Our Taxing Times

2011-The Review

It’s a beautiful but windy winter day and I’d rather be out and about but I did want to do a quick end-of-year post. What I remember about taxes and the tax business in 2011. If you want more info on anything I mention, just search this site using the search widget to the right.

 Tax Laws

Congress spent the year posturing for the cameras and running for re-elections. There was little done in the way of taxes. They did manage to pass a 2 month extension of the payroll tax cut only because of public outrage at their fighting. The special committee on tax reform couldn’t come to any agreement so we are no nearer to real tax reform. They did manage to repeal the 1099 requirements for small businesses. We need to do something about the tax gap but they has to be a better way.

IRS Changes

With Congress playing their partisan games, the IRS didn’t have to worry about any last minute changes to the tax forms. They did keep busy changing forms to deal with previous tax revisions. We got a new Form 8948 to report capital gain sales and the Schedule D was changed to work with the new form. The Schedule C, F and E all now have lines to report 1099K income and to check if any expenses claimed are matched on 1099s (or should have been). The IRS has also been busy increasing penalties for not timely filing these forms. Speaking of penalties, the IRS is cracking down on preparers and EITC. Besides higher penalties for not doing proper due diligence on EITC claims, tax pros now have to file a completed EITC checklist (Form 8867) with the tax return. Modernized e-File and mandatory e-file continue to be implemented. The IRS will not be offering tax refunds on debit cards in 2012. The program was canceled because of lack of interest for the program in 2011. I still think there would have been more interest if the program was offered before January. Finally, the IRS is interested in real time processing of tax return. That means holding off processing returns until most of the 1099s and W-2s are submitted.

Preparer Licensing

Tax preparer licensing was a little bit of a roller coaster this year. The process continued with a few back steps. The minimum competency test is now available after being postponed a couple of times. Anyone who has taken the test still doesn’t know if they passed since the IRS wants to review the results. Fingerprinting of preparers is on hold while the IRS works out some issues. After the news that over 300 current prisoners were able to obtain PTINs most by lying about their criminal record, I think fingerprinting will be back once logistic issues are solved.

Tax Business

The business of tax preparation saw the end of RALs. While Republic Bank will still offer the refund loans until the end of April 2012, it was the FDIC’s banning of the programs back in February that really ended the programs. While the loans are gone, the banks have been allowed to continue their other refund program. The big tax prep companies really have been trying to get bigger. H&R Block tried to buy Tax Act tax software but was stopped by the Department of Justice amid monopoly concerns. Intuit has been aggressively wooing tax pros to their software and/or trying to hire them as customer support for their Turbo Tax software. We’re starting to see more ancillary services using the “Cloud” to help tax offices manage client info securely.

Our Taxing Times

2011 has been a good year for the blog. Counting this post, I will have written 186 posts which received an average of 74 page views a day. I may have gone overboard a little with the social media but I think they are part of the reason my readership is up.

I’m looking forward to 2012 and I have several posts planned before I get tied up in tax returns.

Have a Happy and Safe New Year!

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Problems With Your Preparer?

With the new tax return preparer licensing program, the IRS expanded the Circular 230 rules to everyone who prepares tax returns for compensation. Everyone is now following the same rules of behavior. Right?  But what about those who are ignoring the rules? They may be “ghost preparers” who don’t have a PTIN or they may be preparers who look legit but are cutting a few corners. Both groups are playing the odds that the IRS won’t catch them. After all, how is the IRS going to know you exist if you don’t sign the return? Or, how will they know you use pay stubs for early filers without W-2s? They could know because a client can now tattle report them for bad unprofessional behavior.

The IRS has issued Form 14157 where a taxpayer can report a preparer or tax prep firm for illegal behavior. The taxpayer gives the IRS all the info they have on the preparer or firm. Things like name, address, any PTIN/SSN/EIN they know, credentials (EA, RTRP, CPA), and tax years involved. They then use checkboxes to choose their complaints. The IRS outlines 20 complaints which breakdown into broad areas like not signing the return or using a PTIN, false return info, messing with the refund, filing with a pay stub, or not remitting tax payments. My favorite is using off the shelf software or free file.

The kicker is that the taxpayer doesn’t have to give their name. There is an area for contact info so the IRS can follow up the complaint if they have questions but completion is not mandatory.

It’s good that the IRS has a way that taxpayers can report preparer issues. But we don’t know how it will be used by the IRS. How can a preparer respond to a complaint if they don’t know who is complaining? While I’m sure that many of the complaints will be legitimate but this could also be a way for bad clients to harass a preparer who wouldn’t do what the taxpayer wanted. I can also see this used by tax professionals to identify competitors who aren’t following the rules (Pay stub filers come to mind.) And harassment could become an issue there also.

I’d like to know more about how the IRS plans on using the info they receive from Form 14157. I understand that they don’t want to release anything that could allow a tax preparer to work the system. But I want to know if they will launch an investigation whenever a Form 14157 has been filed or will it take more than one complaint. When will the preparer be notified that a form has been filed or will that depend on the type of complaint? Or is it a matter of smoke and fire? If enough Form 14157s are filed, the service will assume there is a real fire behind them? Any ideas?

 

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Alphabet Soup

Over the next few weeks, you will see a lot of articles concerning finding a tax professional to prepare your tax return. I’ll have a post on that topic soon but before that, I wanted to cover what the alphabet soup you will be hearing actually means. CPA, EA, RTRP, ERO, or JD-you see them after tax professional’s names or in advertising but what do they mean.

Currently, all you need to prepare a tax return is a PTIN (Preparer Tax Identification Number). This is issued by the IRS and the number is used by the preparer when they sign a tax returned they prepared instead of their Social Security Number. No training or testing is required. This is changing. A minimum competency test is now live and by the end of 2013, all preparers will have to pass the test in order to prepare tax returns for compensation. The new RTRP (Registered Tax Return Preparers) will also have an annual continuing education requirement of 15 hours. All the hours will be tax related. Currently on hold, part of the new program will include a background check to weed out preparers with a criminal history. By the end of 2013, anyone wanting to prepare tax returns for the public will need to pass the minimum competency test and a background check before they are issued the PTIN and take continuing education to maintain their credentials.

Probably the most identified with taxes, a CPA (Certified Public Accountant) generally has a degree in accounting. They are also certified by the state which means the actual requirements vary from state to state. Besides the decree, most states require the accountant to work for a CPA for a period of time and to take an extensive test. They also have an annual continuing education requirement. A CPA is trained and tested on all areas of accountancy including taxation. Some CPAs specialize in one aspect of the field such as tax or audit. Others have a more general practice.

An attorney (JD) is a law school graduate. They have then passed the state bar exam to practice law in that state. If they want to practice in more than one state, they need to pass the exam for that state. Of course they have continuing education in any area of law not just taxation. Some specialize in taxation others do little or no tax work.

The Enrolled Agent (EA) designation is an IRS program. A preparer qualifies by either working for the IRS in certain positions or taking an extensive test on all areas of tax. They also have continuing education requirement of 72 hours over 3 years and all the hours have to be in taxation. They can practice in any state.

ERO stands for Electronic Return Originator. This title is given to someone on who can electronically file tax returns. Unless they are also a preparer (RTRP, EA, CPA, JD) they won’t actually prepare returns. You’ll see this when a businesses or organization will file your prepared tax return for you. Locally, the Credit Unions have provided this service for taxpayers who have done their own return or used a preparer who doesn’t e-file.

Which set of letters is best? It depends on what you need? If you just need to e-file you return, all you need is the ERO but many preparers also offer the service to the public. After all, they are also EROs so they can file client returns. Looking for someone to prepare your tax return? That’s where some research is necessary and will depend on the specific preparer and what you need. (Tips are coming.) The major difference between the RTRP (general preparer) and the EA, CPA, or JD is what they can do for you with the IRS. A general preparer can help you with the IRS on a return they prepared if the 3^rd party designee box is marked. They are also limited to helping on audits and account issues. The remaining preparers can represent any client on any issue the IRS throws at them.

Those are the major tax players the general public will encounter. Which is best for you?  That post is coming soon.

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If Your Preparer Won't Do EITC

The Earned Income Tax Credit (EITC) began in 1975 to offer lower income families some offset for the social security withheld from their pay checks. Since 1975, the credit amount has grown due to inflation indexing and legislation which expanded those eligible to receive EITC. For 2011 tax year, the maximum credit ranges from $464 to $5751. The exact amount depends on if there are qualifying children, how many children and if the return is a married or single return. Think of EITC as a pyramid. It starts at $0 credit and $0 income. Then rises to a high point where the maximum credit is earned and falls back to $0 credit as income continues to rise. The maximum credit and the ending income will depend on the factors I mentioned above. But the income must be earned income. That is wages or self employment income. (Actually, the credit amount is figured twice, once on the return’s earned income and then on the Adjusted Gross Income (AGI) reported on the return and the lower amount is used.)

EITC is a good program and helps a lot of families. Unfortunately, it is a fraud magnet. According to TIGTA’s May 2011 report to the House Ways and Means committee (download), The IRS estimates between 23% and 28% of the EITC payments are improper. In 2009, this resulted in $11 to $13 billion in improper payments. As part of a program to reduce the bad EITC claims, the IRS has begun to put more pressure on the tax professional community. If a paid preparer doesn’t do adequate due diligence to make sure a client does qualify for EITC, they could face a $500 fine for each client they qualify but shouldn’t have. On top of that, the due diligence checklist (Form 8867) must be completed and filed with the return to verify each claim. In response to this, many tax preparers are no longer accepting EITC clients. My worry is where will these clients go if their preparer won’t do EITC?

EITC returns are generally the first returns I see in January. These clients know they will be getting a big refund and too often they have spent the money already. Faced with finding a new tax professional, I’m concerned that they might not due a little research and end up with a really bad preparer or try to do it themselves. If that happens to you, ask your former preparer for a recommendation of a preparer who is still doing EITC returns. Once you find a preparer or decide to do it yourself, I have a few suggestions on how to evaluate the work done by the computer or new preparer before the return is sent.

• Be prepared for a bunch of questions about your income, marital status and dependents. It may seem like the preparer or program is prying, but this is proper due diligence. You should also be asked to sign the due diligence check list to verify the info. If the preparer doesn’t go over it with you, take the time to read it. If you have questions, ask them and get real answers.
•  Once the return is done, is there a major change from previous years? Ask why? Don’t assume that the new preparer found a magical source of money. Have they changed your filing status? Missed or added a dependent. Adjusted your income? If they have, be wary and get a second opinion.
• If you’re using a computer program and something doesn’t look right, call their support people and make sure that you didn’t make a mistake. Don’t rely on the advice of your buddy, barber or any non-tax pro because they won’t be the ones facing the IRS if there is a problem.
• If the new preparer charges based on the size of your refund, leave. Not only is it illegal but they could be manipulating your return to fraudulently increase your refund and their fee.
• Be wary of up selling. Many preparers who do EITC returns have refund programs. But you don’t have to use the program if it’s offered. Understand what you sign.

It’s hard on the client when they have to find a new preparer but I understand why tax pros don’t want to mess with EITC. If this happens to you, take a deep breath and spend a little time finding a good preparer. Stay in control because you are the one who will have to deal with any problems.

 

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World Ending - Taxes Continue

As I head into the filing season, I wonder if we will see a big drop in return filings in 2012. After all, the world is ending in 2012 so why waste the time on tax compliance?

This is it, 2012, the year that has been pointed to since the beginning of this millennium as the time the world will end. Proponents point to the Mayan Calendar ending in 2012 as proof. And if it’s not the Mayans, doomsayers cite Nostradamus or Revelations or Buddhist Eschatology. Want something more modern? There are end of the world theories that cite a rare planetary alignment in 2012 and let us not forget the planet Nibiru (Planet X) that is suppose to be our downfall.

There is no shortage of theories claiming that 2012 will be planet Earth’s last. And there are no shortages of experts pointing out logical, intelligent responses to each theory. But theories continue to be debated and the History Channel can load its schedule with all the documentaries that have been filmed on the subject.

So what is a taxpayer to do? Should they act normal and file as usual or hold off filing and see what happens. If the end comes, they’ve saved themselves a headache and maybe some money. But if 2013 dawns bright, the procrastinators will have more work to catch up. Actually, I think the “end of the world” defense will be used as a rational for people who would procrastinate and not file anyway. Maybe we’ll see it as an argument to convince the IRS to forgo interest and penalty; “You see, I shouldn’t have to pay interest and penalties because I expected the world to end and I felt the US wouldn’t really need my money.”

 More on all the doomsday theories.

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Metadata and the IRS

Anytime you use a computer, you leave a trail. The system records the documents and programs you access and when they were created or changed. This is called metadata and according to the IRS Chief Council it can be requested by the IRS. Information Letter Memorandum (ILM) 201146017 states that the IRS can request (subpoena) metadata and use it to corroborate other documentation presented in an audit.

Let’s say I’m being audited and I provide the IRS a scanned PDF of a receipt for a new computer bought in 2010. The IRS questions the date because it’s smudged and requests metadata from my computer. If the metadata shows the document was created after the date of purchase, I’m probably okay on that item. But if the creation date is before the purchase date and there have been changes to the document since then, I’m probably in a little trouble.

This ruling follows a trend of the IRS requesting computer files during audits. They can also request a digital Quickbook file. I don’t know what taxpayer protections the IRS will put in place when they handle this data. If they want to trace the creation and changes to a specific document, I can understand that. However, I would need to be assured that they aren’t snooping at other files. But this may not be something we will have to worry about in most audits. I’m sure the costs of obtaining and analysis of the metadata will restrict its use to bigger cases especially if fraud is suspected.

Thanks to Brian Mahany at Due Diligence for the heads up.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

But What About AMT?

You can’t miss it, it’s been all over the news, the House will vote on the 2 month extension of 2% cut in employee social security contributions and are expected to pass it. Yeah! But what about the other expiring tax cuts?

There are over 2 dozen tax provisions that will expire on December 31, 2011. They include the $250 teacher supply deduction, mortgage insurance deduction, sales tax deductions, a slew of business credits and deductions and AMT. Yes, Alternative Minimum Tax is back on January 1^st, 2012. At that time, the current patch is gone and we are back to lower exemptions and more taxpayers caught in the AMT trap. You remember AMT; our 2^nd tax system that was created to make sure the very rich paid some tax by taking away certain deductions and exemptions. The tax that was not indexed for inflation or seriously reformed and can now be triggered by average income and deductions. Also expiring is the ability to use most non-refundable credits to offset AMT. There are a few credits which can still be used against AMT like the Adoption Credit, Child Tax Credit, Retirement Saver Credit and the Residential Energy Credit. These remain because their ability to offset AMT was written into the legislation for that credit.

Congress will now have to deal with AMT (and the other expiring cuts) in 2012 and make any extensions and patches passed retroactive to the first of the year. I’m sure given the current partisanship and that it’s an election year, we won’t see those changes until this time next year. While Congress might let some of the provisions expire, I seriously doubt that an AMT patch will be one of them. I also doubt that we’ll get a permanent fix to AMT. (Please, please, please prove me wrong Congress!)

So, this time next year we’ll be in the same boat waiting for Congress to fix and extend all the tax patches and tweaks. And we’ll be waiting to see if they will do anything about the extenders that will expire 12/31/2012 or postpone those to late 2013.

 

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Merry Christmas

Just a bit of holiday cheer! I hope everyone has a safe and happy Christmas. (I always wanted to be in the movies.)

 

Thanks to the KSOK Good Guys for the heads up!

Compromise? Cave In?

I don't care what it's called, it looks like the 2 month extension of the payroll cuts is back on again. There is suppose to be a House vote on Friday on the Senate passed plan. Besides the payroll cuts, the bill will also maintain doctor reimbursements for medicare and prevent a drop in unemployment benefits.

This compromise will only be for 2 months but part of the agreement is for a conference committee to look at a longer solution.

We'll see.

Got License?

As anyone who follows this blog knows, the IRS has mandated that all paid preparers have a PTIN. Getting a TIN is relatively painless (there is a $63 fee) and it's good for one year. So anyone who got a PTIN last year, must renew it before they can prepare returns in 2012.  You just have to bop over to the IRS's Preparer Licensing page to get started.

If you are a new preparer and have never had a PTIN, you really have to get a rush on it and apply. While renewals will continue, the PTIN application system for new preparers will be shut down for maintenance for 2 weeks. From Dec. 26th at 5pmET to Jan. 9th at 6am ET, no new PTINs will be issued.