mail.com is a bigger failure than the tenure of NJ Governor Corzine and Rosie O’Donnell’s miserable attempt at a prime time variety show combined – and that is saying a lot.

You would think that Congress had a hand in the “new and improved” mail.com – as it is so FU-ed!

Needless to say I will be taking my business elsewhere ASAP. For now I am using rdftaxpro@comcast.net as my main address.

My advice to you is to avoid mail.com like the plague. It is a total POS.

Thank you for allowing me to rant. This is cheaper than throwing my computer monitor out the window or smashing the wall with my hand.

COMMENTS FROM THE EMAILBAG

Here is a comment I received from a fellow tax professional regarding my post on the IRS Return Preparer Review (Part I and Part II) -

"Hi Robert,

I strongly feel that AGAIN - Tax attorneys and CPAs were treated as being they know all, because of the ill conceived idea of the public and it looks likes the IRS also now, that they know taxes, because they have through the years built up that false reputation. Sadly I don't think it will ever change...

So do we, us lonely little know nothing tax preparers get any initials now to use, if we complete the 3 steps? LOL

As for the other parts - I am already registered and have my PTIN # - renewing it every 3 years will just mean a small hassle and probably have to pay $75 to IRS for it now instead of being free.

As for testing, I'm glad they gave 3 years to complete, but I was a little disappointed in no grandfathering for older preparers.

Take care, Tom"

It seems that great minds think alike!

I am disappointed that I did not hear from other tax professionals on the issue.

This reader had a comment/question about my “ROTH IRA Conversion Trap” post -

"Agree that no one was focusing on spreading IRA basis. Is anyone focusing on NJ tax implications? What similar complexity faces NJ residents that paid taxes on their SEP-IRA or similar contributions, but did not in the years before they moved to NJ and, for example, lived in NY where as with Federal taxes, the SEP-IRA contributions were not taxed? I'll bet NJ has not even thought about this.

A. Katz"

According to the instructions for the 2009 NJ-1040 –

“If you converted an existing IRA to a roll-over Roth IRA during tax year 2009, any amount from the existing IRA that would be taxable if withdrawn must be included in your gross income on Line 19.”

I assume it will be the same for 2010 conversions. So for NJ tax purposes one would need to look at the source IRA and determine its NJ state “taxability”.

If the IRA was funded by taxpayer contributions then only the earnings would be taxable. If it was funded by employee contributions or was rolled over from a pension plan then the entire amount could be taxable.

The NJ instruction book has a worksheet for determining the taxable portion of an IRA withdrawal. Note that for NJ purposes – “For multiple IRAs, the taxable portion may be determined by using a separate worksheet for each IRA, or all IRAs can be combined on one worksheet”.

I do not think that prior residence in another state would make a difference. While I do not have the time to research the issue, I would expect that all contributions would be treated as if they were made as a NJ resident. Does anyone disagree?

TTFN

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

* I begin this BUZZ with a must read from Mary O’Keeffe at BED BUFFALOES IN YOUR TAX CODE – “Dear Congress and Chairman Rangel in Particular”.

* Mary also tells us, in another post, that “The Bed Buffaloes in Our Tax Code Have More Than Doubled in Less Than a Decade!”.

“Professor Graetz cited a figure of 1.4 million words in the IRC tax code in May 2000, based on a Joint Committee Taxation report released in 2001.

In preparing a report to Congress she delivered in January 2009, National Taxpayer Advocate Nina Olson estimated the number of words in the IRC tax code had grown to 3.7 million.

That's far more than a doubling in less than a decade.”

* Michael Rozbruch of the TAX RESOLUTION UNIVERSITY blog has some good advice for business taxpayers that also applies to individuals in “Avoid IRS Penalties in 2010 By Keeping Good Record of Business Expenses”.

“Avoid IRS penalties by making sure that your information is accurate and truthful on your tax returns. Always keep a careful record of your business expenses so that you can back up your tax return if the IRS requests evidence.”

* I just got an email from the producers of the documentary film “An Inconvenient Tax”, which, I believe, features an appearance by fellow tax blogger TAX GIRL Kelly Phillips Erb.

“An Inconvenient Tax” will be premiering at colleges, universities, through various organizations and at select theaters on Tax Day - April 15th, 2010. Visit the film's website for show times, venues and ticket information.

In addition, if you want to encourage a local theater or know a group or organization that would be interested in hosting a screening, please direct them to the screening request page.”

* New Jersey taxpayers and tax pros may want to check out my discussion of the recent NJ-NATP annual state tax update seminar at NJ TAX PRACTICE BLOG.

* Donna Bordeaux, wife of Chad, introduces us to the MERP in "MERP’s the word – aka Medical Expense Reimbursement Plan", at the couple’s blog BEANCOUNTER RAMBLINGS.

The MERP is actually nothing new – it has been around as long as I have been in “the business” (and that is a long time!).

* And Chad Bordeaux follows his wife’s post that answers the question “When does the 5-Year Roth IRA Clock Start?”.

Chad points out –

“Contrary to what one might think, this is not based on the date that you actually made the contribution, but rather the tax year you made the contribution. The tax code deems all contributions made during a year as made on January 1st of that year.”

With the new rules regarding ROTH conversions it is important that those considering converting fully understand all the ROTH rules and regulations.

* I don’t have a cell phone, let alone an ipod. But for those of you who do have one, TAX GIRL Kelly Phillips Erb tells us that, “a new app for the iPhone, automilez™, now generates mileage logs for you after each trip – no more scrambling for a pen in your car” in her post “Mileage? There’s an App for That”.

* And Kelly wonders “Is the White House Banking on a Financial Industry Tax?”

Let’s see if I get this. The government loans Paul (banks, etc) Peter’s (taxpayers) money. Paul won’t pay it all back, so the government taxes Paul to get the money to pay back Peter, and Paul passes the tax along to Peter, just as the tax on any business is ultimately paid by its customers. So the bottom line is Peter will pay Paul so Paul can pay back Peter. Have I got it right? Any way you look at it Peter is screwed (so what else is new?).

* The IRS has announced (in IR-2010-3) that it has “unveiled its first redesigned notices that are part of an on-going effort to improve the way it corresponds with taxpayers”.

According to IRS Commissioner Doug Shulman –

“One of my priorities is to ensure that we have clear and simple communication with taxpayers. In the past, our notices often looked more like legal documents and not an effort to communicate clearly. The differences between the old and new notices are like night and day. They show the potential of our on-going effort in this area.”

The IRS providing “clear and simple communication with taxpayers”? This I gotta see!

TTFN

THE IRS RETURN PREPARER REVIEW - PART II

I am confused about the two competency examinations discussed in the proposed regulations. Both cover 1040 issues – one with non-business issues and one with small business issues. Strangely enough neither exam covers Schedule E. Registrants are only required to pass one of the two exams.

Does this mean that if I take and pass the nonbusiness exam I will not be allowed to prepare 1040s that include a Schedule C or F? It seems obvious that the exam that covers nonbusiness issues will be somewhat simpler – so if it does not matter which test one takes why would anyone take the small business test?

The report indicates that, “the IRS plans to add a third test to address the competency of the tax return preparer with regard to business tax rules {here I assume corporation and partnership issues – rdf} after the three-year implementation phase is completed”.

I have suggested perhaps two separate tests, with two separate “credentials”. There would be a basic competency exam covering all aspects of 1040 preparation, and passage would permit one to prepare 1040s. A separate exam on “entity” returns – 1120, 1120-S, 1065, 1041, 990, 706 – would permit one who passes to prepare “entity” returns.

I am somewhat concerned about the proposed regulation that says “The IRS will perform suitability checks on those paid tax return preparers required to complete competency testing”. As long as all this means is verifying that a person who registers as a paid tax preparer has filed all of his/her required 1040s I do not see any harm. And I would expect that if the IRS found a registrant delinquent on a 1040 filing he/she would be given a period of time to submit the missing return. I would certainly not support a federal background check on registrants. There is no federal background check for becoming a CPA or lawyer (as far as I know).

The report does say, “For renewal of registration purposes, a tax compliance check is a limited review of the tax return preparer’s filing and payment compliance history”.

Regarding the annual requirement for continuing professional education – to be honest I think 15 hours per year is a bit wimpy. I think it should be 72 hours in the three-year registration period, with a minimum of 16 hours in any one year, as it is for Enrolled Agents. And I am not sure if a mere 3 hours in tax law updates is enough.

The regulations require the CPE to be in “federal” taxation. So I expect that seminars and workshops I attend that are limited to state tax issues would not count. The NJ chapter of NATP currently offers two full-day (8 hours of CPE) seminars each year. One covers federal tax issues, for the most part, and one is a NJ state tax update. I guess only one of these two seminars would qualify under the proposed regulations.

I do take issue with the annual requirement of 2 CPE credit hours in “ethics”. This is a pet peeve of mine. Making all preparers take 2 hours of continuing education in ethics each and every year is a total waste of time! As mentioned above I have been preparing tax returns for 38 seasons. If I do not have ethics by now sitting through 2 hours ain’t going to make me ethical. If I am so inclined to be unethical in my practice listening to a speaker tell me what is wrong is not going to make me “see the light”.

While I do believe that there should be some questions on ethics included in any proficiency examination, I would recommend a requirement of 1 or 2 hours of CPE credit on ethics issue updates once in each 3-year registration period.

I have no problem with being held to the ethical standards of Circular 230 that are presently in effect for currently “enrolled” or “licensed” preparers. Even as an unenrolled preparer I am subject to certain IRS ethical standards. And I do agree that registering as a paid tax preparer, and meeting the ongoing requirements, should not allow me to practice before the IRS other then to the extent I am already allowed.

While for the most part the tax preparation community accepts at least the concept of registering paid tax preparers, there are those, my fellow tax blogger Joe Kristan included, who oppose the new regime. One reason they give is that compliance will cause a financial hardship for the previously unenrolled preparer, and will cause a substantial increase in the cost of tax preparation.

I cannot see that registration and licensure of tax preparers is going to substantially increase the cost of tax preparation. I already earn more than 15 CPE credits in continuing tax education a year – so there is no additional cost to me there. And to be honest, any unenrolled tax preparer who was not already taking at least 15 hours of continuing education per year certainly should have been.

My only additional cost will be for taking a competency exam review course and the actual exam, which would not be necessary if there was “grandfathering”, and for the initial and renewal registration fees. If the IRS does not get greedy (like New York State) this amount should not be much – less than $1.00 per tax return per year if actually passed along.

The only area of concern is if newly “licensed” preparers unnecessarily inflate their fees because they now have a “credential”. Let’s face it – CPAs certainly charge more than unenrolled preparers for the same work simply because they feel the presence of the initials after their name justifies it.

Many years ago one of the students in an Adult School tax class I taught asked me what was the difference between a tax return prepared by a CPA and one prepared by someone like me, an unenrolled preparer. My answer – about $100.00. And that figure has to be adjusted for inflation.

A recent article at WEBCPA reports that Barry Melancon, president of the American Institute of CPAs, expressed “apprehension” about the new credential the rules will create. He agreed that the proposal will foster greater compliance with the Tax Code and more reliable service for taxpayers, but expressed (the highlight is mine) “concerns about the IRS plan to provide tax preparers who are not already CPAs, enrolled agents or attorneys with a certification based on limited qualifications. A new IRS examination process may cause confusion among taxpayers about the relative qualifications of tax return preparers.”

There already is confusion and gross misconception about the relative qualifications of tax return preparers. A majority of taxpayers wrongly assume that CPA = tax expert. This is simply not true.

The AICPA itself has said (again, highlight is mine), "We do not offer a credential in taxation. In general, our approach has been not to develop credential programs around areas for which the public already believes CPAs to 'own'. In addition, we do not endorse a particular tax credential.”

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

Having a CPA credential means that the person has passed a difficult test in accounting and auditing concepts and is permitted by state law to certify audited financial statements. It does not mean anything at all regarding the preparation of individual income tax returns.

Just like a doctor, a CPA can specialize. A CPA may indeed specialize, or be proficient or expert, in 1040 preparation. But the initials by and of themselves do not in any way indicate that the person bearing them has actually ever prepared a single 1040.

What, I believe, Mr Melancon is worried about is that now that there is a specific “credential” for unenrolled preparers CPAs will no longer have an unfair and unfounded advantage in the minds of the taxpaying public when it comes to 1040 preparation.

If a CPA or an attorney passed the same initial competency test and was required to take the same number of annual CPE credits in taxation as unenrolled preparers will be required to do under the new proposed regulations then one could be relatively sure that he/she was competent and current in 1040 preparation – and all tax preparers would be on en equal footing.

While I do not agree with Joe Kristan on the issue of regulating tax preparers, I certainly do agree 100% with him when he says –

“The only sure way to improve tax compliance is to simplify the tax law and eliminate the most egregious opportunities to cheat, like refundable credits.”

Prof James Maule has a similar on the money comment -

“If the Congress genuinely cares about reducing the number of errors on tax returns, it ought to turn its attention to genuine tax reform, which might not produce a simplistic tax system but surely would generate significant tax law simplification. Unfortunately, the IRS does not have the power to impose on members of Congress the sort of high standards it seeks to impose on tax return preparers.”

I am glad that the IRS will include public awareness in the new registration regime.
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“The IRS will utilize a full range of social media, public service announcements and paid advertising, if authorized, to provide taxpayers with information on what standards the IRS requires of tax return preparers and how they can determine whether their tax return preparer has meet these standards,” and “the IRS plans to introduce a searchable database of tax return preparers who have met the required standards on its website after the initial registration and examination period have been completed”.

The IRS report also addresses “Refund Settlements” (aka Refund Anticipation Loans or RALs).

“Consumer and taxpayer advocates have long been vocal in their opposition to the use of refund settlement products. These groups charge that changes are needed to protect taxpayers from fraudulent and misleading marketing schemes that conceal the true, high cost of services and loan products.

Some consumer advocates argue that refund settlement products entice fringe tax return preparers, including payday loan stores, and check cashers. Others suggest that the presence of refund settlement products and their pricing structure encourages tax return preparers to take overly aggressive positions on returns to inflate the size of the expected refund and, therefore, the profits to be made from the refund settlement product.”

In response to these concerns –

“The IRS will convene a working group to review the refund settlement product industry. Part of this review will include analyzing opportunities available for the improvement of refund delivery options, including those for unbanked taxpayers.”

While I support a total ban on RALs, or at least banning tax preparers from offering them, if the IRS could speed up the processing of refunds and its direct deposit procedures there would be no need for someone in true need of cash right away to resort to a usurious RAL.

So there you have my take on the IRS Return Preparer Review. What do you think? You can send your comments to me via email at rdftaxpro@mail.com. Be sure to put “THE WANDERING TAX PRO COMMENT” in the “subject line”.

TTFN

THE IRS RETURN PREPARER REVIEW - PART I

During the lunch break at the NJ chapter of NATP’s NJ State Tax Seminar this past Saturday I carefully read through the important parts of the IRS “Tax Preparer Review” report.

As the report points out –

“Over the past 6 months, the IRS, tax return preparers, the associated industry, other federal and state government officials, consumer advocacy groups and the American public engaged in a transparent and open dialogue about tax return preparation in this country. Three public forums were held and more than 500 individuals and groups offered written comments.”

As a veteran tax professional I provided my written comments, directly to IRS Commissioner Shulman and to the IRS review committee, and posted extensively about the issue and the “open dialogue” here at TWTP.

Here are the proposed new regulations that resulted from the IRS inquiry (any highlights are mine)–

(1) “The IRS will require all individuals who are required to sign a federal tax return as a paid tax return preparer to register and obtain a preparer tax identification number. The IRS will make tax return preparer registration effective for three-year periods and require tax return preparers to renew their registration every three years.”

(2) “The IRS will establish competency testing for all paid tax return preparers required to register with the IRS who are not attorneys, certified public accountants or enrolled agents.”

“The IRS will perform suitability checks on those paid tax return preparers required to complete competency testing.”

“There will not be any ‘grandfathering’ from these testing requirements based upon past tax return preparation experience.”

“Initially the IRS will offer two competency examinations. One examination will cover wage and nonbusiness income Form 1040 series returns; another examination will cover wage and small business income Form 1040 series returns.” Non-exempt tax return preparers will be required “to take one of the two examinations relating to 1040 issues”.

“The IRS will develop transition rules to avoid significant interruption of services to taxpayers during the initial testing period. The preliminary approach will require that competency testing requirements be met no later than the required renewal date for tax return preparer registration.”

(3) “The IRS will require 15 hours of annual continuing professional education, including three hours of federal tax law updates, two hours of tax preparer ethics and 10 hours of federal tax law topics, for tax return preparers who are required to register. The continuing professional education requirements will not apply to attorneys, certified public accountants, enrolled agents or others enrolled to practice before the IRS.”

(4) “The IRS will place all signing and nonsigning tax return preparers under Treasury Department Circular 230. The authority granted to those individuals who do not have professional licenses and who are not enrolled agents, enrolled actuaries or enrolled retirement plan agents will be limited to preparing tax returns and representing their clients as currently permitted during an examination of any return prepared by the tax preparer.”

According to the report, “The IRS believes that increased oversight of paid tax return preparers does not require additional legislation” and plans to issue regulations on the registration of tax preparers “under section 6109 of the Internal Revenue Code”. It also “considers the preparation of a tax return for compensation as a form of representation before the agency”. So an Act of Congress will not be required to institute registration.

I do believe that I would prefer the regulation of tax return preparers to be done in this manner, via IRS regulation, rather than be established through legislation. This provides greater flexibility for change and adjustment as needed. Besides, Congress would probably muck it up anyway.

As I have posted many times before here at TWTP, and written elsewhere, I support the registration of all paid tax return preparers. So I have no problem with item #1. Attorneys and CPAs do not appear to be exempt from registering under the new regime, so there is no issue here.

The IRS proposed regulation apparently exempts volunteer tax return preparers such as those in the VITA or AARP programs. While I am not aware of the requirements to become an AARP preparer, I do know that VITA requires an extensive test in federal taxation each year in order to participate as a volunteer tax preparer, so I have no problem with this exemption from registration.

I do not oppose an initial competency examination; however I do have issues with the proposed regulations.

The report tells us –

“For those who supported testing, another issue of concern was ‘grandfathering’. Proponents of ‘grandfathering’ suggested that many unlicensed tax return preparers have been preparing accurate returns for several years with little to no problems with the IRS. These tax return preparers, they argued, have been obtaining continuing professional education and kept current with the tax literature and should be given a pass on any testing requirements”.

I was one of the proponents who so suggested grandfathering.

My basic feeling about grandfathering was, to be honest, personal and somewhat selfish. I have been preparing 1040s for 38 tax seasons now. Why should I be forced to take a test this late in my career to prove that I know what I am doing – and to be able to continue to be employed in my chosen field?

There was also a practical side to my support of this concept. I felt it would be literally impossible for the IRS to properly test all the paid tax return preparers out there within an 8-month period. However I strongly believed that all paid tax return preparers, including attorneys and CPAs (but not EAs), should be required to be tested, and assumed the IRS would need to test all in one short period of time. The IRS realized the difficulty of administering such a test and the proposed regulations give initial registrants three (3) years to take and pass the test.

I still strongly support “grandfathering”. I am aware of tales of 20-25 year veteran tax preparers who do not keep current and still deduct items that once were but are no longer deductible. That is why I suggested –

“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 act,s will be exempt from taking the initial proficiency examination.”

In hindsight perhaps I was too generous with the period of tenure - 10 years of continuous experience instead of 5 would probably be more appropriate - and too harsh with the required CPE during a “look-back” period – 50 credits in 3 years instead of 2 or 35 credits in 2 years now seems better.

The report states that “Several enrolled agents, attorneys and certified public accountants argued against ‘grandfathering’, noting that a minimum level of competency needs to be assured through examination”. However the underlying feeling behind this objection is basically, “If I had to take a test then everyone should”.

My strongest objection to the proposed regulations comes from exempting attorneys and CPAs from the competency examination and continuing professional education requirements. This is a big mistake.

“Many attorneys, certified public accountants and enrolled agents expressed concern, however, about duplicate regulation for those tax return preparers who hold professional licenses or are authorized to practice before the IRS and are subject to IRS and State regulation currently,” the report said. “They argue that testing of those who had to pass examinations to obtain their professional credentials would be costly and redundant.”

It was also noted by members of the exempt group that, “most attorneys, certified public accountants, enrolled agents, and state registered tax return preparers currently must complete continuing education to retain their professional credentials”.

First let me say that I agree 100% that Enrolled Agents should be exempt from the competency test, because they have already passed a much harder test in federal taxation, and that the required annual CPE credits in taxation necessary to maintain enrollment are stricter than those in the proposed regulations.

However applying the argument to attorneys and CPAs is pure hogwash. Testing would hardly be expensive (a one-time cost of a few hundred dollars for a review class and the actual test) and most definitely not redundant!

A CPA is a certified “accountant” and not a certified tax preparer. A CPA passes a test that indicates a proficiency in accounting and auditing. While there are some tax questions on the test, more on “entity” (corporation, partnership, estate, trust) taxation than basic 1040 taxation, the CPA exam is not in any way imaginable the equivalent of the exam that must be passed by Enrolled Agents or even the new exam that will be required of currently unenrolled preparers.

The same argument applies to attorneys. One of my best friends is a labor lawyer and he does not even prepare his own 1040, and neither do several other partners in his firm. As I was saying to him at my father’s wake – I have been preparing 1040s for 38 years and will have to take a test to be able to continue to work, and must take CPE credits each year (which I already do), while he has never prepared a 1040 in his life and will be able to prepare individual income tax returns without having to do a damned thing!

Regarding 1040 preparation and the Bar exam, I have been informed by a tax attorney –

“Tax is not a subject on the MBE (which is the national multiple choice portion) but can be included on the individual state essay exam. PA does include tax on its essay portion as a general rule (which is why most PA law schools suggest you take a tax course). There were sample tax questions on the 2009 model Q&A for PA {these involved business organization and estates and trusts and one item on taxation of scholarships – rdf}. I don't believe NJ or NY test on tax, though.”

And respected tax law professor and fellow blogger James Maule has said in his post “Shakeout in the Tax Return Preparation Industry?” at MAULED AGAIN –

“Letting attorneys off the hook by presuming they are competent in tax law is foolish. . . . Attorneys take bar examinations that devote roughly one to three percent of the testing time to a tax question that is at the most elementary level imaginable. If the GAO and TIGTA took their experiment into law offices, they would discover almost all attorneys in this country who are not tax lawyers and even some who do practice tax would fail miserably when asked to prepare a tax return.”

And as far as I know, while CPAs and attorneys are subject to CPE requirements that vary by state, there is no requirement for either to take even 1 CPE in federal 1040 taxation to maintain their license to practice. Exempting attorneys and CPAs who wish to prepare tax returns professionally from mandatory CPE in federal taxation issues is totally ridiculous.

The IRS has said that it will “reach out to the various licensing authorities for attorneys, certified public accountants and other tax professionals to encourage them to support annual continuing professional education that includes federal tax law topics and updates.” Like that is going to do any good. They are only going to “encourage” to “support” and not “require” to “mandate”.

to be continued . . . . .

TTFN

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

Sorry for such a short BUZZ this time around. Taking care of processing my father’s estate the last few days has not left me with much time for web wandering.

There were many posts on the new IRS recommendations for tax preparer regulation, and Nina Olsen’s report. I will be discussing these two topics in detail next week.

* We welcome back Bruce, the MISSOURI TAX GUY, who returns to posting after a month’s hiatus with “Five Filing Facts for Recently Married or Divorced Taxpayers”.

* Be sure to vote for the “Taxpayer of the Year” at the ROTH AND COMPANY TAX UPDATE BLOG. Not that I want to influence anyone, but my vote goes to “Turbo Tax Timmy”, who seems to be the front-runner.

* Another victory for taxpayers! WEBCPA tells us that “H&R Block to Refund up to $19.4M of IRA Fees” to “settle a lawsuit brought by New York State Attorney General Andrew Cuomo over the tax prep chain’s marketing of high-fee individual retirement accounts to customers”..

The article tells us (the highlights are mine) -

“The agreement requires Block to refund the fees paid by all of its customers nationwide who purchased the company’s Express IRA product, and convert all of the existing accounts to a new program that does not charge onerous fees. Cuomo had accused Block of fraudulently marketing the IRAs to low- and middle-income families.

The lawsuit alleged that Block, the No. 1 tax service provider, had steered hundreds of thousands of customers, including more than 30,000 New Yorkers, into IRAs that were virtually guaranteed to lose money due to a combination of hidden fees and low interest rates. Customers who are eligible to receive the refunds will be contacted by a court-appointed administrator.”

If you wonder why Henry and Richard’s fees are so high in relation to the quality of service it is because they need to generate money to pay off the many, many lawsuits and settlements like this one.

* Kay Bell reports that “For some, {the first paycheck for 2010} will be less than they got in their final 2009 check.” In her post “New Year, New Withholding Amounts” at DON’T MESS WITH TAXES.

The federal withholding tax tables have been adjusted so there is not a repeat of the surprise that many taxpayers will get when filing their tax returns in the next few months as a result of BO’s “Making Work Pay” credit.

* TAX GURU Kerry M. Kerstetter makes good sense in his post “Let's All Try 71% Worth...”.

As a fellow twit has similarly suggested in a tweet, I would not have lasted 38 years as a professional tax preparer if the returns I prepared were only 71% accurate.

* Thanks to a “retweet” I learned of another NJ tax blog (I thought I had the only one) – NJ TAX REVOLUTION. Does anyone know of any others?

The blog tells us that “NJ is a Leader in Outbound Migration” – which is certainly not a surprise to me.

TTFN

JUST SAY NO

I was going to include Trish McIntire’s post “Filing With a Pay Stub” over at OUR TAXING TIMES in my final BUZZ for 2009 – but, as it is an important issue, I decided to devote an entire post on the subject.

Trish tells us –

“This is the time of the year where the radio and TV ads and business signs suggest that you can bring in your last pay stub and get money. Implied is that the return is being done and you are receiving all or part of your refund. Buyer Beware! Please check into what you are buying.”

Basically what the advertiser is attempting to do is sell you a form of usurious high fee Refund Anticipation Loan (RAL) also known as a “pay-stub loan”. And, as Trish points out, there may be additional restrictions – “It may have to taken in a debit card or applied to a car/furniture purchase”.

What is not being done is filing a proper tax return. As a tax preparer for 38 years I can tell you without a doubt that it is literally impossible to prepare a correct and accurate income tax return from just the final pay-stub of the year.

Trish goes into more detail -

“By the middle of January, I will have received a half a dozen calls wanting to file from their pay stub (I've already received one). Can't do it. IRS requires me to have a copy of every W-2 on any return I file. (There is an exception to that but it can't be used until the middle of February.) If you can find someone who says they will file from a paystub, don't assume you are okay since they are the ones breaking the law. You will have to sign the e-file authorization which says you are filing a correct return. If you are filing from a paystub, you may not have an accurate return. W-2s and paystubs seldom match or there may be other income you are ignoring or forgotten about. Also, if the preparer is ignoring the rules and filing with a paystub, what other rules are they ignoring and could those have a consequence for you? Is getting your refund a few days/weeks early worth the potential problems and costs?”

A Refund Anticipation Loan is a bad financial product – and a pay-stub loan is even worse!

TTFN

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

Welcome to the first BUZZ of 2010.

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

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

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

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

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

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

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

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

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

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

She makes several good points –

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

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

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

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

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

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

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

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

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

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

And as for the cafones in Congress –

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

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

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

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

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

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

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

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

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

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

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

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

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

TTFN

A COMMENT FROM THE E-MAIL BOX

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

"Hi Robert,

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

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

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

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

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

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

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

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

Thanks,

Mary"

And my response -

Mary:

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

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

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

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

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

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

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

RDF

PS - Thanks for the message of condolence.

THE TAX COURT AND CELL PHONES

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

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

* Passenger automobiles.

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

* Computers and related peripheral equipment

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

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

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

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

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

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

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

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

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

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

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

TTFN

THIS JUST IN – IRS RECOMMENDATIONS FOR REGULATING TAX PREPARERS

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

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

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

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

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

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

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

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

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

HAPPY NEW YEAR!

HAPPY NEW YEAR !!!

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WELCOME TO 2010 !!!

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Bob Flach - The Wandering Tax Pro

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A WHITE NEW YEAR'S EVE

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

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

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

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

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

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

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

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

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

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