Our Taxing Times

Tax Scam Targets Seniors

From the IRS Media Relations Office in St. Louis, there is a tax scam in the Kansas and Missouri area that is targeting seniors with a promise of a rebate or refund for withholding from Social Security. According to the IRS's Michael T. Devine;

“We are seeing a scam that encourages seniors to file tax returns, for a fee, to get a refund on withholding from Social Security,” explained IRS spokesman Michael Devine.  “But because there was no withholding from the Social Security benefits, the return is false and the refund is neither allowed nor legitimate.”

 According to the IRS, flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a return and get a refund with little or no documentation, have been appearing in community churches around the country.  These schemes are often spread by word of mouth among unsuspecting and well-intentioned people telling their friends and relatives, especially those who normally do not have a filing requirement." 

The IRS says taxpayers should be wary of any of the following:

·        Fictitious claims for refunds or rebates based on excess or withheld Social Security benefits.

·        Claims that Treasury Form 1080 can be used to transfer funds from the Social Security Administration to the IRS enabling a payout from the IRS.

·        Unfamiliar for-profit tax services teaming up with local churches.

·        Home-made flyers and brochures implying credits or refunds are available without proof of eligibility.

·        Offers of free money with no documentation required.

·        Promises of refunds for “Low Income – No Documents Tax Returns.”

·        Claims for the expired Economic Recovery Credit Program or Recovery Rebate Credit.

·        Advice on using the Earned Income Tax Claims based on exaggerated reports of self-employment income.

·        In some cases non-existent Social Security refunds or rebates have been the bait used by the con artists.  In other situations, taxpayers deserve the tax credits they are promised but the preparer uses fictitious or inflated information on the return which results in a fraudulent return.

Let's face it, Seniors are easy targets for many scam simply because they are part of a more trusting generation. Add to the fact that they are getting the info at church and from friends who yet don't realised they have been scammed, it's easy to see how  they can fall victim. If you or someone you know hears of any tax program that promises them money back, please contact the IRS (800-829-1040) to check on the program.

More Time for Innocent Spouse

Back in April, I wrote an Our Taxing Times post outlining the differences between the IRS’s injured spouse and innocent spouse programs. At that time, the innocent spouse program was in the news because there were requests from Capital Hill that the IRS increase the time a potential innocent spouse has to request tax protection. At the time, the taxpayer had 2 years to request inclusion in the Innocent Spouse Program. Time started with the first collection notice.

Yesterday, the IRS announced new time guidelines for Innocent Spouse relief. Under the new rules, the 2 year time limit will not be enforced. If the taxpayer was previously denied because of the 2 year rule and the collection period is still open, they can re–request consideration with a new Form 8857. Details are spelled out in Notice 2011-70 and are effective immediately.

Tax Preparation Fees

Last week I had a case of writer’s block and mentioned it here and received this comment:

That’s ok girl. I have a question that might be an inspiration for your next article. Is it deductible to your taxable income the money you pay for a virtual accountant whom is based in another country and is not registered in the US?

 Karen thanks for the encouragement and suggestion. As for the accountant fees, it depends. It really doesn’t matter if the accountant is virtual, in the US or licensed. The key is that the expenses be part of preparing your income tax returns. This can be someone who is a paid preparer, the cost of software and books to help you do it yourself, even the  costs to e-file or pay your taxes electronically. So, if the expense is tax preparation related, they’re potentially deductible.

The next question is where do you deduct the expenses? If these are strictly business expenses, they go on the form or return for that business. That included rental income. If the expenses are for preparing your personal return, then you use the Schedule A on your Form 1040. Tax preparation fees which include the cost of preparing both the business and personal returns must be prorated between the business/rental and personal expenses.

So far, I’ve dealt with the law; tax prep fees are deductible. The real question is if they will reduce your taxes. The business/rental portion of the expenses come directly off that income and can reduce your tax. But, that leaves the personal tax prep expenses and a couple of hurdles to clear.

Tax preparation expenses are part of the Misc. deduction on the Schedule A. The Misc. Deductions include employee business expenses, investment expenses, hobby expenses, and many other expenses besides tax prep. These expenses are very specific and qualified and do check with your tax professional. The total of the Misc. expenses must be above 2% of your Adjusted Gross Income (AGI). So, take your AGI (see the bottom line on your 1040) time 2% and if your expenses are above that, you have potentially deductible expenses. Let’s say your AGI is $50,000. That makes your “floor” $1000 (50,000x2%) and if you have more than $1000 in Misc. expenses the excess over the $1000 carries to the rest of the Schedule A. Less than $1000 won’t help you.

The second hurdle is that all of the Itemized Deductions on the Schedule A must get above your standard deduction. The standard deduction is a set number based on the filing status on the return modified by age and blindness. On 2010 tax returns, a single filer was allowed a standard deduction of $5700. Or they can choose to use the Itemized Deductions from the Schedule A. For that to do the taxpayer any good, the Itemized deductions have to be higher than the standard deduction. If the state and local taxes, mortgage interest, charitable contributions, allowable medical expenses, gambling losses, casualty losses and allowed Misc. deductions are above $5700 for the single filer, it is advantageous to itemize. But it’s only the difference between the itemized deductions and standard deductions that is actually reducing the tax on that return.

So, tax preparation fees have the potential to reduce your tax but whether they will or not will depend on your other deductions and the return itself.

Karen, I hope that answers your question.

Writer's Block

I have been trying to write a blog post all day. My biggest issue is that I can’t think of anything I want or need to write about.

Tax news has been a little slow right now. I just opened my e-News for Tax Professionals hoping there was an inspiration; but sadly no. I don’t have any truckers who need to know about the 3 month extension for their Highway Use Tax Return. Most of the other items were internal IRS issues. The Direct Seller’s Webinar was better suited to my business blog.

I even started a couple of posts but they just didn’t work out. I do want to write about frivolous tax arguments, but I need a better way to present the topic. I started a post about a tax I want to create for all the spam, e-mail and comment, I get. That one sounded too forced. Even the release of the 2008 individual tax stats, didn’t lead to anything that would make an interesting read. Finally, I looked at very early posts for inspiration. Nope! It’s even too early for an extension reminder (87 days until October 17^th)

So, I’m ending the week a little disappointed. Have a good weekend!

Another Top 50 List

I just received notice that Our Taxing Times has been placed on Accountingedu.org's Top Account Blogs list. I want to thank them for including my blog.

You can find the list at Accountungedu.org.

Tax Authority

Taxes are interpretive as much as they are hard facts. They have to be since there is no way that lawmakers can list every possible variation on a rule. And interpretations can vary so both sides of an issue can present a carefully thought out rational for their interpretation. So how can a taxpayer decide which interpretation to follow for their taxes? No, the one you like best is not a good choice. It might be correct, but you need a better rational than that.

It comes down to the authority of the different interpretations. The authority is the original sources that a taxpayer (preparer) bases their interpretation. But these authorities are not created equal. There is a hierarchy that must be followed:

1. The Internal Revenue Code and other laws.
2. Temporary and final regulations that the Treasury Department issue to explain the law.
3. Revenue rulings are positions that the IRS/Treasury have taken on the regulations.
4. Revenue procedures are the rules and guidelines for a specific tax action. Like the procedure for filing an injured spouse claim.
5. Federal court cases with the Supreme Court being the highest authority. The courts can be tricky since different districts or tax courts can have different rulings on the same issue.
6. Congressional intent and conference committee reports show what Congress was thinking the law will do.
7. IRS Letter rulings, how they have responded to similar decisions, and finally other IRS notices and press releases.

So, if the deduction the client wants to take is specifically mentioned in the IRC as not deductible, it never will be deductible. Not specially mentioned there, I would next look at the Treasury regulations for a similar deduction and how it is handled. I would look for all rules and cases that come close to the deduction. Why do this? That is part of my job. My client has a question on an unique deduction without a clear or established answer and my research won’t change that but it will give us an indication on how related issues have fared. That will allow us to make an informed decision on using that deduction and to know that it might be questioned. The research doesn't need to be done on every issue but sometimes there are special circumstances that need special attention.

By the way, did you notice that the list of authorities did not include “this guy at work”, “my hairdresser”, “my realtor”, “my other preparer” or other backdoor experts. Just sayn’.

Creative Deductions

I love creativity. It doesn’t matter if it is a work of art, a scientific or financial theory or a crazy tax deduction. Clients come in with those a lot. I listen to their idea, giggle a little and tell them “no”. I’m not talking about “my son’s girlfriend and her daughter lived with us” type question. I’m talking about the man who wanted to take his bar hopping as a business deduction. He was only doing it so that he could make sure that the other guys on his work crew didn’t get too drunk to work the next day. After all, he was responsible for his crew and could lose his job if they messed up too much. Nice try, but no!

An Iowa tax preparer couple should get an award for their $21million in bogus deductions the IRS has found on returns they prepared for some clients. According to the AP, Jill Schwartz-Musin and her husband Howard Musin have been banned from preparing tax returns because of their creativity. A few of my favorites:

• If your dog barks while you are away from you home business, it’s a business expense. (My guess-security).
• If your nanny answers your business phone, she becomes a business deduction.
• Over $6000 for a years worth of grocery were deducted on one return. (Entertainment?)
• Or, the legal cost from a bachelor party gone wrong. (No clue on the possible rational)

This was not a new charge for Ms. Schwartz-Musin. She was under IRS disbarment since 1987 for these kinds of acts. And in 2000, she plead guilty to obstructing the IRS. Of course, being the creative person she is, that didn’t stop her from filing Power of Attorneys for clients that said she was not under disbarment. What’s a little lie when you’re deducting invisible furniture for the client’s office?

While the Justice Department has not ruled out more legal action against the Musin’s, their clients are now dealing with the IRS. As one client said, they paid back more with penalties than the refund had ever been; the IRS “pretty much threw the book at us." I can’t get a whole lot of sympathy for the Musin’s clients. There may have been some who were victimized. But it has been my experience that when the preparer is that creative the client has a good idea what is going on.

Enough seriousness, tax preparers what are the creative deductions your clients have suggested or that you have read about? (But don’t breach confidentiality rules.) And non-preparers, what would your creative deduction be?

IRS - Walk In Day

Short notice on this one but the IRS is planning "A Fresh Start" day on Saturday July 16th at their Taxpayer Assistance Centers. If you have a federal tax problem, you can stop by for live help.

The Wichita office is at 271 W. Third St. North and the special Saturday hours will be from 9am to 2pm. Taxpayers will be able to get help with liens, make payments or payment arrangements, get tax transcripts or just ask questions.

Not in the Wichita area? There will be 74 centers open. For one near you, click on your state.

If you can't make it on Saturday, you can get help during the week at the same location.

Death and Taxes

I debated even covering this topic because of the complexity of death and taxes. But I field questions all the time about how much is a client going to owe in taxes on an inheritance. I see property transfers that were never reported as a gift. I hear a general confusion about what a taxpayer has to do to when a family member dies. Hopefully, this post will give taxpayers enough information to know to talk to their preparer. This is a very brief overview of a very complex issue; please talk to a tax professional concerning your specifics.

When someone dies, there can be up to 4 tax issues and possible returns which have to be considered.

1. The decedent’s final return. This includes income the taxpayer received before they passed away.
2. Income in Respect of Decedent (IRD). This is the income that was due to the taxpayer but wasn’t paid before their death. This could include wages, a sole proprietor’s accounts receivable, interest, dividends, or rents. This income is taxable to the beneficiary on their return.
3. Income Tax Return for Estates and Trusts (Fiduciary Return). When a taxpayer passes away, an estate is created while all inheritance matters are being settled. Or there could have been a trust set up instead of an estate. Either way, Form 1041 is used to report the income (and deductions) and allocated the balance to the beneficiaries to be taxed on their returns. The Fiduciary may pay tax but more often it's paid by the receipants.It important to stress that this is the income received not the asset. And if you are preparing this return yourself, make sure you understand what income is reportable and what isn’t.
4. Estate and Gift Tax. This is the tax on the actually assets. If the estate is valued at more than $5 million or the decedent had given away large sums during their life, an estate return might be needed. (The $5 million is subject to change either by inflation adjustment or Congressional action.) Gift tax is reported and paid on form 709. This return is filed (and paid) in the year the gift is made. (Gifts under $13,000 in 2011 are exempt. The return isn’t triggered until the value is over that amount but don’t forget the exchange of property for a few dollars, the IRS considers them a gift.) The cumulative amount of gifts (and taxes paid) is part of the calculations when the Estate Tax is computed on Form 706. The estate tax is computed and paid by the estate before assets are distributed.

So how does this work? A simple example - Your favorite Uncle Joe passes away on October 31, 2011 and you are the sole beneficiary. He was retired with Social Security, interest from several CDs with a total value of $1 million, and rental income on several commercial properties (the properties are valued at death at $5.5 million.) All the income he received before he passed away is included on his final 1040 return; Social Security, the interest earned on the CDs by 10/31 and the rent income he actually received (of course, this is offset by his expenses) before his death. This return will cover 10 months instead of 12. The death estate is created November 1. (If Uncle Joe had a trust set up, the trust would function like the estate.) From then on, the interest and rental income would go into the estate. Except, if Uncle Joe had back rents due to him, this would be IRD and it would go to you the benedictory and reported on your tax return. A Form 1041 would be prepared each year until the estate is settled. It would show all the interest and rental income. After the rental deductions and a few other allowed deductions are subtracted, the remainder would be reported to you on a Form K-1. This your tax preparer would use when preparing your return. You will pay tax on the income only. Once all Uncle Joe’s assets have been located and valued, the Estate Tax Return (Form 706) is completed. This return will start with the value of the estate - $6.5 million. From this is subtracted allowable deductions, state death taxes paid, and value of gifts made (Form 709). A tentative tax is calculated and from this is subtracted any gift tax paid and the allowable credit. What remains is the estate tax and is paid by the estate.

That is a very brief over view with a simple example. Most taxpayers won’t need to worry about the Estate Tax but they may need to do the Fiduciary return (Form 1041) for a year or too while the estate is being settled. There are several issues to be aware of like stepped up basis and grantor trusts, but I’ll save them for another time.

Licensing and a Rant

It’s time for that old favorite post: the licensing update.

When the IRS released its licensing and testing plan, there were 2 tests discussed. One on the basic 1040 return and the second on more complicated returns like corporations and partnerships. The talk at the time was that what returns you could prepare would depend on which test(s) you had passed. That turns out to be the case, but not just now. According to the July 8^th Kiplinger Tax Letter, the IRS is planning more tests in the future and will be limiting a preparer’s returns to just those covered by the test(s) he/she has passed. Until the more complex return testing begins, anyone with a valid PTIN can prepare any return. Testing on the 1040 return (and I’m sure other subjects) is set to being in the fall. Preparers with valid PTINs then have until 2013 to pass the test and earn the Register Tax Return Preparer designation. Then, they can choose to take future tests to expand their practice.

The continuing education requirement has been in the background for a while. But now, the IRS has set 2012 as the start date for continuing ed (CPE). Most preparers will have to complete 15 hours of CPE a year; 10 in tax topics, 3 in tax updates and 2 in ethic. Enrolled Agents, CPAs and attorneys are exempt from this requirement because they already have CPE requirements. Also exempt are non 1040 preparers and non-signing supervised preparers.

The IRS also has announced plans to send letters out later in the year to taxpayers whose returns were not preparer signed but look as if they had help with the return. The idea is to identify the “ghost preparers” who try to get around the rules for preparers by not signing the return. The taxpayers will be told how to find a legitimate preparer and file a complaint against those who won’t sign returns they prepare.

The Rant: I know there are a lot of preparers who don’t like the new testing and licensing requirements and I can understand their objections. I don’t agree. I’m tired of preparers who don’t follow the rules and count on the IRS not being able to find them or enforce the rules due to budget restrictions and no internal system to find preparers. I’m optimistic that cleaning up the PTIN mess and getting everyone to register, and in the future be tested, will cut down on the “bad” preparers.

In IR-2011-74, the IRS announced that last week they began sending out letters to about 100,000 preparers who signed 2010 returns (prepared in 2011) with an invalid PTIN or a Social Security Number. 100,000 preparers who didn’t follow the rules. Let’s put that into perspective. To date, the IRS has issued or re-issued 712,000 PTINs. So, for every 7 preparers who are following the rules there is one who isn’t. I’m sure that some of those are preparers who tried to register but had problems. After all, there were glitches with the application system last year. But that leaves us with preparers who chose to ignore the rules or didn’t know about the new requirements. And as far as I’m concerned, neither group has any business being a tax preparer. Those who disregarded the PTIN requirement are the same jerks who file from pay stubs in January, don’t do the EIC due diligence and inflate deductions for clients. The business is better without them. But the group that makes me the maddest is those who didn’t know about the new PTIN. How could they not know? There was mainstream media coverage of the basic changes; I had people ask me about what they had heard. And you couldn’t attend a workshop or update class without a major discussion of the new requirements. It was covered in all the tax publications and newsletters, a subject of discussion on every tax forum or discussion group, the IRS sent out letters to over a million people who had signed as preparers on returns recently and I’m sure the national chains contacted their employees too. Yet, tens of thousands of people still missed it. The only way it could be missed is for the preparer to be doing nothing to keep up their tax knowledge. NOTHING. If you won’t do anything to keep current in your business, you have no right to be in that business. So, to those getting the IRS letter who ignored or didn’t know about the new requirements, may I suggest a new line of work?