Our Taxing Times

Licensing Update

While most tax preparers have been busy getting ready for tax season and preparing returns, a few have taken the minimum competency test for their RTRP designation. Unfortunately, they’ll have to wait until early March to find out if they pass or not.

According to Prometic:

A sufficient volume of tests is required to determine a statistically valid passing score. The score setting process was delayed until a sufficient number of tests were administered. We apologize for the delay.

Originally test takers were told that their wait would be 6 – 8 weeks.

The IRS is also reminding preparers that when they do pass the test and can begin to use the RTRP designation that they have a disclaimer which must be included on all paid advertising. “The IRS does not endorse any particular individual tax return preparer. For more information on tax return preparers go to IRS.gov.” However, the IRS does not consider business cards to be paid advertising and tax pros are not required to include the disclaimer on them. Notice 2011-45 gives all preparers all the rules on advertising.

Oh, and since no one has passed the test yet, no one should be using the RTRP designation or any variation of the title.

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And An EA Is What?

It’s that time of the year for lists about selecting a tax pro and getting ready to have your tax return prepared. The frustrating thing for me is how Enrolled Agents tend to be ignored in many of these articles. You’ll hear the terms CPA or accountants used a lot but the phrase “Enrolled Agent” is used considerably less. It’s not surprising since there are fewer EAs than CPAs so few writers know about them. And when they do now about EAs they tend to just throw out the phrase with all the other tax pros.

What is an Enrolled Agent?  "Recognized to practice before the IRS." That is the official IRS phrase to explain the EA designation.  It is an IRS program which gives tax professionals the same rights and privileges as certified public accountants or lawyers. An enrolled agent can represent their client at all administrative levels of the IRS and negotiate for that client. Since they are nationally registered, an Enrolled Agent can appear before the IRS in any state.

Luckily, most taxpayers will not need the representation ability of an Enrolled Agent. For them, the significance of an Enrolled Agent status is based in the testing and continuing education required to obtain and maintain the EA status. In order to receive the Enrolled Agent designation, a tax preparer must take and pass a 3 part exam covering all types of tax returns and IRS rules and procedures (or be a former IRS agent/officer). Once the exam has been passed, the IRS must approve the Enrolled Agent application. The applicant is subjected to a background check to make sure they are not a felon and they are up to date on all their tax obligations. If they are accepted, the tax professional is enrolled for 3 years (renewable) and is required to take 72 hours of continuing education in taxation during the 3 years and maintain professional standards. If either of these requirements is not met, the tax professional could lose their Enrolled Agent designation. As a comparison, the test for the new Registered Tax Return Preparer designation has only one part covering basic 1040 tax returns and they only need 15 hours of continuing education in tax a year. Accountant, CPA and attorney rules vary by state. While they may be tested and have CPE requirements, taxation is only part of their testing and education.

An Enrolled Agent can be harder to find because there are fewer than CPAs or accountants. And being an EA doesn’t mean that one is your best choice for a preparer. Remember, there are other factors to consider when choosing a new tax pro. But an EA can be a solid choice for a tax preparer and to help you with a notice from the IRS.

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.

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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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.

RAL's Last Day

The last day any taxpayer can get a Refund Anticipation Loan will be April 30, 2012. After that, you'll have to find another source for a high interest loan on your tax return.  And prior to April 30th, it's going to be hard to find a RAL because only one bank, Republic, will be offering the loans.

The IRS stopped sharing the debt indicator with the refund loan banks in August of 2010 and the banks started pulling out of the business. This departure was hastened when the FDIC and OCC prohibited the banks they regulate from offering the products. Republic was the only bank that fought the FDIC's order. It looks like they have worked out a deal.

April 30, 2012 will be the last day Republic will offer RALs. They will continue to offer Refund Anticipation Checks (RAC). These are not loans but allow taxpayers to have their tax preparation fees come out of their refund. Fees are set and run from $5 on up and depend on the bank and how the taxpayer chooses to receive their refund.

Also as part of their deal with the FDIC, Republic will pay a penalty of $900,000 (down from $2 million) and create an oversite plan for policing EROs (Electronic Return Originator) who offer the RAL. This includes audits of 10% of their EROs that will check documents and policies. They will also use mystery shoppers, create a plan to approve all ERO ads before they are run and create a program to monitor ERO's for income tax return quality and make sure they are charging acceptable fees. Basically, the FDIC will be holding Republic responsible for the actions of the customers who are offering Republic's products.

I'm assuming that the oversite agreement will continue after RALs are gone and the FDIC is planning to monitor RACs too. If that is the case, it won't be long before the other RAC banks are tightening up their oversite too.

 

Thanks to Drake Software for the heads up.

Ghost Preparers

Ghost Preparer! The term conjures images of Jacob Marley haunting Scrooge. A figure in white loaded with chains, money boxes and account books. The reality is that this is the term which has become tied to people who prepare tax returns and don’t sign the return. I first read the phrase in a speech given by IRS Commissioner Shulman. Since then, I’ve read or heard it several times. Works for me since what I’d been calling them wasn’t as elegant (or, generally, as polite).

Who are the Ghost Preparers? For me, they breakdown into two groups. The first are the “friends” who do a return for a case of beer or a little pocket money. Most would never consider themselves preparers or market for more clients. I don’t worry about this group too much since they are at least trying to follow the rules. Also, they send me people when the return is more complicated than they can handle. It’s the other group of ghost preparers that worry me. These are the ones who are blatantly trying to run up refunds with bogus deductions or illegal filings.

Meet “Slick Willie (SW)”. No, not that one. During my first year in business, I e-filed returns that I hadn’t prepared. These were returns that were self-prepared or prepared by a preparer who wasn’t e-filing at the time. That year I filed 4 returns that SW prepared. None were signed and all the taxpayers swore they hadn’t paid him. Three were for sisters whose father was supposed to be a friend of his. The fourth was his “nephew”. All had to be sent back to be corrected (some had to be sent back several times). (When I e-file a return I don’t prepare, I have to have a signed copy of the return exactly as filed in my records.) The issues were simple math errors or the wrong number transferred from a tax or EIC table to the return. Inconvenient but no red flags. It wasn’t until the next year that I saw a really bad return. This was a single taxpayer who SW had taken all kinds of personal expenses as business expenses. These were taken directly on the Sch A avoiding Form 2106. There were deductions for commuting mileage, his utility bills, gifts and clothes. (He was a salesman driving a company car out of the local office and wearing company issued shirts with his jeans but still spent $1000 on “work” clothes and took over a $3000 deduction for utilities for his “office in home”.) By the time SW was done with the itemized deductions, the taxpayer didn’t owe any tax. I stopped e-filing any return I didn’t prepare right then. When I called the taxpayer to pick up his return and explain why I wouldn’t file it, the phone was answered by his wife. I had already filed a SW return that year for her as Head of Household. Not good! The IRS did catch up with him and several of his former clients are now with me. One of them gave him the name “Slick Willie.” The story doesn’t end there because SW is still in business. The IRS shut him down here so he moved 30 miles away in another state. Since he doesn't sign his return, the IRS will have to get him through a client's audit.  Again!

The IRS has promised to deal with ghost preparers by targeting paper returns that look like they were prepared by someone other than the taxpayer and sending the taxpayer a letter explaining the paid preparer rules. I hope they do follow up with taxpayers who consistently get that letter and audit or fine them when necessary. It sounds a little harsh but they’re the ones keeping the Slick Willie type of preparer in business because they don’t care that their return is wrong as long as they get their refund. Cut out the clients and ghost preparers will have to find another profession to haunt.

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Don't Scare Them Off!

The minimum competency test for the Registered Tax Return Preparer designation is now open for registration. Currently the exam is not available in all Prometric locations but as the test has been vetted, more locations will be opened. The test fee is $116.

Prometric has created a video that will walk you though the process of taking the test and visually covers most of the same material as in the Candidate Test Booklet (download) that I reviewed in a previous post.

They have also created a test taking tutorial. The first part is the “how to take the test” tutorial that will be available at the test site. The second part is a 5 question mini test. My Take? First, you don’t get graded on this test. I’m a little test competitive and I was disappointed that I didn’t find out how I did. Also, the test “result” screen showing completed, incomplete and “marked” questions is fake and has no relation to how you answered the questions. (I actually took the mini test a second time before realizing what was happening. I said I was competitive.) I did like that you could mark a question for review later. Finally, the questions are hard. NATP doesn’t believe that these are actual questions but questions pulled off an old SEE (Enrolled Agent) exam. I would suggest using more realistic sample questions so they don’t scare off too many people.

I doubt that Prometric will see too many test takers before mid-April. It’s Christmas! Who wants to spend the money and time to take a test they have plenty of time until it’s due. And then comes tax time and preparer will have a better use of their time than taking a test. But come April, Prometric is going to be busy.

A Date - Sort Of?

The IRS has finally, sort of, set a date to open registration for the new competency testing for the RTRP (Registered Tax Return Preparers) designation. According to IR 2011-111(not on the IRS website yet), tax preparers can begin scheduling their test date next week (week of Nov. 28). (We’ll see!) The test will be administered at Prometric testing sites and will cost $116. At first, not all Prometric locations will offer the test but the IRS expects to add sites quickly and soon offer testing in all 260 US offices. But the first test takers will not know if they passed the test for 2 to 6 weeks. The IRS wants the time to figure out what is pass/fail and to “validate” the exam. Once the test is vetted, the IRS says that candidates for the RTRP will know if they passed once they finish the test. But the early birds will have to wait until mid- January 2012 for their results. Still 2 to 6 weeks is better than the 2 to 6 months it could take the IRS to issue the SEE exam results for EAs. Then the Service would look at questions with high error rates and pull them out of grading consideration if it could  be argued the question wasn't clear. I remember 6 or 7 questions that were given to everyone for that reason.

But back to the RTRP. The IRS has put the fingerprinting requirement on hold for now. This doesn’t mean that they are backing off of their requirement to make sure RTRP candidates have not engages in unsuitable (fraud, perjury, theft) behavior. But there are some concerns about fingerprinting. The IRS is looking at who they want fingerprinted and who will actually do the fingerprinting. However, use of the RTRP designation will not wait on background check. Once a paid preparer has their PTIN and passed the competency test and tax compliance check, they will receive their RTRP certificate. They may still be subject to the background check once the IRS figures out the procedures.

A reminder - PTINs must be renewed annually. The cost this year is $63 and can be done online on the IRS web site.

That's What I Would Say

This afternoon I picked up an e-mail that had a copy of IRS Commissioner Shulman remarks at the AICPA fall meeting today (11/8/11). A good part of the speech covered the tax return preparer licensing. There was nothing much new in his remarks on this topic. Nothing that a CPA attending the meeting wouldn’t already know.  I had just come from reading a tax forum where a collogue was complaining about a regional car dealership that was already advertising about bringing in pay stubs to figure the customer’s refund as a down payment on a car. Since no return can be filed for a couple more months, I assume the dealer is just getting an idea of the potential refund for a loan. But I know that many non-tax businesses have prepared and/or filed tax returns for clients and I wonder if Commissioner Shulman is talking to the wrong groups. Maybe his time would be better served talking at car dealership and pawn shop meetings instead of CPA meetings.

While I’m sure that Commission Shulman (or any IRS representative) would be much more diplomatic, here’s what I would say:

In January of 2010, the IRS released the details of a paid preparer licensing program. These new rules require that anyone preparing returns include with their signature in the Paid Preparer Section a Preparer Tax Identification Number (PTIN). This year the IRS is adding mandatory minimum competency testing and 15 hours of CPE will begin in 2012. By 2013, all paid tax return preparers will be tested, have a PTIN, do continuing education and be covered under the revised Circular 230 rules of professional behavior (actually in force now). Those rules apply to anyone preparing returns for a financial benefit. It doesn’t matter if it’s a one person shop, a national chain, huge CPA firm or a car dealership, pawn shop or other non-tax business.

Now, before you start going on about providing a free service –stop. We all know that you’re not. You are offering tax return preparation to get people to buy something or to rake in the fees advancing them a part of their refund. That means you are being paid. So whoever you have preparing returns, needs to meet these requirements. If they don’t, don’t hire them. By the way, calling an employee “independent contractor” when they aren’t, isn’t a good idea. If your “contractor” gets ruled to be an “employee”, you end up with whole another set of problems.

So let’s talk about some of the new rules. Actually, they’re not really “new” rules. They’re the same rules most of you ignored and played the “the IRS will never know” game. You know, things like filing with paystubs, filing a married couple as two Head of Households, not disclosing all the terms of the loans, not keeping required paperwork, holding the taxpayer’s original documents hostage if they tried to change their mind, not signing the return (all bad). Oh, now you remember, that stuff. You now have to follow the same rules as any other RTRP, EA or CPA. And that means the same penalties for not following the rules. Before you play the “it’s the employee’s fault” card, remember you hired that employee and as far as the taxpayer is concerned your company is who prepared the return. The IRS is very good at identifying all the people who should be held responsible. Think payroll deposits.

It may be tempting to treat all those returns as “self-prepared” returns even if your representative actually prepared them. Don’t even think about it. First, as the ERO filing the return, you need to keep a copy of the return the taxpayer brings in to file. Not a printed copy from your software but an exact copy of what they brought in and you e-filed. Next, the IRS is contacting taxpayers who file returns marked as self-prepared to make sure they really did prepare the return themselves. If they didn’t, the taxpayer will learn that the preparer section needs to be filed out correctly by whoever does prepare the return. And remember that it only takes audited return to tip the IRS off to your operation. Then they start looking at everything.

Since e-filing became cool, you and your buddies have had it good; you got by with not following the rules that the honest preparers had to follow. You took advantage of tax software and taxpayers to increase your bottom line. You counted on blaming the “employee” who did the return when a customer had a tax problem with a return you profited from. In her 2002 report to Congress, Nina Olson, Taxpayer Advocate, used a young couple who needed a car and took their return into a car dealership as an example why we needed preparer licensing. It’s here now and I bet it’s going to hurt you more than me. Oh, you “tax season only” tax offices; the rules apply to you also.

That’s what I would say.