Our Taxing Times

Cancelation of Debt

Any time a debt is forgiven, you run the risk of having to pay tax on the amount that is forgiven. The bank or card company may not warn you about this. Too often, I have had clients who received this surprise in the mail and they don't know what it is.  Often it is sent with all the papers they receive documenting the debt forgiveness, and they file it away with that paperwork. A few years later they get a notice from the IRS.

1099C Cancellation of Debt is the form this surprise takes. If it’s from a credit card company, the amount of debt cancelled is usually the card balance the taxpayer owed. If it is because of a home foreclosure or a repossession of a vehicle or piece of equipment, the debt may be reduced by the amount the asset was later sold for. The bottom line is that if a lender forgives you a debt you can be taxed on the amount of the debt. Why? Because it could be a deductible expense for them. If they deduct it, someone has to be taxed for it. That’s you. The 1099-C is issued in the year that the credit card company or bank forgives the debt (when it comes off their books.) In the case of a repo or foreclosure, it may take a year or more for the process to be completed. At that time, you should receive a 1099C but as I mentioned earlier it could come with all the documents to close the debt. You many need to look for it. Since the lender has issued a 1099C, this income will show on the IRS matching program. If you miss it in the year it is issued, it will catch up with you later with penalties and interest.

Is there a way out of being taxed on the income from the debt cancellation? Yes, if you are insolvent at the time of the cancellation of debt. That means that all your debts are greater than all your assets. So let’s say you owe $20,000 in credit card debt and $30,000 on your house. If right before the credit card company cancels the debt, the Fair Market Value (FMV) of your house is $55,000, you have more assets than debt and you are not insolvent. Assets will include bank accounts, the FMV of homes, real estate, vehicles, and IRAs, cash value if life insurance policies and don’t forget the FMV of personal items like furniture, jewelry, and art work. Debts will include all your debts so don’t forget bills and taxes due. If you can’t claim insolvency, then the 1099-C will have to be reported on your 1040 and taxes paid.

If a lender, be it credit card company, bank, credit union, etc., forgives a debt you owe them, you have to understand that there may be tax consequences and prepare for it. For your specific situation, talk to your tax professional.

Disasters 2011

Last night I quickly put together a post about casualty losses after reading the Twitter posts from several friends and acquaintances. In my inbox this morning, I found an e-mail from the Global Conference on Disaster Management. Usually this would be deleted with the other conference notices that I’m not interested in attending. However, the topicality and the statistics made this something I wanted to read and to share.

We have had nine disasters this year that have resulted in over $1 billion in damages each. Irene will make it 10. From their e-mail:

Pre-Irene, economic damage from natural disasters in the U.S. exceeded $35 billion this year, according to a National Climatic Data Center report released in August 2011. Those disasters were:

• Upper Midwest flooding (summer): At least $2 billion of damage as of mid-August
• Mississippi River flooding (spring and summer): $2 billion to $4 billion in damage
• Drought, heat wave and wildfires in the Southern Plains and Southwest (spring and summer): Over $5 billion in damage
• Tornadoes (May 22-27): At least $7 billion in damage in central and southern states, including the tornado that struck Joplin, Mo., killing 141
• Tornados (April 25-30): At least $9 billion in damage in central and southern states
• Tornadoes (April 14-16): More than $2 billion in damage in central and southern states
• Tornadoes (April 8-11): Losses exceeding $2.2 billion in central and southern states
• Tornadoes (April 4-5): More than $2.3 billion in damage in central and southern states
• Groundhog Day Blizzard: $2 billion in damage after a massive winter storm dumped snow across the central, eastern and northeastern sections of the country

Thanks to the Global Conference on Disaster Management for their timely info. (Link to their conference website.)

Disasters

Earthquakes, tornados, fires, floods and now Hurricane Irene, it makes you wonder if Mother Nature has something against us. Once Irene dies or leave the US shores, people who have been hit will start thinking about clean up and that brings up questions about taxes and casualty losses.
If you have property damage, you might want to order or download Pub 2194 from the IRS (2194b for business damage). This is a comprehensive book that answers most taxpayers’ question about lost records, filing returns and Form 4684 for casualty and theft losses. Included in the publication is not only info from all the publications dealing with casualty losses, the special rules if the loss happens in a Federally declared disaster area, but worksheets that will help you track your losses. If you’re still recovering from a prior disaster, you might want to grab a copy of this publication also. It’s a really good resource at a very bad time.
It’s been a couple of years since I have heard this addressed, but there is a good chance that the IRS will have people with FEMA when they set up at the hard hit areas. (I’ll check this and let you know.)
Keep an ear open to hear what areas are declared Federal Disaster Areas. The rules in a Federal Disaster Are change and taxpayers have a little more flexibility about when they can report the loss. Check with your tax preparer or call the special IRS Disaster Hotline at 1-866-562-5227 for questions about your specific loss.

A few years ago, I wrote an post about Form 4684 and the realities of claiming a casualty loss. Now seems to be a good time to dust it off. Chutes and Ladders.

Continuing Education

Slowly but methodically the different parts of the IRS tax return preparer are being put in place. PTINs are up and running. Minimum competency testing for the new Registered Tax Return Preparer (RTRP) should start this fall. At the same time, fingerprinting and background checks will begin. The IRS has announced the continuing education requirement will begin in January of 2012. The current goal is that by the end of 2013 all RTRPs will be tested and licensed.

The next step is the continuing education (CPE) requirement. The basics have been known for a while. A RTRP will have to take 15hours of CPE each year. The hours are broken into 3 areas of study. Each RTRP will need to take 2 hours of ethics, 3 hours of tax update and 10 hours of tax topics a year. Just like the CPE requirements for Enrolled Agents, these classes will have to be approved by the IRS. (The CPE for attorney and CPA are set by their state licensing organization) The service is working on the specifics for the education providers. Many of the workshops and classes I take annually cover updates, tax topics and ethics. The providers will have to allot the total hours of the class to each category under the new rules.

Where are the new RTRPs going to find CPE? That is actually fairly easy. The trick is to find cost effective classes. So, for all the new RTRPs here are my suggestions. (FYI – one hour of CPE is the equivalent of 50 minutes in a live class. But the course could be live, online, self-study.) But first make sure any CPE you choose have the IRS seal of approval. It should be in the fine print. A class approved for a CPA’s CPE might not be IRS approved.

• The Internal Revenue Service is a great starting point. Check with your state’s stakeholder liaison. Get on their mail list for info about IRS symposiums and workshops. The ones I have attended are free. The IRS Tax Forums are held in the summer and provide sessions on a wide variety of tax topics. The Forums are not free but this year you could get up to 18 CPE for just over $200 for your registration. (While they won’t get you CPE, the IRS has mail lists with loads of info and You Tube videos where you can get a lot of tax info for free.) Don’t forget to check and see if your state has any free or low cost courses.
• Next, check with your tax software company. Many have fall update classes that cover the software changes and tax law changes and the cost is very reasonable. Also, many are building online education programs with free or inexpensive CPE.
• Also look at the national tax organizations. Many offer education programs or the ability to earn CPE from reading their journals.
• Don’t rule out local colleges as a source but don’t think a college class will get you CPE. They might but it’s doubtful. However, in the Midwest the extension offices for a wide variety of schools have created a strong CPE workshop for taxes. There may be others.
• An online search will turn up a large selection of companies which offer CPEs. Take a look at their offerings. If all you are looking for is the cheapest rate per hour, choosing your classes is not hard. But if you also want a good class that meets your educational needs you will want to get recommendations from colleagues and try short classes from different companies to find a few you like. Some of this will be online or self study classes. Others will be live workshops.

A few notes for you. When you evaluate the costs of obtaining your CPEs, don’t forget to take into consideration the travel costs of for workshops. A free workshop isn’t really free if you have a long drive and an overnight stay to participate. It still might be a good value but it’s not really free. And keep records of your CPE. You should keep the completion certificate and a copy of the agenda for each class you take or workshop you attend. Should the IRS want verification of your CPE, you will need these. A file folder for each year will work fine as will a loose leaf notebook.

There are a lot of very good sources for continuing education and with a little bit of research and trial and error any tax preparer can find great courses that will meet their CPE requirement and not spend a fortune.

Proof of Delivery

I love e-file.  I like how it speeds up refunds, automatic checks on SSN /name matching, and prevents clients from playing with the return and sending it in with missing pages and out of order. It makes my life a lot easier. And I know when the IRS has received the return. However, for correspondence with IRS, I can’t rely on e-filing.

The IRS has recently released the final regulations on what they will accept as proof of delivery. IRC sub-section 7502c states that the IRS or Tax Court will accept paperwork sent by registered mail as a proof of delivery. TD 9543 expands the accepted delivery methods to certified mail and approved private delivery services. The specifics for the approval of these services are to be set.

Thanks to the Journal of Accountancy for the tip.

Dear IRS, Slow Down

Just a small rant. I spend a lot of time on the phone waiting to talk to an IRS representative. I can live with the wait and the music and the regular interruptions asking me to stay on the line because "your call is important to us." But I am really getting tired of having to ask the agent to repeat their name and number.

Look at it this way. I've been on hold for a while and trying to multi task while I wait. The only notice I get that it's my turn is the music stopping and a beep. Then I get; "Thank you for calling the Internal Revenue Service, I'm Mr./Ms./Miss LastName, my Id number is #xxxxxxxxxx." And since they know their name and number, this info is spat out. In fact, I think they have a contest to see who can get that line out quickest. The problem is that 9 times out of 10 they are too quick for me to get the name and number written down (I'm lucky to have a pen in hand when they start.) Add to the speed contest, I have to adjust for a different regional accent. Sooo, I have to ask them to repeart their name and number and this is not a good start to a conversation. They don't like having to repeat themselves and I resent that I have to ask them to repeat themselves. Not good.

So, Dear IRS, please pause before you give me your name and slow the delivery down a little so I can get the info on the first time. It really will save you time in the long run.

 

Off soapbox!

 

Not Afraid of Turbo Tax

I received an e-mail from Paul Clausen at Ellingson & Ellingson, Ltd asking my opinion on the tax business in light of the increase popularity of “box” tax software and online free file. He asked who would be our client base in the future as the computer literate younger generation does their own taxes. I think a lot depends on the tax practice’s client base. A large city, high end CPA firm won’t be effected by Turbo Tax and the like as much as changes in wealth and tax law. My clients are mostly working and middle class taxpayers who use my services for my tax knowledge or their convenience. Yes, I’m losing some January and February clients to the “box” but I am gaining later season clients with more complicated returns and IRS/State Notices.

I started preparing taxes in 1988 for an H&R Block franchisee. And the client flow was the same for years. First would be the quick refunds and easier returns and then the small businesses and more complicated returns. 60% or more of the total returns were done by February 15^th. Think about that – 60% in the first month of a 3 month “tax season”. Since being independent, the 60% has decreased but the first month has remained my busiest in numbers. Recently, I’ve noticed losing early season clients to the box but gained older clients who find themselves with more complicated returns so overall there hasn’t been a big change in numbers.

I’m not too concerned about the use of tax software and online tax solutions. I see the issue is not computer literate taxpayers but tax literate taxpayers. I remember clients who were having trouble preparing their own paper return. They would come in with the forms, instructions, and sometimes even a Pub 17. They could tell me where their problem was and show me the section in the instructions that was confusing. Unfortunate, too many taxpayers expect tax software to do all the work for them. With their interview process and tax info, personal tax software has given too many taxpayers the impression that all they have to go is plug in numbers. When they run into a question that they don’t understand, the taxpayer doesn’t research the issue. They punt. They put in what they think should be there and if that doesn’t work they try something else. And too many manipulate the software to get the answer (refund) they want. That kind of cheating is easier for a preparer to catch than a computer. (Example, a young man wanted to claim his girlfriend’s children as dependents. I explained why he couldn’t and he left. The problem was that in explaining why he couldn’t claim the kids I gave him enough info to lie to another preparer or circumvent the interview of individual software.) The IRS has become more skilled at catching the mistakes of the tax illiterate and cheats. They are matching income, SSN, dependents and all kinds of things and sending out notices. Many end up on my desk. I may lose the return but I get to fix the problem and look like the hero (and get the return back).

I’m not trying to be insulting to people who aren’t as tax savvy as me. I love them, they pay my bills. And the personal tax software has been developed to help them prepare correct returns. But they have to follow the rules even if they don’t like the answer. And if they run into problems, they have to do some research. I have a bunch of nephews who are computer literate. They aren’t afraid to manipulate software, to start over, try something new. They’ll try anything but read the instructions (or tax code).

I don’t see Turbo Tax or their friends as an enemy to my practice. It’s an issue to consider when I look at my changing client base and how to market and plan. I also have to consider tax law changes, IRS procedures and the new tax preparer requirements. Actually, personal tax software, in a box or online, could be a boost to my practice. Not only will I earn fees from helping with the notice but with future returns and referrals.

Proof of Not Working

How do you prove that you didn’t do something? Specifically, how do you prove that you didn’t work for a particular employer?

Here’s the situation. In January, you receive a W-2 or 1099 from a business that you don’t recognize. Or, you get a CP2000 from the IRS with W-2 or 1099 info that wasn’t on your original return. Either way, you have to prove that the W-2 or 1099 doesn’t belong to you or you will be liable for the taxes on that income.

You need to take the lead in solving the mystery. The first thing to do is to compare the employer’s name with the businesses you remember working for that year. Do you have a W-2 from all of them? That may be your answer. A fast food restaurant or other franchisee may issue employment docs in the franchise owner’s name (individual or business) and not under the common name. If that doesn’t solve the problem, check with the employer on the W-2 or 1099. Many times there is a contact phone number on the form. If not, you’ll have to do a little research for more info. Then call or write the company. It may be a carryover check from the previous year. Or you may have forgotten about the 2 days you worked there. If that doesn’t work, you need to see what records you have that will prove what you did do. The best records for this are your pay check stubs and bank deposits.

That means that you need to save check stubs and bank records. Set up a folder for your pay stubs and automatically add to it on payday. If you’re set up for direct deposit, you should still receive a pay report. Save it. If you are working for a company that doesn’t give pay stubs (especially if you are being paid in cash), keep a log with the date, and the amount that you receive and any details you can of the work week such as hours worked, the job worked. But you have to have some kind of contemporary documentation if you want to prove that the W-2/1099 is wrong.

How does this happen? Sometimes it’s the taxpayer’s problem. They don’t remember a short term job or employer. But it could be a former employer padding their business deductions to save on their own taxes. It could be a glitch in data entry but it could also be identity theft. But the key to proving that you didn’t work for someone is to prove who you did work for and that means you have to keep your pay and bank records safe.

Back-to-School Record Keeping

It’s back to school time and time to talk tax records. Specifically, I want to talk about records and receipts for your back-to-school expenses. Nope I’m not talking about that cute dress or awesome backpack you bought for the first day of school. I want to talk about college expenses; tuition, fees, books, supplies and room and board. And it doesn’t matter if the student is a young person going full time or a parent picking up a class or going back part time or either in a graduate program, you need to keep records of what you spend and what you receive.
Congress has created several tax programs to help parents and/or students with college expenses. There are credits like the American Educational Opportunity Credit and Lifetime Learning Credits, the Higher Education Tuition Deduction, educational IRAs and the Qualified Tuition Program(QTP). All of them have different qualifications and cover different expenses. And I’m not going to cover them right now. I want to get you thinking about keeping track of school expenses and income while you’re spending the money. The basic ideas apply to most and should get you set come tax time. Then we can figure out which program you qualify for.
It doesn’t matter if you might qualify for a credit or deduction or need to show that withdrawals are for educational expenses, you need to be proactive about keeping records. Don’t rely on the 1098T that the college will send out. Schools have gotten more accurate completing the 1098T but they can be misleading.
What do you need to keep?

• Receipts for books, supplies needed for school and tuition and fee payments. Don’t rely on credit card statements, keep the receipt. Right now this can include a computer (but not school tee shirts or beer.)
• Receipts from textbook buy back and other returns.
• Amounts for scholarships, grants and student loans even if the school is handling the money. (Actually, especially if the school is handling the money.)
• What money is being pulled out of educational IRAs and QTPs.
• If money is coming from Ed IRAs and QTPs, room and board needs to be tracked too.
• If there is more than one student, keep expenses for each separate.
• Most schools have account info online and that can be helpful but don’t rely on it. It may not have everything and you still need the receipts for bookstore purchases.

This information will allow me (or your tax preparer) to accurately calculate the different educations programs and how they effect your taxes and use which program is best for your situation. Believe me, it’s better to put the info aside as you get it than to try to find it in February. Especially if you need you taxes prepared ASAP because you forgot the FASFA deadline.

Mymoney.gov

Last evening, while I waited for a late appointment to show up, I tried to clean up bookmarks. I didn’t get rid of very many sites but I did renew my acquaintance with several I’d forgotten about. One was MyMoney.gov.

I field a lot of questions from clients about money matters. A large percentage of the questions have little to do with taxes. The client thinks that if it deals with money, I could have the answer. While flattering, it’s not necessarily true. Mymoney.gov gives me somewhere I can send them when I can’t advise them. Let’s face it, I can explain all about IRAs and how they work but I can’t tell them what those IRAs should invest in. I’m not an investment advisor. But on Mymoney.gov, they can find more info about investing and risks.

Mymoney.gov was created in the as part of the Fair and Accurate Credit Transactions Act of 2003. This created the Financial Literacy and Education Commission, which was asked to develop a national financial education strategy with a web site and hotline (1-888-My Money) to share financial info. Chaired by the Department of Treasury, the commission include 20 other government agencies all providing financial information to consumers and small businesses. This allows the taxpayer to check one site to find the financial info they need and get those resources through links to the individual agencies websites.

Mymoney.gov is simple to use. The website is broken in to 3 areas; Life Events, My Resources and Tools. Under “Life Events”, the resources are broken down by where you are in life. Are you having a baby, buying a house, retiring, starting a business? If so, start with “Life Events.” “My Resources” are broken into areas by type of person; women, teachers. youth. There are also areas for financial research and people providing financial info to consumers. In the final area, “Tools”, are calculators, worksheets and checklists to assist in planning. Find something you like? Just click and you are taken to that agency’s page with that info.

Mymoney.gov is a simple way to get at all the financial consumer info the Federal government has created. And it’s free.