TAX PROS SHOULDN’T BE FORCED TO BECOME SOCIAL WORKERS

In the beginning the Internal Revenue Service and Congress required paid tax preparers to perform excessive additional “due diligence” for client returns that claimed a refundable tax credit – the Earned Income Credit, the Additional Child Tax Credit and the American Opportunity Credit - in an attempt to reduce the substantial tax fraud resulting from refundable credits.

Tax pros were required to interview the client, asking “adequate” questions and contemporaneously documenting the questions and the client’s responses, and review “adequate” information and related documentation to determine if the taxpayer was eligible to claim the credit.

Documents the preparer is supposed to review include -

·         School records or statement.

·         Landlord or a property management statement.

·         Health care provider statement.

·         Medical records.

·         Child care provider records.

·         Placement agency statement.

·         Social service records or statement.

·         Place of worship statement.

·         Medical records.

As a paid tax preparer, I clearly oppose the imposition of these requirements.  It is totally inappropriate.   Tax professionals should not be required to in effect become Social Workers and investigate whether a taxpayer qualified for a government social welfare benefit, or looking at it another way, forced to do the work of the IRS and “pre-audit” returns instead of enacting the obvious solution to the problem – eliminating refundable tax credits. 

The purpose of the federal income tax system is to raise the money necessary to run the government, and not to distribute social welfare and other government benefits or to redistribute income.

But now, beginning with 2018 tax returns, paid preparers must perform excessive additional due diligence, and complete Form 8867 (Paid Preparer's Due Diligence Checklist), for all client returns claiming the Earned Income Credit, the Child Tax Credit, the new Other Dependent Credit, the American Opportunity Credit, and Head of Household filing status – which is basically every single taxpayer who claims a dependent and some who do not.

This has gone too far.  As I have said in the past, eventually tax preparers will be required to make random surprise bed checks of client homes during the year.   

Unfortunately, tax pros must just “grin and bear it” because, unlike most other professions and industries, the tax preparation industry does not have a lobby in Washington.     

Why don’t taxpayers who self-prepare have to complete and separately sign a tax form checklist declaring they certify they are aware of and meet the requirements of these credits and the Head of Household status?

If tax professionals are required to perform and attest to additional due diligence for anything it should be the newly limited itemized deduction for mortgage interest. 

TTFN

THE ESSENTIAL 1040

As mentioned in this week’s BUZZ installment, I attended the National Association of Tax Professionals’ annual year-end tax update “The Essential 1040” on Monday at Bally’s on the Boardwalk in Atlantic City.  I attend this one-day seminar every year, and have done so for over 30 years, and also occasionally attend the second day, “Beyond the 1040” (although not this year) depending on the topics being discussed.

Bally’s is a good location.  I have no complaints about the classroom facility or my room, which, as a member of the Total Rewards program, was extremely reasonable – certainly cheaper than that at any other location this class is offered.  This year the seminar included, as it does every year, a relatively skimpy, and definitely not diabetic-friendly, continental breakfast buffet, and an afternoon dessert break.  And, for the first time in 30+ years, the cost of the event included a box lunch (also not diabetic-friendly), paid for by a sponsor who gave a presentation for those who wanted to listen.

As a “stand-alone” offering the seminar was, as usual, excellent, and covered just about everything tax preparers need to know to prepare 2018 Form 1040s.  But, as I said to my business banker on the phone on Monday morning, I was listening to what I had already been told 3 times this year.  Because the only real new development for 2018 was the GOP Tax Act, and I had already attended 2 full-day sessions exclusively on the Act and one 2 hour review of it as part of the NATP Forum, almost everything covered at this seminar was truly redundant for me.  I did, however, learn a couple of new things, which I discuss later in this post.

One saving grace – because there was so much to cover with the new Act this year’s seminar did not include the usual 2 hours of redundant and unnecessary (for me) ethics preaching.  So, one paid for eight 50-minute hours of real education and one actually got eight 50-minute hours of real education.

I had signed up for classes that I knew would cover the GOP Tax Act scheduled later in the year, like this one, because I had hoped that the IRS would be releasing new regulations, interpretations, clarifications and information about the tax law changes.  Unfortunately, very little new details have been released.

Three things continue to be reinforced by GOP Tax Act seminars and discussions –

(1) There is still a lot we don’t know yet about how many of the provisions of the Act will be interpreted and implemented.

(2) Because the Act was basically written overnight, the wording of the law is often defective, confusing and unclear.  “Technical corrections” legislation is clearly needed.

(3) It is very obvious that those who actually write tax law and the idiots in Congress who vote on it have absolutely no concept of the practical implementation of the tax legislation they write and pass, or of the actual preparation of tax returns.

Of this I am certain - by the time we tax professionals fully learn and understand the ins and outs of the new law, the IRS has released all the appropriate regulations, and the Tax Court has clarified the issues of confusion, the Act will expire and we will be back to the Tax Code as it was for 2017.

And the more I review the new “postcard” Form 1040 and its 6 supplemental schedules the more I come to believe that this is probably the stupidest thing ever in my 45+ years in the tax preparation business.

So, here is what I learned at the seminar -

* It appears that the Form 1098-T will no longer be as useful as “tits on a bull”. 

The PATH Act of 2015 correctly required educational institutions to report the total amount of payments received for qualifying tuition and fees from a student during the year.  Previously, in most cases, only the amount billed was reported.  The institutions cried that they needed more time to rewrite their software to be able to generate this information (if you ask me a total load of malarkey) and the IRS granted them delays in complying with this new requirement.

Some good news.  It looks like all educational institutions must comply with this requirement for all 2018 Form 1098-T forms.  The draft of the 2018 form shows Item #2, the section previously used to report amounts billed, blocked out with no description and the instructions say this line is “reserved for future use”.

* Sub-chapter S corporation shareholders who have

·         reported a loss from Form K-1, or

·         received a distribution of profits (other than a salary or expense reimbursement), or

·         disposed of shares of stock in the corporation, or

·         received a loan repayment from the corporation

must now attach a computation of their S-corporation stock and loan basis to their Form 1040.  The draft copy of the 2018 Schedule E includes a new column on Page 2 for entries on Line 28 which states “Check if basis computation is required”.  This is not the result of the GOP Tax Act or any tax legislation, but a new requirement established by the IRS.   

* Computers and peripheral equipment are no longer considered to be “listed property”.

Listed property was first created in the Tax Reform Act of 1984.  This act restricted the depreciation deduction for business use of items “lending themselves easily to personal use” and established requirements, such as keeping a log, for substantiating personal and business use.  Computers and peripheral equipment – except for such equipment used 100% for business at a “regular business establishment”, which could include a qualified home office – had been on the “list” of “listed” property.  I explained listed property in a 2008 post here at TWTP – click here.

The GOP Tax Act removed this equipment from the “list”.  Now computers and peripherals can be depreciated or expenses like any other business property and are no longer subject to the additional substantiation requirements.

* The ridiculous excessive “due diligence” requirements for tax preparers, causing us to become social workers, will now apply to returns for taxpayers claiming the new Other Dependent Credit (ODC), as well as the Earned Income Credit, the American Opportunity Credit, the Child Tax Credit, and, also new for 2018, Head of Household status.  The draft copy of the 2018 Form 8867 includes the ODC in one of the columns.

This nonsense is getting out of hand.  Originally the excessive due diligence was only to be required for returns claiming refundable tax credits like the Earned Income Credit or the Additional Child Tax Credit.  As I have said in other venues, soon tax preparers will be required to make random bed checks of taxpayer homes during the year to check on where a claimed dependent is sleeping.

* Veterans who received disability severance payments, that were originally reported as taxable income, from January 18, 1991 through 2016 can file amended returns (IRS Form 1040-X) for all applicable years (not limited to “open” tax years) to claim a refund for the tax paid on this income.  This is a result of the “Combat-Injured Veterans Tax Fairness Act of 2016”.

There is an IRS established “safe harbor” amount or refund claim based on the year of payment –

1991 – 2005 = $1,750

2006 – 2010 = $2,400

2011 – 2016 = $3,200

Qualified veterans do not have to complete the entire Form 1040-X to calculate the refund due.  They can elect to submit a shell Form 1040-X with the personal information (name, SS#, address, year) and enter the applicable safe harbor amount on Lines 15 and 22.  As with anything else related to taxes, claiming the safe harbor refund or calculating the actual refund based on the original return depends on the specific facts and circumstances.  If you quality consult your, or a, tax preparer. 

NATP continues to erroneously, in my opinion based on my research and what I have been told by experts, teach that casual gamblers can now also deduct on Schedule A travel expenses to casinos, racetracks, etc. if losses do not equal or exceed gains.    

The IRS draft instructions for the 2018 Schedule A does not mention this alleged change – it specifically identifies deductible gambling losses as non-winning tickets under the discussion of “Other itemized deductions” and makes no mention of any change in the “What’s New” section.  I have seen nothing “official” from the IRS that says what NATP is teaching.  

I have no more federal tax CPE scheduled between now and the beginning of the 2019 tax filing season.  So, I will have to rely on finalized IRS forms, instructions and publications, and future online and print articles, for further guidance on the implementation of the tax law changes.  As I learn new “stuff” I will tell you about it here at TWTP.

TTFN

IT IS WRONG!

The excessive “due diligence” requirements forced upon tax preparers by Congress is wrong.

Let’s face it – it is truly “passing the buck”.  Congresscritters are lazy.  If Congress is faced with a tax law that is being extraordinarily abused or misused rather than dealing with the problem and fixing or changing the individual deduction, credit or loophole it passes the responsibility down to tax preparers.

First the Earned Income Credit, then the Child Tax and American Opportunity Credits, and now the Head of Household status.  Coming soon – when a divorced parent with joint legal custody claims a child as a dependent we will be required to make periodical unannounced “bed checks” during the year.

Tax preparers obviously must perform basic “due diligence” in preparing a tax return, or in helping anyone complete a government form or application.  We must not purposefully and knowingly lie on the form or application.

If a person filling out a government form or application tells us that he is an African-American, or has blonde hair and blue eyes, we cannot put that information on the form or application when our eyes tell us the person is white or has brown eyes and hair.

If we know from personal experience, observation, or from information from a third party, that a client has a side-line business doing home repairs we must report that business on the client’s return – or refuse to prepare the return.  If a client living in Hoboken wishes to claim a grandchild as a dependent, but we have personal knowledge that the child lives with an aunt and uncle in Swedesboro, we cannot claim that child as a dependent, or we must refuse to prepare the return.

But that is where it ends.  If we have no personal knowledge to the contrary, or no reason to suspect the veracity based on what we see or have seen or know or have been told, we must believe the client is telling the truth.  The IRS audits tax returns - as it has the right to do so and should have the right to do so - but we do not.

If a person tells us his blood type is A-, or that he had steak for dinner the night before, we are not required to take blood samples or view restaurant records and videos to verify the assertion.

As I have said time and again, the tax preparation industry truly needs an organized national lobby in Washington to combat attempts by Congress and the IRS to turn us into Social Workers, and to otherwise protect our interests.

TTFN

A BETTER WAY

Perhaps the greatest source of tax fraud, and tax return error, is the result of the erroneous policy of distributing government welfare and other social program benefits via the Form 1040 (or 1040A), especially when this takes the form of a refundable tax credit – the Earned Income Tax Credit, the Additional Child Tax Credit, and the American Opportunity Credit.

 

Obviously the best solution to the problem of tax fraud and error in this situation is to remove the distribution of government benefits, and all refundable credits, from the Tax Code. 

 

But if Congress insists on continuing this erroneous practice I have an alternative to forcing paid tax preparers to act as Social Workers and verify that clients qualify for these government program benefit payments via excessive additional “due diligence”, and forcing many legitimate low-income claimants to pay a tax return preparer to apply for government benefits.

 

First, require that all taxpayers who claim the Earned Income Tax Credit, whether or not refundable, have their tax returns prepared at an IRS VITA (Volunteer Income Tax Assistance) site, where returns are prepared free of charge for lower-income taxpayers.  Tax preparers would not be permitted to prepare, nor taxpayers to “self-prepare”, tax returns claiming the EITC. 

 

The number of VITA centers would need to be expanded and staffing would include paid IRS employees who, along with volunteer preparers, are specifically trained in verifying EITC qualifications.  Taxpayers would be required to provide VITA preparers with all the appropriate documentation that tax preparers are currently told to ask for.

 

Currently VITA preparers are not required to do the same excessive due diligence as paid tax preparers – which is wrong. 

 

Second, educational institutions must be required to report on the Form 1098-T all cash payments made to the institution during the calendar year for qualifying tuition and fees from all sources (payments from the student or the student’s family, direct student loan or employee benefit payments, and scholarships and grants), net any tuition and fee refunds, without exception (which Congress has already required institutions to do), the Form 1098-T must include a second page that lists the specific details of the charges and payments (as many colleges actually already provide to students), and the Form 1098-T must also be required to be attached to the tax return.

 

Just a thought. 

 

What do you think?

 

TTFN

 

 

 

 

 

 

 

 

 

 

SCREWED AGAIN!

Once more the IRS, this time thanks to the idiots in Congress, is thrusting added responsibilities upon tax preparers.  We are to continue to function as Social Workers by verifying if taxpayers qualify for additional federal benefit programs.  We must already wear the Social Worker hat for Earned Income Credit claims.

Effective for tax years beginning after December 31, 2015, The Protecting Americans from Tax Hike Act of 2015 (aka the PATH Act) requires tax return preparers to meet due diligence requirements similar to those applicable to returns claiming an EITC if they prepare federal income tax returns on which a child (or additional child) tax credit is claimed or on which the American opportunity tax credit is claimed.

I am not quite sure exactly what additional due diligence will be required, but I expect there will be additional forms like the Form 8867 for EIC claims, with appropriate checklists and requirements for checking documents.

This will result in additional fees to taxpayers who qualify for these programs.  So qualified lower income individuals will be forced to pay to apply for federal welfare and tuition assistance benefits.  And, of course, more wasted time for tax preparers during the tax filing season, when time truly is a precious.

If the tax preparation industry had a national “lobby”, as I have been suggesting for years now, perhaps this would not have been included in the PATH Act.  Unfortunately it appears that we preparers must just “grin and bear it”.

The IRS and the idiots in Congress are rightfully concerned about the excessive tax fraud resulting from claims for refundable tax credits.  Of course the blame for this fraud lies squarely with the idiots in Congress for putting the distribution of federal social welfare program benefits in the Tax Code, and creating refundable tax credits, in the first place.

The obvious proper action is to remove refundable tax credits, and the distribution of federal social welfare program benefits, from the Tax Code, and to distribute these benefits through “normal” channels with the appropriate checks and balances.

As I have said many times before –

The benefits provided by the Earned Income Tax Credit and the refundable Child Tax Credit should be distributed via existing federal welfare programs for Aid to Families with Dependent Children. The benefits provided by the education tax credits and deduction for tuition and fees should be distributed via existing federal programs for providing direct student financial aid. The benefits provided by the Premium Tax Credit, the energy credits, and other such personal and business credits should be distributed via direct discount payments to the appropriate vendors or direct rebate programs, similar to the successful Cash for Clunkers program of a few years ago, funded by the budget of the appropriate Cabinet departments.

Distributing the benefits in this manner is much better than the current method for many reasons:

1. It would be easier for the government to verify that the recipient of the subsidy, discount or rebate actually qualified for the money, greatly reducing fraud. And tax preparers, and the IRS, would no longer need to take on the added responsibility of having to verify that a person qualifies for government benefits.

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

3. We would be able to calculate the true income tax burden of individuals. Many of the current “47 percent” would still be receiving government benefits, but it would not be done through the income tax system, so they would actually be paying federal income tax.

4. We could measure the true cost of education, housing, health, energy and welfare programs in the federal budget because benefit payments would be properly allocated to the appropriate departments.

Fellow tax pros - your thoughts? 

TTFN