Our Taxing Times

Filing With a Pay Stub

This is the time of the year where the radio and TV ads and business signs suggest that you can bring in your last pay stub and get money. Implied is that the return is being done and you are receiving all or part of your refund. Buyer Beware! Please check into what you are buying.

Working from paystubs, there are businesses offering to advance part of what they estimate you will be receiving in a tax refund. There also may be a restriction on how you use the advance you are offered. It may have to taken in a debit card or applied to a car/furniture purchase. Whether you get cash or a purchase credit, you will have to meet other qualifications. There may be a credit check, you may have to be a prior customer, your employer may be contacted. Once the advance is issued, you still have to file a return. Sometimes this can be done through the business who issued the advance or you may have to do it on your own and take the re-payment to that business. These advances were a rage a few years ago but after the RAL banks lost lots of money they stopped giving cash. Now you have to settle for a pre-paid debit card or purchase credit. Do your homework to make sure you understand exactly what you are buying. And don't forget to file your return.

By the middle of January, I will have received a half a dozen calls wanting to file from their pay stub (I've already received one). Can't do it. IRS requires me to have a copy of every W-2 on any return I file. (There is an exception to that but it can't be used until the middle of February.) If you can find someone who says they will file from a paystub, don't assume you are okay since they are the ones breaking the law. You will have to sign the e-file authorization which says you are filing a correct return. If you are filing from a paystub, you may not have an accurate return. W-2s and paystubs seldom match or there may be other income you are ignoring or forgotten about. Also, if the preparer is ignoring the rules and filing with a paystub, what other rules are they ignoring and could those have a consequence for you? Is getting your refund a few days/weeks early worth the potential problems and costs?

The IRS doesn't open e-filing until January 15, 2010. If you find someone who will complete a return from a paystub, it can't be e-filed before then. And mailing it will set off questions right off since then the W-2 has to be attached to the paper return. Employers have until January 31st to get W-2 in the mail. Even if an employer waits that long, filing with a pay stub will only gain you a couple of weeks. Is it worth the hassle?

Send Chocolate...

...it's going to be a crazy tax year and I'm going to need lots of the good stuff. Tax season is just a few weeks away for my business and it's already shaping up to be a stressful 3.5 months.

This is my time to get all office stuff done. Stuff like the client newsletter, documents for the client packets printed and some packets made up, archive last year's sig forms, order office supplies, test the software, hire a receptionist and set my ads. Oh, and clean the office. But I am still doing tax returns. Hopefully, by the time I open next Monday, I will have 9 returns completed. I don't want to be doing past year returns between 941s, W-2s, 1099MISCs and the early 2009 returns. With any luck, all those forms will be done by the time we can electronically file on the 15th.

Then it really will get stressful. I have made changes in office procedures that will have to be explained to the clients, several times for some. The biggest change is dropping Refund Loans. I expect some serious cussing and carrying on from a couple clients. Then there are all the consent documents and engagement letter to be explained and signed.

But the major stresses have been provided by Congress and the Administration. Tax changes are part of the job but this is the craziest year I remember since the big reform of 1986 went into effect in 1988.  The Making Work Pay credit is sure to hurt taxpayers who will vent, loudly. Right now, we don't know what info Social Security will give us about the $250 they sent out. From experience, I am sure most clients won't remember what they received especially since most received the money by direct deposit. I'll have to explain to new homeowners that they will have a long wait for their Homebuyer's Credit since we can't e-file that form and we now need documentation of the purchase. Then there is the education credit/deduction confusion, clients wanting to know about Roth IRA conversions and changes in the documentation for Energy Credits. Tax planning for next year will have to be put on hold until Congress gets back to work on the tax extenders and the estate tax.

Then there are the stresses of running a tax business. We have licensing of preparers, the new e-file mandates, the introduction of Modernized e-file, and the RAL issues. While many of these changes might not directly affect me, I'll have to cope with the problems and possibilities they create.

Yeah, this will definitely be a major chocolate season.

Bad News Before Christmas

All over the country, small tax offices and Jackson Hewitt franchisees received a nasty Christmas present 22 days before 2010 electronic filing begins.

On December 24th, Pacific Capital Bancorp announced that they want to sell their tax business to a private equity fund because regulators have barred it from originating any Refund Anticipation Loans in 2010. The thrust of the article is the impact on Jackson Hewitt which relies on Pacific Capital's tax business (Santa Barbara Bank and Trust) for 75% of their RAL funding. Beside Jackson Hewitt, SBB&T has a large part of the independent RAL market.

Another bank faces the piper for it's operating practices - so what? Because the service they offer is relied upon by small business owners all over the country. No matter what you think about RALs, millions of taxpayers use them and that is why JH, H&R Block and independents alike offer them. Had RALs been stopped across the board, taxpayers and business owners would have been effected but without the confusion and side effects this announcement could cause. If JH and Pacific Capital can't get this solved soon, we might see:

• Independents will be scrambling to find a new RAL bank. There are only a few options and from what I have heard, some might be in financial trouble too.
• Once the season begins, I think approvals will be down. If JH and many independents loose the ability to offer RALs, many clients will go to any tax office that can. The extra requests may put pressure on the remaining banks to be more cautious with money since they don't have a history with the new clients. This caution with funding has been happening already and one of the reasons I stopped offering RALs this year was the long time RAL clients who were denied a loan for no reason. The preparer will take the brunt of the taxpayer's anger at being denied.
• I think tax preparation prices will go up. The clients want RALs. There are limits to fees associated to them because of APR issues. The alternative is to raise tax preparation fees to take advantage of the demand. This effects all that preparer's clients not only the RAL client.
• As taxpayers look for a preparer who is still offering RALs, the no show dance will intensify. Joe wants a RAL but can't get in office A for 3 days. He makes an appointment and tries office B which has a wait of 2 days. Another appointment is made and a third office is tried. Of course no appointment is canceled. Those offices get a no show.

I could be wrong but if Pacific Capital and JH can't get this worked out soon, a lot of small business owners will not be seeing a happy new year as their income drops and clients are lost. These was shaping up to be a difficult tax season already but for some, this could be a killer.

W-5 - Advance EIC

A few days ago, I posted about checking your W-4 for 2010. While you are checking that, it might be a good idea to look into advance on your 2010 Earned Income Credit.

Earned Income Credit (EIC) is a program which started as a way to give lower income taxpayers with children back some of their FICA and Medicare withholdings. Since then, the program has been expanded with inflation adjustments, adjustments for additional children and filing Married Joint and a credit for taxpayers without children. EIC can be very lucrative. It is also a major source of tax fraud. For most lower income taxpayers, EIC is a life saver. It is the little extra that allows them to payoff debts, prepare for large expenses and even save a little. It makes tax refunds an anticipated event. But with Advance EIC, the taxpayer can get some of their EIC in their pay check and less at the end of the year.

Here's how it works. The taxpayer completes a W-5 and give it to their employer. They verify on the W-5 that they expect to have at least one child and qualify for EIC for that year. (That means taxpayers without a qualifying child can't get advance EIC.) They also specify if they are single or married and if married if their spouse is also filing a W-5. The employer uses that information and the IRS charts to give the taxpayer part of their EIC in their pay check. The amount the taxpayer received in their check is dependent on how often they are paid, how much their pay is for that period and if they are single, married and if married if both taxpayers are taking advanced EIC. The maximum advance for 2009 was $1826. The W-5 is only good for that calendar year and must be done on an annual basis.

Example - (Based on 2009 figures)

Mary Taxpayer is a single mom providing a home for her son Timmy. Mary qualifies to file Head of Household and claim Timmy as a dependent. She has W-2 wages of $12,000 paid bi-weekly, unemployment of $3223 ($823 taxable in 2009) and $50 in bank interest. This makes her AGI (adjusted gross income) $12,873. By the time her standard deduction and two exemptions are subtracted she has no income to tax. With no tax, Mary will receive a refund of $4443 ($400 Making Work Pay Credit, $1000 Additional Child Tax Credit and $3043 in Earned Income Credit). Had she elected to take advance EIC payments for the whole year she still would have a refund of $2647 but she would have had an extra $69 in her pay every two weeks.

That is a very simple example but it gives you an idea how the program works. Now for the real world issues. If Mary had 2 or more children living with her, her advanced EIC would have been the same. However, she would have received more EIC on her return. If her income was much higher or lower, the advance would have decreased. The example was created to get the maximum advance. She also has to make sure she qualifies for EIC. If she fills out a W-5 and receives advanced EIC payments then doesn't qualify for EIC she will have to pay back the advance. If she had submitted a W-5 and them realized she doesn't qualify for EIC, Mary would have 10 days to give her employer a new W-5 revoking the payments. It is also Mary's responsibility to monitor her pay checks to make sure the advance payments stop.

Advanced EIC is more work for the employer. If an employee gives them a signed and completed W-5, the employer has to give the advanced payments. These payments are reported on the employee's W-2 in box 9. Advance EIC payments are subtracted from the employer's tax deposit. Say Mary's employer has withheld $250 for Federal withholding, FICA, and medicare from all his employees that pay period. He would subtract her advance EIC of $69 and reduce his deposit to $181.

When Earned Income Credit is discussed, forcing recipients to take advance payments is often proposed. My concern is that these taxpayers assume they qualify for EIC and taking the advance payments then not qualifying and having to pay the money back. 

Advance Earned Income Credit payments can be a help to lower income families struggling to make ends meet. But, they should be requested only if there is no doubt that the taxpayer will qualify for EIC and understands how the program works. I have to be honest, in 20+ years of tax preparation, I have never had a client bring in a W-2 with advance EIC payments.

Your W-4

When I was still working seasonally doing taxes and had another job full time, every year my employer gave us a W-4 to complete for our file. For most of us, it was a inconvenience. But looking back it was a good idea. Besides making sure they had a current address, it made us think about our taxes and if we needed to make changes to our withholding. It forced many to do what they had put off all year, adjust their withholding. I don't know how many times I have suggested changing withholding to a client and the next year they still have the same problem because they never got around to taking a new W-4 to Human Resources.

But it doesn't do any good to fill out a new W-4 if you are just going to put same status and exemptions as the preceding year without at least considering making changes. Why should you make changes to your W-4?

• The Making Work Pay Credit is still in effect for 2010. This credit raises a lot of situations where a taxpayer may want to change their withholding. Please see my post on this.
• If you didn't like the results of last year's return and didn't make changes before, now is the time to plan for 2010. A little extra out of each paycheck is easier for your budget to absorb than a big balance due. And it works the other way too. A bigger than planned tax refund is a good reason to give yourself a little raise.
• Think about the changes coming in your life. Marriage, divorce, new baby or children growing up can all impact your taxes and should force a re-evaluation of your withholding.
• Other income will effect your taxes. Some can't be planned for in advance, like gambling winnings, but may trigger the need for a new W-4 during the year. A second job or a spouse taking a job or unemployment can cause a larger change to your taxes than withholding on the new income can cover.

The W-4 is the best tool the average taxpayer has to protect against a nasty tax surprise. It can't reduce their actual tax but it can allow the working person a method of easily fullfilling their tax obligations. But it's up to you to maintain the tool and keep it working for you.

A Business Melodrama?

I work with a local theatre sometimes that does melodramas. Modern pun filled, silly plays where the actors are encouraged to overact and everyone has fun. Originally, melodramas were cautionary tales to warn people to the evil in the world. I have been thinking about writing one and came up with a title based on the phone calls I have received this week:

Know Your Vendors; Or just because someone says they are one of your vendors doesn't make it so.

It is a modern tale of a small business owner who deluged by calls from "her" copier company with a deal on toners, or a sales rep wanting to see if she wants to re-order the pens she likes so much, or a yellow pages call wanting to verify her listing and upgrade the listing. She's confused because she doesn't remember these companies But she's too polite to question these slick sales people and ends up ordering things she doesn't want or need. Now she can't pay the mortgage/employees and her business is a mess. To her rescue comes a blogger with a simple message: know who you want to do business with and don't let the others pressure you to buy from them. Learn to be rude.

Telemarketers have become very cunning. Some have a little info about you or your business and try to use it to worm their way into your trust. I had a call today from a rep from Ikon. I had a copier/printer through them but not now. I am sure the Ikon info came from the property tax list. He wanted to sell me toners. Nope. Others just BS their way in with lines like; "I have the pens you like so much." or "I want to update your listing" or "So-n-so highly recomemeded you for membership". Even if you don't buy from them, you have wasted time and energy dealing with them.

My suggestions:

• Know who you are doing business with. Who is your yellowpages ad(s) or online service with. Who you use for promotional or office items. Telemarketers count on us not wanting to seem foolish and that we will go along with their assertations. If they are lying, call them on it. It can be fun to hear them digging through papers looking for the script covering the fact they lied to you. Then hang up.
• If they sound familiar but you're not sure, ask them for claification. If it still doesn't ring a bell, tell them you think they have made a mistake and you are hanging up. And do hang up.
• For any call, take control of the call. Stop them, tell them you are busy and their have X (15/30/60) seconds to come to the point of the call. If they can't or won't come to the point, hang up.
• Or, put the receiver down and go about your business until they figure out you aren't there.
• If something seems interesting, ask for a website or that info be e-mailed to you (use a hotmail or yahoo account).
• Don't be afraid to be a little rude. You don't have to listen to the call. You don't have to justify your decision. Don't let them control the situation.

The key is to take control of the call. If you buy something, make it because you want that item not because you couldn't admit you don't remember them.

First Time Homebuyer - Part 3

Last month I did a quick post about the extension of the First Time Homebuyer's Credit and promised more info. Sorry, it took so long.

The $8000 credit has been extended to April 30, 2010 for the first time buyer but this time all it takes to meet the cut off is a binding contract in place by the April 30th date. The buyers then have 2 months, until June 30th to close. Military and certain federal employees who are serving out of the country have an extra year to buy a home and still qualify. Also to aid purchasers, Congress increased the upper income cap. For married filing joint taxpayers, they can have modified AGI (adjusted gross income) of $225,000 before the credit begins to be reduced. Above $245,000, the homebuyer's credit is not allowed. Everyone else is limited to income of $125,000 before the credit is reduced and it's gone by $145,000. While the phaseout limits were increased, there is now a cap on purchases. The maximum purchase price for the credit is $800,000. Buy a more expensive home and no credit.

Added to the bill (Worker, Homeownership and Business Assistance Act of 2009), is the ablity to qualify for a reduced credit if you already own a home. Taxpayers who have lived in their home for 5 consecutive years in the last 8 and meet the income and purchase guidelines can take advantage of a $6500 credit. The new home must still be used as their primary residence but the old home does not need to be sold. The taxpayer can convert it to a rental or investment.

The credit can be taken on either 2009 or 2010 returns but there is a new Form 5405 being created that is to be used. As mentioned in the earlier post, this form can't be electronically filed because a HUD statement must be included in the return to document the sale. This has been an issue with amended 2008 returns taking advantage of the credit this summer. Many taxpayers have been asked to send a wide range of documents to verify they qualify for the credit. This program has been a victim to widespread fraud and it is hoped that this will help cut the fraud.

A reminder

If you sell or stop using as a personal residence a home that you have taken the 1st Time Homebuyer's Credit, you might be subject to some recapture (repayment) of the credit. Since the recapture depends on which credit you took and details of the sales, please check with your tax professional for how your specifics affect the repayment.

Paying the Piper

The last 10 day have been crazy with continuing ed, 2009 software, directing a show and catching up on office stuff put off while I finished the web site update. And there is still a lot to do before electronic filing reopens on January 15, 2010. Congress has been busy and are in the process of extending the tax extenders. There are new rules for the First Time Homebuyer’s Credit and we finally heard what the 2010 standard mileage rates will be. That’s part of the job, there will always be tax changes. Some will be well thought out but too many will be confusing and open to interpretation. These changes got me thinking about all the changes I have seen in over 20 years preparing income taxes. Especially the changes to the business of preparing taxes.

In January of 1988, I started working for a HRB franchisee. He was very progressive for the time in that we used a computer program to prepare the return. We interviewed a client and filled input sheets with their information. They were given an estimate and sent home. Next, the data entry operator put the info into the computer and print out the return and send it back to us. We checked the return to make sure it was correct. If it wasn’t, changes were made to the input sheet and it was re-sent to the data processor. Once we we happy with the return, we signed the return and sent it to be checked. If there were any problems with the return, it was sent back to us and the process continued until a correct return was achieved. It was then copied for the client, IRS and any states and the client was called to pick up the return.

Then electronic filing arrived in the early 90s and the business changed forever. Preparers had to deal with Refund Anticipations Loans and direct deposits and the special paperwork they generated. Computers were bought and software learned. Client bases grew as taxpayers started bringing in their completed returns to be electronically filed to speed up their refund. Once they became comfortable with using a tax preparer for filing, many decided to stop doing their return and let someone handle it. But computers were being bought to use at more than tax preparation offices but at home too. Consumer tax software was being marketed to the self-prepared market and some of these consumers decided to not only to do their own returns but returns for family and friends, too.

For many years, the tax business looked quiet. There were no big changes. But behind the scenes, issues were fermenting. The business was growing as more people hung out their “open for business sign.” Pawn shops and car lots began to offer to prepare your return. Relying on computer software, many had little or no true tax knowledge. Too many put their profit above preparing an accurate return. Refund Anticipation Loans were marketed to both the consumers and tax preparer. The taxpayer could get their money, first in 3-4 days and then in a day or even a few minutes. Preparers could make money with incentives from the RAL banks and extra fees from the clients using the products. But there was a major temptation to push the products on clients and in some cases sign them up without their knowledge. More programs were created to take advantage of the taxpayers’ desire to have their refund now. In the rush to prepare returns and secure clients, refund were being issued before taxpayers received their W-2s.

The backlash began simply with EIC due diligence and the IRS putting more pressure on preparers to help verify client’s claims that they were entitled to the funds. Then, consumer groups began to lobby against the RALs and the costs involved (The Department of Defense has banned offering these to current military personal or their spouse.) The Refund Banks learned a hard lesson when their “pre-season” loans lost big money. But they had whetted the appetite for early money and there were preparers willing to file returns without W-2s to get them their money. Enforcement was difficult since most of the problem preparers were gone April 16th (many long before that).

But the problems hadn’t gone unnoticed and actions began to be taken. In her 2001 suggestions to Congress, Nina Olson the Taxpayer Advocate recommended tax preparer licensing. While no licensing bill has been enacted, Congress has passed several bills which died when the session ended. Until recently, the IRS wasn’t fully behind licensing but things have changed this year with the Commission holding hearings this year. General thought is that we will see some sort of licensing soon. Concerns about taxpayer privacy and abuse by some RAL practitioners have brought changes to Code subsection 7216. This alone throwing tax professionals into an interpretation tizzy as we try to figure out exact what qualifies and how to put it into practice. §7216 is just another issue RAL banks and practitioners have to deal with. Public outcry about fees have the banks scrambling to lower rates and in the process they have cut incentives to preparers and limited the add on fees allowed.

The business of preparing tax returns is changing on an almost daily basis. Gone are the days of only having to keep up with tax law changes. Besides the increased due diligence on EIC return and the increased paper work for Use and Disclosure Consents (§7216), preparers are facing increased IRS scrutiny of their tax work and procedures and higher fines if they make a mistake. A few months ago, Congress snuck in e-file mandates for preparers who do more than 10 years to go into effect next year. Licensing of some form is coming. And, Modernized e-File begins phasing in this year. Add to this continual tax law changes and the rules the states are beginning to enact, and this is a stressful time to be in the tax preparation business. I’m sure there are people making plans to retire but for me, this is what keeps the job interesting. Now off to the store to load up on Tums. Tax Season is Coming.

MSRRA

On November 11th, the President signed into the law the Military Spouses Residency Relief Act. MSRRA gives taxpayers who follow a military spouse to a new location because of orders the option to designate their home state as their legal residence and pay state taxes there not in the state of current residence.

Legal residence generally is the state in which you live, vote and have a driver's license. For most of us, that is the state where we current reside. Not so with military taxpayers. When a taxpayer enters the military, they specify their state of legal residence and this determines what state income tax they pay. It is shown on their Leave and Earnings's statement (LES). So, Jane enlists in Kansas and sets Kansas as her legal residence. While she is in the service, Jane will not be subject to any state's tax but Kansas. If, Bob, her husband, follows her to a post in California from Kansas, he would pay state taxes based on the states' residency rules. The first year, he could be subject to both Kansas or California depending on where his income came from. After that, generally he would be subject to California taxes. Jane would be considered to be a resident of Kansas and Bob a resident of California.

With the passage of MSRRA, Bob can elect to become a legal resident of his military spouse's legal residence as shown on her LES. Bob would then maintain a Kansas driver's license, vote in Kansas elections and pay taxes on the income earned in Kansas and not in California. This goes into effect in 2009. If there was CA withholding in 2009, Bob is entitled to get that money back. The catch is that there will be no withholding for the legal residence state and this could result in a balance due.

There are still a lot of details to be sorted out. Each state will have to work out how to handle the refunds of withholding. There are also issues taxpayers with self-employment income. To keep updated on this, there is a Facebook page dealing with MSRRA.

Does This Make Me A Tax Nerd?

Generally, I can't be considered a Tax Nerd. I can't quote the Tax Code or and I don't automatically know many subsection numbers. I'm not an economist or financial wiz so there is no way I can discuss the long range effect of a tax change or create a tax shelter. There are people more knowledgeable than I and many of them write great blogs that I follow. My strength is preparing tax returns for working people and explaining their taxes to them. I can help them start a business or tax plan a retirement or marriage.

But right now I am a Tax Nerd. I, like so many of my online tax friends, am waiting. Waiting as so many children will be waiting on the 24th for a very special delivery. The children are waiting for a man in a red suit, mine is in brown. We have been discussing this delivery for weeks. Did anyone know when it was being shipped? When will it arrive? Will it be downloadable if we just can't wait? But now it's been shipped, so our noses are pressed against our office windows for a glimpse of that truck. And dealing with the disappointment when we are passed by for today.

You guessed it, Drake Software has sent out the first version of their 2009 tax software. We can't wait. For the next month, I will put the software through it's paces. I want to play with all the new features I saw at update school. The client info will be updated along with office and preparer info, pricing, printers. Sample problems will be done and new ones created to test everything I think I will need. There are new procedures to be tried and macros to check. I want to know which of my suggestions were implemented this year and what new ideas can I come up with to suggest. A new user asked on the forum a few weeks ago if Drake needed another beta tester, our reply was - we are the beta testers. What better way catch any conflicts and problems that let the real users use the software and solve the problems they find before clients hit the door.

There will be a major update in January with the states and all the modules to e-file and offer bank products but it doesn't have the same excitement as this shipment. It doesn't change a mild mannered Enrolled Agent into a Tax Nerd - even for a few days.