Monday, April 30, 2012


Now that you have completed your tax return – how long should you keep the return, and the records and documentation that support items claimed on the return?
(1)  Keep the paper copy of your tax returns (Form 1040 or 1040A plus all supporting Schedules and Forms) forever.  This provides a permanent record of your financial history.  You never know when the information on a prior year’s tax return will come in handy for a variety of tax or financial related reasons, or just to satisfy personal curiosity.
(2)  Keep all back-up documentation that supports an item reported or deducted on your tax return for four (4) full years.  This includes all applicable bank statements and cancelled checks as well as W-2s, 1099s, 1098s, and appropriate receipts and bills.  You can toss all such information for your 2011 tax return in December of 2015.
The IRS, and the appropriate state tax authorities, has three (3) years from the due date (or filing date if you had any extensions) of a tax return to audit and revise that return (except in the case of tax fraud – then the IRS can go back forever).  If you filed your 2011 Form 1040 by the initial April 15, 2012 due date, “Uncle Sam” had until April 17, 2015 to audit it. 
(3)  Keep all confirms for the purchase of stock, bonds and mutual funds, and other appropriate back-up (such as notices of splits and records of any dividend reinvestments) for as long as you hold the investment plus four (4) additional years.  Keep the confirmation slip or other documentation for the sale or disposition of the investment for four (4) years after the sale or disposition. 
Similarly, keep all Closing or Settlement Statements for the purchase and refinancing of real estate, and documentation of any capital improvements, for as long as you own the property plus four (4) additional years.  Keep the Closing or Settlement Statement or other documentation for the sale or disposition of the property for four (4) years after the sale or disposition.
And if you have invested in a limited partnership or “sub-chapter S” corporation, or are a partner in a business organized as a partnership, a “sub-chapter S” corporation or an LLC or LLP you should keep the annual Form K-1 you receive from the investment or business for as long as you own an interest in the entity plus four (4) additional years, and keep any paperwork related to the sale or disposition of your interest for four (4) years after the sale or disposition.

Saturday, April 28, 2012


* Over at the MORTGAGES BLOG Polyana Da Costa asks if we “Remember the Homebuyer Tax Credit?”.

More than 2 million homebuyers thought they were getting a great deal when they were offered up to $8,000 in tax credits in 2009.

But did the first-time homebuyer tax credit really help homebuyers? Not really, economist Dean Baker says in a recent study published by the Center for Economic Policy Research.

The credit mostly helped sellers and banks, as it lured buyers who ended up overpaying, he says.

* An automatic federal extension, requested on Form 4868, is an extension of time to file your return, but not an extension of time to pay any tax due.  The IRS will charge a minor penalty (.5% per month, or part thereof) and interest on any tax due with the eventual filing of the return.

However, in “IRS Waives Failure to Pay Penalty for Unemployed” FINANCE DIVA tells us that “for tax year 2011 taxpayers who file an extension can also have an extension to pay and avoid the failure-to-pay penalty. if they meet certain requirements. According to IRS tax tip 2012-48, the penalty relief is available to two categories of taxpayers.

Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to this years April 17th tax deadline.

Self-employed individuals who experience a 25 percent or greater reduction in business income in 2011 due to the economy.

In addition to the 2 categories above you must also meet the following adjusted gross income test and your 2011 balance due cannot exceed $50,000.

Adjusted gross income must be below $200,000 if Married Filing Jointly or

Adjusted grow income must be below $1000,00 if filing status is single, married filing separately, head of household, or qualifying widower.

The most important part of this initiative is while the failure-to-pay penalty is waived, interest will still accrue on any outstanding balance until paid in full and the amount owed, including interest,  must be paid by October 15th, 2012 or all of the original penalties will be added onto the amount due; including any failure-to-pay penalty.”

* From a recent BUZZ-like “Tax Roundup” post from Joe Kristan at THE ROTH AND COMPANY TAX UPDATE BLOG –

Payroll taxes are deadly serious. If you are tempted to “borrow” employee withholding, you should read Jack Townsend’s discussion of how that went very badly for one employer.”

* Will this idiot ever go away? 

TAX GIRL Kelly Phillips Erb tells us that reality tv fool (as everyone who willingly appears on a reality tv show can be so described) and ex-con Richard Hatch is back in her post “Richard Hatch Wants You To Know That IRS Sends People To Prison”.  

* Over at CAFÉ TAX Joe Arsenault explains “Types of Retirement Rollovers”.

* Good news from CNNMONEY – “H&R Block Stock Tumbles on Warning”.

Shares of H&R Block tumbled 16% in premarket trading Thursday after the tax prep company announced significant staff cuts and office closings, and projected weaker-than-expected earnings.”

* The NATP’s weekly email newsletter reported on two recent developments -

Supreme Court Case on IRS Audits:

Generally, the IRS has a three-year statute to audit a return; however, this changes to six years if there is a substantial understatement of income, when 25% of more of gross income is omitted. The definition of what it means to omit gross income is often up for debate as shown by numerous tax court cases.

In a recent court case, United States v. Home Concrete & Supply, the Supreme Court decided that despite overstated basis, the IRS can only audit the last three years. More details of this case will be featured in an upcoming edition of TAXPRO Monthly.

Local Lodging Expenses:

The IRS has issued proposed regulations that provide a safe harbor for taxpayers to deduct expenses for lodging when not traveling away from home (local lodging). These expenses include local lodging expenses when considered ordinary and necessary business expenses in appropriate circumstances. Some of these circumstances include:

• The lodging is necessary for the individual to participate fully in or be available for a bona fide business meeting, conference, training activity or other business function.

 • The lodging is for a period that does not exceed five calendar days and does not recur more frequently than once per calendar quarter.

 • If the individual is an employee, the employee’s employer requires the employee to remain at the activity or function overnight.

 • The lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation or benefit.

Review REG-137589-07 for additional examples and details.”

* Bruce, the MISSOURI TAX GUY, brings us a guest post by Georgia attorney Jeff Fouts on “The Definitive Guide to Getting Your Offer in Compromise Approved by the IRS

* Peter C Reilly still remembers F Lee Bailey, and asks “Did F. Lee Bailey Have A Fool For A Client? over at FORBES.COM.


Friday, April 27, 2012


Several readers of my post “A Tax Season Story” have asked me what the CPA missed that would generate such a large tax liability.
While the IRS has not used the “Three Year Method” for recovering after-tax employee contributions to a pension plan for decades, the State of NJ still does.
The instructions for the NJ-1040 tells us - “if you will recover your contributions within three years from the date you receive the first payment from the plan, and both you and your employer contributed to the plan, you may use the Three-Year Rule Method to determine your taxable pension income”.
Under this method you “exclude your pension and annuity payments from gross income until the payments you receive equal your contributions to the plan.  Until that time, the amounts you receive, because they are considered your contributions, are not taxable and should not be reported on your return.”
The taxpayer in the situation had begun to receive his pension from the NJ Division of Pensions in late 2010.  While his after-tax employee contributions are amortized over an expected life on the federal return, the taxpayer qualified for contribution recovery under the Three-Year Rule Method on his NJ-1040.
NJ will only treat employee contributions to a 401(k) plan as pre-tax for state income tax purposes.  Because the pension plan from which the taxpayer was receiving distributions was a 403(b) plan all employee contributions to the plan were treated as “after tax” for NJ purposes.  NJ state wages were never reduced by the employee contributions.
The CPA reported on the preliminary 2011 NJ-1040 the same amount of pension income that was reported on the federal Form 1040.  This would have resulted in an excessive overpayment.  The taxpayer was still working (not for the State of NJ) and his spouse also did, with a much higher salary, so the exempt pension distribution would have been taxed at a very high rate.
Included in the taxpayer’s copy of his 2010 NJ-1040 was a statement from me that indicated his total after-tax contributions, the amount recovered in 2010, and the carryforward to 2011.  The taxpayer provided the CPA was the copies of his 2010 federal and state returns.
A very expensive mistake!
FYI – the offices of the CPA were in NJ and not NY.

Wednesday, April 25, 2012


BUZZ!  BUZZ!  The BUZZ is back!

* Read about “The Dumbest Tax Loophole In America: The Florida Rent-a-Cow Scam” by Jordan Weissmann of The Atlantic.

* The Tax Policy Center looks at “The Romney Plan (Updated)” – Mitt’s revised tax proposals.

Governor Romney would permanently extend all the 2001 and 2003 tax cuts now scheduled to expire in 2013, repeal the AMT and certain tax provisions in the 2010 health reform legislation, and cut individual income tax rates by an additional 20 percent. He would also expand the tax base by cutting back tax preferences, but has supplied no information on which preferences would be reduced. Tax provisions in the 2009 stimulus act and subsequently extended through 2012 would expire. These include the American Opportunity tax credit for higher education, the expanded refundability of the child credit, and the expansion of the earned income tax credit (EITC). The plan would also eliminate tax on long-term capital gains, dividends, and interest income for married couples filing jointly with income under $200,000 ($100,000 for single filers and $150,000 for heads of household) and repeal the federal estate tax, while continuing the gift tax with a maximum tax rate of 35 percent.2

The plan would reduce the six current income tax rates by one-fifth, bringing the top rate down from 35 percent to 28 percent and the bottom rate from 10 percent to 8 percent. The accompanying repeal of the AMT would increase the tax savings from the rate cuts—without that repeal, the AMT would reclaim much of the tax savings.

The plan would recoup the revenue loss caused by those changes by reducing or eliminating unspecified tax breaks, thereby making more income subject to tax. Gov. Romney says that the reductions in tax breaks, in combination with moderately faster economic growth brought about by lower tax rates, will make the individual income tax changes revenue neutral compared with simply extending the 2001 and 2003 tax cuts. He also promises that low- and middle-income households will pay no larger shares of federal taxes than they do now.”

* FOX NEWS, not my first source of information, reminds us that “Taxmageddon Coming? Answer Could Cost Americans $500 Billion”.
The item quotes Curtis Dubay of the Heritage Foundation, "Taxmageddon falls 70 percent on middle and low income families. That's because 60 percent of the Bush tax cuts were for middle- and low-income taxpayers," and the Tax Foundation’s Scott Hodge, "No American will be unscathed at the end of this year.  Taxmageddon hits all of us."

Hodge identifies the problem, caused, of course, by the idiots in Congress - "Almost the entire tax code has been put on a year-to-year lease, and in some cases, month-to-month lease, which is no way to run a tax system".  

He also voices the opinion of many, myself included - "It's my guess that nothing will happen on any of these issues until after the election”.

Actually I expect that the idiots in Congress will extend the current Tax Code for one more year.

* Joe Arsenault gives a good overview of “What to do When a Family Member Dies” at CAFÉ TAX.

* Prof Jim Maule tells us about “Another Bad Tax Return Clutter Idea” at MAULED AGAIN, and goes into detail on just why it is a bad idea.

And in his introductory paragraph he reminds us –

“Much of what contributes to this aspect of tax complexity is the use of the tax law as a substitute for direct spending programs and use of the IRS as a substitute for other federal agencies that ought to be charged with administering programs in their respective areas . . . . .  using the tax law and the IRS in this manner is inefficient, ineffective, and deceptive”.

* While I was on “hiatus” Joe Kristan filled the BUZZ void with his “Tax Roundup” series.  Check out some of what we both missed during the season.

* Kay Bell, the yellow rose of taxes, reminded us that Tax Freedom Day 2012 fell on Tax Day – the 2012 filing deadline of April 17th – in her post “Happy Belated Tax Freedom Day 2012” at DON’T MESS WITH TAXES.


Tuesday, April 24, 2012



I forgot to include the following item in yesterday’s review of the recent tax filing season.

A long-time client, whose returns I have been preparing since 1984, got married in 2011 to a non-client whose tax returns had been prepared by a CPA firm.

The couple had given their 2011 “stuff” to the spouse’s CPA for review, and the CPA generated joint federal and NJ state tax returns for the couple.

The client asked me to review the preliminary returns generated by the CPA before finalizing and filing them.

Based on a quick review of the federal return, and my knowledge of my client’s prior returns (a copy of my client’s 2010 federal and state returns had been provided to the CPA along with the 2011 “stuff”), it appeared that the federal return was ok (I did not verify actual entries to original source documents such as W-2s and 1099s, nor did I check the math – I merely reviewed it for “theory”).

However as soon as I looked at the CPA-generated 2011 NJ-1040 I discovered a glaring error – to the tune of about $1,800.00. 

Having me, a previously unenrolled preparer, review the returns generated by a CPA (who does not have to take a test to verify tax knowledge as I must eventually do) saved the couple about $1,800.00 in state income tax! 

I did not need to enter the information into a tax preparation software package to find the error – my naked eyes spotted it right away.    

I have been saying for years that I have found more errors on tax returns, federal and state, prepared by CPAs than any other category of preparer – including “self-prepared” returns.

Needless to say I felt great joy!  And so did the client and his new spouse.


Monday, April 23, 2012


Wonder of wonders, miracle of miracles!

For the first time since I took over my mentor’s tax practice in the late 1990s I sent less than 30 automatic GD extension requests to the IRS on April 16th (there were over 60 the first year).  Only 29 this year!

Of course there will be the additional half dozen GDEs that I did not submit myself, but were done directly by the clients, who will contact me in about 4 or 5 months.

All of the GDEs were submitted either because the client’s “stuff” was not in my hands by the March 25th deadline, the client did not send me anything and asked me to file a GDE, or I needed more information to properly complete the return (i.e. I did not have all the necessary information in my hands by March 25th). 

Quite a few returns, historically extended every year, were timely filed for a change, and others were started and extended only because of missing information.

I dropped the ball in only one instance, putting off completing the return because of a massive “cut and paste” job for tons of investment transactions made difficult by missing cost basis info, provided to me by March 25th, and the demands of the new capital gain reporting system.  However it was a strategic move – allowing me the time to complete several timely received returns that would have otherwise been extended

For the first time in years I stopped working on 1040s not because I had run out of steam and did not have the energy, or inclination, to continue - but because I had done all I could within the time constraints.  I was actually able to complete a few selective returns that had been received after March 25th.

Was it because of the 3 extra days of this year’s season (February 29th, April 15th falling on a Sunday, and Emancipation Day in DC) – or am I just getting more organized, and finally getting my clients properly trained?

Due to the idiots in Congress’ inability to think or act there was nothing new in actual tax law – what is taxable and what is deductible – and no unnecessary processing delays for 2011 returns (except for early returns filed electronically – more later).  The expiring Bush Tax cuts, the usual extenders, and BO’s American Opportunity Credit had all been extended through at least the end of 2011 (and most through 2012) in a relatively timely manner.  

The major issue of this tax season involved changes in how certain items of income and expense were reported on supplemental schedules of the 1040.  The major change concerned the new requirements for cost basis reporting, and the resulting new Form 8949 and the revised Schedule D.

For tax year 2011 brokers were required to report to client taxpayers, and to the IRS, the cost basis of most stocks, including foreign stocks, acquired on or after January 1, 2011 (“covered” securities) on Form 1099-B.

A new Form 8949 was added to report the individual short-term and long-term transactions in three separate categories – sales where the cost basis was reported to the IRS on Form 1099-B, sales where the cost basis was not reported to the IRS on Form 1099-B, and sales that were not reported on a Form 1099-B.  A separate Form 8949 was required for each of the three categories.  The Schedule D served as a summary of the 8949s.

The various brokerage and mutual fund houses all treated the new Form 1099-B portion of the year-end consolidated tax report differently. 

For the most part this new system required some additional time, but not additional agita.  In many cases the 1099-B reporting was excellently broken down into separate categories of short-term “covered” (transactions where cost basis was required), short-term “non-covered”, long-term, and undetermined term.  And a gain and loss analysis, with cost basis for all, or almost all, transactions provided, was also included in the report in the same format. 

In some the 1099-B received by the taxpayer included the cost basis for all transactions – although you often had to read the fine print to discover if the cost basis shown had actually been reported to the IRS.

The worst cost basis reporting formats came from Morgan Stanley Smith Barney and TD Ameritrade, with TD the bottom of the barrel.  The 1099-B for these brokerages was not broken down to list different categories of transactions (as described above).  Transactions were listed alphabetically, regardless of term or coverage, with cost basis information shown only where required. 

MSSB reports included a gain and loss analysis, but it was merely broken down by short and long term, as had been done in past years.  TD did not include a gain and loss analysis in its consolidated statement.  The client had to go online to generate the analysis, also still in the short or long only format.

The additional work required for clients of these brokerages was not so bad with only one or two pages of transactions.  But several had multiple (as many as 50) pages of transactions (can you say “churning”) – making proper reporting much more difficult and time consuming than in the past.

The new rules also required brokerage or mutual fund houses to report wash sale adjustments for all “covered” transactions.  In thinking about this I wonder if the issuers of Form 1099-B will be properly treating the previously identified wash sale adjustments when reporting the cost basis of subsequent sales of the investment. 

The also new requirement of credit and debit card merchants and third-party payers like PayPal to report transactions to the IRS, and to the recipient, turned out, despite initial concerns, to be a non-issue, as taxpayers did not have to separately report this income on 2011 Schedules C, E, F and entity returns.

The only other major reporting change was in the format of Page 1 of the Schedule E (rental and royalty income and deductions).  This was a PITA at first (I really saw no need for the revisions), but I soon got used to it.

There were no major problems within my own practice this season.  My new, faster, laptop, its cable access, and my copy machine ran smoothly throughout the 2½ months.  The printer, while deciding it would only print colored pages in pink, and the black printing being less than perfect, did not slow down operations.  There were no issues with my car or any personal concerns to distract and take time away from the job at hand.  And there were no individual client issues.

Although, for the second year, I was required by federal law to submit all returns that I “file” electronically, unless the client opts out, I once again used the ridiculous, but advantageous to me, IRS interpretation of the word “file” to get “off the hook”.  Each and every client signed the following statement (which I attached to my copy of the return) –

“My tax return preparer Robert D Flach has informed me that he may be required to electronically file my 2011 federal individual tax return if he files it with the IRS on my behalf.

I do not want to file my return electronically and choose to file my return on paper forms. My preparer will not file my return with the IRS. I will file my paper return with the IRS myself.

I was not influenced by Robert D Flach to sign this statement.”

With only 8 seasons left I have renewed my vow to never use flawed and expensive tax preparation software to prepare 1040s – so I cannot electronically submit my federal returns.  I plan to contact Dave Williams in the near future and recommend having the IRS follow the lead of New York State and revise the regulation to require only preparers who use tax preparation software to file all returns electronically (unless the client opts out).

Speaking of electronic filing, ACCOUNTING TODAY recently reported that –

The Internal Revenue Service delayed tax refunds early this filing season for 7.8 million tax returns, according to a report by the Treasury Inspector General for Tax Administration, which also described steep cutbacks in customer service at the IRS.

The report, which provided interim results of the 2012 filing season, noted that taxpayers who e-filed their tax returns early in the 2012 filing season experienced delays in receiving their tax refunds due to fraud detection efforts and problems with the IRS’s Modernized e-File system.”

Since I could not file federal returns electronically my clients all received their refunds in a timely manner.

I continued to submit NJ state returns via NJWebFile when possible (and the client does not object).  However this system continues to be unavailable for too many returns.  

For 2009 NJ-1040s the property tax deduction was limited to $5,000 (instead of $10,000) for taxpayers (single or married) with income in excess of $150,000.  For 2009 returns one could not use NJWebFile if the income reported exceeded $150,000.  This limitation was removed for 2010 and subsequent returns, but one still could not use NJWebFile if NJ Gross Income exceeds $150,000.  Idiots are not limited to Congress.  The cafones in Trenton are apparently too cheap to pay someone to revise the NJWebFile software to fix this ridiculous restriction.

I had been concerned before the season officially began (for me February 1st) that the major tax forms (1040, 1040A, Schedules A + B) were no longer available at local Post Offices – but soon discovered that the forms were now available (although in a bit less “bulk) at local libraries.  As a pleasant surprise I found that, while the libraries did not have NJ-1040 forms, they did have New York IT-201s and IT-203s!

One strange difference this season.  The client who is usually the first to meet with me to drop off each year- a NJ state trooper who usually comes on February 2nd or 3rd – was the very last to drop off, during the very last week, this year.  He is going through a divorce and his wife would not give him her tax papers until the very last minute (filing separately would have been much too costly for the trooper because of the disparity of individual W-2 income).

As has happened all too often in recent years, several long-time clients had gone to their final audit in 2011 or early 2012, a few suddenly and surprisingly.  One who will be truly missed is the husband of a couple whose 1040 I have been preparing since 1984.

So there you have it – the tax season that was.  Only 8 more to go!

I welcome fellow professional tax preparer bloggers to share their insights and comments on the tax season.


Tuesday, April 17, 2012


1040s NO MORE.