Our Taxing Times

Dying a Slow Death

Until last tax season, I offered Refund Anticipation Loans (RALs) as part of the tax preparation process. I didn't like them but I understand the people who use them. I made sure I followed the rules for disclosure even when the client didn't want to hear all that legal stuff. I took offense at the "Big Brother" types who branded everyone who offered RALs as evil people taking advantage of the "working poor." Implied was the idea that these clients were unable to make their own financial decisions because they worked as CNAs and garbage collectors. When I opened my own office, I seriously considered not offering Rals but that would mean giving up the Refund Anticipation Checks (RAC) that was part of the program. I had good clients that needed that service.

The RAC (or RT/Bonus$/ or other name) was the backbone of the system. A temporary bank account was set up for the taxpayer and their refund was directly deposited into that account. When the bank received the deposit from the IRS, they pulled the fees from the account and distributed the remainder to the taxpayer. There was a set fee charged for the service which was taken out of the refund with the tax preparation fee. The taxpayer received their refund on the direct deposit timetable and didn't have to wait until they could save their money for the preparation fee. A RAL used the same process but with the taxpayer paying extra to get their money within a day or two. Until last year, you had to sign up to offer RALs to offer RACs but there are now companies that just offer the RAC type program with no RALs. In fact, the IRS is looking at a way to help these clients with fees and banking issues.

That is a good thing because in the last year the RAL business has begun a meltdown. Unfortunately, the meltdown is drawing in not just the banks but the tax professionals who offer them. If you get nothing else out of this post let it be this, while there are people who abused the RAL programs and took advantage of their clients, most are good, professional taxpayers who offered RALs because their clients wanted them. They followed the rules and helped their clients. Now many of them are trapped in the meltdown.

There have always been criticism of the RAL programs. Most were based on a taxpayer's surprise when they discovered how much they spent in fees to get their refund. Too many firms were taking advantage of the taxpayer's hurry to get their refund that they "skipped" the fees and conditions disclosures and too many clients focusing on the refund and not what was being explained to them. The resultant uproar forced the banks to change their pricing scheme from a set "fee" for a refund range to a percentage method. About the same time, the Department of Defense banned RALs from being offered to military personal and their spouses. With the change in pricing and loss of a large client segment, the RAL banks began to change how they did business to keep their profits up. They cut the fee they paid tax preparers for each RAL/RAC funded and began to limit the "paperwork" fee some firms were offering. For many tax firms, RALs stopped being worth the extra headache and work they caused and were dropped. Then the economy hit.

Last year, two days before Christmas, Santa Barbara Bank and Trust(SBBT) announced that they did not have regulator's approval for their RAL program. Although they attempted to make alternative arrangements, thousands of firms (including some offices of Jackson Hewitt and Liberty Tax Service) found themselves unable to offer RALs for the 2009 filing season. In April of 2010, Chase Bank announced that they would not be offering a RAL program for the 2010 filing season. Chase was the most conservation of the RAL banks and they had been in the RAL business since the start (Bank One was bought by Chase).Their departure from the business left many tax offices scrambling to find a new RAL lender. At that time, their choices were Republic Bank, River City Bank, Refund Advantage and SBTG (SBBT reformed). There are some smaller RAL programs which are tied to a specific software. Also, HSBC, the largest RAL bank dropped all their smaller clients and is exclusive to H&R Block.

Then in August, the IRS announced that they would not be sharing the debt indicator with the RAL banks or tax preparers beginning in 2011. This means that the banks don't know if the full refund will be issued and makes the loan precess more risky for them. The meltdown intensified. While some banks required offices new to them to have done a minimum number of RALs the previous year and to have a very low loss level on those loans, the minimum increased and spread to other banks especially with the news of the last week. Last week, H&R Block (HRB) filed suit against HSBC, their RAL bank, alleging that HSBC was trying to get out of their contract with HRB. HRB has not received any program information from HSBC which would allow it to begin planning for 2011. Then, SBTG announced that they would not be able to offer RALs in 2011. They are working to solve this problem and will offer RAC again this year. This announcement sent thousands of SBTG customers scrambling to find a new RAL bank. They found higher minimums which has forced most of the small offices out of the RAL business. Finally, River City, one of the few remaining banks, announced that they will not be accepting applications for the 2011 filing season after Friday October 29th and offices currently in the process of being approved have only to Nov 3rd to submit requested additional info. River City says they have over 2200 applications pending. This is a major change from prior years. I have gone to tax updates in December were the banks were still trying to sign up offices. I've seen application deadline but not before January. With RAL banks stopping their programs or limiting who they accept into their programs, thousands of tax firms are having to do a re-think on their 2011 season.

The general public is going to find it hard to get an advance on their Federal refund in 2011. The number of banks are severally limited and they have limited which offices will offer their RALs. And even if the taxpayer can find a tax preparer who can offer RALs, they need to know that there will be a greater chance of being rejected since the bank won't have the debt indicator. And they can expect to pay more for the service. The RAL industry is on life support with a DNR order. Had I done RALs last year, I would be contacting those clients and warning them not to count on a one day wait for their refund.

More on RALs.

 

A Surprising Education...

too bad I can't get CPE hours for it.

Several months ago I dug though my stack of journals looking for an article I had read. I was researching an issue for a client and I though the article might help. I finally found it but I also came to a conclusion I needed to prevent this from happening again. So I created a database of the articles from my professional journals. I receive 3. Two, TaxPro Monthly and TaxPro Journal are part of my membership in NATP. As part of my NAEA membership, I get The EA Journal. The actual database I kept simple with fields for title, author, journal, date, page and three content driven fields. One field for a broad category, one for keywords and a final one for notes about the articles. Originally, I only planned on entering 2008-2010 and on in the database but I added 2007 so that all the issues in the front office are search-able.

The process was a great review. Most of the articles were read when I first received the journal. But often the read was quick and I am sure some were skipped due to subject matter or time. As I skimmed the articles to develop keywords, the info was refreashed in my mind. I found myself reading as much as skimming. Too often, I would find an article that I could have used for something but since I forgot about it, I researched the issue.

This was a project I thought about doing before but I put it off. I was hoping someone else would create a database. Now that it's done, I have already started using it for research. And it's easier to add articles after I read the journal. They're fresh in my mind then. Maybe next summer, I'll add the 2006 and before articles that are stored in the back office.

Now I need to create a database to organize and catalogue all the CPE materials I receive. Maybe that one will be next year's project and review.

 

No Wonder I'm So Tired

What a year! The last 12 months have been the craziest I remember as a tax preparer. When I went out on my own, I applied for a small business loan and in the application, I put that Congress is continually changing the rules and that gives me job security. The same is true today, the tax rules continue to change but now there are major changes to the business of doing taxes.

I came up with a list of the changes to the tax preparation business in the last 2 months. Some were behind the scene but most are events which will effect the industry for a while.

• Modernize e-file had been planned to phase in for a while. Actually, a good and necessary change will result in quicker processing and refunds and e-filing some back year returns.
• Mandatory e-filing by paid preparers who do over 10 returns.
• Santa Barbara Bank and Trust dropping their RAL program because of the bank inspectors.
• Testing and registration for paid preparers threw me. I expected that the IRS would issue suggestions and then let Congress muck it up. But they found a way to do it themselves and the process has already started and will phase in over 3 years
• The IRS dropping the Debt Indicator come January 2011.
• Several mergers and buyouts of tax software.
• H&R Block suing their RAL bank, HSBC, because HSBC hasn't given them RAL program info for 2011 and they are concerned that HSBC won't fund their RAL program.
• Who knows what else will happen in the next two months.

Then, there were the "special" tax issues.

• The confusion of the different versions of the First Time Homebuyer's Credit and the soon to begin repayment of version 1. Don't forget version 3 had/has to be mailed in because of the documentation now required because of the massive fraud in the program.
• The Making Work Pay Credit and the mess it caused/causes many retirees.
• Federal Health Care Reform and all the mis-information that has been generated about the Act.
• More depreciation/section 179 changes.
• No decision on the "tax extenders."
• No action on the estate tax.
• No action on AMT.
• The last three could cause the start of the tax season to be delayed to allow the IRS and State computers to be re-programed with last minute changes.

The challenge with both the changes to the industry and to the tax code is how do I plan? How will my competition change in the next couple of years? Who will be my competition? What new documentation and procedures will I need to develop to deal with the industry changes. How can I easily explain the changes, tax and industry, to clients. How much more confusion will be caused by what taxpayers hear on the news and from friends? All of this is on top of preparing returns and dealing with notices. I think lots of chocolate is in order.

 

Car Donations

I've never had an extension season like this and I am still digging out. I took several phone questions last week that will make informative posts and I will be writing those as soon as I come across the notes I left myself.

I received a couple of calls last week about contributing a vehicle (car, boat, airplane) to a charity. Both times it was suggested by the mechanic working on the car and does not do taxes. Some of the info they received was incorrect

Many charities accept a donation of used cars and other vehicles. Sometimes they fix them up for re-sell or they may sell them for scrap or parts. So if you have a car you want to get rid of, first check with the charity to see what their rules are. If you do decide to contribute the vehicle, get a receipt from the charity which includes, of course, their EIN, name and address and date. But it should also include how the charity is planning on using the car. This needs to be attached to the return.

Now, how much can you deduct on your Schedule A. That's going to depend on how much the car is worth and what the charity is doing to do with the vehicle. First, you need to establish the Fair Market Value (FMV) of the donation. This is the amount you could reasonably expect to receive if you sell the vehicle yourself. This is not necessarily the Blue Book price. That is the price you can expect to pay for that vehicle in good condition. The FMV factors in the condition of the car/plane. If your car isn't working and it's ready for the junk yard, your FMV is the going price for scrap not the Blue Book price.

Once you have the FMV, what you can deduct will depend on what the charity does with the vehicle. If they sell if for less than your FMV without using it for long or making improvements in the time they have it, then your deduction is what they actually sell it for not FMV. The exception to this rule is if the charity's purpose is to provide vehicles to the poor, then you can use the FMV. The other side of the coin is, without making significant changes to the car, the charity sells it for more than FMV you get to use-the FMV. Basically, you use the FMV with one exception. But that is why you need to find out what the organization plans to do with the vehicle.

One more exception. If the FMV is at least $250, and the charity sells the vehicle for less than FMV, your deduction is the lesser of $500 or the FMV. So the $1000 FMV car you donate to Goodwill and they sell for $375 is a $500 deduction. Again, the charity can't have used or made significant changes to the vehicle.

So, don't take tax advice from your mechanic. If you want to donate a vehicle, find a charity that handles them, find out what they do with them and figure the Fair Market Value. That will give you the info you and your preparer need to know if this will help your taxes or just be a good deed.

More Time Please.

I want a little more time please. Not to get returns finished and e-filed but to deal with any last minute rejected returns.

Here's the background. When I e-file a return, the return passes through my software company to the IRS. At specific times, the IRS "drains" all the returns that have accumulated and beings to processing. For me, that means if I can get a return sent by 10:30am it will meet the 11am drain time for my processing center. Usually by 4pm I can pick up acknowledgements for the returns filed at the 11am drain. Up to the end of main season, there will be 3 drains a day, seven days a week including holidays. After that, there is only one drain, Monday through Friday no holidays.(The IRS doesn't mention no weekend drains this year but since I've never gotten an acknowledgement for a Friday afternoon filing before Monday afternoon I think they forgot something.)

The acknowledgements tell me that the return has been accepted by the IRS. But sometimes a return is rejected and I also get the reason why it was rejected. Generally it is a mis-match of name and Social Security number (SSN) or EIN. Or a SSN being used a second time. Once the issue is fixed, the return can be resubmitted. Time is not a factor until April or October 15th.

A timely filed, rejected return needs to be corrected and resubmitted within just a few days to keep being "timely." This year, I had up to April 22 to get the return re-filed (electronic or paper). Even if I can't make that date, I can still e-file the now "late" return. But with extensions, I don't get the same amount of time. The problem is the weekend. I have 3 returns that will not make today's drain. So I will not know if they need to be resubmitted until Monday afternoon. But I will only have until 11am on Wednesday to get those e-filed again. After that, the return will be late and have to paper filed. In that short time, I have to find the client (generally get them to return my call takes a day), get the correct info, change the return, get papers signed in some cases and file the return. Even under the quickest fix (newly married woman's name on her SS card), the process can take a couple of days.

So please, can we get a few extra days to get rejected returns resubmitted after October 15th, especially when there is a weekend involved like this year.

Expand the Signature Section

I wasn't planning to write anything more on tax preparer licensing for a while. I was going to ignore the recent emails I received from AICPA. But on my way in to the office today to work on extensions and books this idea popped into my head. (If someone has already written this, please let me know and I will acknowledge your idea. My extra blog reading has been limited due to extensions and 941s.)

AICPA is still focusing on the required licensing of everyone who makes a tax decision on the return, even if they do't sign the return. I covered this back in August. Now, AICPA is focusing on student interns/employees and how this will be a big issue for the students. I don't see it. Since these are the future accountants and CPAs, I think they would welcome being licensing as an advantage in the job market. I can't see why they should be excluded because who hired them. But I'm not trying to hold onto the status quo.

Many CPA firms use students and clerical staff for a lot of their tax work. My first tax class included a woman who had worked for a CPA for several seasons doing taxes but this was the first solid tax training she had received. Most of her prior training was done by another staffer, not the CPA. The CPA comes in to "review" and sign the return. The signature is their most important job. A client will look at the signature and assume the CPA did the return and earned the fee charged. How many clients will sit still for a CPA fee if they knew a student did most of the return?

So, is the licensing of staff and students a true concern or a smoke screen? Are CPA firms (or any firm who has many employees work on a return that is signed by the reviewer) willing to add some transparency to who did the return? My idea is to add a special page to follow the signature page which lists everyone who did anything on the return, their job title, what they did, how much time they spend on the return and what percentage is that of the total preparation time. I won't guarantee that I'll change my mind about giving staff and students a pass on licensing but I'll be less inclined to think it as a technique to keep the illusion and fees continuing.

 

New Phishing

In my in-box this morning were 3 emails telling me that my recent payment through EFTPS (Electronic Funds Transfer Payment System) has been rejected. They were bogus. But they were better than most phishing e-mails. They sounded "official" and it took me a moment to realize that if there were problems with my company id as suggested, then I wouldn't have been allowed to make the payment in the first place. I had to double check the respond URL they gave because it is so close to to actual EFTPS URL. The timing is right. Businesses are making 3rd quarter tax deposits now. And their warning:

Your tax payment is due regardless of EFTPS on-line availability. In case of an emergency, you can always make your tax payment by calling the EFTPS.

Very much sounds like something the IRS would write.

I use EFTPS regularly for clients, and these emails made me think. I can see them being a concern to taxpayers who only use the system a few times a year. So:

These emails are a scam. If there is a problem with your company id, you wouldn't have made it into the system to make a payment. If you are concerned about the possibility of this being true, don't use the link but log in to EFTPS directly and check your payment history.

Extensions and a Repeat Post

I haven't posted much lately. There's not much to talk about with Congress taking a break from tax work and there's only so much I can say about licensing and RALs. I have a couple of big ideas I want to write about but they'll take some time to get right. Right now my attention is on getting all the 941s and returns done by the 15th. Add to that a show in rehearsal and regular books and payrolls to do, my life is wonderfully crazy.

So, here's a repeat from last year but still very timely. October 15th Is Not April 15th.

Leave Congress Alone

I just received an e-mail from Santa Barbara Bank and Trust about the debt indicator. (It seems I am still on their mailing list even though I didn't do RALs last year.) The e-mail was in reference to the IRS's decision to not release the debt indicator in 2010. SBBT wanted me to know that this decision would reduce the number of RALs approved and increase the fees and therefore hurt taxpayers. And that is true. Fees will increase, approvals will go down, and some taxpayers will be placed in an awkward situation when they have to wait for their refund. That is not new news. I've blogged about it when the IRS made the decision. The real reason for the e-mail was to send me to H&R Block's protest page. This leads to a form (set to remember your info so you can send more than one) which adds your name and address to a pre-written letter asking to keep the DI. HRB will then sent copies to all your legislators.

Do Not Bother Congress With This!

Yes, there will be some taxpayers inconvenienced come January. But the real reason for the letters is to help SBBT, HRB, JH, Republic, River City Bank and all of the other firms which rely on the RAL  maintain their profits. And that could be an issue for Congress but not this year.

Before the end of the year, Congress must deal with the much more important tax issues. Issues that effect more taxpayers and practitioners than the loss of the DI. They need to work on Bush tax cuts and what they plan to extend and what cut or change. Then, there is the Estate Tax Issue. And let's not forget everyone's favorite annual visitor- the AMT. But Congress is easily distracted and the debate about RALs and the DI could delay the tax legislation which really needs to be completed ASAP. Issues that need to be finalized so that the IRS can update their computers and forms and tax software companies can re-write their software. None of us want the season to be delayed because of last minute law changes. Many of us remember the last time that happened and we had a long list of forms that couldn't be filed until weeks into the season. That will inconvenience more taxpayers and practitioners than not having the DI will.

So please leave Congress alone until they get their tax work done for the year and then you can try to get the DI back.