Wednesday, December 30, 2009


Congress passed three (3) tax Acts in 2009 –

The American Recovery and Reinvestment Act of 2009 in February, referred to as “the most sweeping economic recovery package in the nation’s history”.

The Consumer Assistance to Recycle and Save Act of 2009 in June was not really a tax Act, but it did create the temporary “Cash for Clunkers” program. The program was extended by Congress in August.

The Worker, Homeownership, and Business Assistance Act of 2009 in November, which extended and expanded the First-Time Homebuyer Credit originally created in 2008 and enhanced in the American Recovery and Reinvestment Act.

The House passed the Tax Extenders Act of 2009 in December, which extended the usual popular but temporary tax breaks through December 31, 2010, adding the limited additional standard deduction for real estate taxes (God, and Congress, only knows why), but omitting the annual dreaded Alternative Minimum Tax (AMT) patch, but the Senate did not pass an “extenders” bill in 2009. The House also passed an Estate Tax bill, but again the Senate was too busy to get to it. Senate leaders have promised to deal with these issues in early 2010.

Both the House and the Senate passed separate health care “reform” bills before adjourning for the year. But no more action can be taken until Congress returns in 2010.

I like Kay Bell’s description of Congressional behavior in 2009 from her Christmas Day post “Congressional Tax Wrap-Up” –

Overall, the House did a better job of at least getting something done. Whether you like or dislike what Representatives did, at least they passed legislation.

The Senate, on the other hand, got bogged down in bitterly partisan battles that slowed every piece of legislation, with many measures coming to a grinding (halt).

The Worker, Homeownership, and Business Assistance Act (WHABAA) included a provision that requires any tax return preparer who prepares more than 10 individual income tax returns during a calendar year (this includes returns for estates and trusts) to electronically file all such returns. This requirement is effective for tax returns filed after December 31, 2010. So it does not apply to the upcoming tax filing season. It will start in 2011 for the filing of 2010 returns.

While it was a common belief among tax professionals that such a requirement was coming, it was not expected to come so soon. We all thought that this mandate would be included in the eventual legislation that would require the IRS regulation of all paid tax preparers.

I have no problem with filing returns electronically. However if I am required to do so I must be able to do so free of charge, without having to buy expensive and flawed tax preparation software, via the IRS website, similar to NJWebFile, and clients must be able to “opt-out” of electronic filing if they so choose.

NATP has reported that – “At this time, there is no guidance on how clients can 'opt out' or otherwise file their returns on paper”. There is no information other than the basic requirement. We will need to wait for the IRS to issue proposed regulations.

In June IRS Commissioner Douglas Shulman announced that “by the end of 2009, he will propose a comprehensive set of recommendations to help the Internal Revenue Service better leverage the tax return preparer community with the twin goals of increasing taxpayer compliance and ensuring uniform and high ethical standards of conduct for tax preparers”.

The topic of regulating tax professionals was nothing new. As fellow tax blogger Trish McIntire pointed out, “Nina Olson, the National Taxpayer Advocate, has been recommending licensing for years now. In fact, there have been bills before the last 3 Congresses which would require licensing. They have all died when that Congress ended because there were other more pressing issues distracting lawmakers.”

The IRS held a series of public forums on the issue, soliciting testimony from a wide variety of sources, including the NATP, NSA, AICPA and ABA membership organizations, commercial and independent tax preparers, tax preparation software companies, federal and state government agencies, and consumer agencies. I reported on the testimony at these forums here at TWTP (do a search for “Testimony” above) The Service also put out a call for comments from the public, and I responded (see my post “Dear IRS”).

Several states also took up the issue of regulating tax professionals. In Maryland “all persons offering individual tax preparation services must become licensed with the State Board of Individual Tax Preparers by June 1, 2010”.

In New Jersey State Senator Barbara Buono of Edison has a bill calling for the licensure of paid tax return preparers throughout the state. This bill establishes licensing requirements for tax preparers that prepare only individual income tax returns (i.e. NJ-1040 and NJ-1040NR). It exempts Circular 230 practitioners, presumably CPAs, EAs and lawyers, requires 60 hours of up-front education, passing an exam, a high-school diploma or equivalent (first time I have heard of this as a requirement for licensure), but, unlike other recently-introduced state licensing bills, does not allow for “grandfathering” of long-time preparers. The NJ legislature is currently out of session, and the proposed bill will not be forwarded to the appropriate committee until it reconvenes in 2010.

The DFBs (while the clean version is Damned Fool Bureaucrats, that is definitely not what I mean) in Albany passed a law that now requires all individuals who will prepare New York State individual income tax returns in 2010 as a tax return preparer, or help to issue or administer a refund anticipation loan or refund anticipation check, to register with New York. Tax preparers who were paid to prepare 10 or more New York State individual tax returns in 2009 and will prepare at least one personal income tax return in 2010 must also pay a $100 fee. This applies regardless of where your practice is located, even if you have absolutely no physical presence in the State of New York. A tax preparer that lives and works in Alaska will have to register and pay the fee if he/she prepares New York State individual income tax returns!

Certified Public Accountants and attorneys, regardless of location, Public Accountants (PA) currently licensed in New York State, employees who are preparing tax returns under the direct supervision of a CPA, attorney or PA licensed by New York State, and volunteer tax preparers are exempt from registering and paying.

As far as I know none of the membership organizations, like NATP, NSA or NAEA, plan to contest in court New York’s authority to charge a fee to preparers with no physical presence in the state because it would be too expensive, although the NY State Society of Enrolled Agents is campaigning to have New York based EAs exempt from the law.

Speaking of New York State, this year it decided not to send out forms to resident or non-resident filers – forcing me to purchase bulk copies. I am still mad at NY for making me write the information from W-2s on its IT-2 form instead of just attaching a copy of the W-2 to the return, as every other state and the IRS does.

As for my practice, I ended the season with 32 federal GD extensions filed, and 2 state returns waiting for additional information. About 2/3 of the GDEs were either specifically requested by clients who needed more time to get their “stuff” ready, or returns that were not “in my hands” by March 31st, or returns that needed more information to properly complete. A dozen were received by March 31st, but either arrived during the last week of March or close thereto.

I made it a point this season to finish all returns received in February, for which I had all the information necessary to complete the returns, before beginning any of the returns received in March. I completed returns as they were received, instead of putting off more involved ones until the end of the season and then finding I had to file a GD extension because I did not have enough time to properly devote to them. I finished “red-filed” (need more information) returns as soon as the missing information became available, so there were no returns “hanging over my head” throughout the season. And I strictly enforced my “read my lips – no new clients” policy this year, although I did accept two “lost lambs” back into the fold.

While the filing of federal returns went relatively smoothly, it was “déjà vu all over again” with the NJ Division of Taxation this year! Back in 2006 all of my clients whose 2005 NJ-1040 I had filed via NJWebFile with a balance due, and who had paid the balance due by the April deadline using the payment voucher that NJWebFile had provided, were billed by the NJ Division of Taxation in September for the tax they had already paid plus penalty and interest. It seems that the NJDOT applied the 2005 payment to tax year 2004.

Guess what? It happened again this year! NJDOT applied the payments for all of my clients for whom I filed a balance due 2008 Form NJ-1040 via NJWebFile were billed for the tax they had already paid in July and August.

This time I was prepared. I contacted a person at NJDOT who had spoken at the NJ-NATP January seminar and reported the problem. He was very helpful and the matter was promptly resolved. I even got the NJDOT to issue letters of apology to my clients!

I also emailed the Executive Director of NJDOT, Cheryl Fulmer, about the problem – and, to my complete surprise, she promptly responded! She explained what had happened -

It seems that neither the software vendor nor my staff realized that the scan band had not been corrected to reflect the new tax year. The consequence was payments being applied to the prior year. I've been assured that this error will not occur again, we hope.”

You can be sure that I will not be filing any balance due 2009 Form NJ-1040s via NJWebFile in 2010!

Such was the tax year in review. Did I forget anything important?