Our Taxing Times

More Money for IRS

Just a month after the Taxpayer Advocate Office suggested it in their annual report to Congress, President Obama has proposed an increase in the budget for the IRS in his fiscal 2013 budget.The Administration is proposing allotting the IRS $12.8 million which is $950 million more than they will receive this fiscal year. I don't know if there is a cause and effect correlation but I think it's a good idea. I don't know if this year's refund disaster could have been prevented with more resouces but more people and better equiptment could only help bring in more income.

More info.

Still Refund Delays?

Please don’t spend your tax refunds until you see the money. I said that earlier this year but it’s worth a repeat.

Earlier this season, we had problems with the IRS delaying refunds until they could adjust the system that screens returns for fraud. Just when it looked like everything was caught up and back on schedule, I’ve started hearing things from other preparers and having problems myself. Returns which haven been accepted are not showing up on “Where’s My Refund” 5 days after they were accepted. Those returns showing as being processed are showing a refund date a week later that the IRS’s refund chart.

The IRS has always given itself an extra week pass the date on their refund chart. But I have seldom seen them take the extra time; most refunds came on their targeted date. To add to the confusion, some refunds are being sent out early if they qualify for the CADE system. No word from the IRS if there are problems again.

Bottom line; don’t spend the money until you get the money in your account.

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Options for Your Refund

If you qualify for a federal or state tax refund this year, there are a couple of other options open to you besides just receiving the money.

If you have a federal tax refund coming, you can use all or part of it to buy a savings bond. This program began in January of 2010 and allows taxpayers to use their refund to buy savings bonds two ways. They can have a paper bond sent to them by using Form 8888 when they file their tax return. Form 8888 has 2 parts. The first allows the taxpayer to allocate their tax refund to be deposited into up to three accounts. The second part allows them to designate part of their refund to purchase savings bonds. The amount must be in multiples of $50 and the bond can have co-owners or an owner and a beneficiary. Any refund remaining after the saving bond purchase and direct deposits is refunded to the taxpayer in a paper check. If the taxpayer has a Treasury Direct account, they don’t use Part 2 but Part 1 to deposit the amount they want into their Treasury Direct account and purchase electronic bonds that way.

On the state level, many states have check-off programs that allow you to allocate part of your refund to help a special program or programs. Kansas has always had the Chickadee Checkoff contribution on their return and they have expanded the list to include check offs for senior meals on wheels, breast cancer research, and emergency relief for military service people. Oklahoma has 13 different options. Check your state return to see what programs are available for contributions.

 

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Kansas Tax Reform Proposal

Gov. Sam Brownback’s State of the State Address last night proposed some changes to Kansas’s income tax system. His plan proposes to reduce tax rates and eliminate most deductions and credits for individuals. Business taxes could also be eliminated. The tax cuts would be paid for by reducing spending, cutting tax deductions and credits, and keeping a 0.6% sales tax which is set to expire in 18 months.

Currently Kansas has 3 tax rates. For non-married taxpayers, the rates are 3.5%, 6.25% and 6.45% with the higher rates beginning at $15,000 and $30,000 respectively.  Taxpayers filing Married Filing Joint currently don’t see a rate jump until $30,000 when their rate goes to 6.25%. Their tax rate won’t increase to 6.45% until $60,000. Under the Governor’s plan, there would only be two rates. It would reduce the lower rate to 3% and the higher rate to 4.9% with the rate breaks being at $15,000 for non-married filing jointly taxpayers and $30,000 for MFJ households.

Along with the tax rate cuts, the Governor is proposing the elimination of most tax credits and deductions. On the chopping block are the mortgage interest deduction, earned income credit (currently 18% of the Federal credit), day care credit and adoption credit.

The other change proposed is doubling the standard deduction for Head of Household taxpayers to $9,000. Since I see no mention about increasing the Married Filing Joint standard deduction too, Head of Household filing status would have a higher deduction than Married in Kansas.

I have some of questions about the plan. I’d like to see a full list of what deductions and credits the Governor is looking to cut. And is he going to try to end the Food Sales Tax refund and Homestead program and knew better than to mention them in his speech?

I’m not impressed. A married couple with 2 child and $30,000 in income would have a KS tax liability of $501 this year. This would be countered by Earned Income Credit of $607 and Food Sales Tax Refund of $184. Assuming no KS withholding, they would get a $290 refund. But under the Governor’s plan, their tax liability would go down to $429 (a savings of $72). But with the loss of Earned Income Credit, the tax payer would owe the state $245 if the Food Sales Tax refund was still available. The same couple with $75,000 in wages would have a tax savings of $544 if they didn’t have any credits to lose. But these are taxpayers who would be more likely to have a mortgage interest deduction. Losing that deduction would reduce their tax savings.

We still need more info, but this plan looks like it’s going to hurt the working poor to save some taxpayers a few dollars in tax.

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More Money, Please - For the IRS

National Taxpayer Advocate Nina Olson has presented her annual report to Congress. This year’s report identifies 22 serious problems she believes are hampering the IRS’s ability to effectively collect tax and help taxpayers. Her number one issue is that the IRS is not adequately funded. As Ms. Olson states in her report:

The IRS has been a very effective agency, but as we discuss in this report, the imbalance between its workload and its resources is becoming unmanageable.

 Between 2001 and 2010, the IRS has been given 4430 tax law changes. 479 of those were in 2010 alone. For each change, the IRS must explain to taxpayers what the change is and how to work with it, write computer code to process returns, and train auditors to find the improper uses of the changes. They have also been saddled with a number of new refundable credits which has greatly increased the number of fraudulent return filed. In 2011, The Electronic Fraud Detection System (EFDS) marked 1,054,704 returns as possibly fraudulent. This was a 72% increase over 2010.

At the same time, the IRS budget has been reduced (2.5% in FY2012 alone). This results in a cut in taxpayer services. The chance of getting a live IRS employee on the phone dropped from 87% in FY 2004 to 70% in FY 2011. It now takes the IRS longer to respond to taxpayer letters. The Taxpayer Advocate Service (TAS) estimates that half of all taxpayer will wait almost 7 weeks to get a response from the IRS. TAS has also found the IRS taking “shortcuts” in working with taxpayers. More returns are being selected automatically and many times incorrectly chosen. Many of these are not being classified as “audits” and therefore the taxpayer is not receiving the taxpayer rights they are entitled to by law.

By increasing the IRS’s budget, Ms. Olson  believes we would not only see an improvement in customer service but increase the amount of tax revenues. The IRS could allocate more funds to work on tax compliance and fraud. Besides helping the IRS to do its job better, increased funding could also decrease the tax for honest taxpayers. The current tax gap is costing each household $2,680 a year in extra taxes.

Download Full Report

Download Executive Summary

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Social Security And Tax

Are you planning on retiring in 2012? Or, have you retired but will start to draw Social Security? A word of warning, Social Security can be taxable. This isn’t something most taxpayers realize when they talk to SSA and apply for their benefits. Most will check on how much they can earn and not have to pay back benefits, but they assume if they don’t have to pay back then their SS isn’t taxable. Sorry to break the news to you but your Social Security can be taxable even if you don’t work at all.

I took the basic tax class in 1987 and started preparing taxes in 1988. At that time if I was asked if Social Security was taxable, my quick answer was; "If half your Social Security and all the rest of your income is over $32,000 (MFJ) /$25,000(S, HOH) then there is a good chance you will pay tax on some Social Security." The process is not quite that simple and for this post let's not even mess with MFS. The issue is, 24 years later, the cutoff for taxability is the same; $32,000 and $25,000. There has been no adjustment for inflation. Not even a temporary one. In the meantime, the maximum amount that can be taxed has risen from 50% to 85%. During that time, the Social Security taxpayers are receiving has gone up, people are working past retirement, they have better pensions and IRAs, and we have more couples where both have qualified for their own Social Security. This has made a lot more taxpayers pay tax on their Social Security.

Also, Social Security taxability can be triggered by special income like gambling winnings and hobby income. While a taxpayer can offset the special income with losses or expenses, the taxable Social Security can’t be offset and remains taxable.

It is important that you see your tax pro before you start drawing Social Security. They can use all your projected income to see if you will have taxable Social Security. This will allow you to plan for any tax that might arise. Social Security will do withholding on your benefits but only if you fill out their W-4V. They will not withhold for your state tax. But the good news is that many states don’t tax Social Security benefits even if they are federally taxable.

A little tax planning with retirement planning can keep nasty surprises away.

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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!

 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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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.

IRS Garage Sale?

The IRS needs to hold a garage sale. According to a TIGTA study reported in Wastebook 2011, the IRS currently has 22,486 pieces of furniture and equipment in storage. These items have been stored for at least 18 months and require 35,000 square feet of space at an annual cost of $862,000.

Wastebook 2011 is Senator Tom Colburn (OK-R) oversight report on his top 100 mis-uses of federal tax monies. At a time that the Federal deficit it over $15 trillion, we are still spending too much on pork projects and badly handled programs. Of course, the report represents the ideology of the Senator but he does have a good point. The US is wasting too much tax money. Download the Report.

Some of my favorite “wastes” were government programs:

• China is getting $17.8m in US Foreign Aid. Yes, we are giving aid to the country that holds a large percentage of our national debt.
• $20m to develop a “Sesame Street” type TV series for Pakistan.
• $147,138 was allocated to develop a magic museum.
• $113,277 was spent to study video game preservation. They already have a museum.
• But Skiing didn’t, so they received $86,014 for a History of Skiing Museum.
• To study the impact of television on the family, over $700,000 was spent to provide TVs to rural Vietnamese villages. These villages were so remote they had no electricity, so the families also had to be given gas generators to power the TVs.
• A program to stimulate online soap opera production cost us almost $1 million.
• $200,000 was spent to study if taking a “green” position would help a political candidate get elected.
• The Hawaii Chocolate Festival received $48,700 for festival promotion.
• The National Institute of Health give researchers over $175,000 to see if cocaine had an effect of the sex drive of Japanese Quail.
• Lest we forget it, social networking received a couple of grants. A half a million was spent to study if we could trust what we see on sites like Twitter. And over $750,000 was allotted to see how college students use mobile devices for social networking.

But not all waste is coming from pork programs and questionable grants. Senator Colburn also points out instances when legitimate programs have been mismanaged or just not set up well. It makes sense for the IRS to hold onto some currently unneeded furniture and equipment but they need a plan to get rid of all the stuff that will never be reused. (And I bet the IRS isn’t the only federal agency spending lots on storage because it’s easier than cleaning it out.) And every tax preparer can point to the refunds given for the 1^st Time Homebuyer’s Credit or Residential Energy Credits. In 2011, the estimate is $1billion in Energy Credits went to dependents, prisoners and others who didn’t own a home. Then there’s the Office of Personnel Management sending out $120 million in benefits to dead employees. That’s happened for the last 5 years. One man cashed checks sent to his father for 37 years and was only caught when he died.

The sad truth is that none of this will change. Five years from now, the projects and dollar amounts will be different but there will be another list of “how the government wastes money.” Congress won’t give up their “pork” projects, legislation will be put into effect without thinking about possible fraud and Federal agencies will waste money because it’s easier than working to save it.  Sorry about the gloom but it's hard to be optimistic as Congress plays with tax cuts.

 

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