Our Taxing Times

Response to Robert Flach

This started as a comment to The Wandering Tax Pro post;  "Enough Already!"  However, it started to get long and I hadn't posted today, so I moved the venue.

Robert, yes,  there seems to be a double standard for the EAs, CPA,s and attorneys when it comes to the licensing requirements. I think part of the problem is that the IRS wanted to get the program in service ASAP and so it has been making decisions and putting out fires instead of deciding on a goal and creating the rules to meet the rules. I also think that they have caved a little to the different professional organizations. The idea being to get the program going and then plug the holes later. My first suggestion is to plug (end) the whole nonsense of a "supervised" preparer not having to take the test.

One of your commenters pointed out that the CPA exam has a section on Taxation. And I understand the Bar exam does also. My question is how much of those tests deal with the the basics? Not, partnerships, corporations, or tax theory but the practical issues like the determination of the dependency exemption when the circumstances are X, Y and Z or if the taxpayer qualifies for EIC or what special circumstances apply for a MFS client. Because a CPA can correctly calculate the inside and outside basis for a partner does not mean they are up to date on the Form 8332 rules. BUT, those Form 8332 rules will affect so many more tax returns than the basis. That is why I think CPAs and Attorneys should take the competency test; to test their current tax basics knowledge. And that is why I am beginning to think that part of their annual CPEs needs to be specifically tax update CPEs. (On this, EA's too.)

OK,  a change of topic. I don't have a problem with the fingerprinting. It seems to me that it's a good tool to make the background checks quicker and more accurate. You can change your name but not your fingerprints. And I don't understand the reason EAs, CPAs and lawyers are exempt. I did a 10 card for my ERO application so giving the IRS another is not a problem.
However, I don't agree with you on the "grandfathering". I've seen too many returns by preparers with decades of experience that are big time wrong to excuse them from the test. And how could the IRS, or anyone, verify that a preparer meets all your exclusion requirements? And even if I could see some "grandfathering", 5 years is just not enough time. For a seasonal preparer, that is only 15 months of actual experience. But where you draw the line? 5 years isn't enough but is 10 or 20?

Let's face it Robert, we're stuck with these rules and all future variations. And I do expect we will see changes as the program continues. Honestly, I think we are all going to get tired of writing about the licensing issue before everything is finalized.

Tax Representation

The letter! You know the one, from the IRS. You open it to find pages of double sided explanations that you may or may not understand. And if that isn’t confusing enough, there are a couple of inserts included. What to do? First, don’t panic. Take a deep breath. Then look at the notice and see what it is telling you. Then call your tax pro for an appointment to review the letter.  Even if you are 99% sure you know what the notice is about, get a second opinion. Once you are sure you know what the IRS wants, you can work with them on the problem. If you aren’t comfortable dealing with the IRS yourself, you can have someone represent you.

A representative (for IRS purposes) is someone who acts for you in dealing with the IRS. That means communicate with the Service for you, attend meeting with or without you, negotiate settlements, and prepare returns for you. (The IRS calls it approved to practice before them.) What the representative actually can do depends on who they are. An Enrolled Agent, CPA, Attorney, Enrolled Actuary or (under special circumstances) a student CPA or Attorney, can represent a taxpayer before any level of the IRS up to Tax Court. They can attend audits, work with collections, sign returns, receive refunds (but not cash them). They can do anything the taxpayer can do. There are also the unenrolled preparers, soon to be Registered Tax Return Preparers (RTRP), who have limited rights when acting for clients. If they prepared the return and are the Third-Party Designee listed on the return, they can work with customer service reps, revenue agents and exam offices for that return. For other returns, they can only receive and inspect taxpayer info with a signed for 8821. They can’t represent their clients in Collections or receive a refund.

A taxpayer can give permission to a tax preparer to represent him/her several ways. The most common is the Third-Party Designation on the tax return. Most tax pros have the automatically set up for all clients. That way, when the client calls asking why they still haven’t received their refund or why they didn’t get the 1^st Time Homebuyer’s Credit. I can easily check on it. Otherwise, the IRS won’t talk to me. If all that is needed is to look at what info the IRS has, the Form 8821 is filed. An unenrolled preparer can use this form to get a copy of the tax transcript or account transcript for a specific year or years they did not prepare the return. Finally, a tax pro can have their client (or clients if MFJ) sign a Power of Attorney, Form 2848. The form specifies what area of taxation and for which year(s) is representative is allowed to work with the IRS on. If the filed 2848 is limited to individual returns for 2008 and 2009, the IRS will not talk to me about payroll taxes at all. Nor, will they discuss the client’s 2007 or 2010 personal returns. No matter which form, 8821 or 2848, is used, it must be filled out completely and filed with the IRS before it can be used. The IRS will reject the form if something as small as a date signed is missing. Since the Service won’t work with the representative until the form has been entered into the Central Authorization File (CAF), it is important to get the form filed correctly the first time. An unenrolled preparer can use Form 2848 to get the same info as the Form 8821, but that is all it will do. Even with a signed Form 2848, they are limited to tax info for the years on the form.

A few notes about allowing someone to represent you before the IRS.

• You can have an immediate family member represent you but they need a completed and signed Form 2848.
• Only an individual can represent; not a firm. When completing the 2848, make sure you have at least one person listed. You can have a backup representative in the same firm but you can’t list the firm.
• A business can be represented by an officer of the company or a full time employee with a completed 2848.
• Just because the Form 2848 gives your representative a wide range of rights, that doesn’t mean that you can’t limit them. There is a place on the form where you can specify what your representative can’t do. For example, a representative can negotiate a settlement for you. Their signature commits you to that agreement. Most tax pros will talk to their clients first, I know I do, but you can put on the Form 2848 that your representative can’t sign the settlement agreement. You would then have to sign the agreement.
• Along the same lines, talk with your representative to make sure that everyone is headed in the same direction. Do you intend to fight to the Supreme Court? Or, is getting the interest and penalties abated what you consider winning? What are your goals?
• This is not the time for procrastination. There are deadlines to be met and your representative needs to have the requested information on time or before.
• Nor is it the time to hide info from your representative. If the IRS wants a financial statement completed, make sure that everything gets on statement.
• Expect to have to deal with your state Department of Revenue once you have finished with the IRS. Also, the state may have a separate Power of Attorney to file.
• If you change representatives, you will want to send a copy of the previous 2848 with Revoked across the top.
• Your representative should receive a copy of any IRS notices you are sent for the years and taxes covered on the 2848.

Using a tax pro to act as a representative for you with the IRS can save you stress and time, But as with any tax preparer, take the time to check their credentials and talk to them to see if they are a good fit for you. And don’t expect miracles. If the return was wrong or you owe the tax, there are limits to what anyone can do.

RSS Feed

Please help!

I use Google Reader to keep track of all the blogs I follow. This morning I noticed that this blog had not updated since Friday. The posts for Monday and Tuesday have not shown up. I've deleted and re-subscribed, but still no posts.

Is anyone showing this week's posts for Our Taxing Times in Goggle Reader or other RRS reader? Please let me know so I can track down the problem.

 

Thanks Trish

IRS Redecorates Too

Thanks to Kelly Phillips Erb for the heads up about the IRS redecorated web site. (I read Kelly before I did any tax work.) It looks like the re-do is a work in progress since the change is only on the home page. Having coded websites, this kind of change can take a while to get to all levels of the website.

Taxgirl covers the changes very well and I can't add anything to that. But, I too have an issue with the orange and blue. I don't have a problem with orange and blue but these are the wrong orange and blue to work well together. In fact, I don't think the two blues match (but that's not clear because of the gradient used.)

The main thing is the revamped site is more user friendly. Now, if they can make the site search better, I will be really impressed.

Taxing Redecoration

Yeah, like you haven't figured it out (unless you are viewing Our Taxing Times through an RSS reader) I've redecorated the blog.

It started simply. I just wanted to add the buttons at the bottom of the post for people to "like" or "re-blog". I thought I had seen it once before but I couldn't find it. To make sure I wasn't mistaken (crazy),  I looked a few other Typepad blogs and saw that it was possible to add the buttons. And while I was spying investigating, I found all sorts of other neat stuff to steal add to my blog.  So, I spent part of my Sunday registering and copying code to typelists and rearranging stuff. Also, I did some behind the scenes optimization work. The old place was starting to look pretty good.  Then finally  I found how to add the"like" chicklets - mission accomplished! I stepped back and looked at my days work and went, "Ew!"

All the little white chicklets stood out against the colored background. For most people. that wouldn't be a problem (and it wasn't when the white was bordered). But it bothered me. It still bothered me this afternoon so I did some changing to the whole blog. I've been in the mood to redecorate something and blog elements are easier to move than furniture and you don't have to clean too.

It's not perfect but I can live with it for a while. I don't think I've ever had such a sedate color scheme. We'll see!

October 15th is Still Not April 15th

Okay, this year the dates were a little different. The tax deadline was April 18th and extensions will be due October 17th. But it doesn't really change anything, if you haven't got your return to your tax professional by now you are courting disaster.  

Why? First, because e-filing closes on Oct 17th. Returns not filed by that date will have to be mailed and you lose the advantages of e-filing. I, personally, don't like mailed returns, they're more work to file. This especially true this time of the year when the returns are thicker. On a less personal note, mailed returns aren't acknowledged by the IRS and to prove you sent the return on time you need use registered/certified mail or a private delivery service. Secondly, waiting to the last minute doesn't give anyone time if a real problem arises. This can range from computer problem to missing documents. This time of the year there is no room for delays while you find info you forgot, or missed. In April, missing info means estimating and paying the tax and extending the return. In October, it can mean the return won't be filed on time and could result in interest and penalties. Finally, most preparers have their lives back and really don't want to give it up because you procrastinated. Besides the late tax returns, we are doing payroll reports and quarterly financial reports. That happens in April too. But in April, we might have more help and we are probably putting in longer hours.  Now, I want to go home at night and do something fun on the weekend. I have meetings, continuing education workshops, rehearsals and a wide variety of planned events taking my time (and I am sure the same is true for most tax pros.) I'll be flexible to help someone with a tax emergency. However, procrastination is not a tax emergency. Wait too long, and I might not have the time to finish the return by October 17th.

If your return is not prepared yet, there is still time. A lot will depend on how complex your return is and your preparer's schedule. And even more will depend on you to stop procrastinating. Not just getting the source material to them, but to quickly respond to your preparer's requests for info and questions and to pick up the return when it is ready. Hopefully, I have convinced you that October 17th is a deadline you can't afford to ignore.

The orginal "Oct 15th Is Not April 15th."

TIGTA Visits VITA

Back in January of this year I talked a little about the VITA program in a post covering the free tax prep options available to taxpayers. I really like the VITA program and so I was a little disappointed to read about the TIGTA (Treasury Inspector General for Tax Administration.) report released last month. Every year, TIGTA does undercover visits to tax preparers with agents posing as taxpayers. The survey size is small and split even further into a few scenario groups.

This year’s survey of VITA locations was no different. 36 sites were targeted with each site being visited by a TIGTA “taxpayer” presenting one of 3 scenarios. Of the 36 sites, only 14 (39%) of the returns prepared were correct to TIGTA standards. The big problem is that the volunteers did not follow the VITA guidelines and complete and follow the input form. Besides some math errors, the survey found incorrect addresses and preparers who did not verify info from source documents and the input sheet. TIGTA also found issues with the review process because a number of the returns were not checked for accuracy as required. Also mentioned was that 97% of the preparers did not tell the “taxpayer” that while VITA prepared the return, the taxpayer is ultimately responsible for what is on the return. The big issue is that 3 of the volunteers falsified information on the return. 3 of 36 prepared a fraudulent return. What makes their actions worse is that once the IRS’s SPEC division (oversees the VITA programs) received notice of this, all three sites were closed and all volunteers were released. There was no mention of how many taxpayers no longer had access to free tax preparation.

Bottom line of the report is that the Vita programs needed to follow their own procedures and tighten up site security with background checks a suggestion.

FAQ: in 2010, 12,326 VITA sites prepared 3,070,898 returns with 87,602 volunteers. Not all volunteers prepared returns. Others acted as greeters or handled administrative functions.

Thanks to the Tax Pro Blog for the heads up.

Licensing Update #(I've lost track)

The story continues. More tweaking on the rules surrounding the new Registered Tax Return Preparer designation was issued in Notice 2011-8 and in Reg-116284-11.

• The IRS portion of the competency test has been set as $27 and the fingerprint check as $33. The venders actually handling the test and fingerprinting have not yet set their overall price but current estimates are between $100-125 for the test and $60 and 90 for the fingerprinting.
• Enrolled Agents, CPAs and Attorneys are not expected to be fingerprinted but must answer the suitability questions on the PTIN application.
• Also exempt from fingerprinting are those who do not live or work in the US but are participation in the PTIN, E-file or acceptance agent programs.
• Tax preparers can continue to receive provisional PTINs because of the delay in the start of testing. The IRS will continue this practice through at least April 18, 2012. Once they stop, the IRS will require that preparers pass the test and background check before they are issued a PTIN.
• Continuing education will be tracked on an annual basis and will start in 2012 for anyone who has passed the test or is required to pass the test.

Those are the current developments in the on going saga of the Registered Tax Return Preparer program phase in. Stay turned for the next installment.

Voluntary Worker Re-Classification

As part of the Fresh Start Program, the IRS has announced the new Voluntary Worker Classification Settlement Program (VWCSP). The program is to help employers who have mistakenly treated their employees as independent contractors to easily re-classify them and make a minimal back payment to cover the Social Security and Medicare contributions which were not made.

Employee mis-classification is a major issue for the IRS. Too many employers have treated employees as independent contractors out of mis-understanding of the rules or in a definite attempt to save money and paperwork. For the IRS, the key is control and I covered the topic in my post, Employee or Independent Contractor. The VWCSP will allow the employer to start correctly classify their employees and avoid a possible employment audit. An employment audit could result in considerably higher repayments for any year audited.

To be eligible the business, tax-exempt entities and government entities must have been treating their employees (or a group of employees) as independent contractors and want to correctly treat them as employees. Next, for the last 3 years, the employer has properly filed all required Forms 1099 for the workers. Finally, they can’t be currently under an employee classification audit by the IRS, Dept of Labor or their state agency. Application is made by completing Form 8952 and that must be submitted at least 60 days before the employer intends to make the change from contractor to employee.

If they are accepted into the program, the employer will pay an amount that is about 10% of the estimated taxes that would have been paid on the wages they actually paid in the preceding full tax year. Confusing, yeah! Here is the example from the VWCSP FAQ.

An employer decides to stop classifying their employees as independent contractors beginning January 1, 2012 and files their Form 8952 on October 1, 2011 and is accepted into the program. Their 2010, the last full tax year, contract labor was $1.5 million and based on the IRS’s section 3509 rules the effective tax rate is 10.68% for 2010 (if no employee earned more than the SS base rate of $106,800). The tax under this calculation is $252,000 and under an employment audit this is what they could expect to pay. However, they would only have to pay $25, 200 as part of VWCSP.

On top on only having to pay 10% of one year, the employer will not have to pay any interest or penalty on the tax and they won’t be audited for payroll taxes for any prior years. The only concession the employer has to make is to agree to a six year statute of limitations for the first 3 years they are under the program. The statute of limitations is usually just 3 years.

It will be interesting to see how many employers make the change. If they do, this is a great deal they should consider. For more info, please check the VWCSP page where you can find links to Form 8952 and Announcement 2011-64. If you are already under audit for mis-classification of employees, you might want to check out the Classification Settlement Program.

Ask Questions.

I don’t want the previous post to give you the idea that that I have a problem with clients asking questions. (In that case, the problem was the client arguing for the incorrect opinion of a non-preparer over the actual rules I was giving him/her.) I really do like clients to ask me questions about their taxes. It doesn’t matter when they ask their questions. I have clients who come in to their tax interview with a stack of newspaper clippings or a list of questions. Others call when the question arises. Questions let me solve or prevent a tax problem and they help me do my job better. Questions help the taxpayer to understand their taxes a little bit better and that is always good.

I can’t foresee every possibility when I talk to someone about what records they need to keep. This is especially true for a business with specialized expenses. If the client asks about a specific expenses when they start the business or renting the house, I might have to tell them “no” but it’s more likely I will tell them “yes” and suggest special record keeping tips if it seems a good precaution. And they definitely need to ask when I am preparing their return. We might have to dig for receipts but at least the client hasn’t missed the deduction. I’m not a mind reader. I can’t know every detail of every business. But if the client gives me a little insight by asking a question, I can help them and learn something too. The same goes for credits or other special tax programs. I may have to do a little research if it’s an obscure Federal credit or for a state that I don’t do too often. But the client’s question helps us both.

As I have said before, don’t assume that an IRS or state notice is correct. If the taxpayer calls and asks questions (better yet, brings the notice into the office) It might save them money. I wonder how many married taxpayers paid a tax notice twice because both of them received notices and they paid both of them. Even the newer notices can be confusing, so ask me to explain what it wants.

Life changing event can change your taxes. Children being born or moving out, retirement, divorce, marriage or dozens of other events can effect your taxes and asking a tax professional questions lets the taxpayer plan and prepare and not get a shock in March or April.

Everyone’s taxes are different because their life is different and until they ask, a taxpayer can’t know for sure what is best for them.