Our Taxing Times

Reform Assumptions

This seems to be the time of tax reform. Well, maybe not true reform, but there are a lot of tax change suggestions being floated on the Federal and state level. And I admit I’m doing good to keep track of the major suggestions on the Federal and Kansas levels. But one thing is starting to bother me about them.

Most proposals seem to rely on people, programs and laws over which the proposed change has no control. A few examples:

• If we cut EITC on the state level, then we could get matching Federal funds for programs that target those recipients. It assumes that the state will qualify and that the program will actually exist when they need it.
• Cutting business taxes will increase jobs. It assumes that the business will use the former tax money to hire and not pay down debt, pay bonuses or buy a boat for the owner.
• Increasing sales tax won’t decrease spending because businesses will use the money they are now paying on income and withholding taxes to reduce the cost of their goods to offset what consumers are paying in sales tax. Yeah, right! See above.

You get my point. It seems to me that taxes and the effects of taxes need to be realistic thought out. If we need to pay more in taxes to cover our spending, I may not like it but I understand the need. And I appreciate that you aren’t trying to BS me to cover your backside.

But to assume that a person or business will act a certain way and justify your tax proposal based on that behavior is just plain wrong. If you want to cut a program or increase a tax, do it.  But unless you can qualitatively demonstrate the results your change will create, you’re just making an assumption based on something you can’t control. And you know what they say about assumptions.

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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.

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.

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.

 

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

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!

Congressional Life Swap

That’s It Congress! I’ve had it with your refusal to do your jobs and your ability to reduce everything you do to a pissing match or a huge game of Chicken. I was at lost for a solution but I think I’ve come up with plan.

Wife Swap. You know that really obnoxious reality show where they switch the Mom’s of two very different families for a while. I’m not suggestion that the wives of Congress be switched but something more like a cross between Wife Swap, A Simple Life and the Witness Protection Program.

Here’s my idea: all members of Congress and their families become lower middle class families. They’re scattered across the country but not anywhere near their actual homes. They have to live within the income they earn through their jobs. They can’t use their own personal wealth or any credit cards or call upon their own friends and family for help. No money for gas? They’ll have to walk. They’ll learn the uses of Raman noodles and how to clip coupons. They’ll learn you can’t run to the doctor every time the kids have colds because you don’t have health insurance or because of a high deductible if you have insurance. Congress needs to learn the joys of thrift stop shopping for clothes. If they lose their job, they have to live on unemployment until they can find a new one. Let Congress learn that the 2% social security cut can make life easier and how too many Americans still need unemployment insurance. They’re not bargaining chips to get more toys for their rich friends.

I would suggest an initial term of at least 3 months with additional time for not playing by the rules. If the Congressman or women cheats too often, the swap could become permanent. As for their Congressional jobs, how much do they really do? I’ve not seen any evidence of actual work for a while. They all have staffs that do most of the work and their votes seem to be decided by their party leaders or lobbyists. A web site could be set up where they check in and vote when something actually gets that far. Who knows, more might get done this way.

Congress needs to wake up and realize who is paying their salary. Yeah, they’re getting lobbyist and other special interest money but they wouldn’t be getting that money if they weren’t in Congress. As a member of Congress they are suppose to be representing us. Not just the 1% with lots of money to share. I understand each member has a different idea what will help but that has always been the case. Why has Congress lately become less interested in making things better for the country than funding their retirements and playing chicken with people lives. I think they all need a good dose of reality. Let them spend their Christmas riding a trash truck and not skiing in Vail.

The only problem I see is finding a place for all of them. I can see a backlash as hard working people say “not in my neighborhood.” After all, only a few voters approve of Congress at all.

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

I Can't Speel.

I received a nice reply from Kurt Olsen about yesterday's post; Turbo Tax Defense?

You got it right- I did not blame Turbo Tax for my mistake. I deliberately steered away from the so-called Turbo Tax Defense. 

Treasury Reg 1.6664-4 (b) says "An isolated computational or transcriptional error generally is not inconsistent with reasonable cause and good faith."  I made a transcriptional error and I used Turbo Tax for the limited purpose of showing that I was reasonable in my attempt to correctly determine my tax liability. 

I was inspired by the Thompson case. http://www.ustaxcourt.gov/InOpHistoric/Thompson2.TCM.WPD.pdf

And I want to apologise for mis-spelling Mr. Olsen's last name and thank him for being such a good sport about it.

Turbo Tax Defense?

The Turbo Tax Defense is back in the news. Sort of. The Tax Court has reversed the accuracy penalty in the case of Kurt C Olson v, Commissioner (TC Summary 2011-131).

Mr. Olson used Turbo Tax to prepare his 2007 tax return. When the IRS matched the numbers reported on the Olson’s return and the K-1 they received, there was a discrepancy which increased the tax by $9297. The IRS also added an accuracy related penalty of $1859. Mr. Olson fought that penalty on the grounds that it was a data entry mistake and not an attempt to play less tax.

There have been several other Tax Court cases blaming tax software for preparation errors and they weren’t won by the taxpayer. What makes this one different is that Mr. Olson didn’t blame Turbo Tax. In fact, he took every step to prepare an accurate return but made a mistake. A long time Turbo Tax user, he knew he was faced with a special situation. He upgraded the software package, followed the interview, and listed all the K-1 info (EIN and Name). His only errors were incorrectly entering the interest received from the K-1 into the software and not catching it when he reviewed the return. In this case, it’s really not a Turbo Tax Defense as much as an “I entered the wrong number” defense. That kind of human error doesn’t deserve a huge penalty.

It doesn’t matter if you use a tax professional or tax software you are responsible for what is on your return. You need to review the forms before you sign. If you have any questions, ask the preparer or the software help line. You can’t hope all is okay and then blame the tax preparer or software when there is an error. Mr. Olson did his best to prepare an accurate return and didn’t deserve a 20% penalty for a data entry mistake he admitted was his and the Tax Court agreed.

First Things First

The big tax talk today is the prognostications that the Debit Reduction Super Committee won’t make their report deadline. This isn’t a big surprise. I wrote a post last month where Secretary Geithner was quoted saying that the committee wouldn’t have a report on time. They can continue to work on a proposal but automatic budget cuts will start being put into place.

Why can’t they come to agreement? Much has to do with partisanship and different views of what will be best for the economy and the country. But Congress has always been made up of individuals with different views of the best action and still managed to function. What’s different now?

Last night I happened to catch part of an interview with Harvard Law Professor Lawrence Lessig on C-SPAN. They were discussing his book Republic Lost: How Money Corrupts Congress and a Plan to Stop It. His thesis is that costs of running for Congress have changed the priorities for most of our elected officials. Public service has taken a second place to raising funds for re-election. Allotment of Congressional benefits such as committee seats are based on fundraising ability rather than knowledge and experience.

I haven’t read Professor Lessig’s book yet but the theory makes sense. It takes a strong Congressperson to vote to cut the Mortgage Interest Deduction when he/she knows they will need a contribution from the Realtor’s Association to stay in office. Let’s face it, Congress is no sooner sworn in than they start campaigning for re-election. It’s amazing that anything gets done but campaigning.

We need tax reform. We need to decide what we want our tax system to look like and build a Tax Code that reflects that ideal. Since it’s very clear that under the current dependence on contributions that can’t happen, maybe we need to take a step back and fix that problem first. Take care of campaign reform first. Then, with their dependence on re-election money ended, Congress can concentrate on building a tax system that’s fair for all.

Tax Treatments for Military Taxpayers

I’m an Army Brat. My dad was career Army and served until he had no option but to retire or become an officer. Mom was in the Navy during WWII. One brother was career Navy who became an attorney when he retired. (The military service makes up for the attorney thing.) Another brother served in the Army for a tour and I almost made it to the Air Force. I also live in an area which always sees a high percentage of the young people enlist in the military. And while I’m happy that these kids are coming home, I have been very worried about the chances of finding a job in the current economy.

So, I’m happy that the Senate has addressed the issue with the VOW to Hire Heroes Act. As outlined by Kelly Phillips Erb in her Taxgirl Blog. The legislation would provide tax credits to employers who hire vets that  meet the unemployment requirements. The bill will also beef up the education opportunities available to the vets.

There are, however, other special tax treatments available to the military; active duty, reserve or retired. All treatments have their own qualifications and “buts”. This is intended as an overview.

• Veteran’s Benefits are not taxed. The only time I know they come into play is for the Kansas Homestead/Safe Senior rebate.
• Combat Pay is not taxable although it comes into play in some calculations.
• The First Time Homebuyer Credit allowed active duty personal extra time to qualify for the credit and provided an exemption to the recapture rule for a duty related move.
• A duty move also allows an active duty military taxpayer to qualify for the Sale of Personal Residence exclusion even if they don’t meet either of the time rules.
• For purposes of the Earned Income Credit, the taxpayer can chose to include combat pay into the calculation for a larger credit.
• Combat pay, along with pay differential, is also used to determine if a taxpayer has enough compensation to for an IRA contribution.
• Combat pay also gives the taxpayer longer to file their taxes, claim a refund and defer collections.
• Reservists can deduct the cost of their uniforms, insignias and their mileage, lodging and other training expenses. Active duty military can only deduct the insignias and related stuff. (Of course, they have to meet the miscellaneous deduction floor and other Schedule A qualifications.)
• Many states do not tax military pensions or partially exclude the income. Kansas and Oklahoma are among them.
• A military spouse can get special state tax treatment thanks to MSRRA.

I am sure that there are other special tax treatments for active, reserve or retired military personnel. These were the ones I could think of off the top of my head. And I think the proposed tax credit for employment would be a well deserved addition to these.

My thanks to all who served or are serving in any branch of the military.