NO, NO. A THOUSAND TIMES NO!

On June 20, the House Ways and Means Committee approved 3 tax-related bills -

* The Taxpayer Certainty and Disaster Tax Relief Act (H.R. 3301) would extend through 2020 some 40 tax provisions that expired or are about to expire and provides disaster tax relief portion, funded by ending the Tax Cuts and Jobs Act's estate tax exemption in 2022 instead of in 2025.

* The Economic Mobility Act of 2019 (H.R. 3300) would expand the earned income tax credit and make the child tax credit fully refundable.

* The Promoting Respect for Individuals' Dignity and Equality (PRIDE) Act of 2019 (H.R. 3299), would permit same-sex married couples to amend their filing status for income tax returns with respect to which the statute of limitations has already passed.

All three bills received votes primarily along partisan lines. There is no indication if and when the legislation would reach the House floor for a vote.

I certainly support the Senate Republicans promise that the extenders package is "dead on arrival".  I oppose the extension of these tax benefits – and most certainly if the extension is retroactive to 2018 (not sure if they are in this bill).  Having temporary tax benefits that are constantly extended is truly stupid.  And creating tax deductions and credits that are retroactive to a prior tax year whose returns have already been filed creates problems and agita for taxpayers, tax preparers and the IRS, as well as for state tax agencies. 

I also strongly oppose expanding the Earned Income Credit and making the Child Tax Credit fully refundable.  The EIC does not belong in the Tax Code, and I oppose ALL refundable credits.  The Tax Code should not be used to distribute federal welfare benefits, and refundable credits in general are a magnet for tax fraud.    

I have no problem with promoting respect for individuals' dignity and equality.

Senate Republicans have announced their opposition to all of the bills.

So, what do you think?

TTFN 

WHAT'S WRONG WITH THIS PICTURE?

The Earned Income Tax Credit (EITC) is a federal welfare payment, applied for on the 1040 or 1040A tax return and administered by the Internal Revenue Service.

Traditional welfare payments are administered and distributed by government welfare agencies on a state level, with applicants required to submit to the appropriate agency independent documentation to support their qualification for the benefit.

Individuals applying for the EITC on self-filed tax returns simply need to enter numbers on their tax form and include a Form EIC to identify the dependent children that qualify them for the credit if applicable.  No independent documentation is required to be submitted to the Internal Revenue Service with the filing of the tax return.

It has been suggested that as many as 1/3 of all EITC claims are erroneous.  And the refundable portion of the EITC is one of the main sources of tax fraud, costing the government billions of dollars each year.

If an EITC applicant uses a paid tax professional to prepare their tax return the government requires, under threat of a $500 penalty, that the paid preparer undertake excessive due diligence in verifying the applicant’s qualification for the benefit and prepare an additional tax form identifying and certifying compliance with the excessive due diligence requirement.

A paid tax preparer charges a fee based on the time and work involved in preparing a tax return.  A tax return that includes an application for the EITC requires additional time and work, legally required by legislation and government regulation.  So, the preparation of a return including an EITC claim costs more, or should cost more, than a non-EITC tax return.  By definition, EITC claimants are low-income individuals who cannot necessary afford additional fees.  Yet the government forces them to pay a fee to apply for a federal welfare payment.

Some tax professionals, realizing the inappropriateness of this situation, do not charge clients claiming the EITC the full and proper fee to which they are legally, ethically and morally entitled for the additional work they are required to do by the government. 

So, in effect, either the taxpayer applying for an EITC or the tax professional preparing the return with an EITC claim is penalized.

Here are some solutions to these serious problems.

(1) Remove the Earned Income Tax Credit from the US Tax Code and require individuals to apply for and receive this benefit via traditional welfare channels.

(2) Require tax filers claiming the EITC to use the services of an IRS-sponsored VITA center to prepare their return, where independent documentation of qualification would be required to be provided to the VITA preparer or file their return electronically directly to the IRS via the IRS website, with independent documentation required to be included with the submission of the return.

(3) Forbid paid tax preparers to charge an additional fee for claiming the EITC on a tax return and have the IRS, using the PTIN filing system, pay tax professionals a pre-determined fee for each return they prepared with an EITC claim within 60 days of April 15^th and October 15^th.

Obviously, solution #1 is the best and easiest answer.

So, what do you think?

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

 

 

 

 

 

 

 

 

 

 

TAX PROS DISCUSS THE EARNED INCOME TAX CREDIT

I recently posted the following comment on a Spacebook state-specific tax preparer  group site.  

 

“I see one of the topics of discussion at the next informal gathering is due diligence for the EITC.  This is where the IRS forces tax preparers to become Social Workers.

 

What happens?  We are required to spend more time, unrelated to actually preparing a return, on clients with EITC claims doing “background checks”, for which we should be compensated via higher fees.  But, by definition, legitimate EITC claimants are low-income and cannot necessarily afford higher fees.  So either the tax preparer is screwed by “eating” all or part of the appropriate additional fees out of sympathy for the client, or the client is forced to pay a higher fee for return preparation that it cannot afford.  The obvious reaction from the tax preparation community should be to refuse to accept clients with EITC claims.  But then we lose work, and the EITC claimants are punished by being forced to go to fast food chain services like Henry and Richard, where they will almost certainly be overcharged for much less actual customer service and attention (and perhaps competence).

 

(1)  The Earned Income Tax Credit does not belong on the Form 1040 – or the NJ-1040.  The Tax Code should not be used to deliver federal welfare benefits.

 

(2)  The tax preparation industry needs an organized and unified lobbying organization to represent us against Congress and the IRS and to fight erroneous regulations like the excessive due diligence requirement for EITC claims.”

 

The posting also referenced my editorial “Who Speaks for the Tax Preparer?”.

 

Here are some of the responses I received -

 

“I agree wholeheartedly! I used to work for Henry & Richard in an office located in a low income area. Nearly all the clients I had during the first 6 weeks of tax season, the first "peak", were EITC clients. We also had Rapid Refund, which added to the fee structure the clients had to pay us, but of course, the fees were withheld from their refund.

 

So much of my time was ‘wasted’ being a social worker AND a loan processor.  The loan application in itself took more time than the tax return, on top of the time wasted working on the EITC claim. At this point, I felt I was no longer a tax preparer.

 

I no longer work for Henry & Richard, but for myself, and the clients who didn't follow me were the ones with EITC, since I didn't offer RR, nor am I located in a low income area. Now I feel more like a tax preparer. I only have 2 EITC clients.”

 

John Maxwell

 

“I once WAS a multi-unit franchisee of Henry & Richard's -- two of those offices are very close to Robert's current residence. Said county had the 8th highest per-capita incidence of public assistance at the time.

 

We did about 3,000 EITC returns in those offices -- complicated by the annual rules changes about relationships (pre-UDC), and the proximity to a Conagra chicken processing facility where most of the employees (our clients) did not speak English.

 

Sadly, when this is the largest percentage of your client base, the fees will skew higher than 'perceived value' - but we need to pay rent, royalties, salaries etc.

 

I do agree that the IRS should not be in the business of 'income redistribution'. For that matter, they should not be in health care compliance, either.....”

 

John Sheeley EA

 

“Robert, I agree with just about everything you said. Here is where I differ. I do not mind losing the EITC work. My take on EITC is that it is very risky work. We are held to a very high standard for people who may throw us under the bus for a few extra bucks. It ain't worth the aggravation.

 

I have started referring EITC people to the low income tax clinics or VITA. If the people insist that they want me to prepare their tax returns I demand a bunch of substantiation or tell them (and have them sign) that I will not prepare the EITC (unless I am very certain they are for real).

 

When there is the EITC taxpayer, I have to have my radar running. I simply do not want to discover the taxpayer has a cash only dog walking business on the side.  I don't want to have a problem with the tax police because of social services legislation that leaves it up to a lot of ghost and other tax fraudsters to create a culture of ‘let's see what we can get away with’.

 

On balance I think society would be better served if the social service programs were handled at the state level by the social service agencies. The amount of fraud would most likely be reduced in a big way. It would also make it less profitable for the bad preparers to make a buck or two.”

 

Marc Standig

 

“We as professional tax preparers certainly have the ability to pick and choose who we take on as clients. It's not like we took a tax preparer's Hippocratic Oath and must service any and all taxpayers that seek us out.

 

I also agree that we now have to be experts in healthcare, social work, divorce, and foreign investment reporting ( i.e. finding FBAR assets worldwide), to name a few.

 

Yes we spend more time and have additional risks and due diligence to prepare returns with the above complexities, especially low income clients. EITC clients who either fail to have healthcare coverage or purchased healthcare through the exchange, usually go hand in hand.

 

Way too much work for too little pay, right?

 

Perhaps, but I'm of another mindset. I do see me/us as a professional who has a responsibility.

 

Is it all about the money?

Is it too much due diligence?

Is there too much risk?

Why bother?

You can argue either way.

 

I for one balance my not so well off clients with all others. What I find is they are truly grateful and depend heavily of my expertise to get them any extra money they desperately need. They would pay almost anything to get their taxes done and really never complain about my fees which is often below my standard billing rate. I also find them thankful, and overall much happier than the highly compensated, hi flying executives that hate paying taxes because they make too much money. In fact those people are often just miserable human beings.

 

So what's my point here? Just like the doctor that you go to for help you when you are sick, I believe we too have a similar obligation. We may not get the big fee and most certainly will spend more time working on these returns, but these clients won't put your practice on the brink of failure.

 

Are we just as greedy as the rest of Corporate America? Aren't we smart enough to sniff out the scammers? Isn't that what we spend hours of time and money to learn about and prevent in our practice. In fact we now must give the 3rd degree to all our clients given what we need to know to cover our butts.

 

The IRS didn't ask to redistribute wealth, enforce and monitor healthcare, and alike. We don't have a choice either.

 

Personally I'm kind of naive when it comes to this stuff and believe what comes around goes around. So having some low income, EITC tax clients is just part of my job.”

 

Kenneth Vincent

 

Of course John is correct when he says “they {IRS} should not be in health care compliance, either…..” 

 

And Marc is right to refer EITC claimants to VITA clinics.  And he is certainly right that clients “may throw us under the bus for a few extra bucks” or may blame us if they get caught filing erroneous EITC claims (which we completed based on information supplied by the client).

 

As for Kenneth –

 

I did not think of my objections, or those of our colleagues, to the additional excessive due-diligence for EITC claims as being founded in greed.  My fees are way below market, and very honestly too low.  Part of this is because of my truly minimal overhead.  On balance I do not charge lower-income clients less – it is just that I do not charge higher-income clients more, other than that their returns are more involved and require more forms and schedules.

 

I am aware that many tax pros have historically charged legitimate EITC clients less than those more highly compensated – just as doctors will charge lower-income patients less.  And I support this as a personal choice available to tax preparers.  I do share Marc’s perhaps cynical, justifiably so, skepticism about EITC claimants with “a cash only dog walking business on the side” or who are informed enough to be able to play us and the system by reporting just enough net income from self-employment to maximize their EITC.

 

I do find lower-income clients to be especially appreciative of our efforts to reduce their tax liability, or provide them with “found money” via refundable credits (regardless of our opinions on the appropriateness of refundable credits – they are allowed by law).  And I do find special satisfaction in legally saving taxes for clients who could certainly use the money most.  But I also sympathize with higher-compensated clients who complain that they are being excessively taxed simply because it is assumed they can afford to pay.  I do not believe the Tax Code should be used to punish ambition, investment, and just plain hard work.  While I have had the occasional “miserable human being” as a client over the years, it had nothing to do with their income status.  

 

I do not mind additional work actually preparing forms and schedules that provide our clients with tax benefits, based on information provided by the client or information returns.  But I do mind being forced to do work that has absolutely nothing to do with the preparation of tax returns.  While we obviously cannot knowingly prepare a fraudulent return - unless we have personal knowledge to the contrary, or part of the information provided stinks to high Heaven, we must assume information provided by clients is true and honest.  It is not our job to “pre-audit” our clients’ returns. 

 

My concern is with the IRS arbitrarily forcing its responsibilities for verifying EITC claims upon us, with accompanying potentially high penalties, without having any say in the process.  It is not just about fee income – but about agita and wasting our valuable time during the limited tax filing season.  I truly believe that the tax preparation industry needs a unified lobbying voice in Washington.

 

Obviously the ultimate villain in the piece is the idiots in Congress – who continue to erroneously use the Tax Code to distribute government welfare and other social benefit programs.  It is true that the IRS did not ask for these continuing added responsibilities, usually coming without commensurate increases in budget.

 

So, do any of my fellow tax professionals out there have anything to add to the discussion?

 

TTFN

FOUR REASONS TO REMOVE THE EITC FROM THE TAX CODE

Over at the TAX JUSTICE BLOG Kayla Kitson lists “Four Reasons to Expand and Reform the Earned Income Tax Credit”.

I contend that there are at least as many reasons to take the Earned Income Tax Credit out of the Tax Code and instead distribute the benefits through normal existing welfare programs. 

Let’s make one thing perfectly clear upfront – the Earned Income Tax Credit is a federal welfare program, perhaps the biggest federal welfare program currently in existence.  The direct cost of the EITC to the U.S. federal government was about $56 Billion in 2012.

Actually it is not Kayla but the nonpartisan Congressional Research Service (CRS) that advocates expansion via a recently released “report that makes a strong case for making permanent EITC provisions that are set to expire in 2017 and also improving the credit for low-income workers without children.”

The first reason given for expansion is “EITC Increases Employment”.

I have my questions about this statement –

“There is strong empirical evidence that the EITC increases labor force participation among single mothers. In fact, one study found that 34 percent of the increase in employment for this group between 1993 and 1999 can be attributed to expansions of the EITC.”

As the report suggests in reason #4, which covers the “reform” area of the report, there is indeed “complexity in eligibility rules and credit formulas” for the EITC.  In my opinion the only people who truly understand the workings of the EITC are tax professionals and tax cheats. 

I really doubt that a person decides to go to work, or work more, because they are aware of the fact that they will receive a bigger refund check from Uncle Sam at tax time.  A person decides to work, or work more, because he/she needs the money to feed their family. 

In most legitimate EITC cases, at least initially, the qualified individual (I cannot really say qualified “taxpayer” because a large majority of EITC recipients are not tax “payers”) first learns about the EITC in the process of having their tax returns prepared. 

I would like to see some concrete proof that individuals actually made the decision to go to work, or to work more, because of the EITC.

Here are my “Four Reasons to Remove the EITC from the Tax Code” –

1. The purpose of the federal income tax is to raise the money necessary to administer the government.  Period. 

It is not meant to be used for “social engineering” – distributing federal welfare or other social benefit programs or redistributing income – or to discourage or encourage specific behavior (other than possibly to encourage savings, investment, and growth).

2.  The benefits of the EITC, and any other government welfare or benefit program distributed via the 1040 (tuition assistance, energy credits, etc), are not received “upfront” when it is needed.

The benefit is actually paid as much as a year “after the fact”.  The credit for 2014 is based on 2014 income, but is not distributed until the spring of 2015 after the Form 1040 (or 1040A) has been filed and processed.  But the benefit is needed when struggling to pay bills or put food on the table due to low income and reduced earnings, when actually paying for college or trade school, or when actually purchasing energy efficient products.

Unemployment benefits are paid while the person is actually unemployed.  And traditional Aid to Families with Dependent Children is paid during the period of low income or un- or under-employment.  You do not have to wait 6 months to a year to get your unemployment or traditional welfare payments.

Parents of college age children receive traditional Student Financial Aid at the time when the tuition and fees are due, and when books need to be purchased.  You do not have to wait 6 months to a year to get your financial aid, after you have been forced to borrow money to pay for the tuition, fees, and books.

3.  The actual cost of federal welfare, and educational assistance, energy incentives, etc, as a percentage of the total budget is distorted.

The costs of benefits distributed through the Tax Code are not counted as expenses of the actual program activity – they are reported as reduced income tax collection.  It also distorts federal budget reporting by creating the infamous “47%”.  If properly done there would be much fewer Americans not paying any income tax.  Benefit recipients would actually be paying tax, but receiving more in direct federal benefits.

4. Probably the most important reason – Tax credits, especially refundable credits, are a magnet for tax fraud.

It has been determined, by various sources at various times, that 1/2 to 1/3 of all EITC claims are incorrect if not outright fraudulent.  1/3 of $56 Billion is almost $19 Billion in money stolen from the federal government.  Similar error/fraud rates have been attributed to other refundable credits. 

Delivering government benefits through traditional venues would provide for more scrutiny and examination of claims by the appropriate agency.  The IRS is not the appropriate agency.  And tax preparers should not be forced to become Social Workers (often uncompensated because they do not properly charge EITC clients for the time involved) and determine if a person qualifies for federal welfare.

Here is an additional reason (as if more were needed).  The complexity of the EITC, and of the various tuition tax benefits, almost requires claimants to seek paid professional help at tax time.  And the recent excessive due diligence requirements for tax professionals preparing returns with an EITC claim could substantially increase the fees charged.  So a low income individual, who truly needs the benefits of the EITC, is forced to pay a potentially substantial fee to be able to collect their federal welfare.  When a person applies for Aid to Families with Dependent Children does he/she have to pay an “application fee”?

So it seems clear – at least to me - that the Earned Income Tax Credit does not need to be expanded.  It needs to be removed from the Tax Code!

TTFN

RANDOM COMMENTS ON TAX PREPARATION

Here are some random comments on two topics based on the report I discussed on Monday that resulted from the GAO undercover operation.

(1) The report included some statistics.  One table – Individual Taxpayers’ Estimated Use of Paid Preparers, by Various Groupings, Tax Year 2011 – indicated that 59% of taxpayers who claimed the Earned Income Credit used paid preparers, while the percentage for taxpayers not claiming the EIC was 55%.

In discussing the various fees charged by the 19 “fast food” chain offices visited by the undercover agents, the report stated “Paid preparers provided various reasons for the amount of the tax preparation fee, including (1) the EITC form is the most expensive form to file . . .”

The rules for claiming the Earned Income Credit are indeed complicated, and it makes sense that many taxpayers who qualify, or think they do or may, turn to paid tax preparers for guidance. 

And it is true that, while it may not be the most expensive form to file (I would say Schedule C and Schedule D could cost much more – depending on the specific situation), because of the new overly-excessive due diligence requirements forced upon tax preparers, the fee for claiming the Earned Income Credit can be higher than the fees to file other forms and schedules.

The Earned Income Credit is in reality a federal welfare program.  Those who legitimately qualify for this credit are by definition lower income individuals.  Claimants may indeed truly need the additional monies provided by the refundable component of the EIC to properly care for their dependent children. 

Yet by distributing this welfare benefit via the Tax Code claimants are forced to pay a premium fee to tax preparers, very often truly justified because of the additional work involved, to request the benefit - money that they may not be able to afford to pay, or that could be better used elsewhere.

When applying for the traditional Aid to Families with Dependent Children welfare benefits are the families required to pay the county an application fee?  I think not.

The Earned Income Credit and the refundable Additional Child Tax Credit DO NOT belong in the Tax Code!

(2) The fee section of the report also states –

“Often, paid preparers either did not provide an estimate of the fees upfront or the estimate was less than the actual fees charged.”

This is really not an issue – and should not be a criticism of the otherwise flawed preparers.  The only possible criticism is that the less than honest preparers may have given a low-ball upfront estimate to get the business, knowing full well that they would charge more.

To be perfectly honest, most of the time it is very truly literally impossible to know how much the fee for preparing a tax return will be until after the tax return has been prepared. 

The final fee depends on the number of forms and schedules needed and the time involved to prepare the return, and is certainly impacted by the level of organization of the client taxpayer.

When I was accepting new clients, and a prospective client asked me “how much will it cost to prepare my tax return?”, the only true and honest answer I could provide was “between $45 and $500”. 

To be fair, I could probably be able to “tighten” my fee range and perhaps offer a basic “good faith” non-binding estimate of “between $100 and $250” by looking at the prior years’ returns and the current year’s “stuff” and asking a few questions.  And, of course, I could provide an actual legitimate “quote” for truly simple “short forms”, reporting only W-2 income, minimal interest income, and no deductions or credits.

FYI - in my 40+ years of preparing 1040s, 99.5% of all returns described by potential clients as “easy returns” have NOT been easy returns.

The best a tax professional can do is provide a potential client with a fee schedule, listing the minimum fee or fee range for individual forms and schedules, and explain the guidelines used in determining the fee.

TTFN

IT AIN’T NECESSARILY SO – H&R BLOCK CEO ALLEGEDLY CARES ABOUT EFFICIENT AND EFFECTIVE TAX ADMINISTRATION

While I usually don’t follow the actions of Henry and Richard, other than to laugh gleefully at their many local government and court admonishments and penalty assessments for royally screwing their clients, the title of this post, which I came across via a “tweet” caught my eye –

“H&R Block CEO Asks IRS To Make It Harder To Self-Prepare Tax Returns And Why That's A Good Idea”

The post is by Leslie Book, author of the FORBES.COM blog “Procedurally Taxing” 

(We seek to explain, explore and expose issues involving federal tax procedure).

Leslie starts out by telling us –

“Last week, William Cobb, the President and CEO of H&R Block, wrote to the Commissioner asking that the IRS implement changes to tax forms to make it more difficult for taxpayers to prepare their own returns claiming the earned income tax credit (EITC).”

My response to this is definitely the cynical response to which Leslie refers – “Cobb wants more taxpayers to come to the preparer behemoth”.

H&R Block only cares about H&R Block’s bottom line.  Cobb and his company could care less about what is good for the American taxpayer, evidenced by the many, many legal actions which I mentioned above, or what is good for the IRS and tax administration.

It is like the recent AICPA lawsuit to stop the IRS new voluntary AFSP program.  The AICPA cares only about its CPA members and their bottom lines, and could care less about the taxpaying public.  They filed the lawsuit for strictly selfish reasons, to reduce competition, but “cloaked” it in an alleged concern for taxpayers.

So here H&R makes a recommendation for strictly selfish reasons, but cloaks it in a concern for the IRS and proper tax administration.

What are we talking about?  The IRS wrote to the Commissioner of the IRS to say –

“. . . the IRS will see immediate benefits if it seizes the opportunity to require all EITC taxpayers, including the more than 40% of taxpayers who self-prepare their returns, to submit additional eligibility information to the IRS.”

As Leslie points out –

“Would Cobb’s proposal be good for Block? Of course, as placing more obstacles in the way of self-preparing returns makes it more likely that taxpayers will seek assistance from someone else.” 

Presumably in many cases the “someone else” will be Henry and Richard.

The basis of Leslie’s post is that just because this recommendation will put more money in the already loaded pockets of Henry and Richard does not necessarily mean it is a bad idea.

Here is what is a good idea for proper efficient and effective tax administration -  remove the Earned Income Credit, and all other government social welfare and other benefit programs, from the Tax Code.

Refundable tax credits, like those generated by the Earned Income Credit, the additional Child Tax Credit, and the earlier First Time Homebuyer Credit, are magnets for tax fraud.  Over the years it has been estimated that from 1/4 to 1/3 of all Earned Income Credit applications are erroneous or fraudulent.

I was interested to read that, according to Leslie –

“. . . the IRS’s ill-fated efforts to regulate unlicensed preparers through a mandatory education and testing program {the now-dead RTRP program that was shot down in Loving v IRS – rdf} stems in part from former Commissioner Shulman’s efforts to tackle refundable credit compliance problems.”

The correct way to tackle refundable credit compliance problems is to ban refundable tax credits!

Let me once again tell you what should be done, and why it should be done - 

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 energy credit and other such personal and business credits should be distributed via Cash-For-Clunkers-like direct discount or rebate programs funded by the budget of the appropriate Cabinet department.

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 would no longer need to take on the added responsibility of becoming Social Workers and have 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 infamous “47%” 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.

My only “selfish” reason for making this recommendation is to reduce the agita and aggravation involved in preparing 1040s. 

But wait - what about the recommendation from Henry and Richard?

If we assume (and, unfortunately, it is a good assumption) that the Earned Income Credit will be around for a while, the Form 8867 (currently titled "Paid Preparer's Earned Income Credit Checklist") should be renamed "Claimant's Earned Income Credit Checklist" and completed, and separately signed, by the taxpayer(s) claiming the credit and NOT the tax preparer.  And the tax preparer should NOT have to view public and private records and independently verify and confirm that the claimant is entitled to the credit.

If that is what Mr Cobb has recommended to the IRS then it is a good idea.

Please - what do you think about all this?

TTFN



  

TWO RECENT TAX POSTS WORTH DISCUSSING

During my wanderings on the web in search of BUZZ-worthy items I recently came across two blog posts that require more attention than a mere listing in a BUZZ installment.

The first is “The Tax Code In 2014 -- It Still Stinks” by Christopher Bergin at FORBES.COM.

As is common with Christopher’s commentary, the nail head is forcefully and accurately struck when he talks about the idiots in Congress and the Tax Code.

Speaking about the return of PEP and Pease and the new Net Investment Income tax he calls them “stealth taxes” and explains -

“. . . they are sneaky and cynical and a perfect illustration of the contempt our politicians have for the tax code and taxpayers – which is why the tax code is rotting, and why they don’t do a thing to address that.”

And Congress’ contempt of the Tax Code and taxpayers leads to our contempt of the idiots in Congress.

I used to refer to PEP and Pease as “back door taxes” or the “Read My Lips Taxes”.  The elder Bush attempt to avoid breaking his promise by going through the back door.  He didn’t raise the bridge – he lowered the water.

And, as Christopher points out –

“The NII {Net Investment Income = rdf} tax is a result of Obamacare, and yet another example of what a mess that legislation really is (I’m still trying to figure out why we had to pass it to find out what was in it).

Obamacare is the classic example of the fact that the idiots in Congress do not read the laws they vote on – they merely do what they are told to do, vote yes or vote no, by the Party “leaders”.

The basic idea behind Obamacare is a good one – an attempt to provide universal health care coverage via the existing insurance marketplace.  However the legislation was not given sufficient serious thought (something the idiots in Congress are incapable of) and was pushed through Congress hastily for political expediency to give BO an early win.

These three new taxes for “the wealthy” for 2013 are bad tax policy that just add more unnecessary complexity to an already FU-ed Tax Code.

The second post surprises us by reporting on an actual good common sense proposal from one of the idiots in Congress.  Kyle Pomerleau of the Tax Foundation’s TAX POLICY BLOG reports that “Marco Rubio Proposes a Replacement for the Earned Income Tax Credit”

In a recent speech on the 50^th Anniversary of the “War on Poverty” Republican Rubio, the junior United States Senator from Florida, “mentioned that he wants to replace the Earned Income Tax Credit (EITC) with a low-income wage subsidy”.

Government welfare programs in general, and the Earned Income Tax Credit in particular, do not belong in the US Tax Code.

The post, and Rubio. hits on two good reasons why the EITC must go –

“One weakness of the EITC compared to the minimum wage, however, is the fact that low-wage workers only see the refundable tax credit once a year in a lump sum, rather than a small increase in their paycheck over a full year.”

And –

“Currently the Earned Income Tax Credit has one of the highest payment error rates of all federal programs that cost between $11.6 and $13.6 billion in 2012. Whether these payment errors are due to intentional fraud and abuse or the program’s staggering complexity is up for debate (it is likely a mixture of the two).”

The post tells us –

“It is not entirely clear what form the replacement wage subsidy will take. It could take the form of a tax credit to employers who hire low-income workers or a transfer to low-income workers. Either way, Rubio believes that the subsidy will be an improvement over the EITC.”

I have not read the rest of Rubio’s “anti-poverty” proposals, and am aware that he was once a favorite of the Tea Party extremists (although maybe not so much anymore) – but I am glad he wants to take the EITC out of the 1040 and replace it with a direct payment program.

The idiots in Congress must understand that the purpose of the Tax Code is to raise the money needed to run the government – PERIOD.  It should NOT be used to distribute the benefits of government welfare or other programs.  And it should NOT be used to redistribute wealth.

TTFN