Our Taxing Times

Can't Blame Congress for This.

Go to prison and learn a trade - tax fraud. A new TIGTA report is the basis of a CNN Money article highlighting the fraud problem with the First Time Homebuyer's Credit. Anyone who reads this blog much knows how I feel about that credit and it's 3 incarnations. I put a lot of blame on Congress for a questionable credit made worse by changes and extenders. But I have to move some of that ire on to the IRS.

To date, there have been 1.8 million claims paid for a total of $12.6 billion dollars. That averages about $7000 per claim. The IRS/TIGTA have identified 4608 paid claims by people in state or federal prison. The problem is that 1295 of those claims are fraudulent. That's 28.10% The report found that there were serious issues with the Prisoner Database and that those numbers are based on the info they have. The fraud could be higher. In a survey TIGTA did for the report, 87% of the surveyed claims were by inmates who were locked up before 2007; 27.99% had been in jail since before 2000. Over 700 of the fraudulent claims, were paid to lifers. Easy money and what's there worse they can do? Send you to jail?

And taxpayers at large have done their share of blatant fraud. The report found 2751 claims with dates that were before the April 8, 2008 start date. 27% of the claims used dates before 2008. That fraud cost us $18.8 million dollars. Another $1.4 million went to the 206 claims using multiple addresses. These are the ones they're are sure about..so far. According to the TIGTA report they have identified 18,832 claims on 7695 addresses. The worse is 256 of those claims were on 5 addresses.

At issue here is that safeguards/check and balances were not put into place before the first credit was issued. Form 5405 asks for the date of purchase and address of the home. How hard would it have been to add a flag to the date field for out of range dates. (My tax software has it.) Check the address against already paid claims. Nothing was done until it was clear there was a major fraud problem. No documentation, no questions. I can't believe that the issues with the prisoner database weren't know before this, surely there was an easy check here too. I guess the IRS didn't count on taxpayers being dumb enough to put a bad date or use the same address as everyone else. Remember, this is outrageous almost stupid cheating. How much more was done creatively to look valid?

The question is: has the IRS learn not to make the same kind of mistakes going forward? Let's face it, Congress will continue to write badly thought out tax laws. Has the IRS put into place a team that can think about how taxpayers will try to cheat and create checks and balances to catch them. They need to start thinking like a crook now. (Hey, what about the 87 IRS employees who were caught cheating on the FTHC?) Paybacks on the original First Time Homebuyer's Credit begin next year. How is the IRS planning to quickly catch missing repayments? Is there going to be a way for a preparer to check if a new clients has to repay? Or, will we have to wait until the notice months/years later?

Preparer Registration - Surprise!

The new preparer registration rules are making for in interesting spring and summer. We're still waiting on a lot of details like cost, who will administer the test, what other info will be needed for the PTIN, stuff like that. However, all kinds of little nuggets are showing up in webinars and press releases. A BNA article brings up 2 of the nuggets courtesy of Director of the Office of Professional Responsibility, Karen Hawkins.

The first one is more of a clarification of how the new PTIN/testing rules will apply to "non-signing" employees. In some firms, the basic data entry/interview is done by one person and the return is finished and signed by a second. A webinar I saw recently gave a registration pass to someone who just enters the W-2 and info into a computer. If the preliminary contact does more. like interview or interpret taxpayer info, then they will be required to have a PTIN. According the Hawkins; “The goal is to get everyone … who has some sort of face-to-face contact with the taxpayer, who is advising on positions, extracting information where they might be making some adjustments, … those kinds of people, even if they are not the ultimate signer of the return,” to have a PTIN.

The big "gotcha" is the decision to bring all registered preparers under Circular 230. This has been part of the thinking since the report was released in January. Circular 230 is the IRS rulebook which guides those of us who "practice" before the IRS. The Enrolled Agents, CPAs, lawyers and others who have qualified for extra privileges in representing clients in IRS issues. For example, I can directly negotiate a collection issue between a client and the IRS  (with a proper power of attorney). But a non-enrolled preparer can advise a client how to handle a collection issue but they can't do it for them even with a POA. The extra rights come with extra responsibilities and regulations. A Circular 230 practitioner can be suspended or even disbarred from IRS practice for violation of the rules. But they can still prepare tax returns. That is about to change.

The rules expected to be released this summer will change the definition of "practice' before the IRS and that means who is covered by Circular 230 regulations according to Hawkins. Tax preparation will become a part of "practice" and that means anyone who prepares returns will be covered by the rules. This also means they become subject to suspension and disbarment for not following the rules. And once tax preparation is considered a part of "practice" before the IRS, practitioners who are suspended or disbarred need to find a new job. They can no longer "fallback" to preparing tax returns because preparing returns is now part of what they are suspended/disbarred from doing.

The new rules aren't finalized yet but it sounds like the IRS has thought these through and it is committed to giving themselves a strong tool to keep tax preparers in line.

Surprise!

Dear IRS,

Here's my issue. A taxpayer calls an IRS call center about a tax issue and in the course of conversation reveals some info that makes the IRS representative sit up. Too often, the taxpayer has just cut their own throat with too much information. But sometimes it is info that makes the representative want to make sure the taxpayer got a credit or deduction to which they might be entitled. The best of intentions and to be applauded. At this moment, the rep. has 2 responsible options. They can mention the credit/deduction in general and suggest visiting with a tax professional. Or, do some serious due diligence to see if the taxpayer actually qualifies for the credit/deduction. Do not, under any circumstances, tell the taxpayer that they may(could) qualify for the credit. For example, the taxpayer mentions buying new windows in 2009. It is fine to tell the taxpayer there is an energy credit and they should talk to their preparer for details. You have promised nothing, no hopes have risen. Or you can ask all the questions I would ask; when were they bought, what is the energy factor, was it their house or the rental, how much were just the windows, do they actually have tax to offset? Until you do that, don't tell them that they may qualify for a credit up to $1500.

You see, there is a problem in the US phone system. Too often "may" and "could" are switched to "can". I don't know how it happens but I see it all the time, "could/may" is magically transformed to "can". So, the taxpayer comes tearing into my office (having spent that $1500 on the way over) and tells me the IRS told them they can claim the credit. Of course, they really don't qualify but since "the IRS said I can have it" the taxpayer is mad at me. Explaining to them that they were probably told "could/may" doesn't help since they know they heard "can". After explaining in great detail why they don't qualify and having the truth rejected, I am forced to play dirty. I have to counter the taxpayer's belief that if it came from the IRS it has to be right. I have to point out that a TIGTA investigation in 2005 showed that taxpayers were given incorrect info from the IRS 35% of the time. I don't like doing that but you have left me no other option.

So, Dear IRS, if you promise to either do the same due diligence I have to do or just suggest they look into the credit or deduction, I promise not to bring out the statistics unless it is an emergency. Don't get their hopes up to make me look like the villain when I say no and I won't make the Service look bad with stats.

Deal?

Better Than a Check?

Yesterday the Treasury Department announced their plan to end mailing checks to Social Security, SSI, Railroad Retirement, OPM and VA recipients by March, 2013. Taxpayers who are receiving the benefits will have the option of having their money directly deposited into their own bank account or loaded on to the Treasury's Direct Express Debit MasterCard. The plan is expected to save over $300 million in the first 5 years. Currently, the debit MasterCard is an option to Social Security recipients.

I was a little concerned reading about the debit MasterCard. I have upon occasion offered a debit card as part of the RAL or bank program for tax returns and honestly was less than happy with the programs. While I like like the e-Collect program I'm currently using, I do not push the use of cards because of the usage fees involved. And several area employers use a debit card for employees who don't have bank accounts and, again, the fees are outrageous. However, the Express Debit MasterCard seems to be operating on the same fee structure that the debit card tied to my checking account, next to none. There are no monthly or transaction fees. The fees seem to be tied to ATM withdrawals out of their network or purchases out of the US. So that worry is gone.

Currently, there is no plan to include IRS refund to the program. Kay Bell at "Don't Mess With Taxes" suggests the IRS is holding off until a procedure to make sure refunds are not mis-directed into the wrong account is in place. I wonder if there is concern about the paperwork and cost to set up a one time deposit of refund? (Let's face it, taxpayers who would only use a debit card for their tax refunds would be high maintenance; needing new cards each year, forgetting/ losing their account info.) The costs of my "free" debit card are covered by the interest the bank receives from using my money. Even with a Social Security recipient, their money is withdrawn over the course of the month and could be invested. But, too often, a tax refund is spent within days of receipt and it would earn very little in interest. Not enough to cover the costs of starting an account. Although, the ability to add a refund to an existing card might be a good first step.

It looks like the Federal Government is moving us one step closer to being a cash less society. Next step is for the IRS to come up with a plan to safely and inexpensively put refunds on debit cards for taxpayers who can't maintain a bank account.

Getting Compliant

It's summer and, for my tax office at least, that means multiple years of returns. It's not that uncommon or hard to get behind. The taxpayer misses sending in the first year's return. They may owe and not have the money to pay, they forget, life happens. The next April rolls around and "what do I do now?" becomes the question. If there is no IRS notice or need for that return, it's easy to "forget" about this one too. After all, nothing happened when the first return wasn't filed. This continues until the taxpayer gets a notice or needs a return for a home loan, financial aid, or business loan. Then panic or denial will set in. Unless the client is sure the IRS will be breaking down the door to haul them to debtor's prison, a little panic is good. It gets the taxpayer motivated to get the job done and the notices settled. But for some taxpayers, the IRS or state notices are an excuse to stick their heads further in to the sand and wait. What is one back year becomes 7 or 8 for these people.

Whether you are only one year behind or dealing with notices and several years, the first step to getting compliant is the same. You need to gather all the W-2s and 1099s you were sent and get the returns prepared. But what if you don't have all the W-2s or 1099s? That isn't a problem just an extra step.

The IRS will provide you with a wage and income transcript for each year (the last 10 years only) which lists all the information returns they received from employers, business, banks, brokers... You can let your preparer get the transcripts for you. They will need to have you sign a form which gives them permission to get the transcripts. Or you can get them yourself. One way is to call the IRS at 800-829-1040 (and work through the prompts) to get the income transcripts mailed. Or you can complete form 4506-T and mail or fax the form to the IRS (that info is on page 2). The form can be ordered on the forms line - 800-829-3676 or downloaded from the IRS website. Fill it out completely and mark the box after line 8. If you need more than 4 years, you'll have to submit a second form since the 4506-T only allows 4 years. Once you have received the income transcripts, you can use them to prepare your returns as usual.

A few warnings. First, be careful where you mail the returns. If you are in a collection or audit process, check with the IRS agent you're working with as to where they want the returns sent. Also, these returns will take longer to process. If you are dealing with liens and levys, don't expect them to be lifted for a while. Besides the return processing time, the IRS will need time to lift the lien or levy once they are okay with the returns. If you are getting refunds, please understand that you will only get the refund for the last 3 years. Once the tax year is closed (3 years after the due date of the return), no refund is issued. And yes, there will be penalties and interest added to the balance due.

Once you have the IRS up to date, you will also need the get your state returns done if they were not done with the federal returns. A warning - the IRS transcript does not have the state withholding on it. You will have to contact your state for that info. Don't put this off too long since the IRS does give the states the return info and the state will want their return too.

Getting your returns caught up is not hard to do. And it is absolutely necessary if you are trying to work out a financial deal with the IRS. Finally, with your returns caught up, you have one less thing to worry about and hopefully you'll never be late again.

Kansas Requires Online FIling

Hopefully, my Kansas readers have already received notice of this and are taking it seriously. Beginning on July 1, 2010 all Kansas sales, compensating use and withholding tax returns will have to be filed electronically or by phone. KDOR will give you a little time to make the transition but they will stop providing paper returns after September 30, 2010.  First you will need to contact KDOR's Electronic Services for a PIN. You can call 800-525-3901 (296-6993 in Topeka) or email them at eservices@kdor.state.ks.us to get the PIN.

If you chose to file online, you just set up an account at webtax.org and the system will walk you through the process and at the end you will be able to print a confirmation of the filing. If you don't want to use the online system. You can also file your return by phone.

Don't forget the 1% sales tax increase goes into effect on July 1st too.

Double 1099s

Besides the S-corp issue I discussed in the previous post, tax blogs and forums have been discussing the new 1099 requirements from the health care act. Basically, starting in 2012, businesses will have to issue 1099MISC to any vendor or other business they pay over $600. Okay, but what does that mean? It means that I will have to get EINs from most of my vendors and then issue them a 1099 in January. I will also received a 1099MISC from my bookkeeping clients and a 1099K from my credit card processor for the amount they paid me. The idea is to create a better paper trail for the IRS to follow and, hopefully, that will help cut the tax gap. But...

First, unreported cash payments are the generally considered the issue in the tax gap and this won't stop that.  The law is targeted at businesses and not individuals. All of my cash payments are from individual clients who don't have to issue 1099MISCs. My business clients never pay me in cash. It may help a little but the tax gap will continue.

My big concern (right now) is how is the IRS going adjust all the 1099s for double income before they issue notices and audits? Or will they issue the notice and make the business owner prove the income. Example- I buy my office supplies from 2 places, Browns, a local office supply store and a Staples store about 30 miles away. Over the course of the year, I will spend over $600 with each. I pay Browns with checks and to comply with the new law, I'll have to get their EIN and issue them a 1099MISC come 2012. Staples, however, are paid with a credit card. But that doesn't change my reporting requirement and I'll issue them a 1099MISC also. The problem is that their credit card company will be issuing them a 1099K for their credit card payments. A 1099K which will include my charges reflected on the 1099MISC I send out. So my Staples purchases will show up twice on the informational statements that Staples receives. Now I am sure that Staples won't take the income twice but what about the IRS? How are they going to adjust the info they receive so that the matching program doesn't target a business because of double 1099s? I really hope that they exclude either credit card payments or what I pay to stores like Staples from the reporting requirement.

At least, this time, Congress gave us some time to sort this out and adjust for their lack of understanding in how the real world works.

Small S-Corps - Beware

A long standing issue with the IRS has been the amount of salary s-corp owners take. An S-corp is a small corporation where the profits are passed to the owners and not taxed as traditional corporations. It has long been seen as a S-corp advantage that owners could take modest wages (like any other employee, the social security and medicare held and matched.)and then just pay income taxes on the profit which passes to them. The IRS has been working for years to get owners to take a realistic salary. A salary closer to what they would pay someone else to do the same work. The effect would bring more of the S-corp's income under Social Security and Medicare. Not content to let the IRS do it's job, Congress looks to be sticking their nose into the issue and making it worse.

As a way to pay for reinstating the expired tax cuts, Congress has added an amendment to H.R. 4213 -American Jobs and Closing Tax Loopholes Act of 2010. This amendment would subject all the profit of certain S-corps to Social Security and Medicare. The issue is "certain" S-corps. The Act targets small personal service corps where the principle asset is the skill and reputation of the owners and their staff. How small? 3 or fewer workers. 

If I was a S-corp, I would be subject to this amendment. My business is small and falls in the personal service category. But if I was the owner of a retail store with the same amount of profit, I wouldn't be subject to the tax. Or if I was a larger tax business with more employees, I would be exempt. And that is a problem. This amendment targets the smallest of business and adds an additional tax burden on them. An argument could be made that, for many of these businesses, the "salary" the owner takes is too low and if the IRS was to do a SE audit, they would be forced to take a larger salary and pay more Social Security and Medicare anyway. Maybe, but why are only certain S-corps being targeted? And why only very tiny businesses? It's like someone in Congress had this idea but didn't have the nerve to apply it to everyone and picked on the smallest and least likely to fight back.

I don't envy the IRS trying to enforce this one. The key is in "principle asset is the reputation and skill of three or fewer worker." Does this mean a tax business that has a bad reputation and turns out mistake laden returns is exempt from the amendment but a "good" business pays more tax? What about franchisees? Who's reputation will be used to qualify the business the person actually running the business or chain's? When does a new business have a "good" enough reputation and skill to qualify? Too many question.

Both house have passed a version of the law and are now trying to work out the differences. I hope that someone wakes up and cuts this. However, I doubt that will happen.