Friday, August 31, 2007


This week I attended the annual IRS Nationwide Tax Forum at the New York Hilton. Each year since 1990 the IRS Nationwide Tax Forums are be held in six cities across the nation during July, August and September. The Forums offer three full days of seminars with the latest word from the IRS leadership and experts in the fields of tax law, compliance and ethics. Attendees can earn up to 18 continuing professional education (CPE) credits, learn about the latest IRS e-Services products and schedule a visit to the Practitioner Case Resolution Room. The forums also feature a two-day expo with representatives from the IRS, business, finance and tax software companies offering their products, services and expertise. The theme of the 2007 Tax Forums was “A Partnership That Works”.

The New York Forum is always well-attended. The keynote speaker, IRS Chief Counsel Donald L. Korb, mentioned that there were 2000 tax professionals attending this year from all 50 states – including one from Switzerland.

The bulk of the questions and comments addressed to Mr. Korb expressed tax professionals’ frustrations with getting proper cost basis information from clients to correctly report capital gains, the new preparer penalties (under IRC section 6694) passed in the Small Business and Work Opportunity Act of 2007, and having to explain to clients the new strict rules for claiming deductions of cash contributions. While I “feel their pain”, these questions and comments were misdirected. They should be addressed to Congress and not the IRS. The IRS does not make tax law – Congress does. Regarding the new guidelines for tax preparer reporting standards – this was sprung on the IRS the same time it was sprung upon the preparer community, after the bill was passed. Neither the IRS nor the general public was asked for input before passage of the bill.

I had attended the IRS Forum (for the first time) at the Hilton two years ago and, while I had at the time promised to never again attend in NYC if the location remained the same, I decided to give it another try this year.
Nothing has changed. I truly hate the New York Hilton as a location. While there is nothing wrong with the actual Hilton facilities, I do not want to have to schlep from 40th Street and Eighth Ave to 53rd and Ave of the Americas for three days. Luckily this time the weather was a bit more pleasant - it is not just the heat but the actual schlep.

I would very much prefer the Marriot Marquis or another hotel in the lower 40s, a better location for those of us who commute from NJ into NYC via the Port Authority Bus Terminal. What would be even “more better” would be returning to Atlantic City, where the Forum has been held three years ago, as the Northeast US location. However it apparently is not to be. The locations for the 2008 Tax Forums have been announced, and the Northeast US location is once again the New York Hilton.

And location is not the only problem. Another is that the Forum’s format of 50-minute sessions do not provide for more than a very general cursory review of the topic, with no real depth. One can barely touch the surface of topics like “Tax Issues on Distributions from Retirement Plans”, “Tax Rules Relating to Home Ownership”, and especially “Depreciation from Start to Finish” (you can barely cover the start) in only 50 minutes.

You must know by now that I do not file returns using software or electronically (I do all 350-400 by hand). While many tax professionals would be interested in new developments in this area I am not. I do not do client representation, unless absolutely necessary, and do not have any currently pending cases worthy of bringing to Case Resolution, although I do agree that this is a very important and welcome component of the Forum for many other preparers.

As I am sure you are aware, the IRS Tax Forum is not my only source of continuing education. As you well know I attend the local and national conferences and seminars of the National Association of Tax Professionals and the National Society of Tax Professionals each year. The Forum is only a supplement, something I sign up for because the registration fee is extremely reasonable. The education provided by the Forums is really not sufficient to be one’s only source of updates and refreshers. Its main value is to provide current information on IRS services and resources and the IRS prospective on tax issues.

I get the most value from the Forum if I can pair it with an already existing NATP or NSTP conference, like I did last year with the NSTP regional conference in Chicago. Next year I plan to attend the Forum in Atlanta, as both the NSTP and NATP will be having there annual conferences there around the same time. I look forward to returning to Atlanta for, this time, an extended stay.

One thing I was happy about with this year’s Forum – the “stuff” provided to participants upon registration did not include a totally useless IRS T-Shirt as it had the past two years - although there was still no free coffee which I had recommended as a substitute. The IRS Forum is the only educational conference I have ever attended that did not provide participants with at least free coffee – most also include a free continental breakfast each day!

So much for my general comments on the Forums. Let me address some of the topics discussed in the too-short educational sessions.

· Unless Congress gets off its duff and acts in time the dreaded Alternative Minimum Tax (AMT) exemption amounts will revert to what they were “pre-George W”! This means the AMT will claim 25 Million victims for tax year 2007 – up from the approximately 3.8 Million victims for tax year 2006! The IRS expects Congress to extend the AMT “fix” for another year – as do most tax professionals - and hopes it does so before it has to “go to press” with the forms and instructions.

· Speaking of the dreaded AMT, it has been determined that 93% of all AMT is the result of three add-back items – personal exemptions and the standard deduction (21.6%), taxes deducted on Schedule A (51.1%) and miscellaneous job-related expenses in excess of 2% of AGI (20.3%). Much of the 51.1% created by the second item is from highly-taxed residents of states like New Jersey and New York.

· The IRS website is the 3rd most “hit” website on the internet – behind two porn sites.

· Approximately $41-44 Billion in Earned Income Credits are issued each year. The IRS EITC “department” feels that EIC claims have a 23-28% error rate – ranging from inadvertent errors to out and out fraud. 70% of EITC claims are submitted on returns prepared by paid tax professionals, so it seems we are the ones getting it right.

· Tax preparers have a more detailed requirement for “due diligence” when it comes to claiming the Earned Income Credit than for most other tax reporting, and are subject to more strict fines in this area. {The Earned Income Credit is perhaps the biggest federal welfare program in existence today. As tax professionals we have enough to worry about just getting all the necessary information from our clients without the added burden of having to determine if a person qualifies for federal welfare. – RDF}

· There is a new IRS form for claiming the above-the-line deduction for tuition and fees, which did not even have a line on the 2006 Form 1040. It is Form 8917. The IRS believes that some taxpayers are “double-dipping” by claiming both a deduction and a credit for the same student and wants the name and Social Security number of the student for whom the deduction is claimed placed on the record. The IRS has also created a new Form 8919 (Uncollected Social Security and Medicare Tax on Wages) for employees improperly classified by employers as independent contractors and issued a Form 1099-MISC instead of a W-2 – I believe I mentioned this form in an earlier posting. The Form 1120-A (US Corporation Short-Form Income Tax Return) is no more. All “C” corporations must use the Form 1120 for 2007. I have no idea why this form was killed – I used if for my remaining corporate clients. More work for tax preparers!

· The courts will use a “duck test” to try to pierce the “corporate veil” and allow for personal liability by one-man corporation shareholders. If it does not “walk like a corporation” or “quack like a corporation” – especially in terms of minutes of shareholder meetings and similar record keeping requirements – it will not be considered a corporation for liability purposes. This is not the case with an LLC.

· I never had, and probably never will have (remember - no new clients), a client who had a plumbing business. If I did I would tell him/her to adopt the slogan that NSTP Executive Director Beanna Whitlock used in her LLC presentation – “Joe’s Plumbing Service – The Best Place to Take a Leak”.

There was one strange occurrence during my visit to the Forum. When I went out for lunch on Tuesday it was snowing soap suds on 54th Street!


Thursday, August 30, 2007


A few weeks before attending the IRS Nationwide Tax Forum in midtown NYC I went to to check out what shows were available for the first night of the forum, when I would be attending educational sessions until 5:15 pm.

I decided on the latest edition of Gerard Alessandrini’s perennial review of “fractured Broadway fables”
FORBIDDEN BROADWAY - the Special Summer Edition titled “The Roast of Utopia”. Like the Energizer Bunny, FB just keeps going on and on. As it was playing at the tiny 47th Street Theatre, apparently its new permanent home, this would nicely break up my schlep from 53rd St. and Ave of Americas (the New York Hilton – location of the Forum) to 40th St and 8th Ave (the Port Authority Bus Terminal).

I have seen many of the various editions of FORBIDDEN BROADWAY at various locations over its 25-year history. It is given fresh life each new Broadway season, as new musicals, revivals and trends appear. The last incarnation I saw, also at the 47th Street Theatre, was its SVU (Special Victims Unit) edition (in honor of the various LAW AND ORDERs Broadway connection - Jerry Orbach and B D Wong).

This FB included some familiar numbers from ongoing musicals such as CHICAGO (“Give me the old saucy Fosse”), THE LION LING, WICKED, SPAMALOT, AVENUE Q, and THE PHANTOM OF THE OPERA (“Why we’re still here there’s no explanation”), including a duet with the Phantom and Ethel Merman (each edition has to have a visit from either Ethel or Carol Channing) on wireless mikes vs belting from the diaphragm (“Get that mike out of your ass”), as well as dead on jabs at new shows COMPANY, MARY POPPINS, GREY GARDENS, THE LOWSY – I mean DROWSY - CHAPERONE, CURTAINS, JERSEY BOYS and RUDE - I mean SPRING – AWAKENING by a cast of 4 “practically perfect” FB veterans. An apparent upcoming revival of LES MISERABLES provided a return of the Act 1 ending Les Miz medley.

As with any review of this nature, every lyric is not always inspired genius. Often, as is also the case with the politically incorrect CAPITAL STEPS shows, the joke is in the title of the number, with the rest of the parody basically just filler. But there were certainly enough laugh out loud moments in this edition to make it well worth the price of a ticket (especially at tdf prices). Two thumbs way up!

I considered dining at “Rosie O’Grady’s” on 53rd Street, but it appeared crowded and a bit pricey, and the Shepherd’s Pie was misnamed – it contained beef and veal and not sheep! I ended up at “The Olive Garden” on 47th Street. As I booked through tdf the dinner cost twice as much as the ticket (it could have been worse)!


Wednesday, August 29, 2007


I received the following email from a WANDERING TAX PRO reader:
Q. I read your article {“Back to Basics”} regarding mutual fund cost basis. I am in the process of consolidating a number of funds I've held for too long into a more manageable portfolio. One fund was opened in 1987 and the fund has basically grown and grown. I have to sell it to move the proceeds into another investment. I've read about the 4 methods and for determining the basis and know that I have to include the original investment (less expenses) and the reinvested dividends which bought more shares of the fund - in the basis. I never sold anything from the fund since I invested in it.
My question concerns the treatment of the 1099-DIV amounts that I paid taxes on just about every year, specifically the amounts that are in boxes:
1a (Ordinary dividends)
1b (Qualified divs)
2a (Total capital gain distrib)
Should they be included in the basis? Seems like since I've already paid taxes on these amounts, they should somehow go into the basis....?
Thx much.
Dave C

A. If you are selling your entire investment in a fund, and you have not sold any shares of this fund in the past, you do not need to consider the 4 methods – they will all provide the same result.

You indicate that you know you have to include the reinvested dividends in your basis. If all of the dividends and distributions you received from the fund over the years were reinvested then the amounts reported in box 1a (Ordinary Dividends) and Box 2a (Total Capital Gain Distributions) of the Form 1099-DIVs represent your dividend reinvestment and should indeed be added to your original investment to determine your cost when calculating the capital gain.

The amounts reported in Box 1b (Qualified Dividends) are already included in Box 1a (Ordinary Dividends) and should not be added to your cost. Similarly, any amounts reported on Lines 2b, c and d are already included in Box 2a (Total Capital Gain Distributions) and should not be added to basis.

You would reduce the amount of Qualified Dividends and Capital Gain Distributions by any amounts reported in Box 4 (Federal Income Tax Withheld), Box 5 (Investment Expenses) and Box 6 (Foreign Tax Paid).

If the dividends and distributions were not always reinvested, or only certain distributions were reinvested (i.e. ordinary dividends paid in cash and capital gain distributions reinvested), then you should only add the actual amounts reinvested to your cost basis.

Amounts reported in Box 3 (Nondividend Distributions) generally represent a return of capital and are basically a wash (you would add the amount of the distribution to basis as a reinvestment, but then subtract it out as a return of capital) and should not be added to your cost. You would not have included these distributions in income on your Form 1040 in the year(s) received

Basically your cost basis is the original investment in the fund, plus any additional share purchases and the net amount of total dividends and distributions reinvested, less any distributions classified as a return of capital.

It would be helpful to review the annual fund statements showing all activity for the year when determining your cost basis. You should be able to reconcile the Form1099-DIVs to these statements.

If your capital gain is substantial enough, and you will not be covered under the “safe harbor”, you may want to consider making federal and state estimated tax payments to “cover your arse” and avoid potential underpayment penalties.

A substantial long term capital gain, while taxed separately under both regular tax and the dreaded Alternative Minimum Tax (AMT), may also cause you to become a victim of AMT.
Your tax professional can help you determine your cost basis and if you would need to make estimated tax payments.

I hope I have been of help.


The very first Carnival of Smart Money appeared yesterday (August 28th) at the MY MONEY THINKS blog.
And the Carnival of Personal Finance Money Tips finally showed up on August 25th at KCLAU’S MONEY TIPS – better late than never!
Both Carnivals include my “If You Believe That I Have a Bridge for Sale Cheap” posting on urban tax myths.

Tuesday, August 28, 2007


My annual extended visit to the “Lake District” was scheduled around another silly farce at Hawley’s Ritz Company Playhouse – THE SENSUOUS SENATOR by Michael Parker.

I had reserved a room at the “Sandy Beach Motel” during my overnight stay there in July – and found myself once again in Room 4. It appears from what I read in the local paper that the “Fife and Drum Motel” in Honesdale, where I usually stayed, was undergoing an extensive renovation by its new owner, including the addition of a restaurant. I look forward to seeing its new look next summer.

As usual, I visited Beach Lake, Hawley and Honesdale in PA and Narrowsburg and Lake Huntington in New York. Nothing much had changed since last summer. And, also as usual, I relaxed and read my latest mystery – a new (to me) series with cat detectives Joe, Dulcie and Kit, who actually spoke (to certain humans and not just to themselves), by Shirley Rousseau Murphy – while sitting at the Observation Deck overlooking Lake Wallenpaupack or in the Tusten Veterans Memorial Park under the Narrowsburg Bridge overlooking the Delaware River.

When vacationing here with the family over the years we always stayed at “all-inclusive” houses (the Lazy J, Dellwood Acres, the Central House, and Evergreen Lodge) where all three meals were served daily, so I enjoy now being able to investigate the many dining options available.

I returned to old favorite “Gresham’s Chop House” across from the lake and last year’s find “Three Wishes” in Beach Lake (where another bartender made his first Stinger) and discovered the “Capri Restaurant and Lounge” overlooking a marina on the “other side” of Lake Wallenpaupack. Run by the Fabri family, it is located 2 miles in from Route 590 on Lake Shore Drive. I started off with a refreshing specialty cocktail called “Capri Comfort” and enjoyed an excellent New England clam chowder and the house specialty Veal Parmagian while listening to Frank Sinatra’s “Duets” tape. As a break I ate at “Arby’s” one night.

I miss the drive-in theatre in Indian Orchard (now a Ford dealership), and was disappointed that the movie theatre in Callicoon was not showing anything I wanted to see (I’ll get there yet), but I did manage a bargain matinee of RUSH HOUR 3 at the multiplex in the Route 6 Plaza Mall, where I also finished my clothes shopping for the year at K-Mart.

The weather was very pleasant, with only one 90+ degree day. The gas differential from NJ to PA was about the same as it had been last month – both states under $3.00 for regular with PA 15-25 cents more than NJ – but once I crossed the bridge into New York State the first station I came across charged $3.05.

Sunday morning I slept late, finished my book on the Lake Wallenpaupack observation deck, and stopped at the “Towne House Diner” in the center of Honesdale (the very first place we stopped on our very first visit to the area over 40 years ago – then it was “Steve’s Diner”) for a French Toast Ham and Am sandwich and banana shake before heading back to Jersey City and the last of the GD extensions.


Monday, August 27, 2007


One of the first things I do when I return home from “wandering” is to check my email at When I did so late Sunday afternoon I discovered 127 new messages waiting for me in my “in box”.

· 20 of these messages were “MAILER-DAEMON” or similar emails notifying me that my “auto-response” had been returned undeliverable. All were deleted

· 12 were “FWs” of presumed jokes (every now and then a political or religious message is forwarded) from a fraternity brother and client. I almost never open a FW – except on occasion from this source, as he has sent some good stuff in the past, when I get a “vibe” from the subject line. What “burns my toast” about FWs is that you have to scroll down what seems to be 20 pages listing the various email addresses of each of the recipients of each forward before you get to the “meat”. My email system allows me to forward an email as “inline text” and edit the email so that I can erase all the various headings and send only the “meat”. Why can’t other email systems do the same thing – or are the senders of forwards just too lazy to edit them? All were deleted.

· 31 (about 24%) were actual legitimate messages – responses to emails I sent and requested updates and subscriptions.

· That leaves 64 “spam” messages – one more than half of all the emails! These included solicitations for some form of Viagra or Cialis (who is spreading these nasty rumors – granted I am not 25 anymore, but there is still life in the old boy yet), to refinance my mortgage (I have never owned real estate in my life), to provide urgent help in freeing up millions of dollars held in some third world country (as I mentioned in an earlier posting), and, of course, all kinds of “sexually explicit content”. All were deleted.

I have three (3) email addresses – the one discussed above, one with (my “home page”) and a third with I use the address when emails sent from are treated as “spam” and not delivered (as occasionally happens) and the for rare personal emails when I want to remain relatively anonymous (I hardly ever send emails from this address). I can count on the fingers of one hand the total number of spam I have received at the address in the past year. I get about 30 unsolicited spam emails a day at, even though I have sent at most only a dozen emails from this address in the past six (6) years - how do they get this address?

A word to the wise - I never open a message unless I recognize the name or email address of the sender, or the “Subject Line” properly identifies the message content (i.e. “comment on a WANDERING TAX PRO posting” or “Tax Question” or “I got a notice from the IRS”). Now don’t go sending me spam with “Tax Question” in the “Subject Line”! I am sure there have been a few occasions over the years when I have deleted unopened a legitimate message from a client whose email address was unknown and “Subject Line” entry was unclear or blank. I also do not open what I assume to be “are we there yet” messages for returns/GD extensions I have not yet begun – I save these and wait until I am ready to “go to press” before opening them.

Oh well – I guess there is really nothing I can do except “grin and bear it”.


Sunday, August 26, 2007


Not much “buzz” while I was out “wandering”. It seems that I was not the only one on vacation.

* An article in the WEB CPA WEEK email newsletter said that, according to a report from the Treasury Inspector General for Tax Administration, more than 8 million people file tax returns each year who don’t need to do so, “imposing heavy costs on the Internal Revenue Service”.

TIGTA discovered that taxpayers spent an average of $390 million and 75 million hours per year preparing and filing unnecessary tax returns. The IRS, for its part, spent an average of $11 million each year to process the unnecessary returns

While many low-income taxpayers file the returns to obtain refunds on their withheld taxes, 15 percent of the unnecessary tax returns did not generate a refund. For the other 85 percent, the taxes often should not have been withheld in the first place – in many cases because the filers were under the age of 21 and were claimed as dependents on other people’s tax returns.

Check out my posting on “Dependents and Income Tax Withholding”.

There may be another reason why a taxpayer would want to file a return even though he/she is below the income threshold and there is no balance due or refund requested. By filing a return you “start the clock” running on the time the IRS has to question the return. The IRS has three (3) years from the due date of a filed return, including extensions, to audit that return. If a return is never filed the clock never starts.

* I received a press release from the National Association of Tax Professionals, of which I have been a member for 20+ years, on an interesting item that Congress snuck through as an addition to May’s Irag funding bill. Here is the copy:

The National Association of Tax Professionals (NATP) is recommending Congress correct a provision recently enacted that raises the tax return reporting standard for preparers above the standard for taxpayers, thereby creating a potential conflict of interest between preparers and their clients. The new provision was included in the Iraq war funding bill that became law in May with no prior notification to the tax preparing and taxpaying public.
“We were surprised that this tax provision was enacted without warning and without the characteristic protocol accorded the public to comment,” Paul Cinquemani, NATP Director of Government Relations, said. “The increased standard created what we hope was an unforeseen conflict of interest between preparers and their clients, putting preparers in the unfair position of acting as auditors for the Internal Revenue Service (IRS) while dramatically increasing the cost of return preparation to the American public.”
In a recent commentary submitted to the chairpersons and ranking members of the House Ways and Means and Senate Finance Committees, NATP states that the new law has raised tax preparing standards to a point higher or ‘tougher’ than the standards for the taxpayer for purposes of imposing a costly penalty for the understatement of a tax liability. It goes on to say that for tax preparers to be protected from a possible imposition of an understatement penalty, they must now be able to demonstrate a reasonable belief that a position taken on a return would “more likely than not” be sustained on its merits, or otherwise insist on a disclosure of the position on the return. The standard requires an in-depth and costly research process usually reserved for tax shelter transactions, not for routine, non-tax avoidance items.
“Taxpayers, on the other hand, may take a position on a return that has a “substantial authority” for being upheld,” commented Cinquemani. “Prior to the enactment of this provision, tax return preparers were held to a standard of “realistic possibility of success” that was lower than the standard for taxpayers.” NATP believes that the standards for imposition of a penalty for understatement of a tax liability should at most be equal between tax return preparers and taxpayers so that the potential for a conflict of interest between them does not arise.
NATP states it strongly supports well-targeted efforts to eliminate abusive transactions and close the ‘tax gap.’ It believes public awareness is critical when provisions are enacted that affect the rights of taxpayers when meeting tax law compliance requirements. “There was not so much as a hearing on this vital matter,” stated Cinquemani. “... nor was there any recommendation from Treasury to create this conflict.”
FYI, Gina of GINA’S TAX ARTICLES discussed this way back in June in her posting “Taxpayers Beware?”.
* The IRS reminds us, in Information Release 2007-144, that “Phone Customers Can Still Request Excise Tax Refund”.
* The General Services Administration (GSA) has released the federal domestic per diem rate tables for the fiscal year October 1, 2007-September 30, 2008.

Wednesday, August 22, 2007


TWTP will be on a brief hiatus while I wander. I will be making my annual pilgrimage to the summer playground of my youth – Wayne and Pike Counties in PA.

When I get back I will be attending the IRS National Tax Forum in NYC.
I don’t know what ever happened to the Carnival of Personal Finance Money Tips from the blog in Malaysia. Hope all is well with K C Lau.

“Talk” to you when I get back.


During the tax season a client sent me the following email, apparently originated by David R. Kamerschen, PhD, a Professor of Economics at the University of Georgia.

Sometimes politicians, journalists and others exclaim; "It's just a tax cut for the rich!" and it is just accepted to be fact, without questioning it. But what does that really mean?

Let's put tax cuts in terms everyone can understand.

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.

If they paid their bill the way we pay our taxes, it would go
something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1...
The sixth would pay $3...
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until on day, the owner threw them a curve.

"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20." Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?'

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now paid $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

"I only got a dollar out of the $20," (5% discount) declared the sixth man. He pointed to the tenth man, "but he got $10 out of the $20" (50% discount)

"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I!"

"That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore.

In fact, they might start drinking overseas.

Nicely put, Professor!


Tuesday, August 21, 2007


Kay Bell’s Sunday posting at DON'T MESS WITH TAXES brought to my attention the August 17th issue of the Citizen’s for Tax Justice “Tax Justice Digest”, which provides a quick review of the tax proposals put forth so far by the 2008 presidential candidates.

The CTJ puts its own spin on the proposals by grouping them, not by candidate, but by, in their opinion, “Bad Ideas” and “Good Ideas”. I thought I would weigh in with my 2 cents worth on the subject.

Here, with by my comments, is what they consider Bad Ideas:

· Make Permanent the Bush Tax Cuts. If George W’s tax cuts are allowed to “sunset” everyone will be hit with a huge tax increase in 2011. Doing away with the 10% tax bracket, the increased Child Tax Credit, and the partial marriage penalty relief would hurt lower and middle income families. Some of the tax cuts have already been made permanent, such as those that relate to pensions and retirement savings (by the Pension Protection Act of 2006).

· Repeal the Estate Tax. I am not a fan of the estate tax (I do not prepare federal or state estate or inheritance tax returns). My only concern with its total repeal is losing the “step-up in basis” on inherited property. It would be a nightmare for tax preparers if the original cost basis of the deceased is carried over on inheritance.

· National Sales Tax. While I have not embraced the Fair Tax proposal (I am not ready to retire yet) I will admit that replacing income and payroll taxes with a national sales tax has some things going for it. As I said in an item from the September 4, 2001 installment of TWTP - (1) “A national sales tax would eliminate the problem of the ‘underground economy’ which escapes taxation under the current system. Everyone, regardless of the source of their income, would pay sales tax at the point of purchase.”, (2) “A national sales tax would encourage saving and investing. As the tax is assessed on retail purchases only, income from investing activities would not be subject to tax.”, and (3) “If under the national sales tax system corporate and business income taxes are abolished, along with the need for expensive compliance costs, the savings would be passed along to consumers in the form of reduced prices and to stockholders in the form of increased dividends.”

· Flat Tax. I would support a flat tax, with minimal, if any, deductions. The goal is to “simplify, simplify, simplify”. It would not be bad for my business - as a tax preparer I would make more money, and experience much less “agita”, if all I did was prepare simple short forms all day than I currently do preparing complicated returns. Besides, I do not like the “progressive” tax system. Why should a high-income individual pay a higher percentage of his income? If everyone paid a flat 10%, or whatever, a person making $1 Million would obviously pay more than than a person earning $30,000.

· Increase Revenue by Cutting Taxes. I do believe that reduced taxes may result in economic growth, given the right circumstances. I seem to recall reading that tax revenues have historically increased after cuts in capital gains rates have been enacted.

· Tax Breaks for Health Care. The cost of health insurance is prohibitive for many individuals, especially those of us who live in New Jersey. Something has to be done. I do agree with CTJ that a credit is “more better” than a deduction, and “if it's not refundable it still won't help those who pay federal payroll taxes but not federal income taxes.” But then I am opposed to refundable credits. The bottom line is that the answer to the problem will not be found by using the 1040.

· Eliminate the IRS. There will always have to be an IRS in some form, although a simpler tax system would be easier to administer. My September 2001 posing also said, “A national sales tax would also be relatively easy to administer. Almost of the 50 states already have a state sales tax, with all the appropriate collection and auditing functions in place. The national sales tax could be incorporated into the collection and compliance process of the various state sales taxes, with the states receiving a ‘commission’ from the federal government.”

The Citizens for Tax Justice think the following are Good Ideas:

· Repeal Bush Tax Cuts to Fund Other Priorities. See my comments above on making the Bush Tax Cuts Permanent.

· Stop Taxing Work More than Wealth. I do not want to see an end to preferential capital gains tax rates. I want to encourage investment. And, as I have said above, I seem to recall reading that tax revenues have historically increased after cuts in capital gains rates have been enacted.

· Close the Loophole for Carried Interest. I will agree that there may be some merit to this idea. I rarely, if ever, come across this tax break with my clients, so I have not followed this issue.

· Taxing Carbon Emissions. Again, I have not followed this issue and do not have enough information to form an opinion at this point. I do agree with CTJ’s comments of concern that the resulting “added cost would likely be passed on to consumers in the form of higher prices that disproportionately burden low-income families.”

So it looks like the Citizens for Tax Justice and I disagree on many of the candidates’ proposals. What do you think?

As a final comment - I am surprised the review did not address the dreaded Alternative Minimum Tax (AMT). Have the candidates been silent on the AMT?

FYI, Kelly Phillips Erb posted interviews with several Republican candidates on tax policy at her TAX GIRL blog a few months ago.


Monday, August 20, 2007


I am, or will be, in two new (for me) blog carnivals today!

The first is the 14th edition of the Carnival of Money, Growth & Happiness over at CREDIT CARD LOWDOWN (“bringing you the best credit card offers and tips"). This carnival is currently “up and running”. It is an extensive carnival on personal finance, with 43 postings.

The second is the Carnival of Personal Finance Money Tips at
KCLAU’s MONEY TIPS, scheduled to be posted today. KCLAU's MONEY TIPS is “a Malaysian [blog] compiling lots of tips and advices on personal financial planning - Protect, accumulate, preserve, and manage your WEALTH wisely!” I did not realize it was based in Malaysia when I submitted my entry. In the future I will have to investigate the host of a carnival before I enter. Anyway, I look forward to reading the “advices” included in this carnival.


I tell my clients in my “finished return” letter - “Please examine these returns carefully to be sure all items of income and deductions have been accounted for properly. You are responsible for all the information reported on the returns. If you find anything that is not in order, or that you do not understand, contact me immediately.”

I recently received the following email from a client upon receipt and review of her 2006 return (a GD extension) – with “ERROR?” in the subject line:

“I'm just comparing the taxes to 2005. In 2005 [my husband’s] SS benefits came to 16,166. and the taxable amount of that was 1,875. On the 2006 taxes his SS benefits came to 18,476. and the taxable amount of that was listed as 9,951. How can he have been taxed 53% on his SS benefits for 2006. That is really outrageous!!”

I replied - “No error! While I agree it is outrageous, you can be taxed on up to 85% of your Social Security benefits! The amount that is taxed is based on the amount of your other income. Because of the depreciation recapture from the sale of your Summit home your income is higher, so more of the Social Security is taxed. There is a special worksheet in the back of your 2006 copy that shows the calculation.”

FYI, because of the way Social Security and Railroad Retirement benefits are taxed it is possible that for every additional $1.00 of income you must pay tax on $1.50 or $1.85.

In this case the taxpayers sold their personal residence in 2006, part of which was used for an income-producing activity. The part of the property “used for business or to produce rental income” was within the home. So, while they could exclude up to $500,000 in gain under Section 121, they had to “recapture” (claim as income) the depreciation “allowed or allowable” after May 6, 1997 (i.e. the home office rule).

This question brings up two very important tax issues.

(1) The maximum tax on long-term capital gain property is not 5%, 15%, or 25% (on recaptured depreciation) as advertised. While long-term capital gains reported on Schedule D are taxed separately from other income on a special worksheet, these gains are included in your Adjusted Gross Income (AGI), so they can increase your net “regular” taxable income in a number of ways - increased taxable Social Security (as in this case) or Railroad Retirement benefits, decreased deductions for medical expenses (as also happened in this case), miscellaneous expenses, tuition and fees, student loan interest, and deductible IRA contributions - and reduce credits such as the Child Tax Credit and the education tax credit. Plus it can cause you to become victim of the dreaded Alternative Minimum Tax (AMT). See my posting on “The Most Important Number on Your Tax Return”. So the effective tax cost of a long-term capital gain is more often than not more than 5%, 15% or 25%.

(2) If you use a property for an income-producing activity and claim depreciation deductions you must “recapture” these deductions when you sell the property. As I explained in my email response to the client – “You claimed a tax deduction over the years for depreciation on a portion of the Summit home, and received additional refunds because of this deduction. When you sell the property you have to "pay back" some of the refunds you had received in the past. In truth, it was only a loan from the government.” When you sell a qualified personal residence you can exclude up to $250,000 or $500,000 of the gain from federal and state taxes. However if you have a home office or rent rooms within your one-family home, you cannot exclude – and must report as a taxable capital gain – any depreciation you claimed after May 6, 1997. And – very, very important to remember - if you have a two-family home and rent out half you can exclude one half of the gain as your personal residence, but you must pay tax on the rental half of the gain and you must recapture (add-back) all the depreciation you claimed over the years.

While I am on the subject there are some other important points I want to make:

· Your gain on the sale of a property has absolutely nothing to do with the amount of cash you walk away with from the sale. When a client sells a home I am often told “The check we received from the lawyer was $XX,XXX”. That is nice, but so what? The gain is the sale price less the original cost, the cost of any capital improvements made over the years, and applicable closing costs such as legal fees, title insurance and transfer fees at both purchase and sale, plus any depreciation “allowed or allowable” over the years. In most cases, the actual capital gain will be much more than the check received at closing, usually because of having to pay off existing mortgages. If you have frequently refinanced or “over-financed” you may actually get next to nothing at closing, but still have a substantial capital gain.

· You may actually have lost money on a property, but you still could have a taxable capital gain. “I bought the property for $100,000 and I sold it for $90,000 – how come I owe tax?” As I mentioned above, and I cannot mention often enough, if all or part of the property was rented you have to add back all or some of the depreciation deductions claimed over the years.

On a final personal note – it is a “pet peeve” of mine when a client who does not understand an item on a tax return I have prepared tells me in a phone message or email “You made an error on my return”!

Obviously I am not perfect, and even I make mistakes. Hey, look at the number of tax returns I prepare – all manually - during a tax season. I am surprised I do not make more mistakes than I actually do. But just because you do not understand an item on your return or you think something does not make sense (who ever said that the Tax Code had to make sense) don’t automatically assume that I FU-ed! You certainly should ask a question – but be honest and say “I don’t understand an item on my return.” If you do discover an obvious error, i.e. I entered the wrong Social Security number for a dependent or I transposed a number, say so – “You have the wrong SS number for my son”.

The above email from my client really doesn’t apply – by putting a ? after ERROR it is more wishful thinking than an accusation – and this doesn’t happen often, but when it does it really “burns my toast”.

So a word to the wise – if you do not understand something on your tax return do not call or email your tax preparer and say “You goofed!”.


Sunday, August 19, 2007


Did you know –

· The timing of a depreciation or Section 179 deduction for a business asset is determined by the date the asset is “placed in service” and not the date the item is purchased. If you purchase and pay for a computer for use in your business at the end of December 2007 - but it is not delivered and installed until January of 2008 - the depreciation begins, or the Section 179 deduction is claimed, in 2008.

· When claiming a deduction or credit for qualified tuition and fees you must reduce the amount of tuition and fees charged by 100% of any awards, grants, scholarships, Veteran’s benefits and employer-paid benefits received during the year. You cannot allocate these items between tuition and fees and room and board.

· If you own a “timeshare” at a resort, such as Marriott or Disney, a portion of the annual “maintenance fee” you are charged will contain your proportionate share of the real estate taxes on your unit - which is deductible on Schedule A. This amount should be identified somewhere on the annual billing notice.

· Many closing costs on the purchase or refinance of a rental property can be amortized over the life of the mortgage, including loan application fees. The “unamortized” portion of any loan application fees you paid can be written off when you refinance the mortgage with a new lender, similar to the rule for unamortized “points”.

· The first actor to play James Bond on the screen was Barry Nelson in a tv adaptation of “Casino Royale”, shown as an episode of the anthology series “Climax” in 1954. In this adaptation Bond was an American agent with the Combined Intelligence Agency who works with British Secret Service agent Clarence Leiter, a version of American agent Felix Leiter from the Fleming books. The villian, Le Chiffe, was played by Peter Lorre. (I know this had nothing to do with taxes - so what?)

You do now!


Saturday, August 18, 2007


* Ryan Ellis of the TAX INFO BLOG (the blog formerly known as “Tax Playa”) reports on an interesting development for individuals who pay for their own private health insurance premiums. According to Ryan, “The IRS this week has announced that employees can defer from their paychecks pre-tax the cost of individual health insurance. That is, the employer health exclusion does not simply apply to employer-sponsored plans. Employers can either directly-reimburse employees for part or all of the plan cost, or can allow the employees to take a pre-tax deduction from their paycheck.” This is the first I have heard of this change. I will investigate and report more on what I find out in a future posting.

* KPE at TAX GIRL answers one of the most frequently asked questions posed to tax professionals over the years in her posting “Ask the Taxgirl: Blood Donations”. Alas the answer to this FAQ is not the one that taxpayers want to hear.

* GLG at GINA’S TAX ARTICLES touches on the issue of “annualizing income” to avoid the penalty for underpayment of estimated taxes for a self-employed taxpayer with seasonal income fluctuations when answering a question in her posting “
Estimated Tax: Self-Employed”.

Gina also offers some valuable words of wisdom in her posting on “
Investment Newsletters”. Just because an item is “deductible” does not necessarily mean you will receive a tax benefit from deducting the item. As Gina points out, “Many tax deductible expenses do not end up providing a tax deduction. Salespeople will rightfully tell you when something they are selling MAY be tax deductible, only they always seem to say it as it definitely IS deductible and fail to mention the various exclusions that apply. The most painful of these is usually related to a home purchase that they have been told will result in a big annual tax savings, which for many people does not. It is always a mistake to purchase something because you believe it will provide you with a tax deduction without first asking your tax adviser if it is true in your case.”

While the investment newsletter discussed in the posting is a deductible item, you will only get a tax benefit if –

(1) you itemize deductions on Schedule A,
(2) your total miscellaneous deductions from Schedule A exceeds 2% of your Adjusted Gross Income (AGI), and
(3) you are not a victim of the dreaded Alternative Minimum Tax (AMT) – miscellaneous expenses are not deductible in calculating AMT.

* Kay Bell of DON’T MESS WITH TAXES reports that “IRS Formalizes Child Care Regs”. There is really nothing new here. As Kay points out, most of the final regulations “reflect proposed regulations that were published on May 24, 2006, and have been in use by filers since then”.

* The Tax Foundation’s TAX POLICY BLOG adds baseball’s Mr. Strawberry to the list of celebrity tax cheats in its posting “
Daaaaaaaaaaarryl: Your Taxes Are Due”. The post reminds us that, “Yes, Mr. Strawberry, when you charge people for autographs, that is income according to the IRS”.

* The Times of London reports that “
Pope Set to Declare Income Tax Evasion 'Socially Unjust'”. Remember, “Render Unto Caesar…” Thanks to Paul L Caron, the TAX PROF, for pointing out this article.

* I always enjoy reading Trish McIntire’s comments on “the tax preparation business from my perspective”. As usual, I feel your pain, sister, with regards to your posting “Tax Preparation-Jack of All Trades?”. My clients are also often asking me questions that have absolutely nothing to do with taxes, and asking me to fill out mortgage or loan applications, census forms, college financial aid applications, prescription drug or utility discount program applications, or any other such forms. As I state on the back of my “finished return” letter, “I have no special experience, knowledge or expertise with any of these forms. I do not know any more about them than you do.”
I also strongly identify with her final comments - “But for me the problem is not being asked questions out of my field but that non-tax experts are being asked to give info on taxes. Just as I don't know what are good investments, few brokers understand all the nuances of how an IRA distribution can effect a client's return. No one wants to say they don't know the answer and possibly lose business. So they give a general answer and at tax time I clean up the nuances.” Trish – “nuances” is too nice a word. What you really mean is “mucking fess”.

Friday, August 17, 2007


I recently received two email questions regarding New Jersey issues – one from a “second-generation” client and one from a stranger who had come across my website while doing an online search.
The client, who had purchased her first home in 2006, wanted to know - “Is there is a limit on the percentage your property taxes can be raised for your home each year.”
I answered – “As far as I know there is currently no statutory limitation on annual increases to real estate taxes. Corzine may have talked about it at one point, but I am not aware of any law. From what I have seen in the past few years municipalities can raise taxes as much as they like. Senior citizen homeowners have some protection with the "Senior Freeze" property tax reimbursement program - but "normal" taxpayers get no relief.”

As referred to in my response, I have noticed over the past two tax filing seasons that the property tax deductions of NJ homeowners have increased dramatically – and at the same time the amounts of the homeowner rebate checks for non-senior and non-disabled homeowners have decreased dramatically. The new rebate program, renamed the Homestead Rebate, promises much higher rebate checks this year. Although the money for the increased rebates will have to come from somewhere – the NJ legislature would never think of reducing spending, only increasing taxes, fees, surcharges, etc – so the money will come out of one pocket and go into the other.

In the “old days” you could always tell when it was the local election year in Jersey City, New Jersey – the real estate taxes would go down!

The other email read – “What a wonderful service you are providing by making your website such a resource of tax information. I learned so much by reading through it. I wonder if you could answer a quick question concerning the Homestead Rebate/Fair Tenant Rebate. I tried asking the State, but keep getting a run-around. If a person was qualified to file a Fair Tenant Rebate for 2004 and 2005, but didn’t do so, could these be filed now and be paid retroactively?”

My answer – “Thanks for the kind words. I glad you found my website helpful. As far as I know, if you did not file an original tenant rebate application (TR-1040) for 2004 and 2005 with your 2004 and 2005 NJ-1040 filing it is too late to do so now. There is a Form TR-1040-X (Amended Fair Rebate Application) for 2004 and 2005, but these forms are only if you actually filed an original 2004 or 2005 TR-1040 - and not to submit an original 2004 or 2005 application. So it looks like you are out of luck.”

The application for the NJ tenant’s rebate is submitted by filing Form TR-1040 with your 2006 NJ-1040. According to the NJ-1040 instructions, “A tenant who is not required to file a NJ income tax return (because of income below the minimum filing threshold) and meets the qualifications for a tenant homestead rebate may file only Form TR-1040 to claim a rebate. It is not necessary to file the NJ-1040 along with the tenant rebate application.” If you are filing only the TR-1040 you have until October 31, 2007 to file.

The first round of tenant rebate checks has already been mailed out. The maximum rebate for a qualified non-senior and non-disabled tenant has been increased from $75.00 to $350.00.

The email mentioned “getting the run-around” when calling the NJ Division of Taxation with a question. My advice is never call the State if you have a question. Over the years clients and others who have done so have been given totally false answers to specific questions. Ask your tax professional. Or you can email the state at

I never call a state or federal tax agency – I have been “burnt” too often in the past. I require that all contact be made either via postal mail or email so that I have documentation of any representations made by the agency. I almost never receive the courtesy of a written response to my postal correspondence to the NJ Division of Taxation (unless I write to a specific person – generally higher up on the chain of command) – although most times the issue addressed in the correspondence is taken care of. I have found lately that I get a prompt and, for the most part satisfactory, response to specific client questions and issues from the NJDOT by using the above email address.

While on the subject of New Jersey taxes, as I probably mentioned in a posting last year, every single client, without exception, who had a balance due on a 2005 NJ-1040 I submitted online using NJWebFile was double-billed for the amount due (a balance due notice was sent to the client in August of 2006), even though the balance due had been originally been paid on time and the client had a cancelled check. What the state did was apply the payment to tax year 2004 and not 2005. Most clients either contacted the NJDOT directly or emailed me and I contacted Trenton to explain the error. Recently, in the course of preparing one of the GD extensions, I discovered that the client had simply paid NJ the amount requested without notifying me.

Two things:

First - I am required by law by the State of New Jersey to file all full-year resident NJ-1040s electronically, unless the client provides me with a signed “OPT-OUT” form. I am not a federal “ERO” (Electronic Return Originator) and I do not file federal returns electronically (and will not do so until the federal government either provides me with free software or allows one to do so free online, like NJ does with NJWebFile). I do not use software to prepare tax returns – I do all 400+ manually. So the only way I can comply with the law is to use NJWebFile, which I do whenever possible or feasible. If the State of New Jersey wants me to file all my NJ-1040s electronically the least they can do is make sure that the system to do so actually works properly! This year I filed all balance due NJ-1040s manually, and got a signed OPT-OUT form from the client.

Second – Whenever you receive a balance due notice, or any correspondence, from the IRS or a state tax agency send it to your tax preparer immediately! Do not just automatically pay any balance requested. If you prepared the return yourself you should contact a tax professional. Over the years I have found that more than 50% (and that is conservative – it is more like 75%) of balance due notices received from the IRS or the state are incorrect! When I found out that the client had double-paid her 2005 NJ state income tax I immediately emailed the NJDOT with copies of both cancelled checks attached.
Those of us who live in the Garden State are well aware of just how expensive a proposition it has become. Check out my earlier posting on “

Any questions about New Jersey taxes or rebates?


Thursday, August 16, 2007


I subscribe to email alerts on tax issues from former NATP Research Director Dave Mellem of Ashwaubenon Tax Professionals in Wisconsin. A recent email reported on an interesting Tax Court case (Cynthia Rowe, 128 TC No 2) in which a person who spent more than half of the year in jail and yet was still able to claim the Earned Income Tax Credit.
Here are the facts, as summarized by Dave:
“Cynthia Rowe and her two children lived together during 2002, first on Marcum Lane and then with her mother-in-law. Cynthia was arrested in June 2002 and spent the rest of the year in jail. She was convicted of murder in 2003 and is serving a life sentence, but the case is on appeal. She continued to support the children until early July 2002 and claimed them on her 2002 income tax return for purposes of the Earned Income Tax Credit (EITC). Tax Court gave Cynthia the credit stating Cynthia’s principal place of abode for the rest of the year was the mother-in-law’s home. Under IRC Section 32 a taxpayer’s principal place of abode is basically the place they live on a permanent basis and temporary absences, generally out of necessity, are not counted against this. Illness, education, business, vacation, military service, and a custody agreement are examples used in IRS regulations for Head of Household status.
Tax Court determined the rules for the Head of Household status and the EITC were similar for this purpose. Although spending time in jail is not included in the list in the IRS regulation, the Committee Reports show Congress intended similar issues to be temporary absences. Tax Court ruled Cynthia’s stay in jail after an arrest and before a conviction was a “temporary” absence. It further stated Cynthia’s jail status for 2002 controlled the temporary nature of her 'principal place of abode' and not the fact that she was convicted during 2003.”
I am not familiar with the dollar amounts of income reported on the return – but it would seem to me possible that the reason her income fell within the Earned Income Credit requirements was because she spent more than 6 months in jail!
I am not the biggest supporter of the Earned Income Credit as it now exists. It is in reality a federal welfare program – one of the largest. It is also one of the prime sources of tax fraud. You can read my comments on the program from the NATP quarterly publication TAX PRO JOURNAL by clicking here.
So what do you think about the case, and about the Earned Income Credit in general?

Wednesday, August 15, 2007


Today is August 15th. For those of us in the tax profession that used to mean something – but not any more.

Prior to this year, taxpayers who filed federal Form 4868 (Application for Automatic Extension of Time to File US Individual Income Tax Return) initially had four months to complete and submit their Form 1040. The return, or a second extension request on IRS Form 2688, had to me in the mail by August 15th (unless the 15th fell on a Saturday or Sunday – when the deadline was the 16th or 17th). The second extension request would give you another two months, until October 15th, to file. It was not automatic - you had to give a reason why you needed an additional extension - and it had to be approved by the IRS (although most were).

For 2006 tax returns the initial automatic extension granted by filing Form 4868 has been extended to the full six months – you now automatically have until October 15th to complete and submit your return. There is no second extension request – October 15th is it.

So August 15th has no significance any more.

However, for me it is a time to sit down and figure out, like that famous lost Indian tribe proclaimed, “where the fakawi”.

(1) I have completed all the required 2nd quarter 2007 payroll tax returns for my few remaining year-round business clients.

(2) I have kept up-to-date on all federal and state tax return correspondence. As notices or letters come in to clients regarding income tax returns I have filed, and they send them to me, I have responded promptly, in most cases explaining to the appropriate tax agency its errors.

(3) I have kept up-to-date on all email questions from clients (other than “are we there yet” inquiries from clients with GD extensions). As questions are posed I respond promptly with an appropriate answer.

(4) As missing information, and answers to questions and inquiries, relating to red files are received I have promptly completed and mailed out the returns.

Here is where I stand on the GD extensions:

· I have one red file for which I just last night received the answer I was waiting for (although not the one I was hoping for). I expect to have it in the mail by Thursday afternoon.

· I have three (3) remaining red files for which I need additional information from the client. Two are for “lost lambs” who sent their stuff to me late after a two-year absence – I have requested copies of their 2004 and 2005 returns. One is waiting for a K-1 from a hedge fund investment.

· I have five (5) returns for which I have received absolutely nothing yet for 2006 (although one did send me her 2005 “stuff”). One of them I have given up on and will not do – I need to send her a note to that effect.

· I have two (2) relatively normal returns, received late, that I need to do – and should have them done by the “end of business” on Friday (unless, of course, they become red files).

· I have one real project that I have saved for next to last. I can kick myself for saying this, but it is a new client - a retired couple, friends of my parents, with all kinds of “stuff” whom I never should have agreed to accept. To be perfectly honest, at this point I have absolutely no desire to do their returns – but it is too late now. It has nothing to do with the clients themselves – I just should have obeyed my own rules and “read my own lips” when I said “no new clients”. I will most definitely enforce this rule next tax season – absolutely, positively, under no circumstance, regardless of who the person(s) is/are, who referred him/her/them, or their relationship to me or my family NO NEW CLIENTS!

· The very last is a three-year project (2004-2006) regarding like-kind exchanges, hurricane damage and self-employment income for two unmarried but connected clients, for which I have not yet received the 2006 “stuff” for one of them. They are from Florida, so at least there are no state returns involved.

And when all that is done I have a box of miscellaneous work (amended returns, NOL carrybacks, review for possible amendment, analyses to prepare, etc) to do.

I also have two fiscal-year ending June 30th sets of corporate income tax returns (federal return due September 15 and state return due October 15) to do. I only have four corporate return clients left - a personal friend, a long-time client of my mentor Jim Gill, a long-time client of mine, and the owner of my mail drop – two calendar years and two fiscal years.

What I need to do after finishing and mailing out the three basic GD extensions by the end of Friday (cross your fingers) is take time out to do some housecleaning to my home office area. Then I will do the two corporate returns. After that it is the new client with the big project, and the rest of the GD extensions as they come in, with the miscellaneous work in between.

Oh well! Next year will be better – no multi-year projects left and only those GD extensions that are absolutely necessary. And NO NEW CLIENTS!


Tuesday, August 14, 2007


Generally in order to claim someone as a dependent on your tax return you must provide more than half of the person’s total support (there are other requirements – see IRS Publication 501 - Exemptions, Standard Deduction, and Filing Information).
If you do not provide more than half of the total support for a qualifying family member, an elderly parent for example, but you do pay more than 10% of the person’s support, and you and other members of your family together pay more than half of the person’s total support you can claim the family member as a dependent under a multiple support agreement. Only one of the family members who provide at least 10% of the person’s support can claim the person being supported as a dependent. A different qualifying family member can claim the dependency exemption each year.
The qualifying persons who are not claiming the exemption must sign a Form 2120 (Multiple Support Declaration), which is attached to the tax return of the person claiming the exemption. Here are some examples from IRS Publication 501:
“Example 1 - You, your sister, and your two brothers provide the entire support of your mother for the year. You provide 45%, your sister 35%, and your two brothers each provide 10%. Either you or your sister can claim an exemption for your mother. The other must sign a statement agreeing not to take an exemption for your mother. The one who claims the exemption must attach Form 2120, or a similar declaration, to his or her return and must keep the statement signed by the other for his or her records. Because neither brother provides more than 10% of the support, neither can take the exemption and neither has to sign a statement.
Example 2 - You and your brother each provide 20% of your mother's support for the year. The remaining 60% of her support is provided equally by two persons who are not related to her. She does not live with them. Because more than half of her support is provided by persons who cannot claim an exemption for her, no one can take the exemption.
Example 3 - Your father lives with you and receives 25% of his support from social security, 40% from you, 24% from his brother (your uncle), and 11% from a friend. Either you or your uncle can take the exemption for your father if the other signs a statement agreeing not to. The one who takes the exemption must attach Form 2120, or a similar declaration, to his return and must keep for his records the signed statement from the one agreeing not to take the exemption.”
Jane Q Taxpayer and her three brothers each provide 20% of the total support for their mother, who lives in an assisted living facility. The remaining 20% is provided by Social Security. Each year at tax time they get together and compare situations to determine which sibling would receive the most overall federal, state and local income tax benefit by claiming the mother as a dependent. When the refunds come, the person claiming the exemption gives each of his/her siblings ¼ of the total tax benefit.

Monday, August 13, 2007


The TAX ALMANAC site has begun a discussion thread on “Urban Tax Legends”, or more appropriately tax myths – statements that many believe to be true but are totally false.

Here are some of the urban tax legends from the forum that I agree are untrue (my comments in parentheses):

· Receiving a 1099 increases your audit risk (However, if you do not report the income from the 1099 on your 1040, or attach some kind of explanation to the return, you will receive a bill from “Sam” for additional tax and accrued interest).

· Filing late in the filing season near April 15 decreases your audit risk (You are audited based on what is on your return and not when you filed it).

· Filing an extension and filing near Oct 15 decreases your audit risk (See above).

· Taxpayers over age 65 (or over 70) who are still working don't have to pay Social Security tax (I actually had an employee at one of my clients tell me that since they are age 70 I do not have to withhold Social Security tax from their paycheck any more – age 70 used to refer to no longer having to reduce/repay your Social Security benefits based on excess earned income).

· You can deduct the cost of your car and all its operating expenses, or mileage, as a business expense if you put advertising on the car (IRS Publication 463 clearly states that “putting display material that advertises your business on your car does not change the use of your car from personal use to business use. If you use this car for commuting or other personal uses, you still cannot deduct your expenses for those uses”).

· You only have to claim the income for which you received a 1099 (All income from self-employment is taxable, whether or not you receive a Form 1099).

· You can deduct a gift of up to $12,000 given to your daughter (You can never deduct a gift to an individual on an income tax return; this applies only to the federal “Gift Tax” – you can make a gift of $12,000 per person per year without becoming subject to the gift tax).

· Police officers can deduct $5 a day as Walking Around Money (This came from a specific tax court decision several years ago that applied only to a specific tax court jurisdiction – in the case state troopers were required to eat their meals at public fast food restaurants to increase their visibility).

· Because the IRS didn't audit your returns, the deduction you have been taking all these years must be legal (It just means you weren’t caught!).

· AMT is only for high income taxpayers (It is not for true high-income individuals, but for the upper-middle class).

· You can incorporate your business in Nevada and pay no state income taxes, even though the corporation does business in your home state and other states (Most states will tax the corporation as a “foreign corporation”).

· When a client calls and says "I have a quick question", it does not mean it will be a quick answer (Oh how true – and “Oh, it’s a simple return” is never a simple return!).

· CPA's know more about taxes than EA's (The opposite is more likely true).

· Putting it on the corporate credit card automatically makes it deductible (Putting a personal expense on a corporate credit card means that you owe the corporation money or you have additional taxable compensation).

· If you go to one of those "pennies on the dollar" places you will only owe them and the government "pennies on the dollar" (Don’t believe those ads – in 99.99% of cases an Offer In Compromise will not let you pay $100 to settle a $10,000 tax debt, more like $7,500 – and you will pay a sizable fee to the “place” – how do you think they can afford to advertise on tv?).

· "What do you mean it's wrong? I used Turbo Tax. It has to be right" (The Tax Court has on at least two occasions rejected the "Turbo-Tax Defense" when a taxpayer attempted to blame tax preparation software for a negligent tax return).

Here are some of the items reported on the forum to which I take exception:

· Using the pre-printed IRS label increases your audit risk (I do believe there really may be some code built in to the federal label regarding your tax-filing history – so just to be safe do not affix the label on your federal income tax return unless you have a spotless past).

· Firefighters can deduct the cost of their lunch since they are on duty 24 hours a shift (When a fire department requires its firefighter-employees to make payments into a common meal fund as a condition of employment, such expenses are ordinary and necessary business expenses under Section 162(a) – and I have the Tax Court references to support this).

Gina, Kay, Kelly, Trish, Dan, Jim, Joe, Ryan – did I forget any tax myths?


PS – According to my Blogger “dashboard” this is my 200th posting since moving back to on Friday, December 1, 2006 – previously I had blogged at And my site meter indicates that I have had 13,051 visits since then – or since adding the site meter to the page a few days thereafter.

Sunday, August 12, 2007


Sorry for the late post. This afternoon I attended the matinee performance of THE ALL-AMERICAN SPORT OF BIPARTISAN BASHING, a one-man show starring Will Durst, at the New World Stages Theatre at 50th Street in NYC. I had purchased the ticket for $27.00 through my membership in the Theatre Development Fund (tdf).
The show was in Theatre 5 at New World Stages (formerly Dodger Stages), one of the smaller theatres in the complex, and my seat was third row center.

Before hearing of this tdf offering I was not familiar with Will Durst, despite the fact that, according to his “Who’s Who In The Cast” entry, he has had more than 400 television appearances in 14 countries over the past 20 years, some of which were included in an onscreen montage before he appeared onstage.

Will had us in stitches as he proceeded to “bash” both parties in what appears to be an extended version of his night club stand-up act, living up to the New York Times’ view that he is “quite possibly the best political satirist working in the country today”. I am sure he would have been a regular on “The Smothers Brothers Comedy Hour” had he been performing 40 years ago.

While there was Democrat bashing (“The reason the Democrats are so intent on passing a stem cell bill is they're depending on the research to grow themselves a spine”), the Republicans took it on the chin much more – hey, consider the material available – partially because of his self-professed “centralist” leanings.
As with similar political commentary shows, like CAPITAL STEPS, the material changes slightly each performance, depending on the news of the day. At one point Will perused the newspapers and magazines of the past few days and commented on particular stories.
In the playbill Will thanks his writers "without whom none of his trenchant yet pithy diatribes would be possible", including the 435 members of the House of Representatives, the 100 members of the US Senate, the President, Vice-President (especially the Vice President), both of their families and staffs, etc, etc, and points out that his performances are made possible by the First Amendment.
As the audience began to file out after the curtain calls I noticed that Will came out from backstage to shake hands and autograph playbills.

The bottom line is two thumbs up from me. It was certainly worth the 10-block hike in the summer heat (although not so bad this afternoon). Go see Will if you get a chance. Besides being a gifted satirist it appears that he is also a fellow lover of medium rare cheeseburgers (extra grease, please)!

After the show I returned, after a long absence, to the Mont Blanc Restaurant on 48th Street for dinner, now across the street from its former location due to high rise construction. I was assured that it was the eatery I thought it was when hostess Maria verified my memory of the Tattoo-esque (think FANTASY ISLAND) former head waiter. I had what had in the past been my usual of Escargot, Veal Cordon Bleu, delicious Potato Pancake, and Chocolate Mousse (I did not have the cold Vichyssoise soup to keep the bill manageable – as it was it was almost 2½ times the cost of the theatre ticket, par for the course in midtown Manhattan; it looks like hot dogs and cold cereal for dinner next week). I was surprised that the bartender could not provide me with a Stinger – perhaps next time I will add him to the list of bartenders whom I have taught how to make one.

Come to think of it in the past 10 days I have had Cordon Bleu at two different “fancy” and relatively expensive restaurants. While both offerings have been good, neither has surpassed Nick’s Chicken Cordon Bleu that used to be on the menu at the Lincoln Inn here in the Jersey City heights at least once a week.

Tomorrow (Monday) back to work on the GD extensions!


Saturday, August 11, 2007


* Mitchell A Port of the CALIFORNIA TAX ATTORNEY BLOG discusses how to settle tax debts with the IRS online in his post “What You Can Do If You Owe Tax Of $25,000 Or Less”. According to the post - “The Online Payment Agreement (OPA) allows eligible individuals to apply for an installment agreement to pay off their tax liability. To qualify, you must have your bill from the IRS and have filed all required tax returns. You must owe less than $25,000 and be able to pay the entire liability within 60 months.” Thanks to Joe Kristan of ROTH AND COMPANY TAX UPDATES for bringing this post to my attention.

* Speaking of
ROTH AND COMPANY UPDATES, Joe provides the latest word on the status of tax credits for purchasing a hybrid automobile in his August 08, 2007 post “Hybrid Update”.

* Kerry M. Kerstetter, the internet’s self-proclaimed
TAX GURU, offers an interesting thought on our Social Security system - “The best way to explain how Social Security works is to describe a typical Ponzi Scheme.”

* Rasmussen Reports reports that “
Democrats and Republicans Have Different Understanding of Fair Tax System”. The article states that “Overall, 41% of voters currently trust Democrats more than Republicans on the tax issue. Thirty-seven percent (37%) have more trust in the GOP while 22% don’t have a preference.”

* The Friday edition of
CCH’s TAX NEWS HEADLINES reported that “President Bush said that he is open to cutting corporate tax rates if the current tax structure puts the United States at a competitive disadvantage, but he stressed that any proposal must be revenue neutral. At an August 9 news conference, the president said that the underlying issue is simplification of the tax code.”