Our Taxing Times

More Instant Tax

I have returns to do! I shouldn’t be messing with Instant Tax Service’s (ITS) injunctions but it’s like watching one of those “dumbest _____ in the world” shows. You can’t believe how stupid/fraudulent people can be. There were several injunctions issued, one for the owner in Dayton, OH and 4 more in Chicago, Indianapolis, Las Vegas and Kansas City. I’ve only fully read the injunction for the KC area but that one is bad enough. It could have been used as a how to guide to prepare bad returns. The government found the following issues:

• ITS fabricated W-2 and filed return using pay stubs. They actually used software to create dummy W-2s to put in customer files.
• Since most pay stubs don’t have the business’s EIN, they maintained a list of area EIN so they would have the info needed to file without a W-2. If the employer wasn’t in their EIN list, they used the number and name of another business.
• They created phony business income for Schedule C’s. The idea was to maximize Earned Income Credit. They were smart enough to claim expenses make the Schedule C appear more realistic.
• They claimed the education credit when the taxpayer had not taken college classes.
• ITS would regularly file married taxpayers as single or head of household to increase the refund.
• They would draw customers in with holiday loans then file their return when electronic filing began. They would do this without the taxpayer’s signature on the e-file form.
• ITS, through Tax Tree (a loan company also owned by the owner of ITS), offered false and deceptive loan products. The loans were used to draw customers in so they could gouge them with fees. The Ohio injunction against ITS owner Fesum Ogbazion charges that the average fee for the top 80 franchises was over $400.
• Finally, ITS hired unqualified tax preparers and didn’t train them to do taxes but to create fraudulent returns. They also told their employees that they couldn’t get into trouble for creating the bad returns. It would be the client’s problem.

The government estimates that the KC Metro group cost the US Treasury $2.3 million in false refunds just for 2011. Based on a review of 2000 returns prepared, it’s estimated that 60% of the returns ITS filed were fraudulent. The IRS has been auditing ITS’s work since 2008 and has issued warnings and reprimands which have been ignored.

So this bunch of ITS franchisees and preparers will not be allowed to be involved in the tax business in the future. And they have 30 days to notify, by mail, all clients who they had prepared a tax return since 12/1/2010 that there may be problems with their return and give them a copy of the injunction. They also have to give the government’s lawyers a list,  with all contact information they have, of everyone for whom they prepared a Federal return for since 12/1/2009 within that same 30 days.

It will be interesting to see what financial penalties will come out of this. The injection mentions sub-sections 6694(a) and (b) and 6695(g). 6694(a) is for taking an unrealistic position and carries a penalty of the greater of $1000 or 50% of the fraud. 6694(b) is for the willful disregard of the rules and could cost the greater of $5000 or 50% of the fraud. Finally, 6695(g) is $500 for not doing EITC due diligence. All of those are for each incidence found.

Instant Tax Service has been a thorn in ethical preparers’ sides for a long time. These investigations have been going on quietly for years. ITS’s competitors have long been frustrated by the apparent lack of concern on the part of the IRS. I know that they have been a topic of discussion on the Drake Software Forum. And it’s important to note that ITS was blatant in their disregard of the rules even after warnings from the IRS. But there still many preparers that are guilty of all or some of the same infractionswho will fly under the IRS radar.

I’m sure these injunctions will spark discussions. Could the IRS moved earlier and saved taxpayers the problems caused by ITS? Will these injunctions really stop these people or will they just move to a new location with a different name? Will licensing help get rid of bad preparers like ITS? How hard should the IRS come down on the clients ITS used? What financial penalties will ITS get hit with and don’t forget civil lawsuits? What about criminal charges? As more info comes out about the ITS, I’m sure there will be more questions.

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Instant Tax Service

Back in January, I wrote a blog post called RAL Bounce about a problem some Instant Tax Service clients had had with their refund loan checks bouncing. My point was that the RAL weren’t completely dead because there were finance companies that would fill the void.

Shortly after that, I heard from Todd E Bryant the General Counsel for Instant Tax Service asking that I remove or correct my post based on info he provided. Instead I added his e-mail to the original post.

I didn’t hear from Mr. Bryant again but I continued to hear a lot about Instant Tax Service and the problems their customers were having. Customers were complaining about returns being filed without their knowledge, outrageous preparation fees, and their checks being held hostage. When they tried to contact Instant Tax Service, they couldn’t get their problems solved. In some cases, the offices had to hire security to keep angry clients under control.

Well, Mr. Bryant will be keeping busy because the Justice Department has filed a permanent injunction against Instant Tax Service, the owner Fesum Ogbazion and several franchisees. A couple points from the injunction:

• Instant Tax Service uses its false and deceptive loan products principally to lure customers into its local stores so that franchisees may charge them unconscionably high tax preparation fees and added fees. Ogbazion calls the added fees “junk fees” and “revenue generators.” The junk fees include bogus charges for: “service bureau,” “document preparation,” “refund estimate,” “technology/software,” “account set up,” “check printing,” and “Efile/electronic transmission.” Collectively, the tax preparation and junk fees charged by Instant Tax Service typically average $400–$500, and sometimes run as high as $1,000 or more, for as little as 15 minutes of return preparation.
• Although Instant Tax Service boasts of being one of the fastest growing tax preparation franchises and “Entrepreneur Magazine’s top new franchise,” it has been overwhelmed for years with complaints from taxpayer customers about poor service, incompetence, and most predominantly, fraud. For instance, in the past 36 months consumers filed over 900 complaints with the Better Business Bureau in 48 service areas across the country covering Instant Tax Service stores nationwide. Hundreds of additional complaints have been posted to online consumer protection forums such as “The Ripoff Report.” And Instant Tax Service offices nationwide have been the subject of numerous local TV news consumer fraud reports. Most of the complaints focus on Instant Tax Service stores filing tax returns without the customers’ knowledge or consent, making false and deceptive representations to customers, and charging unconscionably high and undisclosed fees. Moreover, IRS audits of individual Instant Tax Service customers, as well as other efforts by the IRS to monitor Instant Tax Service’s compliance with the internal revenue laws, demonstrate systemic misconduct by Instant Tax Service locations nationwide.

We may see the end of Instant Tax Service but we can expect that someone will take their place. Taxpayers-please know what you are signing when you get a pre-tax season loan, look at the fees they are charging you, and get copies of anything you sign. Better yet, avoid the pre-season loans and find a reputable preparer to help you with your taxes.

PDF of the Injunction

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When to Extend

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 about what the client is going to owe so that they can pre-pay that.

The IRS gives individuals an automatic 6 months to file a return. The due date for 2011 tax returns is October 15, 2012 Of course; you can always file the return before that. BUT! An extension is not a delay in paying. It just means 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.

I just said that if you are getting a refund, you don’t need to file an extension but you should if you want to protect the right to elect a special tax treatment. Many elections must be filed with a timely filed tax return and that could include extended returns. For example, a net operating loss is generally carried back to prior years (the number depends on the IRC at that time). But you can elect to just carry the loss forward. But the statement must be filed with the return by April 15^th (17^th this year) unless you file an extension on time. Then you keep the option available until the return is filed or October 15th.

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 unless you want to protect a special election. 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 the extension but not pay anything but you have to be prepared for a notice wanting interest and penalties for not pre-paying your tax.

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Careful With Your State Return

You have your Federal tax return done, but what about your state return? The best way to approach that return is with the same care as you did with your federal return. In some cases, the state makes few changes to the income from the federal while with other states you almost have to do everything over again. So, here are a few things to think about as you prepare your state return.

• Do you have to do a state return? There are several state with no income tax; Alaska, Washington, Nevada, Wyoming, Texas, South Dakota, Florida, Tennessee and New Hampshire. But double check if you live in one of theses state for other “special taxes”. Tennessee and New Hampshire have a form of intangibles.
• Did you take advantage of Bonus Depreciation on your Federal return? Then you might want to check if your state allows the extra deduction or if they modify it.
• Is there special treatement for Capital Gains?
• There are some forms of income that states may choose not to tax. US Government interest generally isn’t taxed on the state level. And look beyond the savings bond you cashed in. A lot of mutual funds are partially invested in US securities and the brokerage statement or accompanying information should tell you what may not be taxable in your state. While we’re talking about interest, tax exempt interest may be taxable in your state or only exempt if the bond meets special criteria. Also, look at retirement income and taxable social security. Some states have special rules concerning pensions and social security.
• How does your state treat your Federal credits and deductions? A lot of states have their own version of the Child Care Credit, Earned Income Credit, or Education Credits. Or they might add special credits on the state tax return or on a separate form. States might also allow a state deduction for contributions to 529 plans and Long Term Care insurance.
• Is it better to itemize deductions on your Federal even if they’re lower than your standard deduction? For most states, you have to itemize deductions on your Federal return to be eligible to itemize on your state return. But because of lower state standard deductions, the few dollars more in Federal taxes may be more than offset on your state tax return. (In Kansas, it could mean the tax on $5000 or more for a MFJ return.)

This post is just to getting you to think about your state return. The best suggestion I can make is to download the line-by-line instructions and read those through to see if you’re missing something. It could save you some money or stop a future “oops” letter. Or see a tax pro. I know I do a couple of state only returns for new clients this time of the year.

 

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PTIN for CPE

Several weeks ago, the IRS issued info for continuing education providers for IRS approved CPE. At the time, I was busy with clients and I didn’t pay much attention to the notice. But it’s come to my attention that the CPE providers will be requiring the PTIN of the preparers taking the continuing ed and reporting this to the IRS. This data will be used to verify the RTRP compliance to maintain the preparer’s PTIN. CPE providers will be required to electronically submit this info to the IRS (in the 4th quarter within 5 days of the class) so that it will be available for PTIN renewals. The reporting is scheduled to start in July of this year.

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Aging Parents

One of the best things about my job is the clients. Yes, some can be the pits but many are a joy to see each year. But each year we all get a little older and clients are no different. It’s sad to read or hear about a client passing away. But also it’s hard when the client slips mentally and physically especially when that impacts their taxes. Clients who were always prepared for our meetings with their source documents and notes organized begin to forget basic things like 1099Rs. Their notes stop being organized and become confusing. I get all the info I need but it takes several long calls to get what’s missing..

But it also means that I run into tax issues I would have never seen when they were are the top of their game. Balance dues and estimates not paid, minimum distributions from IRAs not taken, stocks sold but with no idea of what they paid for it. You get the idea.

Oh, and one other, family members sticking their nose in after the damage is done. I’m not talking about the son who brings dad in for his appointment and helps answer my questions. Or the granddaughter who drop off grandma’s stuff because grandma can’t drive but can answer my questions if I call. No, I’m talking about the family member who calls because they find a tax bill or they are shown a return with a big balance due. They call wanting answers I can’t give without a release from my client (too often they are family members that I’ve never dealt with before.) They rant and try to blame me. They don’t want to get a release but they want answers. Too often they want an easy, for them, solution.

I can’t control what happens when I give the client their copy of the return and anything they need to file or pay. The same goes for decisions made that impact on taxes. I’m only brought in to do the return. The family has to recognize that they may have to start stepping in and taking control of their loved one’s tax situation. It’s a delicate situation. I had to do it for both parents and a Grandmother. You want them to feel they have control over their taxes but at the same time you want to make sure everything is done correctly. What can you do? Become familiar with their return so you know what needs to be paid or filed. If there is talk about moving money, suggest they talk to their tax pro and offer to go with them. Get a tax power of attorney if necessary.

Any good tax pro is going to try to file the most accurate return possible. But that’s all we can do. The rest is up to the client and their family if the taxpayer can’t do it any longer.

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Tax Debt In the Real World.

TaxMasters, one of the firms filling late night TV with promises to settle your tax debts for “pennies on the dollar” has filed for bankruptcy. They join JK Harris and Roni Deutch not only in bankruptcy but facing state charges for fraud. Basically, the taxpayers these firms help are themselves not their clients. So, if you owe the IRS what can you do? Get good help from a tax pro who doesn’t make promises they can’t keep. And you have to realize there is no magic formula to solve your tax problem.

Who can you turn too for help? An Enrolled Agent, CPA or attorney can represent you with a valid Form 2848-Power of Attorney. Other tax pros can help you get info and act for you in limited circumstances. They may need a Form 8812 to do that. For more info on representation, please check this post. Besides giving your representative authorization to act for you, you should expect to pay a retainer for services. If you can’t afford the preparer’s services there are low income tax clinics which specialize in representational work.

The first issue to resolve is to make sure that all your tax returns are filed. This may be the actual problem of your tax debt. When a tax return isn’t filed, the IRS uses the information they have from W-2s and 1099s. But these calculations don’t take into consideration the basis, expenses, deductions, and credits to which you are legally entitled. The IRS doesn’t have that info. By filing a return, you might find that your balance due disappears. The IRS also won’t work with you on an Offer in Compromise until all your returns are up to date.

The Offer in Compromise (OIC) isn’t you making an offer about what you want to pay. It’s a serious look at what you can pay. Most taxpayers will have to complete a financial statement which lists income, assets, living expenses and other debts. And the IRS expects to be paid before most other creditors. It’s not the easy solution firms like TaxMasters make it sound.

If the OIC doesn’t work for you, you can set up an installment agreement with the IRS. This will allow you to make monthly payments until your debt is paid off.

Being in debt with the IRS is not fun and getting out of debt is not easy. Please don’t let the late night pitches convince you otherwise. Use the links in this post to educate yourself about your options and find a tax pro that will work for you. There are no guarantees that your debt can go away but it may be possible to make it easier to handle.

IRS Fresh Start Program

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That Reminder-2012

Your Failure to Plan Is Not My Emergency!

There are only 4 weeks and 1 day before tax returns are due. (You have until April 17^th this year due to the combination of a weekend and Emancipation Day.) But that does not mean you should wait until the last minute to get your return to me (or any tax pro). Yours isn’t my only return on my desk. If you leave it too late, I won’t be able to get your return done without an extension.

I know there are all kinds of reasons why you procrastinate, but that doesn’t really matter. The bottom line is there are only 24 hours in the day and I can’t pull extra tax time out of thin air to accommodate late returns. The longer you procrastinate I have less time to work on your return. This is when missing info or unexpected circumstances can hold up the tax prep past April 17^th. You don’t want that to happen.

The best idea is to get your tax documents to your preparer ASAP. If you put it off, don’t look for too much sympathy from me. You have been warned.

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Responding to Taxgirl

Because Twitter doesn’t give me enough space to fully answer, I have posted here.

Kelly Phillips Erb wrote several days ago about the fact that attorneys, CPEs and Enrolled Agents, (EA) are exempt from the RTRP testing but they shouldn’t be. Today, she posted this on Twtter over 2 tweets:

Sooo at the risk of starting a war on twitter, I am kindly asking why it seems that EAs are so defensive. I have, over the years, a disproportionate # of grumpy emails/comments from EAs telling me about testing, etc. I don't get this from any other tax pros.

Well, Kelly I can only speak for myself, but I think you’re getting grumpy comments from EAs on this issue is because we’re tired of being treated like a red-headed stepchild. It’s frustrating to read a tax article and see that it ends with the advice to see my CPA. It’s frustrating when most people assume I’m a CPA because I prepare tax returns. It’s frustrating when people in the business don’t recognize your accomplishments.

As for the testing issue, I shouldn’t have to take the RTRP:

Because I’ve already taken that test.

Everything that is on the RTRP test is on the Enrolled Agent exam. Plus a lot more. So it’s very frustrating when the financial media and tax peers ignore my hard work and think I should do it all over again because they want to lump me with the untested or partially tested. And what’s really frustrating is that I may have to take the test because it’s easier than explaining to people why I don’t have to take the test.

Frustration tends to make me a little grumpy.

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Preparer Licensing Lawsuit

It only took a couple of years but there is a lawsuit in the making over the licensing of tax preparers. According to an article on Smartpros, the Institute of Justice is planning on filing the suit on the behalf of three tax preparers this week. They are alleging that the IRS doesn’t have statutory authority to require licensing without Congressional approval.  Maybe they need to look again.

In the original report issued in January of 2010, Pub 4832, IRC section 6109 is cited as to why the IRS doesn’t need Congress to require licensing. Specifically look at 6109(a)(4):

Any return or claim for refund by a tax preparer shall bear such identifying number for securing proper identification of such preparer, his employer, or both, as may be prescribed.

The IRS has chosen to prescribe the PTIN as the identifying number and set the requirements to obtaining that number. Remember, once the phase in is completed a preparer can’t get a PTIN without passing the test and undergoing a background check. The continuing education is required to renew annually.

Besides the statutory authority argument, the lawsuit argues that licensing will reduce consumer options and increase prices. Let’s look at cost for a minute. The test is one time only and runs about $100. Annual renewal of the PTIN registration is $65. My CPE costs averaged $19 per hour last year. So, estimate $25 for 15 hours for $375 total. That’s a total of about $540 for the test year and $440 for other years. The plaintiffs seem to average 100 returns a year. That makes an average increase per return due to maintaining licensing $4.40 to $5.40. Not that bad of a price increase. As for the decrease in options because preparers will leave the field, if they can’t pass the test, they shouldn’t be in the field. If they aren’t willing to keep up on tax laws with continuing ed, they should get out of the business. Sorry no sympathy from me.

There are tax pros who don’t like the idea of licensing. I understand that. But this lawsuit seems to be more for the attention.. As I see it, if there was a solid legal argument against preparer licensing a lawsuit and/or injunction would have been filed long ago.

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