YOUR COMMENTS ONCE AGAIN WELCOME

I have reinstated the ability to submit COMMENTS to my individual posts - so you do not have to send them to me via email any longer.

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I very much want to hear your comments on my ramblings.

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Just be sure that you do not abuse the COMMENT function to try to get free specific tax advice - or to do nothing but promote your unrelated product or website. I suggest you read my post "UPDATED COMMENTS ON COMMENTS".

“JUST ONE MORE THING . . .”, HE SAID COLUMBO-LIKE

OOPS! I forgot to include an obvious but important point in my response to the email from MK –

In order to build a list of loyal 1040 clients from referrals you must know what you are doing and do it right.

You must be more than just competent in the preparation of individual tax returns, and you must keep up-to-date by taking more than a token number of federal and state continuing education classes and taking advantage of the many online tax news resources. Join the National Association of Tax Professionals (and if you do, use me as your referral).

You must show interest in and concern for your client’s tax and financial situation. Don’t simply be a data entry clerk, typing the information provided by the client into a computer program and accepting what is spit out. Dig for legitimate deductions and credits and make sure your clients take full advantage of all that is available to them in the Tax Code and state tax law.

You must act honestly and ethically with your client and with the IRS and appropriate state agencies.

As a companion to HOW I GOT MY CLIENTS I suggest you also read my post DEAR GRADUATE.

Ok, that should cover it.

HOW I GOT MY CLIENTS

Here is an email I received from a fellow tax preparing Twit and TWTP reader:

“I enjoy reading your blog, and just read your post about Twitter. I follow you on Twitter, and other tax professionals, as well as family, but I don't think I will get clients from it. I agree that Facebook would not bring me clients either.

But what do you recommend for someone who is just starting out? I don't have any of the clients from my former firm, because those clients belong to the firm. I believe I provided good service to them, but they won't recommend me personally - they'd recommend the firm.

Do you have any advice on how someone starting a practice gets those first clients, who would then refer others?

I am not a CPA yet. I've passed REG and FAR, and taken AUD but don't know if I passed yet. I've had 5 seasons of tax experience with firms.

Thank you for your advice,

MK”

Glad you enjoy TWTP.

I may not be the best person to ask how to build a practice – as the bottom of my shoes are sticky and smelly. But I will tell you what has worked for me over the years. I will be talking about building a tax preparation practice, and not an accounting one.

In my 38+ years in “the business” I have never taken out an ad – other than a “business card ad” in a charity journal. I do believe that clients who look to the yellow pages and print advertisements to find a tax preparer are “shopping” and are more driven by price rather than quality of preparation. These will not be loyal clients, and will probably leave the herd when they find a better deal.

As I have said many times before the best source of clients is referral from existing ones. While I have gotten a few “clunkers” this way, for the most part referrals from satisfied clients usually become good and loyal clients who will themselves provide good referrals.

Think of the tv ad of a few years back where “you tell two friends, and they tell two friends, and they tell two friends . . .”.

Initial referrals often come within a specific field, industry, trade or profession. So it pays to be proficient in particular types of client returns. Learn the unique deductions and loopholes available to specific professions.

Many years ago, on an escorted cross-country train trip, I met a young fireman from Newark who was just starting out in his career. I did his taxes and he was pleased. He then sent me many of the other young firemen in his company, who in turn followed suit.

But I did not get only firemen. The members of the Newark Fire Department also sent me friends and neighbors who were policemen and public works employees, and if a wife happened to be a teacher I would get referrals of other teachers.

And I also eventually “did” the parents and siblings of many of the firemen, policemen, teachers, etc.

I sat down one day and did a “tree” of client referrals, listing the various branches that “grew” from the initial Newark fireman. I turned out that almost half of my clients at the time had come either directly or indirectly from that traveling fireman.

Similarly, also many, many years ago, I did the tax return of a casual high school friend who was ordained as a Lutheran minister and was assigned a “parish” in our home town. As a result I added other Lutheran ministers in the “diocese” (not, I am sure, the correct term) to my list of clients. It seemed that when a new minister was assigned to a church in the county my business card was among the items that he was given.

I still prepare the returns for that initial fireman, and that initial Lutheran minister (who is now in Maryland).

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As soon as you are introduced to someone and you tell them that you prepare tax returns for a living you are bound to be asked for free advice. While you shouldn't "give away the store" you should not hesitate to provide basic answers. Seem interested in their situation and add something like, "I really can't properly answer that question without knowing more about your specific situation {which in most cases is actually true}. Why not stop in the office sometime and we can discuss this further?"

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{As an aside, when I met Elliot Gould's aunt and uncle on a cruise to Alaska and told them I was a tax accountant the response was in effect, "Those damned accountants stole Elliot's money!"}

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Back in the 1980s I taught courses in tax planning and tax return preparation in the evening at various Adult Schools near where I lived. Many Boards of Education will offer classes and workshops for adults in a wide variety of topics in the evening held in actual school classrooms.

My courses were not for individuals who wanted to prepare tax returns professionally, but for average middle class taxpayers who wanted to learn how to pay the absolute least amount of tax possible on their own individual 1040s. I had various models – a one session overview, a 2-3 session review of year-round tax planning techniques, and a multi-session in depth line-by-line review of the Form 1040 and Schedule A.

The pay was not great – a modest per hour or per student stipend – but the reason was not to make money as a teacher but to “spread the word” of my abilities as a tax professional.

A large percentage of my students also became clients, some who have been with me for 25+ years now.

When I first started out I had a “regular” 9-5 W-2 job - as the business manager and accountant for a suburban YWCA branch - and, during the tax season, worked for my mentor Jim Gill on week-ends. I began my own little 1040 practice by making house calls and doing “kitchen table” tax preparation, initially for co-workers from my 9-5 job. I then began teaching, as discussed above, and making house calls to my students. By the time I met the fireman I was sharing an office with a fellow accountant.

After my tenure with the YWCA I worked briefly, as a “para-professional”, for one of the then “big-eight” CPA firms – Deloitte Haskins + Sells, becoming my department’s resident tax expert. I was able to go totally on my own through contacts made during my year at DH+S. When I left I did actually take a few of my small business clients, who did not need a CPA, with me.

My mentor’s office was a storefront, initially steps from “Journal Square” in Jersey City (where the Jersey Bounce started), the city’s transportation hub (we later moved to another storefront steps from the County Courthouse and Administration Building). Because of our locations, and being a storefront, we had a steady source of walk-in clients – some of whom stayed for only a year or two (often thankfully) and some who are still with me today.

I was able to limit my practice to tax-season 1040 preparation (except for a very few select long-time year-round business clients) when my mentor (with whom I had worked for at least 25 years at the time), having turned age 75, said to me, “I’m tired of doing this. You can have the practice.”

While I no longer seek new 1040 business, because of my profile as a tax blogger I often receive emails from taxpayers asking me to take them on as clients. I am thankful but decline. Writing a tax blog, with correct advice and information, is a good way of "spreading the word" about your ability and soliciting clients.

I hope my little walk down memory lane has been helpful.

TTFN

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

* Check out my article on forming an LLC at MainStreet.com. This was my 75th item for MainStreet.

* Kay Bell offers us “Graphic Looks at Where Your Taxes Go” at DON’T MESS WITH TAXES.

* In addition to her blog Kay Bell also writes on taxes for BankRate.com – just as I write about taxes for MainStreet.com. Over at BankRate Kay has a good comprehensive article on “Teen Jobs and Tax Issues”, which discusses some of the issues I also dealt with in MainStreet items.

She tells us that some teens get a special break -

“There are special tax rules for typical teen jobs.

Individuals who provide babysitting and lawn mowing services are viewed by the IRS as household employees. In these cases, a household employee who is younger than 18 at any time during the tax year the work was performed is not subject to Social Security and Medicare taxes.

The same SE exemption also is allowed for newspaper carriers, distributors or vendors younger than 18.”

* Trish McIntire adds her voice to the discussion of the ridiculous amendment to H.R. 4213 (the American Jobs and Closing Tax Loopholes Act of 2010) in “Small S-Corps – Beware” at OUR TAXING TIMES.

Trish says (highlight is mine) -

“An argument could be made that, for many of these businesses, the ‘salary’ the owner takes is too low and if the IRS was to do a SE audit, they would be forced to take a larger salary and pay more Social Security and Medicare anyway. Maybe, but why are only certain S-corps being targeted? And why only very tiny businesses? It's like someone in Congress had this idea but didn't have the nerve to apply it to everyone and picked on the smallest and least likely to fight back.”

* And Joe Kristan continues to spread the word about this Congressional folly in “A One-Hitter is “Not Perfect’. This is Something Else” at the ROTH AND COMPANY TAX UPDATE BLOG, taking on one of the provision’s few public supporters.

Amen to – “To support the absurd and unenforceable S corporation provisions of H.R. 4213 as ‘A major step in addressing the problem, even if not perfect’ is a lame cop-out for lazy drafting and terrible tax policy.”

Thanks to Joe for continuing to fight the good fight.

And, Joe, it is indeed good to call Congress lazy idiots! As my British friends would say – call a spade a shovel.

* The IRS HITMAN reports on a recent incident where “Man Threatens IRS Office With a ‘Bomb Bag’”.

This is another case of shooting the messenger. Whatever you may say about the IRS - the Service does not write the tax law; they only attempt to enforce the oft times nonsense that the cafones in Congress come up with.

* Some tax pros oppose the new license and registration regime for preparers because they sincerely believe that the new requirements will cause tax preparation fees to increase as the additional costs are passed along to clients. I do not see this.

Russ Fox of TAXABLE TALK tells us in “Your Tax Return May Cost More” that there is something else that will cause tax preparation fees to rise -

“The Tax Extenders Bill, HR 4213, would impose a new tax on small S Corporations…like mine. If this bill becomes law, I will be forced to increase my rates. I’d guess the increase at somewhere around 10%.”

I do believe that Russ has a point.

* Kelly Phillips Erb, the TAX GIRL, sets a reader straight regarding misconceptions about the new health care “reform” bill in “Ask the taxgirl: Health Care Benefits and Taxes”.

She prefaces her answer with the spot on statement (highlight is mine) – “This is the problem with the health care bill. It’s so giant that very few people have read it (including many in Congress).”

* The NEW YORK TIMES brings us the news that “Half a Dozen States Delay Tax Refunds”.

NJ seemed to be no slower than usual in sending out state income tax refunds this year. New York told us up front that if a taxpayer does not opt for direct deposit of a refund it would be months before a paper check was received.

But even the direct deposit of NYS refunds was delayed. As the NYT article points out – “New York briefly postponed sending out half a billion dollars worth of refunds until its new fiscal year began in April.”

I had begun to get some “Hey Dude, Where’s My Refund” calls and emails from NY filers who had requested direct deposit at the beginning of April – just as I had heard on tv that NY was finally releasing refunds.

* Just wanted to remind you that, as reported in the JOURNAL OF ACCOUNTANCY, “IRS Revises Section 179 Expensing Amounts to Reflect HIRE Act Changes”

According to the article –

“On March 18, 2010, the Hiring Incentives to Restore Employment Act of 2010, PL 111-147 (the HIRE Act), extended for 2010 the increased amounts that taxpayers can expense under IRC § 179. The HIRE Act extended the $250,000 limitation on the aggregate cost of section 179 property that can be treated as an expense. It also provided that the $250,000 amount is reduced by the amount by which the cost of section 179 property placed in service during 2010 exceeds $800,000.”

* An item in the July issue of KIPLINGER’S PERSONAL FINANCE titled “A Tax Break Expires” sent me to the internet for confirmation.

According to “Intro to ESAs” at SavingForCollege.com -

“Unless Congress acts, certain ESA benefits expire after 2010. K -12 expenses will no longer qualify, the annual contribution limit will be reduced to $500 {from $2,000 – rdf}, and withdrawals will not be tax-free in any year in which a Hope credit or Lifetime credit or Lifetime Learning credit is claimed for the beneficiary.”

Currently the Coverdell Education Savings Account is the only tax benefit available for elementary and secondary school expenses. But this will not be the case in 2011, unless, as SFC says, Congress “acts”.

Don’t you know that Congress never “acts” – it only “reacts”!

* It seems that the Tax Dude does not speak often, but when THE TAX DUDE SPEAKS it is worth “listening” – i.e. his explanation of “Business Incentives Under the HIRE Act”.

TTFN

TO TWEET OR NOT TO TWEET, THAT IS THE QUESTION

I must be getting desperate for topics about which to post.

A recent tweet led me to a blog post titled “Not Worth the Time for Small Businesses to Embrace Social Media”.

I am currently on Twitter as “rdftaxpro”. I am certainly not on FACEBOOK or MY SPACE, and never will be.

On Twitter I follow only fellow tax bloggers. None of my family members are “twits”, as far as I know (and I have occasionally done a search) – at least in this sense (sorry for the bad joke), and I am not aware of any clients who tweet (also searched). I am certainly not looking to make new friends in this manner. I have plenty of friends as it is, thank you.

I use Twitter mainly as a resource for updated tax information and BUZZ items. I am not looking for new 1040 clients, or for any 1041, 1065, or 1120 clients at all. I do use Twitter to promote THE WANDERING TAX PRO, the NJ TAX PRACTICE BLOG, and my articles at MAINSTREET.COM, and to share interesting tax-related posts and online articles between BUZZes.

I will admit that I do enjoy “tweeting” with fellow tax pros and bloggers. And I do, on occasion, find tweeting as a good way of venting – although I try not to abuse the privilege.

I have absolutely no use for FACEBOOK or MY SPACE, and cannot understand why anyone who is not a high school or college student would have any. I certainly have no intention of making personal information available to the great unwashed masses. If I want to share information or pictures with family and friends I can always send them an email.

As I said, I am not looking for new clients. But if I were I certainly would not do so via these types of sites. As it is I could probably get up to 100 new clients simply by telling current ones that I am accepting referrals.

If I am looking for a plumber, or an investment advisor, or any type of consultant or vendor the last place I would look is on FACEBOOK or the like.

So, to those of you who are above the age of 21 with FACEBOOK or MY SPACE “pages”, could you please explain why (via email, please)? It is really Greek to me.

TTFN

THE CAFONES!

I have been thinking about the new IRS requirement, as per Section 9006 of the health care “reform” bill, for sending out 1099s to everyone and their brother, and about how it will affect me.

As CNNMoney’s article “Health Care Law's Massive, Hidden Tax Change” tells us (highlight is mine) - “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”.

The article goes on to explain –

“Right now, the IRS Form 1099 is used to document income for individual workers other than wages and salaries. Freelancers receive them each year from their clients, and businesses issue them to the independent contractors they hire.

But under the new rules, if a freelance designer buys a new iMac from the Apple Store, they'll have to send Apple a 1099. A laundromat that buys soap each week from a local distributor will have to send the supplier a 1099 at the end of the year tallying up their purchases.”

So first, corporations are no longer exempt from receiving 1099s. And second, 1099s must now be issued for the purchase of goods as well as services. The filing threshold, which has historically been more than $600, remains unchanged. So if payments to any vendor or contractor exceed $600 a Form 1099 must be issued.

I have no problem with having to issue corporations a Form 1099 for services provided. I am a corporation, so this would mean my business clients would need to issue me a Form 1099-MISC each year. I report all my income, so this would not increase my tax burden. I would just have to add Taxpro Services Corporation to the list of 1099s I must type for each business client along with W-2s on Christmas and New Years Eve. I can count my business clients on the fingers of one hand, so my workload would not increase materially because of this change.

The problem will arise if I must issue 1099s to Staples, Office Depot, and other vendors for my own business and for all my business clients. Here is where Congress, in its wisdom (or, as is more often the case, lack of wisdom), has once again overreacted to an issue rather than responding to a problem, something they are famous for doing.

One of my clients is a tavern. So I expect they will have to issue to each and every liquor supplier a Form 1099. On the way into work the bartender will regularly stop at a local Shop Rite and purchase food and other items for the bar. Does that mean that it must also issue a Form 1099 to Shop Rite?

In my case I personally record the business checking account activity, including individual check payments, for each of my business clients on a general ledger computer program. This program not only keeps track of payments by expense type, but also by individual vendor. So in January I can print-out a report of payments by vendor, making it easy for me to determine which ones will need to be issued 1099s.

But what of businesses who keep their own books, such as they are, and do so manually? This will certainly create more work for them and their accountants, bookkeepers and/or tax professionals.

But the actual issuing of 1099s is not the real problem. The CNNMoney article quotes Marianne Couch, a principal with the Cokala Tax Group in Michigan and former chair of a citizen advisory group to the IRS on small business and self-employed tax issues, who “thinks the bigger headache will be data collection: gathering names and taxpayer identification numbers for every payee and vendor that you do business with”.

Getting EINs from Staples, Office Depot, and, in the case of the tavern, regular liquor suppliers should not be a problem. But what of local independent vendors and contractors? I expect many will be reluctant to provide such information. So W-9s will need to be issued and back-up withholding will need to occur. This will cause much more “agita” for small business than the mere need to issue 1099s.

As a long-time tax professional I can tell you, and I expect most of my colleagues will agree, that many truly small business clients do not have any contact with us during the year, and we are only given a list of expenses by category at tax time for transfer to a Schedule C. So we will have to waste valuable time during the filing season to determine if any 1099s are required and track down the necessary information well after the fact.

Luckily these new requirements will not begin until tax year 2012. So when these clients come in to have their 2011 returns prepared we will have to tell them, and remind them again several times before the end of 2012, that they need to get EINs from all vendors and contractors to whom they will pay more than $600 during the year, and that they need to get the necessary information to us as early as possible in January of 2013.

While the new rules apply only to businesses – what of the owner of rental property? Is renting not a business? Will Schedule E filers, as well as Schedule C filers, need to get this information and issue 1099s also?

I hate to say this, but members of Congress are at the very least lazy and at most idiots. They more often then not don’t fully understand all, if any, of the implications of what they are passing. I doubt they actually read any of the bills they vote on. Either that or they have absolutely no regard for the additional burden their oft ridiculous laws puts on various classes of taxpayers.

TTFN

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

Not much BUZZ – due to holiday week-end.

* I always enjoy Trish McIntire’s posts at OUR TAXING TIMES. She start’s today’s BUZZ off with a good one that involved the consequences of “Begging Forgiveness” from the IRS.

* A tweet from a fellow tax twit led me to an interesting story from the NY TIMES that concerns student loan debt titled “Placing the Blame as Students Are Buried in Debt”.

* Joe Kristan’s ROTH AND COMPANY TAX UPDATE BLOG led me to two good posts on the new rules for issuing 1099s that will begin for payments made in 2012.

In “Get Ready for Onerous New 1099 Reporting Rules” by Scott Heintzelman, the EXUBERANT ACCOUNTANT, explains the rules as they now exist and what will change under the new rules.

Among the issues that arise from these new rules –

“TINs must be obtained from your vendors to avoid having to institute backup federal income tax withholding on payments made to them. By the same token, your business must ensure that your customers have your TIN to avoid backup withholding on payments made to you.”

And –

“To compound the problems with the new reporting requirements, many businesses use accounting methods other than the cash basis. In addition, a number of businesses file their returns using reporting periods other than calendar years. In an audit, imagine your business and the IRS attempting to reconcile 1099s with these complications.”

In “As Carl Sagen Would Say ‘Get Ready for Billions of Form 1099s’” at FARM CPA TODAY author Paul Neiffer goes further to point out - “if we do not comply properly with the rules, two bad things can happen”.

What are the two bad things -

“First, if you do not report the transaction to the IRS, they can assess a penalty of $50 per form 1099 not reported up to a current maximum of $100,000. . . .

Second and perhaps more important is that if you do not provide your federal identification number to your customers, they may be required to perform backup withholding on payments to be transmitted to you. This backup withholding is usually 20% of the total sale. . . . . you have to wait until the following year {when you file your tax return – rdf} to get your money”.

* Twitter has turned out to be, if nothing else, at least a good source of BUZZ. Like “How Do You Rank as a Taxpayer?” – a tool from KIPLINGER that shows “your income status compared to your fellow Americans. . . .based on adjusted gross income (AGI) reported on 2007 tax returns -- the latest statistics available”.

TTFN

AS THE CONGRESS TURNS

How ridiculous!

If you are self-employed, either as a sole proprietor or a partner, all of your net income from self-employment is subject to the “self-employment” tax, which is the equivalent of the FICA (Social Security and Medicare) tax paid by employees. There is a maximum subject to the Social Security portion, but 100% is subject to the Medicare portion.

A self-employed taxpayer can incorporate his/her business and limit the FICA tax to the wages he/she pays himself/herself. Any additional profit that the shareholder gives to himself/herself is considered to be a dividend, and is subject to “double-taxation”.

Self-employed taxpayers can avoid some of the Social Security and Medicare tax on their net earnings and avoid the double-taxation of a regular “C” corporation by electing to be a “sub-chapter S” corporation. The FICA tax is still limited to wages paid, and the balance of the corporation’s income is passed through to be taxed as ordinary income only on the shareholder’s Form 1040. The “sub-S” corporation itself does not pay any federal, and generally state, income tax on the net profit of the business.

For years the sub-S corporation has been used to avoid paying FICA/self-employment tax. If the shareholder pays himself/herself too small a salary he/she faces the possibility of an audit in which the IRS would “reclassify” some or all of the pass-through “dividends” as wages subject to payroll taxes – but the risk was, for the most part, worth it.

In order to pay for the various provisions of the American Jobs and Closing Tax Loopholes Act of 2010 Congress chose to close this “loophole” provided by sub-chapter S corporation treatment. However, the cafones want to close the loophole for only certain sub-S shareholders.

If a loophole is considered “inappropriate” it is so for all who can take advantage of it. If Congress wants to do away with the exemption from FICA/self-employment tax for sub-S shareholders it should do so for all sub-S shareholders.

{As an unrelated aside, I also think that if a tax deduction is “appropriate” it is appropriate for all taxpayers, and should not be “phased-out” based on some arbitrary level of income.}

Limiting this loophole closing to only a certain “class” of shareholders makes no sense.

You should read the posts of Joe Kristan and Monica Lawver, which I included in this past Saturday’s BUZZ, for more detail.

This action clearly sends a message, as pointed out by TAX GIRL Kelly Phillips Erb, that “Congress Hates Small Businesses”.

To repeat – how ridiculous!

TTFN

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

* My article “Find Tax Benefits from Your Junk” appeared this past week at MAINSTREET.COM.
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* Speaking of MAINSTREET.COM – want to know “Who Was the Richest President?”.
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* New Jersey senior and disabled homeowners should read my post “OOPS – They Did It Again” over at the NJ TAX PRACTICE BLOG.

* Shop till you drop! Kay Bell tells us about “Memorial Day State Sales Tax Holidays for Shoppers in Virginia, Texas and Louisiana” at DON’T MESS WITH TAXES.

* Kay also posts about a recent Tax Foundation study that finds “Southerners Pay Fewest Taxes”.

As Kay reminds us that “according to 2008 IRS data, a record 52 million filers (or 47 percent of the 143 million who filed a tax return for that year) had no tax liability”, and goes on to say that, according to the report, “Southern states have the highest percentages of nonpayers”.

* Approximately two hundred IRS Taxpayer Assistance Centers across the country will open on Saturday, June 5th, to provide help to individual taxpayers dealing with notices and payments, return preparation and a variety of other tax issues. Each office will be open from 9:00 a.m. until 2:00 p.m. local time.

Click here to find the locations in your state – and here for the locations in NJ.

* The Tax Foundation’s TAX POLICY BLOG reports on “Pork Barrel Tax Provisions in the Extenders Bill”.

* Joe Kristan (the ROTH AND COMPANY TAX UPDATE BLOG) in “Reputation and Skill” and Monica Lawver (THE TAX CPA) in “The Fuzzy Definitions” eloquently discuss the totally ridiculous idea of applying “self-employment tax to some -- but only some -- professional S corporations” that is part of the current “extenders bill”.

With the success of the Limited Liability Company entity, which provides liability protection while permitting the more flexible method of allocating income and expenses of a partnership, is the “sub-chapter S” corporation form really relevant any more?

* And, speaking of the “extenders bill”, Joe also tells us that “Extender Bill Extended to Next Month”. Joe tells us it “won't pass the house until after Memorial Day”.

* Howard Gleckman takes a scholarly look at the home mortgage deduction in “Should We Dump the Home Mortgage Interest Deduction?” at TAXVOX, the blog of the Tax Policy Center.

Perhaps the only reason most of my Schedule A filers are able to itemize is the mortgage interest deduction – and I would not necessarily want them to lose this deduction. However I might consider replacing the deduction with a non-refundable credit.

* Before I go – a thank you to Joe of CAFETAX for including me in his “Tax Around the Web” post and including TWTP as one of his favorite blogs. Check out Joe’s blog when you get a moment.

TTFN

DEAR GRADUATE

Since I guess you can say it is currently “graduation season” I thought I would post another rerun – advice that I would give to college graduates if I were the keynote speaker at a graduation:

WON’T YOU TAKE THIS ADVICE I HAND YOU LIKE A BROTHER –

A while back two of my fellow tax bloggers gave some good advice to those starting out in the accounting world. I would like to add a couple of cents.

My advice involves a song lyric and two advertising slogans –

* “You See You Can’t Please Everyone, So You Got to Please Yourself” (no jokes about pleasuring oneself now)

* “Only Sherwin Williams Can Cover the Earth”

* “Just Say No!”

1) Rick Nelson was spouting real wisdom when he sang “You see you can’t please everyone so you got to please yourself”. Do not choose your career, or run your life or business, because it is what you think your family, friends, clients, etc would want you to do. Follow your own dreams, and make your own decisions, and your own mistakes in the process, based on what you want.

2) When I first began my own practice, many, many, many years ago, I thought that I should offer, either personally or via relationships with consultants in other fields, all kinds of financial services to clients, not just 1040 preparation, so that their tax business could not be stolen away by their insurance agent or broker or another financial professional.

Then I remembered what a wise old Texan (my boss at the Summit YWCA) once told me – “Only Sherwin Williams can cover the earth”. You can’t be all things to all people. Don’t spread yourself too thin and try to offer the world to your clients.

Along the same lines, remember that the Tax Code is humongous and you can not be an expert in all Sections. Choose the area of tax practice that you enjoy most and are best at and limit your practice to that area.

3) Don’t be an Ado Annie. You must learn to just say “no” to clients. Regardless of how much you would sincerely like to help them with matters other than that in which you are educated and experienced, realize your limitations and learn to tell a client “I don’t do that”.

Over the years clients have brought me census forms and loan, financial aide, discount program, and rebate applications asking for help. I clearly state that I do 1040s and nothing else, because that is where my education and experience lies. I tell them that I know nothing more about these forms and applications then they do, and that I do not have time during the tax season to do anything that does not involve a 1040.

You should also learn to just say no to accepting a new client. If you feel you are already overworked during the tax season, or that the client shows a potential for agita and aggravation, learn how to say that you are not accepting any new clients.

And lastly learn how to say “no” to a client when they ask you to do something that is “shaky” or “shady” – such as to claim a deduction that you know, or strongly suspect, is not legitimate or appropriate or not to claim income that you know they received. It is better to lose the client than to gain the potential problems.

While I have written these three pieces of advice based on my many years of experience as a tax professional, they are valid regardless of your choice of trade or profession, and each one has many applications.

So good luck!

TTFN

HERE IS SOMETHING TO THINK ABOUT - AGAIN

Just thought I would “rerun” a post that on an item of tax reform that needs to be thought about and discussed.

I welcome your comments on this issue. Please email them to me at rdftaxpro@yahoo.com (with WANDERING TAX PRO COMMENT in the subject line).

HERE IS SOMETHING TO THINK ABOUT -

I have a unique tax simplification proposal. I haven’t heard it discussed or proposed anywhere else. I submit it is something to think about.

What if we did away with the depreciation deduction for real estate?

According to the IRS, depreciation is “an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property”. The IRS discusses depreciation in detail in Publication 946 - How To Depreciate Property.

Let’s look at depreciation from the point of view of the Income Statement. Basically, if you purchase an asset (i.e. equipment, a vehicle, or real estate) that will last more than one year you spread the cost of the asset over its “useful life”. You purchase a new computer. You certainly do not purchase a new computer each year – you expect that it will continue to provide service for several years. So you divide the cost of the computer over a period of years to reflect this fact, and to properly report the “economic reality” of the purchase.

If you deducted the full cost of the computer in the year of purchase this would distort the true cost of doing business. Since you generally purchase a new computer every five years, claiming a deduction of 1/5 of the cost each year “more better” represents your cost of operations.

Thus depreciation is used to “recover the cost or other basis of certain property”.

Another way to look at depreciation is from the Balance Sheet perspective. When you purchase an asset that asset has value to you. You trade the asset of cash for a computer. If you sold your business the value of the computer would be included in the value of the business. As an asset ages its value drops. A two-year old computer does not have the same value in the market as a comparable brand new computer. Depreciation is used to reflect the drop in value of the asset.

Thus depreciation is used to reflect the “wear and tear, deterioration, or obsolescence of the property.”

There are several ways to depreciate an asset. The simplest method is “Straight Line”. You deduct the cost of the asset evenly over its life. If you purchase a computer for $1000 and you expect it to last for five years you would deduct $200 per year. There are also “accelerated” methods which recognize that the value of an asset will be reduced disproportionately, with the reduction in value being greater in the earlier years. As you well know, when you buy a new car it drops in value the minute you drive it off the lot.

To simplify matters, the government provides guidelines for the “useful” life of different types of assets. The current depreciation system is called the “Modified Accelerated Cost Recovery System” (MACRS), which came about with the Tax Reform Act of 1986. MACRS is divided into two separate depreciation systems:

General Depreciation System (GDS) – this is “regular” MACRS and is used most often. It provides the shortest “recovery periods”. You can use the accelerated “150% Declining Balance” method or the Straight Line method over the GDS recovery period.

Alternative Depreciation System (ADS) – you can elect to deduct the cost of the asset over a longer life using the Straight Line method. In some instances, such as for “listed property” which is used less than 50% of the time for business, ADS must be used.

MACRS allows the cost of the asset, other than real estate or improvements thereto, to be deducted over 3, 5, 7 and 10 years. The most common recovery periods are 5-year, for cars, computers, copiers, typewriters and software, and 7-year, for furniture and fixtures.

For tax deduction purposes depreciation begins when the asset is “placed in service” and not necessarily when it was purchased. If I purchase and pay for a computer online in December of 2007, but the computer is not delivered to my office until the first week of January 2008, then depreciation begins in January and I can begin to deduct depreciation on the computer in tax year 2008.

Tax rules call for a “half-year convention”, which treats all assets whose cost recovery begins during the year as being placed in service on the midpoint of the year. It basically allows for 6 months of depreciation. Under certain circumstances assets can be depreciated using a “mid-quarter” convention, provided a greater first year depreciation for assets purchased early in the year.

Real estate is treated differently in the Tax Code. First of all the cost of land is never depreciated. So one must remove the value of the land from the purchase price of the property. The adjusted purchase price of Residential Real Estate, including residential rental property, is recovered over a “useful life” of 27.5 years. Non-residential Real Estate (i.e. commercial property), including the portion of a residence that is used as a home office, has a useful life of 39 years. The depreciation of real estate uses a “mid-month” convention.

If we look at economic reality, a building has a life of much more than 27.5 or 39 years. The building I lived in before moving to my current apartment was 100 year old and still going strong. And, for the most part, the value of real estate does not drop in value over the years. If properly maintained its value will generally increase. My parents purchased their first home for $13,000 and sold it many, many years later for $75,000 (and they were robbed).

For all intents and purposes, again for the most part, real estate does not “depreciate”. You do not replace a building every few years because it no longer provides the same service or function. And the value of real estate as a component of the value of a business does not drop as it ages. So why do we allow a tax deduction for the depreciation of real estate?

Where depreciation of real estate comes into play most often in the world of 1040s, at least in my 35 years of experience, is with the rental of a 2-family building. One floor of the building is used as the personal residence of the owner and the other is rented out. Depreciation is claimed as a deduction against rental income on Schedule E and, in most cases, either creates or increases a tax loss. It is possible for the rental activity to provide positive cash flow, but because of the depreciation deduction result in a deductible loss. The depreciation deduction can increase the return’s refund by up to $1,000 or more!

The problem arises when the taxpayer(s) sell the property.

With a two-family house as described above, if the required conditions are met one half of the gain on the sale, up to $250,000 or $500,000 depending on filing status, is eligible for exclusion under Section 121. The other half is taxable as a capital gain. Any depreciation “allowed or allowable” (see my post on “Ask The Tax Pro – Allowed or Allowable”) over the years must be “recaptured”, or added back, to the taxable gain from the rental half of the property.

If the total net gain on the sale of the property is $100,000, generally (but not necessarily if, for example, capital improvements were made directly to the rental half) $50,000 will be allocated to the personal residence and $50,000 to the rental activity. If the taxpayer claimed $25,000 in depreciation on Schedule E over the years, or was entitled to claim $25,000 in depreciation (the “allowable” portion of “allowed or allowable”), the taxable capital gain is $75,000.

While long-term capital gain is taxed at 5% or 15%, gain resulting from depreciation recapture can be taxed at up to a maximum of 25%. In the above example, if the taxpayer was in the 25% bracket before adding the capital gain, $50,000 is fully taxed at 15%, for $7,500 in tax, and the $25,000 depreciation recapture would be taxed at 25%, for $6,250 in tax, resulting in total federal tax of $13,750 (effective 18 1/3% tax) – plus the appropriate state income tax on $75,000.

The above is the tax reality. But here is what the taxpayer will probably be thinking:

· “I sold my personal residence and my gain was only $100,000 – so I do not have to pay any federal or state income taxes!” – or

· “Since it was a two family house I only have to pay tax on half the profit - $50,000!” – or, worst of all

· “Hey, I just bought a new house that cost more than what I sold the old one for, so there is no tax!”

What is “more bad” is if the sale, after claiming all closing costs from the purchase and sale and capital improvements made over the years but before factoring in the depreciation recapture, results in a net loss! If we assume $25,000 in depreciation recapture against a $5,000 loss (50%) that is $20,000 taxed at up to 25%, or $5,000 in federal tax, plus state tax on the $20,000. You have to answer your client when he screams, “but I lost money – why am I paying tax?”

It is possible that recaptured depreciation can add $12,000+ to the overall federal and state tax bill – which more often than not comes as a complete shock to the taxpayer. And of course I was not told about the sale, which happened in May, until I get the client’s “stuff” in March of the following year. And again of course, the taxpayer did not increase withholding or make any estimated tax payments to cover the gain.

You try to explain to the client that he/she/they was/were saving $500-$1,000 each year by deducting the depreciation in the past, and now they are just paying “Sam” back – but clients cannot always understand or accept this. That $500-$1,000 per year was spent a long time ago!

In the “good old days”, when ordinary income rates were higher and there was a 50% or 60% capital gain exclusion (I am dating myself again) instead of reduced capital gain rates, it was easier to show a client that he actually made money in the long run by claiming depreciation – but not so today when the possible 25% rate on depreciation recapture could be the same as the rate for ordinary income.

And you won’t avoid the problem simply by not deducting depreciation when it is “allowable” – back to the “allowed or allowable” rule.

So we can see that in the long run depreciating real estate on the 1040 only results in increased “agita” for both taxpayer and tax professional.

Doing away with this deduction would provide “Uncle Sam”, and corresponding state uncles or aunts, with additional tax money up front, instead of having to wait years or decades to finally collect it. And bottom line - doing away with the depreciation deduction would more correctly tax the actual economic activity.

Recent court cases and IRS regulations have more clearly defined the difference between a capital improvement that is depreciated and a repair that is currently deducted, moving away from the dollar amount as the criteria and towards the nature of the expense as the determining factor. This is a topic for another posting. Under my suggestion there would also be no depreciation of true capital improvements – they would simply be added to cost basis.

No longer “allowing” the depreciation of real estate would not only affect the tax on the sale of rental property, but also remove the need for a taxpayer to recapture depreciation claimed on a home office when the residence is sold.

As THE WANDERING TAX PRO deals with individual income tax issues I will not go into this suggestion from a corporate tax point of view, at least at this time. Perhaps I will discuss it in a future posting.

So, what do you think - should we do away with the depreciation deduction for real estate, at least on the 1040? I am especially interested in hearing the opinions of my fellow tax bloggers.

This post has been especially long, and I apologize if it was because of my being long-winded.

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

* A double helping of Joe Kristan (of the ROTH AND COMPANY TAX UPDATE BLOG) – two posts worth checking out: “Insert your 'Professional Courtesy' Joke Here” and “I Lied to the IRS, But I'm Being Honest With You!”.

Joe was on a roll Monday- did you see my Monday post “I Tried”?

* ABOUT.COM: TAX PLANNING: US provides a list of states that will be running a Tax Amnesty program in 2010 -

"• Maine's tax amnesty program runs from September 1, 2010 through November 30, 2010
• Massachusetts has an amnesty program that is limited to businesses which begins April 1, 2010 and ends June 1, 2010
• New Mexico has approved an amnesty program, but the dates have not yet been released
• Nevada will conduct a tax amnesty program between the dates of July 1, 2010 and September 30, 2010
• Pennsylvania's tax amnesty program begins April 26, 2010 and ends June 18, 2010
• Philadelphia has a tax amnesty program that runs from May 3, 2010 to June 25, 2010"

You can link to the website of each state’s Amnesty program at the ABOUT.COM post.

* No surprise here when Kay Bell reports that “Homebuyer Credit Sales, Related Audits Up, But Other IRS Audits Likely to be Lower” at DON’T MESS WITH TAXES.

Kay tells us -

“The April 30 expiration of the first-time homebuyer credit prompted more people to buy houses last month.

And in connection with those purchases, we get another statistical bump that's also unsurprising. The IRS is auditing more tax returns that contain those homebuyer tax credit claims.”

* The Small Business Taxes and Management website provides a good special report that explains “Documentation is More Than Invoice and Canceled Check”.

* BNA reports that “Extenders Vote Postponed Amid Concerns Over Cost, Carried Interest”.

* BNA also brings us an update on the testing process for the new program of licensing tax preparers in “IRS to Match Return Preparation With Testing Under Preparer Regime”.

While the IRS announced that it will offer two options for the test that preparers, except for some unknown reason (defying logic) CPAs and attorneys, must pass and has said that preparers can take whichever one they prefer – until now there has been no reference to limiting the scope of returns that one can prepare based on the test taken.

BNA reports (highlights are mine) – “The Internal Revenue Service will eventually check on whether the returns that tax preparers do fall into the category for which they have been tested, but not for now, David Williams, IRS Electronic Tax Administration director, told a gathering of accountants May 21.”

I am still somewhat perturbed that I have to take a test to show that I know what I am doing after 39 tax seasons without incident, considering that I take more than the now required continuing education CPEs in taxation each and every year, and even more considering that CPAs and attorneys are exempt from the test.

* Bill Perez tells us of a new IRS payroll form in “Form W-11 Released For Payroll Tax Exemption” at WILLIAM’S TAX PLANNING BLOG.

* You will notice that TWTP has a new “sponsor”. Click on the CPA ORANGE COUNTY, CA link in the upper left hand margin to go to ELLS, CPAs and Business Advisors.

The firm’s website also has a tax-related blog – ELLS BLOG.

I have not yet had the time to review in detail the tax provisions in the new healthcare “reform” bill. The ELLS BLOG discusses one aspect in its post “Tax Credit Helps Small Employers Provide Health Insurance Coverage”.

Do you want to help keep TWTP alive by becoming a “sponsor”? Click here to find out how.

TTFN

WRONG ANSWER!

During my “wanderings” on the web I came across a blog post that was providing answers to tax questions.

The question, submitted by a person who had recently begun doing some work as an “independent contractor”, was – “How much money do I have to make in order to be taxed?”

The blog author provided the following answer –

“Self-employed individuals are required to report any income earned over $400.00."

That answer is wrong!

As a self-employed individual you are taxed on your very first dollar of income! There is no minimum amount of self-employment income needed to be subject to the income tax. If your net income, after deducting all allowable legitimate business expenses, is $3.00 you must include this $3.00 in gross taxable income. If the net income is $398.00 you must add $398.00 to your gross income, same as you must do if the net income is $46,000.00.

The $400.00 figure refers to “self-employment tax” – the equivalent of FICA (Social Security and Medicare) Tax paid by those with net earnings from self-employment. If the net earnings from self-employment calculated on Schedule SE – which is 92.35% of the net profit reported on Schedule C or C-EZ (or passed through from a partnership on a K-1) – is less than $400.00 you do not have to pay any self-employment tax.

Let’s say Line 31 of your 2009 Schedule C, which is carried over to Line 12 on Page 1 of the Form 1040, is $430.00. Your net earnings from self-employment is $397.00 ($430.00 x .9235). Your Schedule C income is not subject to self-employment tax. If the Schedule C incomes is $500.00 your net earnings from self-employment is $462.00 ($500.00 x .9235). You will pay self-employment tax on the full $462.00.

The self-employment tax rate is 15.3%. Half of the self-employment tax calculated on Schedule SE is deducted “above the line” as an adjustment to income on Page 1 of Form 1040, reducing your Adjusted Gross Income.

I just wanted to set the record straight.

TTFN

I TRIED!

I just can’t seem to avoid distractions to take me away from getting the GD extensions done. The obvious solution is no more GD extensions - my goal for next tax season!

Over at the ROTH AND COMPANY TAX UPDATE BLOG Joe Kristan tells us that according to a “Former Tax Policy Chief: Tax System ‘Nearing Collapse’".

Joe quotes from a “sobering speech from Pamela F. Olson, a former Treasury assistant secretary for tax policy” on the mucking fess out federal income tax system has become.

Ms Olson joins Joe, myself, and other tax bloggers in our concerns regarding how the cafones in Washington have totally FU-ed the Tax Code. Her comments certainly bear repeating.

“Congress decided to administer all manner of benefits through the tax code decades ago, but it has become particularly popular to do so in the last 15 years. Somewhere in the 1990s Republicans realized they could enact promised tax cuts with targeted provisions in the tax code, and Democrats realized they could enact promised spending programs with targeted provisions in the tax code.”

She hits the nail on the head with -

“That is unfortunate, because the tax code is a poor delivery vehicle for tuition tax breaks that can't be delivered until long after the tuition check is written, for income support paid on the basis of last year's annual income, or for healthcare for those without employer-provided coverage. It is also a poor delivery mechanism because it fails to provide an incentive for many at the bottom of the income ladder who pay home mortgage interest but cannot deduct the interest, who set aside money in savings accounts but do not qualify for the savers credit, whose employers don't provide a retirement savings plan.”

Her bottom line –

“In the tax world, instead of simplifying to increase productivity in compliance and administration, we keep adding complexity -- more rules, more limitations, more terms, more conditions, more qualifiers, more provisos, and more exceptions. The result is that our system gets slower and slower and more inefficient.”

.

Right on, sister!

As I have said in an August 2009 post “There Has Got To Be A Better Way” (which also bears repeating) –

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

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

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

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

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

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

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

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

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

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

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

TTFN

NO TIME FOR POSTINGS

Like Winsocki I must “buckle down”.

.

This is the last week in May. If I will be moving on July 1st, as I am hoping, I will need most of June devoted to organizing and packing. So, since wishing won’t make them go away, I must spend this week plugging away on the GD extensions.

So I must take a hiatus from posts this week – with the exception of perhaps a Wednesday BUZZ or if there is breaking tax news that will not wait.

.

New Jersey taxpayers may want to check out today's post at my NJ TAX PRACTICE BLOG.

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

TTFN

ANYTHING BUT TAXES - THE SPA!

During my entire career I have been preparing 1040s to the tune of “American Popular Standards”. I find that I cannot work properly without background music. It began with New York’s WRFM in the early 70s, which was playing constantly in my mentor’s office at Journal Square in Jersey City. It went on to include WNEW-AM and other NY based stations.

While Jonathan Schwartz broadcasts from the local NYC public radio station on week-ends, I know of no New York or New Jersey based station (which I can get on the radio here in Jersey City) that plays APS round-the-clock. There is WOBM 1160 AM – which plays APS from mid-morning to mid-afternoon – but it cannot be heard outside of Monmouth and Ocean counties. There are plenty of NY and NJ “oldies” stations, to which I listen on occasion, but none playing the music of Francis Albert and friends.

I have turned to the internet, listening to stations originating throughout the US. Unfortunately, as formats change and stations give-up live online streaming, I must often find new stations. To do so I turn to RadioLocator.com – which identifies by format and links to stations from all over the US.

My latest find is KFSD 1450 AM “The SPA” from Escondido CA – Southern California’s Contemporary Standards. The SPA blends the enduring standards of timeless artists with bold new interpretations from the younger vanguard. From Frank Sinatra, Dean Martin, Sammy Davis Jr., Barbra Streisand, Harry Belafonte, Ella Fitzgerald, Perry Como, Andy Williams, Petula Clark, and Nat King Cole, to Diana Krall, John Pizzarelli, Harry Connick Jr., Diane Schuur, Michael Bublé, Rod Stewart, Karrin Allyson, and Natalie Cole.

Why not check it out.

Let’s hope they continue to stream APS online for years to come.

TTFN

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

* I was represented at MAINSTREET.COM this week with “Planning A Deductible Vacation – Part 2”.

* Joe tells us about the “Revised 941 for 2010 2nd Qtr” at his CAFETAX blog.

* Another Joe, Mr Kristan of the ROTH AND COMPANY TAX UPDATE BLOG, tells us that his earlier post, mentioned in this past Wednesday’s BUZZ installment, was premature in “Estate Tax Deal? Not So Fast”.

As Joe excellently puts it - “Well, Congress has been botching the estate tax for almost ten years now; why should they start getting anything right now?”

* Joe makes up for his “prematurity” with the post “Oh, THAT $658,447”, which talks about a taxpayer who failed to report a huge capital gain because he had repurchased the stock which was sold for a gain and thought the “wash sale” rule applied.

Joe properly points out that – “There is no 'wash sale' rule for stock gains. While wash sale rules disallow stock losses if you buy the stock back within 30 days before or after the loss sale, you normally can't undo gains.”

And, perhaps more importantly, “Oh, and if you omit 98.6% of your gross income from your 1040, don't expect to pin the whole blame on your preparer.”

* Kelly Phillips Erb, the internet’s TAX GIRL, brings us some great news in “H&R Block Takes Hit, Announces Lay-Offs”.

Kelly reports – “Overall, H&R Block reported a decline in tax preparations at its tax offices. The number of returns prepared fell by 6.6% while tax preparation fees decreased 5.5%.”

What has caused this drop. Kelly says – “High unemployment rates and fewer numbers of taxpayers who owe have translated into more than just headaches for IRS: many tax preparers across the country saw a dip in 2010.”

I have personally not seen a dip in business this past filing season. While I have lost clients due to death, I doubt few, if any, of my clients decided to try preparing their own return this year. I have always said that my profession is inflation-proof. People will always need to, if not actually pay taxes (thanks to GWB and BO), at least tile tax returns. The Tax Code does not get any less complicated during times of economic downturn – probably the opposite.

I can only hope that Henry and Richard’s drop in income is the result of taxpayers realizing that these guys charge gourmet restaurant prices for fast food service (again apologies to fast food chains – I have found good service and true value at Burger King and McDonalds locations that does not exist at H+R Block).

* Some good advice from Michael Rozbruch at the TAX RESOLUTION UNIVERSITY blog – “Taxpayers Must Beware of Tax Relief Firms That Misrepresent Their Ability to Resolve IRS Problems”.

Remember – NOBODY can guarantee to resolve your tax debt for pennies on the dollar, and any firm that suggests this is possible is full of reality tv (we all know what word reality tv is a synonym for)!

* Jean Murray discusses taxes and bartering in “6 Things to Consider About Barter Transactions” at JEAN'S BUSINESS LAW / TAXES: U.S. BLOG.

As Jean says – “While barter is a legal way to do business, barter is considered taxable by the IRS. The IRS says: ‘Barter dollars or trade dollars are identical to real dollars for tax reporting’."

* Kelly, the TAX GIRL, also touches on the topic of barter in “Ask the taxgirl: Swaps and Payments”.

* Ben Harris suggests “An Alternative to the Alternative Minimum Tax” at TAXVOX, the blog of the Tax Policy Center.

“Congress could improve the current system by creating a true "minimum tax": Adjusted-gross income (AGI) above a certain threshold—perhaps the $200,000 for single filers and $250,000 for married filers that President Obama favors—would be subject to a minimum tax rate. High-income taxpayers would lose the benefits of various deductions and credits if their average tax bill on AGI above the threshold fell below the minimum rate.”

If we must have a minimum tax this is certainly “more better” and less convoluted than the current dreaded AMT, which, as Ben points out, “isn’t a minimum tax at all; it’s simply a parallel tax”. But why have any kind of minimum tax, alternative or otherwise? Just fix the damned Tax Code!

I still say there should be a true “minimum” tax – every single American citizen who is over the age of 18 and not a full-time student should be required to pay a minimum tax of $100.00. This way there would be no more “non-taxpayers”.

TTFN

AS THE CONGRESS TURNS

I am taking a break from the IRA series to bring you up to date on the “extenders” bill.

Ways and Means Committee Chairman Sander Levin and Senate Finance Committee Chairman Max Baucus have introduced the American Jobs and Closing Tax Loopholes Act. Click here to download a 29-page summary of the Act.

According to the official press release, included in the legislation are provisions to –

• “Provide tax relief to businesses and State and local governments to help them invest and create jobs;
• Provide important tax cuts to put money back in the pockets of working families;
• Help restore the flow of credit to enable small businesses to expand and hire new workers by extending small business loan programs;
• Expand career training programs for Americans who are looking for work;
• Extend eligibility for unemployment insurance benefits, COBRA health care tax credits and other critical programs that families and communities depend on through December 31, 2010;
• Endure that seniors, military service members and Americans with disabilities continue to have access to doctors they know and trust; and
• Close tax loopholes for wealthy investment fund managers and foreign operations of multi-national companies.”

Gee – it does everything but grow hair!

The bill will extend for one year - through December 31, 2010 only – the following popular tax benefits:

• the option to deduct state and local sales tax instead of state and local income tax,

• the additional $500 or $1,000 standard deduction for real estate taxes paid,

• the “above-the-line” adjustment to income for qualified tuition and fees,

• the “above the line” adjustment to income for educator expenses, and

• the ability to make a tax-free transfer of up to $100,000 directly from an IRA to a qualified charity.

You will note, as I have highlighted above, that these items are extended for 2010 only. As fellow tax blogger Kay Bell says – “We’ll have to do this all again in seven or so months”.

When will the idiots in Washington stop this nonsense? If a tax deduction is appropriate make it permanent. It can always be repealed in the future. This annual ritual of passing an extender bill is ridiculous.

The bill would be paid for by closing a multitude of foreign loopholes, making owners of S corporations engaged in a “professional service business” pay full FICA (Social Security and Medicare) tax on all net income (they will no longer be able to take a nominal salary and avoid payroll taxes by receiving the rest of the income as pass-through dividends), and preventing “investment fund managers from paying taxes at capital gains rate on investment management services income received as carried interest in an investment fund”.

Conspicuously missing from the Act is any mention of the annual AMT patch!

TTFN

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

TAX GIRL Kelly Phillips Erb sets a bride-to-be straight on the rules for determining filing status in “Ask the taxgirl: Filing Single When You’re Married”.

I can’t imagine where this college student heard some of the stuff she mentions in the course of submitting her question to Kelly. BTW – I assume that the questioner is not an English major.

* An interesting report from the US Census Bureau – “Census Bureau Reports Nearly Half of U.S. Residents Live in Households Receiving Government Benefits”.

According to the report –

“In the third quarter of 2008, approximately 45 percent of U.S. residents lived in households in which at least one individual received government benefits, according to data released today by the U.S. Census Bureau.”

Unfortunately I am not among the blessed 45%. What am I doing wrong?

* I had previously reported that April 9th was Tax Freedom Day (OOPS- did I forget to post on Tax Freedom Day 2010?). Now Kay Bell tells us that this past Monday was “Tax Freedom Day Sequel: Deficit Day” at DON’T MESS WITH TAXES. This year’s “D-Day” was “the second latest deficit-inclusive Tax Freedom Day since World War II”.

Kay’s post provides an interesting statistic – “This creates a per-household deficit of $13,158”.

This item seems to be an excellent “companion” to the previous one on the extent of Americans “on the tit”.

FYI, New Jersey’s Tax Freedom Day was April 25th. NJ was #2 (no jokes now) on the list – only 2 days before Connecticut.

* It seems that someone actually reads these tax blogs – in addition to other tax bloggers.

The blog posts of absolutely fabulous Joe Kristan (ROTH AND COMPANY TAX UPDATE BLOG) and Kelly Phillips Erb (TAX GIRL) are quoted by Bill Toland in the Pittsburgh Post-Gazette article “Some Find Pennsylvania's Tax Amnesty Ads Too Scary”.

For more info on PA’s Tax Amnesty Program click here.

* Speaking of Joe Kristan, he reports that “the Senate Finance Committee may be nearing an estate tax agreement” in “Estate Tax: 35% Rate, $5 Million Exemption?” at the ROTH AND COMPANY TAX UPDATE BLOG.

* The IRS HITMAN provides some good “More Hard Truths on Tax Debt”.

TTFN

FROM THE MAILBAG

* Here is a comment from a fellow blogger on my WHERE THE FAKAWI post -

“I wish you all the luck. I felt extremely luck as far as GDE’s in that I only have two this year to deal with. One I expect around mid-June, the other (a fruit-loop that owns a roofing company) I expect around the first of October.

I am expanding my services and have been out of touch with everyone. I have spent my time learning new software and re-learning all the new rules as pertaining to same. I am trying to get back into the groove with everyone but doing so softly. Still learning new stuff.

I like the new car.

Bruce – the Missouri Tax Guy”
.
Thanks!

I would be in heaven if I only had 2 GDEs to deal with – and none workload related!

I see that “fruit-loops” are not limited to the NY-NJ metropolitan area.

I look forward to your returning to the “groove” – and to your return to posting at THE MISSOURI TAX GUY.

* I tell my clients that if they receive any correspondence from “Sam” of any other “uncle” they should send it to me immediately. Don’t call or email first – just put it in the mail.

{As an aside many clients waste lots of valuable time trying to call me to tell me they got a notice instead of just automatically mailing it to me. If they ever did get me on the phone the first thing I would say would be, “mail it to me”.}

I recently received a copy of a CP12 notice that the IRS sent to clients (a married couple). This notice indicates that the taxpayers will receive a refund of $3,226.00. It tells them – “We are writing to you because there is an error on your 2009 Federal Income Tax Return.”

The notice goes on to say – “We changed the refund amount on Line 73a or the amount you owe on Line 75 of your Form 1040 because the amount entered on your tax return was computed incorrectly.”

FYI – Line 73a of the original Form 1040 that I prepared for the clients indicates a refund of $3,226.00. This is the exact same amount of refund the notice said they were getting.

The back of the notice includes an analysis showing “Line Item on Your Return”, “Your Figures” (the amounts reported on the originally filed return) and “IRS Figures”. The “Your Figures” and the “IRS Figures” were exactly the same.

Why the cafones at the IRS sent this notice to my clients is totally beyond me. I do suspect that it had something to do with BO’s “Making Work Pay” credit – further confusion on the part of the IRS.

The couple are both over age 65 and both collected Social Security for the entire year. The husband continues to work and earned more than enough to qualify for the full $800.00 MWP credit. However, because they each received a $250.00 ERP (economic “recovery” payment) the amount of credit claimed on Schedule M was $300.00. This is correct.

Another example of your tax dollars at work!

TTFN