Monday, January 31, 2011


Just one more thing . . . he said, Columbo-like.

I finally remembered to submit a post to Kay Bell’s Tax Carnival. What a surprise when I checked my email inbox first thing this morning and found that “Tax Carnival # 80 - Tax Horror Stories Edition” was up – but not at DON’T MESS WITH TAXES! Instead it is at MY PERSONAL FINANCE JOURNEY (“Personal Finance, Intelligent Investing, And Frugal Living Tips”) written by Jacob. a 24 year old engineer.

And my entry on “What To Give Your Tax Preparer” was the Editor’s #1 Pick!

In this very well-written, detailed piece, Robert explains what is necessary to give and not to give your tax professional when preparing your taxes. Read and learn!

Thanks, Jacob.

As an Editor’s Pick I am in good company. Be sure to check out the other two posts that share the honor with me.

The Carnival is called “Horror Stories Edition” because it features tax horror stories in between the entries.

The posts in this edition are all from personal finance bloggers. Kay Bell and I appear to be the only tax-bloggers represented.

I will have to check out DON’T MESS WITH TAXES to see why Kay is not the host of this edition.


Joy to the world - tax season’s here.
I’ll soon be flush with cash!
Let every client be organized,
and give me all I need, and give me all I need,
and give me all I need to prepare their returns!

My 40th tax season will officially begin tomorrow - let the deluge begin!

As is my custom, due to the demands of the filing season I will be taking my annual “tax season hiatus” from posting to THE WANDERING TAX PRO and the NJ TAX PRACTICE BLOG. Between now and April 18th I will barely have time to relieve myself let alone blog! I will NOT be answering emails from non-clients, nor will I have time to respond to comments. If a comment requires a response I will do so after April 18th.

I will be publishing a WHERE THE FAKAWI post at least every other week here at TWTP to keep my clients up-to-date on my progress during the season and to report changes or additions to my tax season policies and procedures. Clients can also keep track of my tax season progress by following me at TWITTER (rdftaxpro).

I realize that I am abandoning you at a time when you may need me the most – but I need to make a living!

I find it a bit amusing that the period of time when TWTP gets the most “hits” is during the tax filing season when I am not posting.

“Talk” to you when it is all over!


BTW – be sure to stop by tomorrow for the annual posting of my TWELVE DAYS OF TAX SEASON!

Saturday, January 29, 2011


This is the last BUZZ for a while. It will return at the end of April.

* While I am on “hiatus” be sure to follow my twice weekly (changing to week-day daily in mid March) column of Tax Tips at MAINSTREET.COM. You can start with “What’s New for 2010” and “Use A Tax Preparer”.

* TAX GIRL Kelly Phillips Erb gives a brief description of “The A, B, C and Ds of Medicare”.

* Joe Kristan talks about the federal EFTPS system in his post “Lessons Learned the Hard Way: Why Employers Should Use EFTPS to Check Their Payroll Tax Deposits”, which gives good advice.

I use EFTPS for the few client payroll and corporate estimated tax payments I make and it is very good. I also recommend 1040 clients use it to schedule their 1040 estimated tax payments.

BTW – did you read about Joe in my Friday TWTP post?

* The Center for Responsible Lending excellently answers the question “How Do Tax Refund Loans Work” in cartoon form.

U+I Broke Tax Services – I wonder who they are trying to parody? “U”, the customer, may be broke, but the Tax Services certainly ain’t after getting your fees.

* While the article “Tax Redo to Seek 'Level Playing Field'“, which discusses an interview with Turbo Tax guy Treasury Secretary Timothy Geithner at WSJ.COM deals mostly with corporate tax reform, Geithner responds to questions about individual tax reform at the end -

Q. The president also mentioned his interest in pursuing simplification of individual income taxes. Is that as high a priority?

A. As he said, along with corporate tax reform, we want to explore comprehensive individual reform. There's a good case for doing both. We want to start the process of exploring what's possible.

Q. What are the next steps?

A. It's good for confidence if we can find things that both Democrats and Republicans want to do. We're in the first inning. We're going to keep consulting—with key committee chairman, with ranking members, with other stakeholders, with architects of past reforms, both ones that worked and those that didn't. Everybody who looks at the current system says: We can do better than this. And there's a lot of interest in doing it. A lot of people in the business community are prepared to be part of something that is revenue neutral, broadens the base, and lowers the top rate. Others want to hold out for something better

You will note that, in good politician style, TG did not answer the question “Is that as high a priority”? As I said in an earlier post it looks like White House will not be offering the leadership needed to accomplish serious and substantial tax reform.

* Beans, Beans! The Beans are back! Check out Joe Arsenault’s “BlogRoll Beans- Tax Season Edition” at CAFÉ TAX!

As usual, thanks for including TWTP, Joe!

* A “tweet” from Joe A led me to a new, to me, tax blog – INTAXICATION (Tax Buzz with a Twist) by Traci Wheeler. You may want to check out some of “Our Most Popular Posts for 2010”.

I have, on occasion, posted some Fine Whine at TWTP. Traci has a Red Whine Wednesday. “(W)e’re sharing our biggest Whines about tax, technology and everything in between.”

And Traci’s colleague and fellow blog-writer Kelly Lear firmly believes that “Tax Pros ROCK” –

We are not boring, nerdy, frightening, strange or demented. We are tax professionals, and we rock!

* The blog at DOORFLY.COM (A fresh start to home buying) recently posted “Tax Advantages of First Time Home Buyers Explained”.

Home ownership has both positive and negative aspects to it. There are added expenditures and added responsibilities with owning a home. In addition, there are also many benefits to home ownership and the tax advantages is one of them.”

* Trish McIntire offers some great Do and Don’ts” for your upcoming appointment with your tax preparer at OUR TAXING TIMES.

Some of my favorites “Dos” –

"· Bring your glasses.

· Turn your cell phone off. Don’t take calls or text while we’re working. A tax interview requires both of us to pay attention to the return for a few minutes. Neither of us can do that if you’re talking to your BFF about what happened at work.

· Leave the kids at home. If you absolutely have to bring them, bring something for them to do. It’s not the responsibility of my receptionist or me to amuse them."

And “Don’ts” –

"· Don’t bring in your box of receipts and expect me to total them during the interview. A few receipts are okay, but plan on leaving the bags and boxes.

· When I ask about deductions, don’t ask how much you deducted last year. And don’t tell me to use last year’s figure (and by the way, the numbers aren’t on my ceiling. No, they really aren’t!)."

To be honest I do not miss the days when I had a storefront office open to the public.

* The CCH daily headline email newsletter reports that “
House Votes to End Taxpayer Funding of U.S. Presidential Elections”.

House lawmakers on January 26 approved a measure to end the post-Watergate-era option of allowing taxpayers to check a box on their federal tax returns to designate $3 of their tax liability to finance presidential campaigns.”

In 39 years of preparing 1040s (and 1040As) I cannot remember a single client who actually “checked the box”.

Will it pass the Senate? CCH tells us “The Obama administration strongly opposes the legislation”.

* CNBC.COM tells us that, according to Governor Chris Christie, “New Jersey to Cut Corporate Taxes Further”.

What I would like to see cut is the corporate “minimum tax” - which is based on gross receipts and not taxable income. Currently a corporation with “0” net taxable income can still pay a “minimum” corporate business tax of $2,000!

* The IRS has issued a “Nationwide Free Tax Preparation Site List”.

The VITA Site list helps taxpayers locate nearby volunteer sites that help low- to moderate-income (generally, $49,000 and below) people who cannot prepare their own tax returns. IRS-certified volunteers sponsored by various organizations receive training to help prepare basic tax returns in communities across the country. VITA sites are generally located at community and neighborhood centers, libraries, schools, shopping malls, and other convenient locations.”

Taxpayers who think they need to get a Refund Anticipation Check from Henry and Richard because they cannot afford to pay the excessive tax preparation fees upfront should go to VITA to have their returns prepared for free.

* In case you did not read the comments to my “CAN SOMEONE PLEASE EXPLAIN IT TO ME” post – Mary O’Keeffe tries in “Explaining the ‘Refund Anticipation Check’ Product” at BED BUFFALOES IN YOUR TAX CODE.

Mary correctly explains –

The RAC product (like its cousin the RAL) also reduces the transparency of the transaction--the taxpayer may not notice how much they are paying for tax return prep because it is buried in a huge stack of paperwork as an item subtracted from their refund.”

That’s all the BUZZ for a while. As I said at the beginning it will return at the end of April.


Friday, January 28, 2011


I do not understand the “Refund Anticipation Check” being offered by Henry and Richard in replacement of a Refund Anticipation Loan (RAL).

I just heard an ad that says it takes 15 days to get a Refund Anticipation Check from H+T Block (granted it was a Jackson Hewitt ad).

If you submit the return electronically, as H+R will, and choose Direct Deposit you should get your refund in 15 days or earlier.

Why would anyone in their right mind pay Henry and Richard a ridiculous fee to give them a check when the IRS will have the money in their account in the same amount of time or sooner absolutely free?

But then again – why would anyone in their right mind go to Henry and Richard to have their return prepared in the first place?
H+R Block - don't settle for less! Pay through the nose!


I end the current series of mini-interviews with fellow tax bloggers with Joe Kristan, CPA of Roth and Company PC, “a full-service CPA firm based in Des Moines serving clients throughout Iowa”, author of the ROTH AND COMPANY TAX UPDATE BLOG. I have saved the best for last!

Joe and I do not always agree, especially on the issue of regulating tax preparers, but we always respect each other’s opinions and abilities.

It seems we both worked for Deloitte Haskins + Sells (obviously different offices and at different times) early in our careers. He lasted with DH+S longer than I did.

(1) How did you become interested/involved in preparing tax returns or teaching taxes?
(2) How were you educated/trained in preparing tax returns?

I started taking accounting courses my sophomore year in college, when reports from fellow liberal arts graduates alerted me to the ugliness of the late ‘70s job market. I liked the first course, so I took all of the courses available at my small liberal arts college (Cornell College, Mt. Vernon, IA). They didn’t offer an accounting major, so I took Intermediate Accounting I as a commuter in the summer at Northwestern in Evanston, and Intermediate II as an independent study course.

This was enough to let me enroll in the Masters of Accountancy program at Southern Illinois University-Carbondale with a graduate assistantship. I took my first tax course there, finished with the top grade, and decided that’s what I would do for a living. I finished my SIU Masters of Accountancy with an “emphasis in taxation.”

I started at Price Waterhouse in St. Louis in 1984 and got fired after my first tax season. I joined Deloitte Haskins & Sells in Des Moines in 1985, which worked out much better.

While I got a good tax education at SIU, I believe the way to really be “educated/trained in preparing tax returns” is to prepare tax returns while supervised by a more experienced preparer. While tax preparation is a related skill to tax consulting, which is my bread and butter, it is not the same thing.

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

I quit Deloitte in 1990 to join several of my colleagues in starting Roth & Company, PC, where I remain. I wrote an old-fashioned mail newsletter for the new firm, but moved it to e-mail as our colleagues got on the Internet. Somewhere around 2000-2002, I started to post the e-mail newsletter on our then-primitive website, trying to imitate the format of the Wall Street Journal “Best of the Web” feature. Before long I started to put stuff on the site first and then select posts for the e-mail newsletter, which I still do.

Why? It helps market the firm and make me a better tax professional. Also, I enjoy it.

Even at Deloitte, I made reading the tax news every morning a daily habit. Blogging makes me read more closely and critically. It makes me learn stuff well enough to write about it (and if I screw up, I can count on you and other bloggers to let me know!)

(4) How has blogging helped your business?

• Combined with the e-mail newsletter, it keeps me in front of referral sources – bankers, lawyers and clients.

• It gives me and the firm credibility. When people are looking for a firm, they Google nowadays, and it gives us a big fat Google footprint.

• It gets people who are looking for help in a specific area – say, understanding bonus depreciation – to our website.

• It gets local media to contact me, which helps give the impression of competence.

• It makes me keep up on the constantly-changing tax law.

• It has kept me energized. My morning blogging ritual is the part of the day I look forward to most.

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

Pay for the tax help suitable for your situation. Nothing costs more than cheap tax help.

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

Assuming you are talking about the current Shulman power grab, certainly not.

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

Again assuming you are talking about the current Shulman power grab, yes. I also think everyone else should be similarly exempt, because I think the testing and government-approved CPE are a foolish and futile waste of time and money.

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

I’ll say “You’re a Good Man, Charlie Brown,” because my 12-year old son will play Pig Pen in a church production of it in March. Of course, I haven’t actually seen it yet. I have never seen a professional production of a Broadway musical, (I saw a pretty good community theater version of “Cabaret” once, which depressed me for a week), so I have no real good answer for this one. My wife is the musical theater fan in our house.

I do agree with Joe that “the way to really be ‘educated/trained in preparing tax returns’ is to prepare tax returns while supervised by a more experienced preparer”. That is how I was trained.

I, too, feel “my morning blogging ritual is the part of the day I look forward to most”, unfortunately often putting off real paying tax work.

And I agree that price should not be the first consideration when choosing a tax preparer, and that cheap tax help can be expensive. But I also feel that in many cases you do not get what you pay for (especially with the fast food tax preparation chains), and that you do not have to pay an arm, a leg, and an ear to get good competent tax help.

Joe, next time you are in NYC you must go with your wife to a Broadway show!

Thanks to all of my colleagues who participated in this initial series. I will talk with more Tax Blogosphere Buddies after my tax season hiatus.



Here is a suggestion for Tax Reform I recently sent to the Taxpayer Advocate -

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 deduction for depreciation of 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”.

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.”

If we look at economic reality, a building has a life of much more than 27.5 or 39 years. 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.

For all intents and purposes 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?

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. Under my suggestion there would also be no depreciation of true capital improvements – they would simply be added to cost basis.
So what do you think?

Thursday, January 27, 2011


Tax season officially (for me) begins next week. FYI, I have not registered as an ERO (Electronic Return Originator), and I do not intend to submit any 2010 Form 1040s (or 1040As) electronically this tax season, regardless of the new “mandate”.

I have listed below the reasons why I am “exempt” from the mandate. Obviously item #6 is the most important.

(1) I do not object to electronically submitting federal or state income tax returns to the IRS or state tax authorities. I acknowledge and sympathize with the Internal Revenue Service’s desire to have returns submitted electronically. I also acknowledge that submitting returns directly to the IRS electronically reduces the potential for error by eliminating the “middle-man” step of having someone transcribe a written 1040 into the IRS software system. I would gladly submit, on my client’s behalf and if they do not choose to “opt-out” based on personal preferences, the federal income tax returns I prepare electronically if I could. I currently, whenever possible, and when not specifically told not to by my client, submit full-year resident NJ-1040 state income tax returns electronically directly to New Jersey via the NJWebFile system available at the website of the New Jersey Division of Taxation

(2) I have been preparing 1040s for a fee since February of 1972. During the past almost 39 years I have never used flawed and expensive tax preparation software to prepare a federal income or payroll tax return, and I have no intention of unnecessarily incurring substantial expense to purchase such flawed tax preparation software.

(3) The very minor advantages to me that tax preparation software might provide does not justify the additional substantial expense. On average, I would not save any time by using tax preparation software instead of preparing the returns manually. The resulting 1040 or 1040A would be no more accurate, as the finished return would need to be subject to the same checking and verification process as a manually prepared return. Using tax preparation software would substantially waste paper and printer ink, adding to the cost of purchase and annual update. I find that with the NJWebFile system I use at least twice as much paper, and ink, in printing out copies of the submitted return than when prepared manually.

(4) The only way I can currently, properly, and efficiently submit completed federal income tax returns directly to the Internal Revenue Service is by using flawed and expensive tax preparation software. As I do not use tax preparation software I therefore cannot submit my returns to the IRS electronically.

(5) Several states that mandate e-filing currently exempt preparers who do not use tax preparation software.

(6) I do not “file” my clients’ income tax returns. I prepare the return manually and give/send the finished returns to the client, with a non-stamped addressed envelope, and the client(s) sign(s) the return and mails it directly to the IRS themselves. For purposes of §6011(e)(3) and these regulations only, an individual income tax return is considered to be "filed" by a tax return preparer or a specified tax return preparer if the preparer submits the tax return to the IRS on the taxpayer’s behalf, either electronically (by e-file or other magnetic media) or in non-electronic or non-magnetic media (paper) form. Submission of an individual income tax return by a tax return preparer or a specified tax return preparer in non-electronic form includes the direct or indirect transmission, sending, mailing or otherwise delivering of the paper tax return to the IRS by the preparer, any member, employee, or agent of the preparer, or any member, employee, or agent of the preparer's firm, and includes any act or acts of assistance beyond providing filing or delivery instructions to the taxpayer. If the preparer files no returns whatsoever on the client’s behalf, the preparer would never meet the definition of a specified tax return preparer. I file no returns whatsoever on the client’s behalf, so I do not meet the definition of a specified tax return preparer under the regulations for the e-file mandate.

So – does anyone have any comments?


Read my lips -

Do not fail to claim a legitimate, documented tax deduction on your 2010 Form 1040 just because you read somewhere that it is an IRS “red flag” and that claiming it will automatically result in an IRS audit.

(1) If your deduction is legitimate and you have sufficient documentation to prove its authenticity in an audit then what is the problem? An audit is not something that must be avoided at all costs – it is merely an inconvenience.

(2) Just because the IRS pays closer attention to tax returns that contain certain deductions or credits does not mean if you return contains this deduction of credit you will “automatically” be audited. The IRS only audits a small percentage of 1040s – and several factors are involved in determining which returns are selected for audit.

(3) If you fail to claim a legitimate deduction or credit you have, in effect, audited your own return and disallowed the deduction – neither of which the IRS may actually do.

(4) Just because you read somewhere that an item is an IRS “red flag” does not mean that the item is really an IRS “red flag”.

I must add that if the alleged “red flag” deduction or credit is legitimate and documented, but another item on your return is not, an IRS audit might turn up the “questionable” item. The answer is obviously to claim only items that are legitimate on your tax return, and be sure to have sufficient documentation for all deductions and credits you claim.

In addition to being an inconvenience an audit will also cost you some money – especially if you bring your tax pro with you or send him/her to the audit as your legal representative under a Power of Attorney. You will need to pay for the tax pro’s time. If you are selected for an audit you should determine if the amount of additional tax, interest, and penalty charges you may be assessed for the item(s) in question is more than your potential costs at the various levels of the audit process.

If you are selected for an audit by the IRS or state tax authority, or receive any correspondence from these guys, the first thing you should do is immediately send the notice or correspondence to your tax preparer.


Wednesday, January 26, 2011


It looks like, from my quick scroll down of the text of the speech, that the extent of BO’s mention of taxes in the SOTU address came down to-

In fact, the best thing we could do on taxes for all Americans is to simplify the individual tax code. This will be a tough job, but members of both parties have expressed an interest in doing this, and I am prepared to join them.

It was not a priority. There was no “we must” or “I will”. It was more a “wouldn’t that be nice”.

Earlier in the address he stated -

"I ask Congress to ... make permanent our tuition tax credit – worth $10,000 for four years of college."

And the call for simplifying the Code was preceeded by –

And if we truly care about our deficit, we simply can't afford a permanent extension of the tax cuts for the wealthiest 2 percent of Americans.”

It seems he doesn’t get the idea of starting from scratch and removing “tax expenditures” from the Tax Code.

So the leadership needed for real tax reform will not be coming from the White House. Let’s hope it comes from somewhere.


I hope you agree with me that any BUZZ is better than no BUZZ. Have been busy lately and have not had the time to properly “wander” the internet in search of good BUZZ. I am sure there is a lot of good stuff out there that I missed.

* It’s nice to see some agreement with my annual “Don’t Assume” post. Caleb Newquist puts his 2 cents in on the CPA issue in “A Multitude of Big 4 Auditors Can Confirm This” over at GOING CONCERN (Accounting News for Accountants and CFOs).

Case in point: many relatives and clueless friends of auditors still ask said auditors to prepare their tax returns. In most cases, a) this is a HUGE mistake and b) they don’t want to help you anyway.”

Be sure to read the comments to this article. Here is an especially appropriate one –

I just tell people I will do it at my billing rate. When they ask what that is, I never seem to hear from them again on preparing it.”

* Tax attorney Darren Mish tells us that members of Congress, like Chuck Rangel, are not the only individuals who get away with tax fraud in his post “Preventing Tax Fraud in Prisons” at his IRS PROBLEM SOLVER BLOG

Darren reports –

Over the last five years about $123 million in tax refunds have been fraudulently received by prison inmates through phony applications made from behind prison bars.”

* And Darren brings us up to date on the progress of repealing the new 1099 requirements that begin with tax year 2011 in his post “Lawmakers Call for Repeal of IRS Rule

As I have said many times before – why the idiots in Congress did not just include the repeal in December’s year-end catch-all compromise Tax Act is beyond me.

* Not that I would recommend prematurely withdrawing retirement funds, but if you must ROTH IRA WITHDRAWAL RULES explains how to go about “Tapping Into Your Roth IRA Penalty Free”.

* I still do not have a cell phone – but for those of you who do TAX GIRL Kelly Phillips Erb tells you “Checking Your Refund? There’s an App for That”.

(T)he primary pitch for the app is that it allows you to check on the status of your refund right from your phone. It’s easy. You’ll need your Social Security number, filing status for the year and refund amount to use it. It’s just like the “Where’s My Refund?” tool online.”

* Bill Perez tackles an interesting issue in “Is Head of Household Status Possible for Two People at the Same Address” at ABOUT.COM TAX PLANNING: US.

* A “tweet” from Kay Bell told me that “Jersey Shore sets ratings record”. A sure sign of the Dumbing Down of America. How could anyone with even an ounce of intelligence watch (a) reality tv in general, and (b) in particular a show about brain dead drunks, sluts and horndogs engaging, on screen, in such “entertaining” activity as public urination (not one of the guys)? As Jay Leno keeps proving with his “Jay Walking” bit – the great unwashed masses ain’t very bright.


Tuesday, January 25, 2011


Hey, I’m in a new Blog Carnival.

It is the “Totally Money Blog Carnival #3” at BUDGETING IN THE FUN STUFF (A Personal Finance Blog About the Next Financial Step). My post on "What To Give Your Preparer" is in the TAXES section (next to last).

While in the TAXES section check out “7 Simple Tax Organization Tips To Use All Year Round” from the Silicon Valley Blogger’s THE DIGERATI LIFE.

There are lots of good stuff in a variety of categories.


Some real good news for many of my clients!

Do you remember when the elder President George Bush said, “Read my lips – no new taxes!”? Well, like the title of an old Jerry Lewis movie (“Don't Raise the Bridge, Lower the River”), Congress didn’t raise the taxes, but instead they lowered the deductions.

I am talking about what has become known as PEP and PEASE. PEP stands for “Personal Exemption Phase-out” based on a taxpayer’s Adjusted Gross Income (AGI), and PEASE refers to the reduction of itemized deductions, again based on AGI, named for Democratic Congressman Donald Pease of Ohio, who pushed for the enactment of this reduction in 1990.

Under these provisions one’s personal exemptions could be totally wiped out and up to 80 percent of a taxpayer's itemized deductions could be disallowed if their income was deemed too high.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) phased out PEP and PEASE, totally repealing them for 2010. Personal exemptions and itemized deductions are allowed in full on the 2010 Form 1040 regardless of income - there is no more reduction of these items based on your AGI.

FYI, the recently passed Tax Act extended the repeal of PEP and PEASE through tax year 2012.


Monday, January 24, 2011


I certainly don’t think you should wait till the last minute to prepare your tax return. I also don’t think you should rush to be among the first taxpayers of the year to have your taxes done.

For me the “tax filing season” officially begins on February 1st. I tell my clients not to come to me until then, and rarely prepare a tax return before the 1st of February unless both the client and I are sure that he/she has received everything necessary to properly prepare the return.

The reason I chose February 1st is because, under federal law, all W-2s, 1099s and 1098s are required to be furnished to taxpayers by January 31st (unless the 31st falls on a week-end). The instructions for these forms state that the “furnish” requirement will be met if the form is properly addressed and mailed on January 31st.

Plus, most banks, brokerages, mortgage companies, colleges and the like are not able to send out 1099s and 1098s until the end of the month because of the volume involved.

Several years ago, when I still had a storefront office open to the public, a long-time client came in on the morning of February 1st to have his return prepared. He had received all the 1099s for interest and dividends for all accounts and investments as well as the 1099s for Social Security and pensions. Upon reviewing the “stuff” he presented to me I found that he had a form for every source of income he had reported on the previous year’s return. He told me he had not sold any stock during the year, and that there had been no spin-offs, mergers or “cash in lieu” for fractional shares. So I prepared the federal and state returns.

He left the office with the completed returns happy in the thought that he was finished with his “uncles” for the year and pleased with himself for being so early. He returned home, signed the returns with his wife, and went directly to the Post Office to mail the returns.

The next afternoon I got a call from the client. He had gotten another 1099-R in the mail that morning! His wife received a pension from Lucent Technologies and, while the amount of the annual pension generally remained constant, early in the year Lucent had made a special one-time distribution to its retirees from a fund other than the regular pension fund, and issued a separate 1099-R for this distribution.

The client returned to my office that afternoon and I prepared amended returns, for an additional fee, to claim the income and withholding from the new 1099-R. I instructed him to wait to mail the amended returns until he received the refund checks from the original returns, so as not to confuse the IRS and NJ by having two returns in the system at the same time. The bottom line is that the client had to pay twice for filing his returns.

More recently another long-time client – a single mother with a daughter in college – gave me what she thought was all her and her daughter’s “stuff” on January 27th. I cautioned her that she should wait for a few more days to make sure she had received everything – but she assured me she had. She was, of course, in a hurry to get the refunds, which she always had directly deposited into her bank account.
Luckily I did not rush to do the return. The next day she called to say that something else had arrived in the mail – a W-2 for her daughter’s work-study, which she dropped off for me. Again I did not rush to put pen to paper. The next day she called again to say that still another tax form had arrived – a Form 1098-T for college tuition. It was a good thing I had waited!

If you have a brokerage account there is an excellent chance that you will receive at least one corrected “Consolidated 1099 Statements” to report taxable dividends, interest and gross proceeds after the initial statement arrives in late January. The final corrected 1099 may not arrive until mid-March.

And don’t get me started on K-1s. These forms from partnerships, LLCs and sub-chapter S corporations are not required to be distributed by January 31st, and many do not arrive until the end of March or beginning of April!

My instructions to clients clearly state:

Do not give or send me your ‘stuff’ until you have received all the forms and information needed to complete the returns! That means every W-2, every 1099, and every K-1. I do not want to receive your 'stuff' in installments. If you are waiting for an information return such as a Form K-1, for details from your broker on the cost of stock sold during the year, or for anything else, please do not give or send me anything until you have everything in hand!

So – don’t be in such a hurry!


The Republicans have begun their campaign to kill BO’s convoluted health care “reform” bill. The House has already voted to repeal the Act.

While I agree that something must be done regarding health care I am not a supporter of further complicating the already mucking fess of the Tax Code to do so.

The major problem with health care in the US that needs to be addressed promptly is that many individuals cannot afford to purchase health insurance (especially here in New Jersey). Because of the increased and increasing cost of health insurance it is no longer regularly offered as a free employee benefit. Many of the “uninsured” are self-employed individuals.

The only way to encourage the purchase of health insurance is by actually giving the uninsured cash to pay for the premiums. I propose that the idiots in Congress enact a direct government payment to insurance companies of the first $X,XXX of premiums for every household.

The Cash for Clunkers program of a few years back proved that the government could provide credits to individuals for a specific purpose without going through the Tax Code. I discussed how a similar program to provide a direct credit for health insurance premiums back in September of 2008 in my post “I Guess There Is Always An Exception” -

How would this work? I would go to the Horizon Blue Cross and Blue Shield website, for example, and apply for health insurance. After entering my information and choosing the coverage and deductible I would receive a quote. If I chose to enroll the annual premium would be reduced by the amount of the government credit ($2,500 or $5,000 proposed by McCain), and my monthly premium would be determined accordingly.

Or coverage would begin immediately, but monthly premium payments would begin once the credit amount was used up (i.e. the credit would pay the first three to five months of premiums). At some point the insurance company would apply to the federal government for direct payment of the credit amount.

Of course there would have to be a system to determine if any portion of the credit amount had previously been used by the insured during the appropriate calendar or fiscal period (it would have to be decided if the credit amount is applied on a calendar year or policy year basis)

Of course this seems too simple for the idiots in Congress to consider. And we know that they can never do anything simple (although based on performance many of the members of Congress could be so described).

What do you think?


Saturday, January 22, 2011


A few new, at least to me, tax bloggers in today’s BUZZ installment.

* Over at MAINSTREET.COM I suggest that you “Contribute Now to Tax-Deferred Accounts”.

* Howard Gleckman asks the question “Will Obama Call for Tax Reform in the State of the Union?” at TAXVOX.

Tax reformers are pushing President Obama to use his upcoming Jan. 25 State of the Union address to press for a rewrite of the revenue code. They admit, though, they are uncertain whether he’ll do so, or whether he’ll follow up the rhetoric with a major White House initiative.”

* Kay Bell reports that the House has voted to repeal BO’s convoluted health care “reform” bill in “Health Care Reform is Dead. Long Live Health Care Reform”. But, as Kay tells us, the Senate probably will not, and BO will veto the bill if it does.

* I have always said that bloggers love lists. Case in point – Kelly Phillips Erb lists “Nine Tax Deductions You Shouldn't Even Think About Claiming” at WALLET POP.

*ACCOUNTING WEB brings us an interesting tail, err I mean tale, in “From K-9s to 1099s: Pet-Friendly Firm Boosts Morale”.

When I had a couch in my home office my cat Nosey (who passed last year at 19) would sleep there all day and often greet clients who dropped off their “stuff”. After the couch was removed she would occasionally walk into the office while a client was there, meow something to us, and walk back to the living room.

* Trish McIntire recommends that taxpayers “Get Past the Spin” at OUR TAXING TIMES. Basically – ignore the multitude of ads for tax preparation that are beginning to inundate the airwaves, and get the real skinny at Trish’s post.

* The Tax Foundation’s TAX POLICY BLOG tells us “House Ways and Means Committee Holds First Hearing on Fundamental Tax Reform”.

Sander Levin, the ranking Democrat on the Committee, called for a bipartisan, bicameral effort with support from the President. He asked for the reform plan to follow a few basic principles: create jobs, promote economic growth, be fiscally responsible, and benefit working American families.”

The bottom line (highlight is mine) -

The witnesses and the members of the Committee, both Democrats and Republicans, outwardly expressed support for tax reform. But it remains to be seen if Congress can produce one.”

* We all know the MISSOURI TAX GUY. But did you know there was also a TENNESSEE TAX GUY? Actually I found out about the TTG via a “tweet” by Bruce, the MTG. He is “a Nashville tax and estate planning attorney who worked as an accountant prior to attending law school”. He joined the Tax Blogosphere on December 31, 2010.

In reviewing some of his recent posts I discovered in response to my annual “Don’t Assume” advice. The TTG adds his 2 cents to the discussion in “Tax Blogs Getting Heated”.

If I may make one thing clear – my post does not say there are not good, competent, current, experienced and knowledgeable CPA tax preparers out there. There certainly are, such as fellow tax bloggers Joe Kristan and Monica Lawver. What I am saying is that just because a person has the initials CPA after his/her name does not mean that he/she is automatically a tax expert. When looking for a tax preparer do not limit your search to CPAs only - look for a qualified tax professional, who may just happen to be a CPA.

I do, however, believe that you should avoid the fast food tax preparation chains.

Back on topic – I suppose I am the New Jersey Tax Guy (and Joe Kristan is the Iowa Tax Guy). Are there any more state-themed tax guys (or gals) blogging?

* Paul Neiffer explains that “You Can Pick & Choose on Bonus Depreciation!” at FARM CPA TODAY. A tip o’ the hat to Joe Kristan for leading me to the post.

* Thomas Scanlon lists “Seven Things Every Taxpayer Should Know” at the Borgida and Company blog.

I especially want to bring your attention to item #7 –

7. Know to Get Professional Advice Before Entering into any Significant Transactions-
Always get professional advice from your . . . tax preparer before entering into any significant transactions. We know one unfortunate taxpayer that closed on a home one day before the new home buyer’s credit took effect. This cost them $8,000 by closing a day early!


Friday, January 21, 2011


In case any of my clients are “listening” - - -

I have completed all my 4th Quarter and Year-End 2010 payroll tax returns and reports (941s, 940s, NJ-927s, W-2s, W-3s, 1099s, 1096s, etc)!

I have completed and mailed out my own 1040 and federal and state corporate income tax returns (my NJ-1040 s done – but as there is a balance due it will not go out till April 14th)!

I have two relatively big projects, and a 990, 990PF, and 1065, scheduled for completion on Saturday and Sunday (one project is 3-years of 1040s).

My answering machine is not on yet – I have a small problem with the wiring that I need to fix by Monday morning. The machine should be on beginning next week – although I will be “out and about” most of the week (and not sitting by the phone waiting for your call). Email still the best way to contact me.

Next week, after a non-profit year-end closing consultation, will be devoted to “housekeeping” items – stocking up on office supplies, tax forms, and food, getting shorn, getting my car tuned-up and “winterized”, doing laundry, and cleaning the apartment.

And then – on February 1st – it officially begins!

I have actually already received the first package from a client of, I assume, 2010 Form 1040 “stuff” (not yet opened – will do over the week-end).

I do not anticipate anything causing delays this tax season – no family or car “issues” to deal with – and hope to head for a recuperative trip to the Jersey shore on or around April 25th with absolutely no GD extensions in my “to be done” or “red file” boxes! The only GDEs I want to have undone by 4/25/11 are those for which I have not yet received the client’s “stuff” (i.e. they are waiting for K-1s).

Wish me luck!


Today we meet Professor Mary O’Keeffe. Mary is a public policy economist who is “excited” about teaching Income Tax Policy and Practice at Union College in Schenectady, New York. She is also excited about coordinating the college’s Volunteer Income Tax Assistance (VITA) program.

Mary writes the blog BED BUFFALOES IN YOUR TAX CODE. If you want to know what are bed buffaloes and how did they get in our tax code click here. She has written a couple of great posts about my “eccentricities” as a tax preparer (click here and here).

The Professor has some great connections to the IRS. National Taxpayer Advocate, Nina Olson, was one of the 200 members of her Bryn Mawr graduating class, and David R Williams, IRS Director of Electronic Tax Administration and Refundable Credits and current preparer regulation “czar”, was one of her students. David has told me, “and I do owe it all to Mary. :-)”.

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

When I was a little kid, I remember being fascinated by the income tax instruction booklets that came through the mail slot at our house each year right after Christmas. I lived in Washington, DC and was intrigued--and disturbed--by the convoluted way in which we financed our government. I had a high school boyfriend whose father said he claimed their family dog as a dependent on his tax return. (I thought he was joking, but later when he was arrested for embezzlement at the firm where he worked, I'm not so sure!) Later, as a graduate student in economics at Harvard, I got to study public finance with Prof. Marty Feldstein, a brilliant scholar--even if I don't always agree with him--who gave me analytic tools that helped me think more clearly about our tax system.

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

Until about six years ago, the only tax returns I prepared were for my immediate family. My dad was a librarian, and I'm a big believer in reading and self-education from credible sources, so early on I supplemented the IRS instruction booklets with a really excellent book, The Tax Guide for College Teachers, which specializes in tax topics relevant to professors. (Sadly, there have been no annual editions of that book in recent years--probably a casualty of the fact that people rely more on software and the Internet these days.)

When I took over the VITA program at Union College, I realized that there was a lot I didn't know about the aspects of the tax system relevant to low-income working families, so I was very grateful for the excellent training and support provided by the award-winning IRS employees at the Albany Stakeholder, Partnership, Education, and Communication Office (SPEC). The wonderful folks in that office are always willing to go the extra mile to help me get the answers to any questions that come up at our VITA site. The TaxProf blog and its associated email list that Dean Paul Caron runs for tax professors across the country have also been a great resource.

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

I started my blog in November 2008. My students at Union College are on a trimester system, which means they are off-campus from the third week of November until right after New Year's. Some of them are all over the world during that time--we have mini-terms in New Zealand and Egypt. Others spend the time in their hometowns, working part-time jobs or internships. I expect them to "hit the ground running" and return to campus ready to take their IRS VITA certification exams on the first day of class, so my blog is one way to communicate with them.

(4) How has blogging helped your business?

Writing is an enjoyable way to clarify my own thinking and to reflect on tax issues.

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

No matter who or what helps you with your tax returns--whether it's a professional, a volunteer, tax software, advice from a tax blogger, etc.--the person ultimately responsible for the accuracy of the tax return is YOU, the taxpayer. Take the time to understand the basic logic of your tax return line by line BEFORE you sign it and file it. Double-check everything. Don't assume that your preparer is doing everything right. Error rates are high, even on professional prepared tax returns. If there is something on your return that you don't understand, "kick the tires" and get your questions answered before it goes into the system.

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

Yes, I do. It's not a panacea, but anything that weeds out some of the worst of a bad lot is a good thing. Especially in this day and age of electronic filing, a tax preparer has the capability to move millions of dollars of taxpayer money from the US Treasury into bank accounts of his designation.

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

I think the professional societies for CPAs and attorney ought to step up to the plate and take the initiative to develop certification tests and CPE requirements that are appropriate for their members who specialize in taxation. Those tests and requirements for CPAs and attorneys ought to go above and well beyond what the IRS contemplates for unenrolled preparers.

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

Musicals don't have to be on Broadway to be great fun. There is wonderful musical called LES PHYS about Prof. Howard Georgi's legendary Physics 16 class at Harvard. I am also very partial to the excellent original musicals written and composed by Kit Goldstein, a very talented Union College graduate. Like my own two daughters, Kit grew up homeschooled in Schenectady County.

Mary’s great advice echoes that given by Trish McIntire last Friday, and she puts it excellently – “the person ultimately responsible for the accuracy of the tax return is YOU, the taxpayer”.

I doubt that the AICPA will do anything along the lines of what Mary has recommended. The Institute does not believe that there is a need for a “specialization” in tax for CPAs because, as they told a CPA who asked about it a while back, it believes the public thinks that CPAs already “own” tax preparation. Let us hope the new tax preparer regulation regime headed by Mary’s former student will correct this public misconception.

I agree with Mary that great musicals come from all types of sources, and many do not make it to the Great White Way. But I am disappointed that she did not mention a “traditional” favorite.
Next Friday the current Tax Blogosphere Buddies series ends with the Joe Kristan of THE ROTH AND COMPANY TAX UPDATE BLOG, who disagrees with the rest of us on the new tax preparer regulation regime. Some might say I have saved the best for last.
Not to worry - the series will return after my annual tax filing season hiatus.

Thursday, January 20, 2011


Here is what I, as a tax preparer, need to receive from my clients to properly prepare their tax returns – and what you should provide to your tax preparer.

Obviously start with all copies of all your W-2s, 1099s, 1098s and K-1s from all sources. I tell my clients to make and keep a photocopy of all W-2s. This information may be needed for college financial aid or mortgage applications, or for a variety of other reasons, and this way you won’t have to bother your preparer for the information.

Next is a detailed listing of itemized deductions, rental income and expenses, self-employment income and expenses, and child-care expenses. I don't need to actually see all the individual bills, receipts or cancelled checks for these items- a detailed list or worksheet will suffice. It is important to include the Social Security or Employer Identification Number of all child care providers. “Sam” will disallow the Credit for Child and Dependent Care Expenses if you do not provide an identifying number on the Form 2441.

I, and your tax preparer, will want to see all year-end statements, reports, booklets and other literature received from brokerage accounts and mutual funds. The statements may contain details on cost basis, purchases, dividend reinvestment, margin interest, management fees, etc., and booklets often include important information on income from US government obligations that will be useful in preparing the state income tax return.

If available, include the final pay-stub for the year for each employer. I use this to reconcile the federal wages to the state wages if there is a difference.

Provide the dates of birth for the taxpayer and spouse as well as for all dependent children. Taxpayers have always been allowed an extra deduction for being age 65 or older, or legally blind. Originally it was an additional personal exemption, so everyone received a tax benefit for being a “senior citizen” or blind. Since 1986 seniors and the blind get an increased standard deduction. Now qualifying taxpayers with excessive itemized deductions get no benefit.

Being a gentleman, I try to use tact in soliciting a client’s age. I recall one time when my mentor said to a long-time client, “Now make sure to let me know when you reach age 65.” The client tittered, both flattered and embarrassed, and told him that she was 68 years old! He promptly prepared amended returns for all open years. The next day a sign was hung prominently in the waiting room that read “Please Let Us Know When You Turn Age 65”.

There are other reasons to know the age of a client. For example, ages 55 and 59 are important in determining whether the distribution from a pension plan is “premature”. New Jersey offers a “retirement income exclusion” for taxpayers age 62 on the state return.

The age of dependent children is important to know because it affects various tax benefits, such as the Child Tax Credit, the Credit for Child and Dependent Care Expenses, the stimulus rebate amount, and the dependency exemption.

Special information and documentation is needed for special situations. Here are some examples of what your tax preparer will need in various situations:

IF YOU SOLD STOCK, BONDS OR MUTUAL FUND SHARES- The date of purchase and cost of the stock, bond or mutual fund shares sold. If shares were purchased over the years via dividend reinvestment the amount of dividends reinvested each year. If the investment was inherited the number of shares you inherited and the date of death of the person from whom they were inherited. If at all possible have your brokers provide you with (or send directly to your tax preparer) a "profit and loss" statement for the year's trades that reconciles to the 1099B for your accounts.

IF YOU SOLD REAL ESTATE- The Closing or Settlement Statements for both the purchase and sale of the property, plus the cost of capital improvements made to the property over the years.

IF YOU PURCHASED REAL ESTATE- The Closing or Settlement Statement for the purchase of the property. For rental property - the separate amounts of the "assessed value" for land and improvements from the tax bill (or the post card you received from the municipality).

IF YOU REFINANCED A MORTGAGE- If you paid any points and, if so, the amount paid and term of the new mortgage.

IF YOU ARE RECEIVING IRA DISTRIBUTIONS- The year-end statements for all IRA accounts.

IF YOU RECEIVED A DISTRIBUTION FROM AN IRA OR AN EMPLOYER PENSION PLAN- Did you roll-over the distribution to an IRA or did you just “take the money and run”?

IF YOU HAVE DEPENDENTS IN COLLEGE- The 1098-Ts you received, all the "Bursar's Reports" for the year, and a separate list of the cost of books and other “course materials”.

IF YOU DONATED A CAR TO CHARITY- The paperwork you received from the charity, including the Form 1098-C, the fair market (blue book) value of the car on the date of the contribution, and the original cost and date of purchase of the car donated.

IF YOU ARE PAYING ALIMONY- The Social Security number of the person to whom you are paying the alimony, the amount paid for the year, and any other required payments (i.e. health insurance premiums, real estate expenses) that you are making on behalf of your former spouse.

IF YOU PURCHASED OR LEASED A CAR, TRUCK OR BOAT- The amount of state and local sales tax paid.

IF YOU PURCHASED AN ITEM ELIGIBLE FOR AN ENERGY CREDIT– The cost, and description, of the item(s) purchased and the “Manufacturer’s Certification” you received from the seller.

IF YOU ARE A RETIRED POLICEMAN OR FIREFIGHTER- The amount withheld from your pension for the year for health insurance premiums.

I tell first-time clients to provide me with copies of the past three years federal and state income tax returns. The prior year return (2009 return when preparing 2010) is an absolute must. I also review all three open returns to see if I can get any additional money back by filing an amended return.

I have always said it is better to give me too much information than too little. I tell clients to provide me with anything else they think will be helpful in preparing the return.

The last few years I have also included the following statement in my annual client mailing –

I need specific numbers for deductions you are claiming. “Claim the maximum” or “Whatever I am allowed” or “Same as last year” don’t cut it. The maximum is what you actually paid – and you are allowed what you actually paid! It is very rare that an expense or number of miles driven for an activity is exactly the same as it was the previous year. I cannot make up numbers for you– I need you to tell me “$1023.50” or “$20.00 per week for 50 weeks” or “4638 miles”!

The more organized you are and the more detailed information you provide your tax professional the happier he will be, the more accurate your return will be, and perhaps your fee will be lower.

Fellow tax pros – did I forget anything?


Wednesday, January 19, 2011


He who thinks CPAs and attorneys walk on water has commented on my recent annual “Don’t Assume” post -

But Flach must make the false comparison because anyone in his right mind would choose an experienced tax preparer with the letters CPA after his name over a purportedly experienced tax preparer with no letters after his name.

It’s not the letters that are important, but rather what they represent. The lack of letters represents something, too:

1. The unenrolled preparer is incapable of obtaining a CPA or IRS Enrolled Agent designation (or has tried to do so and failed);

2. The unenrolled preparer is lazy and doesn’t want to do the work required to obtain a designation;

3. The unenrolled preparer is insufficiently committed to his purported profession; or

4. The unenrolled preparer believes that the entire licensing regime is bogus and, by God, he isn’t about to subject himself to oversight by no damn gub’ment agency.

Pick any one. I wouldn’t want someone like that preparing my tax return

To this nonsense I reply -

More than 300 taxpayers in their right mind choose me, an experienced tax preparer with “no letters after his name”, over an experienced tax preparer with the letters CPA after his/her name each year, and have been doing so for decades. And many thousands of taxpayers in their right mind choose other experienced and currently uninitialled tax preparers over initialed ones each year.

I have never pursued “initials” because I have no desire to either audit financial statements or represent taxpayers before the IRS.

(1) I am certainly capable of obtaining either a CPA or EA designation – I have just chosen not to do so because there was no need to do so. I have never attempted to do either and failed.

(2) I am not lazy – I just see no need to do unnecessary work to obtain unnecessary initials I neither want or need.

(3) I have certainly proven that I am more than sufficiently committed to the tax preparation profession.

(4) I have vocally supported, for the most part, the current IRS tax preparer regulation regime. I have submitted my application and my PTIN has been “fabrezed”. I do not fear proper government oversight. I actually welcome the ability to have my training and experience, and competence and currency, recognized by being given the initials RTRP (Registered Tax Return Preparer).

Once the regulation regime is fully phased-in, and previously unenrolled preparers like myself are given the RTRP designation, the taxpayer public will know that only those individuals with the initials RTRP or EA after their name have proven competence and remain current in federal income tax preparation.


It is quality not quantity in this BUZZ installment. BTW – it is Wednesday, isn’t it?
* Check out my latest tax tip at MAIN STREET.COM - "Save Sales Tax Receipts".
* Kay Bell’s “Tax Carnival #79: Filing Season Begins” appeared on late Monday at DON’T MESS WITH TAXES.

For 39 tax seasons the 1040 filing season has always begun for me on February1st (the day after the deadline for getting out the W-2s). Why everyone says the tax season has already begun is beyond me. I have plenty to do before February 1st.

* A tweet led me to David Kay Johnston’s piece “Making Tax Simple” at TAX.COM. Johnston joins me, and other tax bloggers, in supporting National Taxpayer Advocate Nina Olsen’s call for tax simplification. The piece had some good comments -

Olson is absolutely right; the time for tax reform is now. And complexity is issue number 1. The problem is how to get Congress to act. As things stand, mucking up the tax code rewards politicians while hurting most people and damaging the economy. And in real reform, every ox will be gored.”

But we also must keep in mind the political economy of tax changes, be they good, bad, or indifferent. Politicians gain when they propose tax favors for donors, sometimes in the form of tax breaks and sometimes in the form of subtleties that create problems for the donors' competition. Proposing tax law changes is a reliable way to gather donations.”

Then there are the businesses that profit off the misery of tax compliance -- notably Intuit Inc. The company spent $1 million trying to help an obscure candidate win statewide office so he could kill California's successful ReadyReturn program to help people prepare their tax returns free of charge, which threatens Intuit's TurboTax software business. Luckily for the rest of us, Intuit's candidate lost.”

* Good news! Brett Fergusen reports “Camp Schedules Tax Reform Hearing to Kick Off ‘Dialogue’ With Obama” at BNA SOFTWARE.

House Ways and Means Committee Chairman Dave Camp (R-Mich.) announced Jan. 13 that he will hold a hearing to examine the current tax structure as the first part of efforts to begin working with the Obama administration on tax reform.

Camp said the hearing will occur Jan. 20 and public comments on tax reform will be accepted by the committee until Feb. 3

* Joe Kristan responds to my annual “Don’t Assume” post on choosing a tax preparer in “Defending CPA Tax Pros” at THE ROTH AND COMPANY TAX UPDATE BLOG. Be sure to read my comment.

* Now here is a bill that I would support (with perhaps shorter term limits) – “The Congressional Reform Act of 2011”.


Tuesday, January 18, 2011


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

When my mentor and I got a hold of the H+R Block fee schedule back in the late 1980s we were in complete shock - Henry and Richard ain't cheap!
They, and others of their ilk, are very expensive, especially considering the quantity and quality of the service they provide. They charge fancy restaurant prices for fast food service! Plus they will attempt to squeeze even more money out of you by trying to push you into unnecessary, but profitable to them, products like a usurious “Refund Anticipation Loan”, a high-fee H+R debit card, or a Block-sponsored high-fee, low-yield investment that is practically guaranteed to lose money.

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

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

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

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

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

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

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

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

Some of the more serious errors included –

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

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

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

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

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

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

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

So bring on the comments!


Monday, January 17, 2011

YOUR W-2s AND 1099s

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

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

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

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

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

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

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

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

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

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

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

And finally, according to Internal Revenue Service Revenue Ruling 69-184 you cannot be both a partner in and an employee of the same partnership. A partner cannot receive a salary from the partnership, and should not be given a W-2. If you are a partner who received “guaranteed payments” in 2010 but you receive a 2008 Form W-2 from the partnership you should go to the partnership’s accounting firm and tell them that they goofed.


Saturday, January 15, 2011


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Henry and Richard are not offering RALs this tax season – but that hasn’t stopped them from looking for other ways to screw clients with high fee (and high profit) products. The item tells us -
H&R Block Chief Executive Alan Bennett has vowed to create ‘other financial products’ to fill the void -- speculation has centered on other high-cost, short-term loan products.”
And -
Trainees who attend H&R Block employment sessions are being instructed to upsell short-term loans called 'Emerald Loans' offered by H&R Block Bank, according to people familiar with the training.”