Our Taxing Times

Tax Simplification My.....Eye!

Does the US Tax Code need simplification? Yes! Will it happen? Probably not as long as lobbyists exert so much influence on Capital Hill. The latest attempt is from Senators Wyden and Gregg called the Bipartisan Tax Fairness and Simplification Act of 2010.

The bill hasn't made it to Thomas yet and the text available for download on Sen. Wyden's web site is almost 200 pages so I haven't printed to out yet to read but I have read the "short" form and skimmed the whole bill. And I am under whelmed. I am sure I will have more to say in the future. Right now I want to focus on the sample new 1040 (which can also be downloaded on the Senator's site). On the summary, much is made of the new 1040 which is only one page long. They call it straightforward. I call it a misleading showpiece.

Lets look at income. On the "shorten" form, income is reduced to 2 lines and a total. Capital gains and dividends on one line and everything else on the other. The current 1040 has 21 lines. Now buried deep in the bill may be sections with exclude currently taxable income but a quick skim didn't reveal any. So "simplification" is lumping income. The problem I see in the office is not where to put the income but if they have to report the income. If you are reducing the kinds of income subject to tax, you may be simplifying. Eliminating individual lines that might act as a reminder what needs to be reported is adding to the confusion.

The major source of confusion in our income taxes system comes not from the forms but from the theory. That you can't simplify without hurting some taxpayers. It would be easy to say if you are married - you file jointly or separately. But is that fair to taxpayers who are victims of their circumstances. Under this rule a woman (or man) who has been abandoned by their spouse could never qualify for EIC until they can scape together the money and and meet time requirements to divorce an absentee spouse. You can't get EIC if you file MFS and you've taken away the possibility they could qualify for head of household by "simplifying" the filing status. Dependent qualifications can be the most confusing part of tax preparation and the last time Congress "simplified" them - they made them worse. And don't get me started on the three sets of rules for the First Time Homebuyer's Credit. And even if you do simplify the theory, the confusion remains because the information is still in the taxpayer's brains. I still get asked about "income averaging" even though that hasn't been available since 1987 for anyone but farmers.

If you want to simplify the tax code, simplify the confusing theory and not the forms. All you are doing is using smoke and mirrors to cover the increase in confusion you will be causing.

Last Chance - Final Week

You have one week left to take advantage of the First Time Homebuyer's Credit. Then it is gone - hopefully, forever gone. That roar you hear is the cheering of tax preparers everywhere - but more on that later.

As it looks now, the First Time Home Buyer's Credit will not be extended. That gives qualified taxpayers one week to enter into a binding contract to purchase their new home. If they meet that deadline, they have until June 30th to close and qualify for the credit. The credit is 10% of the purchase price up to $8000 for the "first time" homebuyer and $6500 for the "long term resident." Most of the details of the current program are in a post from December. The credit can be taken on your 2010 return or by amending your 2009 return. The time limit is on the actual home purchase.

The First Time Homebuyer's Credit is a good example of the two biggest problems with our tax system; fraud and Congress.

There have always been people who have cheated on their taxes but now there seems to be a  cottage industry in tax fraud. The frauds which gain the most attention, and are the most lucrative, are based in the credits. Inflating Sch A deductions could get a taxpayer more of their own money back, but the refundable credits let you tap into other people's money for a big take. These are good programs and they help a lot of taxpayers and their families through the year but too many dishonest people have figured out how to cheat the system. The pump is primed and once they know how to scam one credit, it's easy to figure out how to scam the new credit. That's what happened with the Homebuyer's credit part 1 and especially part 2. Pick a price and date, fill out a form and just wait for the money. Too Easy!

The IRS and honest tax professionals are working to cut down the credit fraud but Congress needs to start doing their part. The IRS develops programs to screen for potential fraud and preparers do due diligence to help screen out taxpayers who don't qualify. If Congress insists on using the tax system to social engineer, they need to approach new credits and deductions from a cheater's point of view. Then ask what needs to be built into the law to deflect some of the fraud. Not just documentation but age of taxpayer or how related parties are defined. That kind of stuff. But most of all, give the IRS time to set up their computers and screening processes. This pass the law today and give out the money tomorrow may look good to some taxpayers but most of us would prefer accuracy over speed.

Even if there is little chance of fraud, Congress needs to think a law through. Not just benefits and administration but who is it going to hurt. Collateral damage should not be a tax term. If you doubt me, ask all the people who got hurt by the Making Work Pay Credit.

It's So Quiet

Tax Season is over. Yes, I will do plenty of returns in the next 6 months (officially, 16 extensions and there are always taxpayers who didn't extend.) There will be bookkeeping and payrolls to do. And I still have some catch up work to do; lots of filing and database entry. But the worse is over. I've cut back hours and started to plan my summer trips and activities. It was a good season but I'm glad it's over.

It's nice to be back to relative quiet. Only a few phone calls and no one through the door but the mail carrier. I'm sure in a few weeks, I'll consider it too quiet, but now, it's heaven.

Tax Day 2010

No time for my own post but I like the sentiments shared here.

A Little Rant

I really do have returns to finish, extensions to file and clients to call. However, I am hoping that a quick post will relieve some of the frustrations and let me focus on clearing my desk.

Dealing with last minute people is part of the tax preparer job. Some businesses love them, I'm not a fan. I have great clients who show up the last couple of days but this year the numbers have been unreal. Most have been very flexible and understand I might have to do an extension because of the time issue. My problem is the people calling trying to get in anywhere.

I don't do appointments the last 2 days. I don't want to encourage taxpayers to hold off that long. I save those days for return pickups, finishing returns I have, a rare walk-in and lost vouchers and estimates. The last 2 days have also been marked by phone calls wanting appointments for today and tomorrow. Several have been willing to come in sooner when they heard about the no-appointment rule. Others have asked about extensions. That leaves a half dozen who actually get mad about the rule. They only have a very specific time they want to come in and they want a guarantee they will get in then. Not happening here. The response varies. Some people get pushy, others whine, a few cuss. A couple might show up to try their luck as a walk in but most won't.

For people still trying to get someone to do their return by April 15th, think. In my case, you are dealing with someone who has been working 80+ hour weeks for 3 months. I've only had a dozen meals in that time that didn't come out of a drive thru bag. (Most suppers at 9pm) All this doing fuzzy things to my brain. As I type, I have 10 returns to finish, 8 more extensions to file, a dozen pickup calls to make and all the little parts of running a business. I'm like a school kid in the last few days before summer break. Not someone, I want messing with my taxes.

So, maybe it would be better if you call and talk to me about an extension and an appointment for next week.

End of Season Reminders

Repeat after me...

Filing an extension does not get you out of paying what you think you will owe.

If your tax returns are done, and you can't pay the balance due, file the returns on time. It will save you the failure to file penalty (IRS, states vary) This is a killer penalty, 5% a month up to a maximum of 25% figured on the balance due. All it takes is 5 months to significantly increase your tax. So, get the return in if you can.

If you can't pay the balance due you have some options. If you think you could pay the balance due off within 120 days call the IRS and make arrangements with them. If it will take you longer to pay off the debt and you owe less than $25,000 you could qualify for an automatic installment agreement. This is requested with form 9465 and it can be done online. There is a fee of $105 but the IRS will reduce that fee to $52 if you agree to have the month payments directly debited from your bank account. There is also a possibly of a lower fee for low income taxpayers. All the details on installment agreements can be found on the IRS website. While interest will accrue while you pay the debt, the failure to pay penalty is put on hold. You can also use a credit card to pay your balance due though Official Payments. They may charge fees so read all the details.

If you really can't finish your tax return by April 15th, you can file an extension using form 4868. This will give you until October 15th. However, you want to send in how much you think you will owe once the return is done with the extension. If you are sure you will be getting a refund, then you really don't need to do an extension.

As for states and extensions, you'll have to check your state's rules. Kansas uses the Federal extension. Oklahoma, however, has it's own form. Both want their money now, not when the return is filed.

Bottom line: the April 15th deadline is for finished returns and money, whether the return is finished or not. Extensions only delay the return not the money.

Thank You

It is so nice to be recognized. It perks up the day and makes me feel happy. It's especially good when it is for something I'm not great at like blogging.

The folks over at Career Overview have included me in their "20 Best Blogs for Tax Advice." It feels good just being recognized but to be included with these great blogs (many I read on a daily basis) makes the thumbs up more exciting.

Thank you.

Now back to returns.

I Love April Fools Day

April 1st has become one of my most favorite days of the year. I'm not a practical joke person so it's not because of gags and tricks. I love April Fools Day because it's two weeks before April 15th and the end of the main tax season.

It's a psychological thing for me and for clients. For me, the end is in sight. I still do lots of returns after the deadline but they're spread out over 6 months. It means I have time for other activities like visiting family, shopping and even a nice meal out or cooking a proper meal. I can really read the stack of journals and updates I've just skimmed. There are so many options open to me.

For clients, it's a wake up call that they really can't procrastinate much longer. April 1st amps up the motivation to get the return done (or picked up). If you have left your tax return to this late, may I make some suggestions?

• Don't rely on cute, smart Alec lines to get me to laugh off your procrastination. You're late, okay. Playing cute doesn't change that. Frankly, I've heard that line before and it wasn't funny then.
• Forget all the media generated cliches about working all night for days to get returns out. There may be preparers who still do that, but no one I know. I sure don't. If you didn't care enough to get it to me early enough why should I kill myself to get it out.
• While we're talking about differences in preparers, check with your preparer about what their last minute policy is. I know preparers who are done now. Others who automatically extend returns what come in this late. I don't take appointments for return prep on the 14th and 15th. Those days are for pick ups and finishing promised returns. I'll take walk-in returns with no guarantee that they will be done by the deadline.
• Check your post office postmarking plans. If you are mailing a return or payment, it needs to be postmarked before midnight. When is the last pick up on the 15th? Are they going to clear the box at midnight? This is one time you can procrastinate too long. Even if you are making electronic payments, you can wait too late and find that they won't be posted until the 16th.

So let this day of practical jokes give you a wake-up to get your tax return to your preparer soon. As I post every year:

Your lack of planning is not my emergency.