Our Taxing Times

On the Licensing Front

We got through the first tax season under the new PTIN (preparer tax identification number) so a quick update.
The IRS has announced that they have issued or renewed 700,000 PTIN. This actually surprises me a little because when the process first started the IRS sent out over 1 million notices to paid preparers explaining that they have to renew their PTIN. Adding the preparers who never had a PTIN and taking off the ones who have left the business makes me wonder; are they still hundreds of thousands who still need to register? If there are, they need to do it before testing starts later in the year. That gives them a grace period to take the test. Once the testing begins, potential preparers will have to pass the test before they can register.
The IRS has also begun the task of sorting through through the PTINs and weeding out the bad apples. They recently announced that they had sent notices to 19 preparers who lied about a criminal tax conviction or have been permanently banned from preparing taxes. They have 20 days to explain why their PTIN should not be revoked. 19 isn’t a lot but the action demonstrates that the IRS is serious about cleaning out some of these people.
The IRS has also announced that they have issued two contracts as part of the preparer licensing process. The first is that the firm Prometic will be responsible for administering the licensing test. They are the firm currently administering the SEE (enrolled agent) test. The test is projected to begin later in the year. And Daon Trusted Identity Services will be handling the fingerprinting of applicants. This is part of the background checks into criminal and fraud charges. Fingerprinting has always been a part of becoming an ERO or Electronic Return Originator (being able to e-file) now it’s being expanded to include employees who work for an ERO.
Of course, the tax preparer support community is gearing to offer test review materials. I have already seen offers of workshops, online course and self study.
Finally, not directly related to preparer licensing, the IRS has finally set the cost for EA renewal and that will beginning again. EAs must have a PTINs and without the cost adjustment would have been paying for the compliance checks twice. The IRS put renewals on hold until they could make a price adjustment. Now that the new price ($30) has been set, the renewals will begin in a month or so. The IRS is planning on sending out notices soon.

Decompression

It's a week after the end of the 2011 tax season and I'm still decompressing.

During tax season, so much of my life, professional and personal,  has to go to the back of the line. I get done what has to be done but the rest waits. Then after season I catch it all up. My trick is to do most in the days right after the end of the season when I'm still in tax mode. So, the last week has been spent finishing a few returns, bringing client books up to date, logging receipts, working on my business books and some theatre projects. I still have a few things that need to be done namely my personal books. But those should be done before this weekend. I'm taking a few extra days to visit with family and do a mini planning retreat.

If I had gone right from tax season to a vacations, I would have been too wired to enjoy. Now, I'm looking forward to the time away. And since I've caught up the biggest part of my list, no guilty thoughts should invade my time away. Once back, I can start on the big projects, CPE and blog posts. And maybe the filing, but then that can always wait.

Injured vs. Innocent

The IRS has two programs to help spouses who are victims of debts they didn't create; Injured Spouse and Innocent Spouse. The Injured Spouse can help a spouse get their part of their refund back while the Innocent Spouse program helps a spouse who could be saddled with a tax debt of which they had not knowledge.

Injured Spouse Relief is the more commonly used of the two programs and is for times when a refund from a joint return could be taken for debts that  belong to only one of the spouses. Bob and Jan are filing a joint return and have a $2300 refund coming. The problem is that Jan owes on a back child support and the refund will be taken to put on that bill. Bob has 2 options. He can let the refund go on the debt or he can fill out a Form 8379 to get his part of the refund back. Form 8379 has the taxpayers allocate income and deductions to each spouse. The IRS then calculates the refund the injured spouse is due. To qualify, the Injured Spouse must not have a debt that the IRS will collect from a refund (currently back Federal taxes, child support and a default on a federally backed program like student, VA, or FHA loans). They also have to have some kind of income on the return and either withholding or refundable credits they are eligible to receive. One exception, if the couple resides in a community property state, the injured spouse doesn’t have to have income or withholding. Form 8379 can be filed with the tax return or submitted when the letter arrives announcing the setoff (a nice way to say we’re taking your money). Some states also have a form of injured spouse. Kansas, for example, will send out an allocation letter when they receive a return eligible for setoff. I wish they would allow the allocation to go in with the return, hint, hint. Another advantage of filing as injured spouse is the couple gets the benefit of filing a joint return. The other option for an injured spouse is to file as Married Filing Separate and that could mean the loss of credits and deductions that can be taken on a joint return. Filing form 8379 is a much better option.

Innocent Spouse Relief is in the news right now because Democratic Senators and Congressmen have asked IRS Commissioner Shulman to look at the 2 year rule for applying for Innocent Spouse Relief. This program can provide some protection for a spouse when a joint return was filed and they can show that had and could not have had knowledge of the tax problem. Basically, they had no control over taxes that year. After Bob and Jan file for divorce, Jan finds out that Bob cheated on their taxes. He had actually lost his job and spent the time she thought he was at work in a casino winning jackpots. He had their return prepared without his gambling winning. She actually didn’t see the return just the Form 8879 to sign. Once the IRS caught the missing W2Gs, Bob hide those notices from her too. The first she knew of the debt was after he left and she received an un-intercepted notice. Jan can file a form 8857 with a statement explaining why she should be considered for innocent spouse status. Timing is important on this. The taxpayer right now only has 2 years from the first collection notice to request innocent spouse status. Further complicating the timing is that the taxpayer and spouse must not have lived together for the year before the innocent spouse files Form 8857. And the couple must be divorced, legally separated or the non-innocent spouse has died. The biggest hurdle is the innocent spouse must prove that they had no clue that their spouse was filing a bad return or was intimidated into filing the return. If Jan knew that Bob was off work and they were living on his winnings, she is just as liable for the tax as he is.

As with any tax issue there is more to both the injured and innocent spouse programs If you think you might qualify, check with a tax professional.

RAL for KS Homestead?

Congress is not the only legislative branch that can write a law that will take a good idea and turn it into a confusing mess.  Kansas has a program, Homestead Refund, which provides eligible taxpayers a rebate on their property tax they paid directly because they own or indirectly through rent. To qualify, you have to be, for the whole year, over 55, have a dependent child or be permanently disabled. You also have to meet income guidelines. This changes each year but for 2010 returns the max was $30,800 (only half of your SS counts). It’s a great program and I have a lot of seniors and single parents who qualify. However, I will be discouraging them from taking advantage of one of the payment options. The Refund Advancement Program rivals the Making Work Pay Credit for dumbness. The only good thing is that fewer people are affected by this mess.

When my Grandmother was alive, she would go to the county treasurer’s office when she received her property tax bill in Nov/Dec. They would estimate how much Homestead she would receive and apply part of that to her first tax payment. When I filed her actual Homestead return, the state would subtract what she was advanced and mail her a check for the difference. No problem then. Now taxpayers have an option on their Homestead Return to have their refund applied to their next bill. At least, that’s what I thought was happening. Actually, it turns out that’s what a lot of people thought was happening

 Here’s what I thought the procedure was. In early 2010, the taxpayer files their Homestead return and qualifies for $500 in a Homestead refund. They can opt to get the refund now as a check or direct deposit into their own account. They can spend it as they choose. In fact, when they get their tax bill in December, the taxpayer can used the refund they saved in their own account to pay their taxes. But Kansas has another option. The taxpayer can mark a box to participate in The Refund Advancement Program. It sounds like the taxpayer’s refund is being sent to the county as a prepayment of their taxes. Then in December the county uses the refund as a partial payment of their property taxes. Sounds great. It’s logical and efficient. Pre-pay so you won’t spend it. Withholding for your property taxes. But that’s not what is happening. Think a RAL (refund anticipation loan) with no interest based on last year’s refund.

They’re using a variation of the program my Grandmother used. The county reduces your tax bill by the Homestead Refund you qualified for earlier in the year. Then you re-pay the advance with your next year’s (2011 in this example) Homestead Refund. If the 2011 Homestead is less than the prior year, the taxpayer pays back the difference. If it’s higher, they get the extra refunded to them. Next Nov/Dec their property tax should be reduced by what their Homestead refund was back in the spring. That’s the big difference that most people don’t understand. Unlike today’s program, Grandma’s program only credited her with a percentage of the projected Homestead. The taxpayer was less likely to get caught up in the repayment/refund trap the new program has.

Sorry KDOR, this is one program I will try to discourage my clients from taking. Now if you could convince the Legislature to carry forward a Homestead refund to the same year’s tax that would be a program I could get behind.

So You Want to Procrastinate

I’m writing this post during a lull in the craziness that is the last day of tax season. I expect that I will be interrupted several times. I am at a point that I can’t do anything else until clients return my calls or come in and pick up their return. Tomorrow I’ll have a lot of catch up work to do but today I want to focus on the end of tax season.

One of the reasons I have even this little bit of calm is that I put in a rule several years ago that April 13^th is the last day for tax prep appointments. If you want to come in and take your chances, I’ll see what I can do. No promises. What has surprised me is the number of people who get mad at that policy. I’m not saying that they can’t bring in their return, just that I won’t give them an appointment. I also won’t promise it will be done in order to file on time.

Yes, there are taxpayers with more than W-2 returns who show up the last few days. I should treat them the same as I treat the same return that comes in during February but I can’t. There isn’t time. The early return gives me time to see what may have been missed and gives the taxpayer the time to find that info. The late return doesn’t have the time unless we do an extension. I don’t have a problem with extending the return but clients can. They want to get it taken care of now! They’re sure they can find what I need. They don’t take into consideration the time I will need to add that material, review the return, print, and get them in to sign and e-file the return. They don’t understand that even if I have everything on April 15^th (or 18^th this year) I might not get the return done. I have other things that need to be done besides their return. They are not the only client who wants my help.

The phone brings calls from people who have tax question or to see how their return came out. They are calling with the last bit of info I need to finish their return. Missing payment and estimate vouchers are popular calls today too. Clients are dropping by all day, especially at lunch and after work, to ask questions, return signed forms and pick up their return. And I am finishing returns that I can finish and filing extensions for those I can’t finish. Even if I have all the info for the return, this late there are no guarantees it will be filed today. I may be able to stay a little later than my 6pm closing but I'm not going to give up evening plans because someone waited too long.

There are a lot of reasons not to wait until the last minute to bring in your tax return. The chance it won’t get finished (or started). The preparer gets sick or has a family crisis. There is bad weather that makes it hard to get to the preparer’s office or causes power outages. You might not find that missing info. You could get a surprise balance due with not enough time to put together the funds to pay it on time. However, I can’t think of any reason to wait this long but procrastination. That is your option. But as I have said often; “Your lack of preparation is not my emergency.” And all the tantrums and pleading in the world doesn’t make it an emergency.

P.S. In the time it took me to type this, I stopped to take 3 calls, accept a signed 8879 from one client, give another client his return and form to get signed by his wife, and gave a client an overview of dependent rules for next year.

Extensions

As the tax filing deadlines approach, I get calls from clients wanting me to file an extension for them. It’s easy to do electronically; set up a file and send. I don’t need signatures. What I do need is to know is what the client is going to owe so that I can give them vouchers. They need to pre-pay their tax.

An extension is not a delay in paying. It just says you want more time to get all your info together to file a complete return. If you know you will be getting refunds, you really don’t have to file an extension. The extension gives you protection against the failure to file penalty if you make a good faith effort to pay what you think you will owe. Underestimate your final tax and balance due too much and the IRS says they could add the failure to file penalty back. But if you send them too much now, you will get that back as a refund when you do file.

What to do? If your return is done and you just can’t pay the balance due, file the return. You can work out a payment arrangement. If you need more time to get all your paperwork together, estimate your taxes. If you’re sure you’re getting a refund, you don’t need an extension and now you have motivation to finish your taxes. File an extension if you owe (or as a protection if the estimate is close) and send them what you think you will owe. You can always file but not pay anything but you have to be prepared for a notice wanting more interest and penalties for not pre-paying your tax.

Please note, just because an extension gives you 6 more months, until October 15, 2011, you don't have to wait months to get the return filed.

Tax Freedom Day

According to the Tax Foundation,  April 12th is Tax Freedom Day for 2011. This is the day that the average American has earned the money to pay all their  federal, state and local taxes for the year. This isn't your actual, personal taxes for the year but the national average for the year.  The Tax Foundation also breaks it down by state.  Kansas' Tax Freedom day was actually the 10th and Florida won't celebrate theirs until the 16th.

 

Shutdown

I'm not going to wait up to see if Congress works out something or the Federal government is going to shutdown. I have returns to do and that takes some sleep. If there is a shutdown, the IRS has a plan in place.

First, 2010 returns are still due the 18th. The same goes for all payments and extension requests. If you e-file, you shouldn't see a slowdown. Electronic returns will be processed as usual. Paper returns will be accepted but not processed until the all clear.
Other IRS services will depend on the computer. Services like "Where's My Refund" will be available. The same thing applied to most of www.IRS.gov. The only telephone number that will be operating is1-800-829-1040. And service will be limited to individual return issues. The IRS says to expect longer wait times. Walk in services will not be staffed. If you have an audit or hearing or meeting scheduled, it will be postponed and rescheduled once the shutdown is over.
Hopefully, I will get up in the morning and find that Congress worked it out and the government is still functioning. That would be a good dream.

This was a quick overview. Check out www.IRS.gov for all the details.


- Posted using BlogPress from my iPad

The Wicked Witch Is Dead!

All of OZ (the tax prep community) rejoices at the news that the 1099 reporting requirements for both businesses and rentals is dead. Thousands of exhausted but happy tax professionals are dancing around their desk throwing 1040 forms in the air to celebrate that Congress has finally got it right and that as soon as the President signs this bill their nightmare is over.

Okay, the tax gap is a serious problem. There is too much unreported income and it's too easy to fudge expenses. As much as the IRS tries, they can't catch everything. Small businesses, especially heavy cash business, have long been believed to be the biggest contributor to the tax gap. Individuals have a harder time to cheat because so much of their income is reported and is compared to their return. The new (and now gone) 1099 rules were created to help create a paper trail the IRS could follow to track down cheaters. But asking a small business to 1099 anyone they paid $600 in a year is madness.

There has to be a better way to find the missing income than the 1099 reporting rules. I hope someone can come up with a good way to do that. Right now, I have returns to finish. As soon as I pick them up off the floor.

Change of Address

Moving can be hectic. There is so much to do; start and stop the utilities, transfer your personal stuff from one residence to the other, clean, change your address with everyone…

Hectic! But I want to suggest one extra task. You need to mail a change of address to the IRS. All you need a copy of Form 8822 and a few minutes. But the time and effort can save you a world of aggravation later. The form is simple. Individuals use part A and all you need is to give the IRS your name and SSN (and spouse if married) and the new and old addresses and mail it to the location listed for your state on page 2. The only time I wouldn’t worry about filing a change of address is if you will be filing your tax return in very short time. Otherwise, send in the Form 8822.

The IRS uses the last known address they have for you to send out notices. Now hopefully, you won’t be getting any IRS notices but if you are mailed one you want to make sure that your receive it. Unless the piece of mail says “don’t forward” the Post Office will forward if they have a current (12 months or less) change of address for you. After that, the mail is returned to the IRS. If you’re lucky, they will use any new address info the USPS provides to re-send the notice. But the IRS is manpower challenged and they may not catch the change of address until it’s too late. Then there are the issues of multiple moves and name changes. All can conspire to keep mail from the IRS from you when you need it.

The problem is that IRS notices are time specific. The first notice most taxpayers will get is a CP2000. You have 30 days to respond. If the IRS hasn’t heard from you, they will send out the next notice. That one gives you 90 days to respond. If you don’t, they will assume that you agree with the changes they are proposing. But this notice generally doesn’t give you the specifics because you got them in the first notice. After that, the IRS considers the matter closed and starts the billing. You may still be able to fight the changes but it has become much harder. Even if the IRS was correct in the first place, the interest and penalties have been accruing since the first notice. You will pay more because it took so long to find you.

Bottom line is to keep the IRS informed when you move. It may not make a change in your life but if there is a problem with a return you want the IRS to be able to find you. You might not like the mail but believe me it is easier to deal with the first notice than even the second one.