Our Taxing Times

A Bad Preparer Checklist.

About a month ago, the blogs were full of tips to find a good preparer. I wrote one back in January. But I’d like to share a few ways to tell if you have a bad preparer. If any of these sound familiar, you need to find a new preparer. It may be too late for this year, but start looking for next year.

• When you tell the preparer you don’t have any dependents, they ask if you want to rent any for your tax return.
• When you went to pick up your refund check, your preparer suggests a store across town to cash your check and offers to drive you. The gun is for your protection, right?
• The preparer asks you how much refund you want this year.
• When you arrive at the office, there are security guards controlling the crowd of angry clients looking for their refund/returns.
• You look at the fee breakdown and notice one of the charges is labeled; “Because it’s Thursday.”
• The preparer’s office is a table in a BBQ restaurant.
• The preparer takes a return from a stack on their desk, fills in your name and SSN and hands it to you sign.
• The preparer has been featured on a local TV station’s “(call letters) On Your Side” segment-annually.
• The preparer asks you to stop at the local IRS office and pick up blank forms for them.
• You arrive at the office and have to knock, tell who sent you and give a password to get in.

The sad thing is that only a couple “tips” are made up. The rest are based on news reports or stories clients have told me. Most tax preparers are pros. They follow the rules and do right by their clients. It’s a small portion that you see in the news. But it’s these people who hurt some clients and defraud the rest of us.

 

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Creative Deductions

I love creativity. It doesn’t matter if it is a work of art, a scientific or financial theory or a crazy tax deduction. Clients come in with those a lot. I listen to their idea, giggle a little and tell them “no”. I’m not talking about “my son’s girlfriend and her daughter lived with us” type question. I’m talking about the man who wanted to take his bar hopping as a business deduction. He was only doing it so that he could make sure that the other guys on his work crew didn’t get too drunk to work the next day. After all, he was responsible for his crew and could lose his job if they messed up too much. Nice try, but no!

An Iowa tax preparer couple should get an award for their $21million in bogus deductions the IRS has found on returns they prepared for some clients. According to the AP, Jill Schwartz-Musin and her husband Howard Musin have been banned from preparing tax returns because of their creativity. A few of my favorites:

• If your dog barks while you are away from you home business, it’s a business expense. (My guess-security).
• If your nanny answers your business phone, she becomes a business deduction.
• Over $6000 for a years worth of grocery were deducted on one return. (Entertainment?)
• Or, the legal cost from a bachelor party gone wrong. (No clue on the possible rational)

This was not a new charge for Ms. Schwartz-Musin. She was under IRS disbarment since 1987 for these kinds of acts. And in 2000, she plead guilty to obstructing the IRS. Of course, being the creative person she is, that didn’t stop her from filing Power of Attorneys for clients that said she was not under disbarment. What’s a little lie when you’re deducting invisible furniture for the client’s office?

While the Justice Department has not ruled out more legal action against the Musin’s, their clients are now dealing with the IRS. As one client said, they paid back more with penalties than the refund had ever been; the IRS “pretty much threw the book at us." I can’t get a whole lot of sympathy for the Musin’s clients. There may have been some who were victimized. But it has been my experience that when the preparer is that creative the client has a good idea what is going on.

Enough seriousness, tax preparers what are the creative deductions your clients have suggested or that you have read about? (But don’t breach confidentiality rules.) And non-preparers, what would your creative deduction be?

Not a Return I Would Want to Do

I’m not a big movie buff but I love theatre and movie costumes so I was sad to learn that Debbie Reynolds is selling her huge (3500+) pieces of movie memorabilia in an auction today (June 18, 2011) in L.A. I have often seen Ms. Reynolds on talk shows discussing her dream of building a movie museum to house and display her collection. However, she’s not been able to raise the money to do that and is selling the collection. The collection includes props, scripts, equipment and most of all costumes from the golden age of Hollywood movies. This was the time when no expense was spared and the costumes were often handmade out of the finest fabrics and embelishements. As I was looking at some of the pieces what will be available, the thought struck me, I’m glad I don’t have to do the return reporting the sale. Now I’m sure there are tax professional who deal with collectables all the time but I’m not one of them. I would have to do some serious research.

These costumes and props would most likely be classified as collectables and be subject to the capital gains tax rate for collectable of 28% much higher than the special rates I usually deal with. That makes it very important to get the basis of each piece correct. Basis for any asset begins with the cost to obtain the item. Then there are items which can add (improvements) or subtract (depreciation) from the cost to become the adjusted basis. This is subtracted from the sale price of the asset to create a gain or loss on the sale. (A very simplified explanation.) My question is what can be added to Ms. Reynold’s purchase cost to get the adjusted basis? There is no question she could take any restoration costs. But what about the insurance for the collection? That have to be broken down by piece (if it isn’t already). What about storage? We’re talking about more than just a metal storage unit someplace. This would have to not only have the security to keep the insurance company happy but also have the temperature and humidity controls to protect the fragile costumes. What about moving costs to get them to the Paley Center for pre-auction display? Was there a staff member in charge of tracking the collection who’s salary should be considered in adjusting the basis? And it goes without saying, the auction fee is definitely part of the basis equation. That’s what I came up with off the top of my head. Did I miss something? Then all these sales need to be reported on the new Form 8949 and Schedule D. I doubt the IRS will allow them to be lumped together.

It’s sad that there won’t be a museum where this collection could be seen as a whole. And there is no way I can afford to bid on any of these pieces. The lowest estimated price I saw mentioned in the articles I've read was $5000. So I will have to make due with a PDF of the catalog (the actual catalog has sold out) and be glad that I don’t have to figure the basis for all those beautiful pieces.

Cash Discounts

I'm working through a pile of returns today,  but I wanted to share a timely post from Kelly Erb at TaxGirl.

IRS Offers Discount for Cash Payments

 

Thanks Kelly!

No! Bad IRS!

The IRS has caved to pressure from CPA and larger practices and have decided to exempt non-signing preparers from the new testing and continuing ed requirements(CPE). According to Notice 2011-6, a non-signing preparer who's work is supervised by and returns signed by a practitioner who is covered by Circular 230 does not have to be tested and do the CPE. They will have to get a PTIN and they will be subjected to the tax and background tests.

I have two issues with this decision. First, since CPAs are not subject to the testing, how does the IRS know they are qualified? Yes, they have had some tax training but can they pass the test(s)?( My evil twin would like the see the IRS test the proposed test(s) at the next AICPA conference. No warning, just herd them all into a room, give them a pencil, test book, answer sheet and a few sheets of paper for scratch computations and see how well they really do.) My second issue is the  supervisory question. I am sure there are firms with serious documentation and review procedures in place. The CPA signer makes sure the return is correct. But how many firms just give the returns a look over, especially the easy(?) parts, and slap a signature on the return. After all they can charge more if the CPA signs the return than if the intern does.

The logic has been that the signer takes the responsibility for any problems. What what about the mistakes that don't cause any problems the IRS/taxpayer sees? Times when the non-signing preparer doesn't give the taxpayer a deduction or credit they are entitled to. The mis-interpret the facts or requirements. The signer won't see the problem if they are not extensive notes (paper trail), the IRS won't catch this problem but the taxpayer pays more in tax.

I really think the IRS has dropped the ball on this. The preparers now getting PTINs have until 2013 to be tested. Hopefully, by then the IRS will reverse themselves or put in some procedures that will protect taxpayers by ensuring proper supervision.

My previous post on this topic is here.

Legislative Spam

A special thanks to Doug Lee for posting this on a tax forum.

This is a prime example what is wrong with how the tax code gets treated. H.R. 3501.

Rep. Thaddeus McCotter (R-MI) introduced the "Humanity and Pets Partnered Through the Years (HAPPY) Act on July 31, 2009 and it has been referred to the House Ways and Means Committee. If passed it would allow a deduction of up to $3500 in pet care expenses per qualified pet a year. This would include anything, including vet bill, except acquisition expenses. This would include any legally owned, domesticated, live animal except research animals, animals used in businesses or service animals. If passed, it would start in 2010.

I have a few questions:

1. How long does Spot have to live with you? Does he have to be in the house the whole year? This is especially important if Spot dies during the year because of illness or injury and there are vet bills. But will there any penalty if the family gets tired of Spot and gives him to the local shelter or will they get the whole $3500?
2. If a partial year counts (like with dependents) and Fluffy has kittens, are they each entitled to a $3500 deduction even if you give them away?
3. Are acquisition expenses just the adoption fees or purchase cost or do they include the initial purchase of beds, leases, clothes. And if the shelter requires spay or neutering, is that a vet cost or an acquisition cost?
4. Will there be Pet Mileage (like medical mileage)?  To the vet, groomer, to the store 50 miles away that has those treats Fluffy likes best.
5. Will this include entry fees for dog/cat shows or other competitions? Hotels for the pet and support staff or just the pet?
6. Can the deduction be split? If not who gets the deduction? For example, Spot is owned by Joe but he can't keep the dog where he lives so Spot is at Mom's house. Who gets the deduction?
7. Can replacement of carpets and furniture be included in the pet deduction when pet damage is the cause of replacement?
8. Will there be a Pet Tax Number? If not, how are you going to track which pet has been deducted?
9. Where will the deduction be taken? Will it come directly off income as an adjustment or will it be added to the itemized deductions.

I am sure more questions will pop into my head but I think I have made my point. The idea of a pet deduction is a fun diversion on a dreary Friday afternoon but it highlights a major problem with the US Tax Code. Congress and the Executive branch, both sides, have for too long used the tax code to reward, punish or encourage the behavior of individuals and businesses. The tax code should fairly raise money to run the country. It's nice to be assured of job security as taxpayers need help getting through the tax maze. However, the US has some major issues to deal with and bills such as this waste the time and resources. They are nothing more than Legislative Spam.

Where do the Paper Clips Go?

I just grabbed a new box of paper clips and realized that this is the fifth box I have opened since the first of the year. I use a lot of clips when working on a tax return. I use them to separate information and papers. But when I finish with a return, I replace the clips with staples. That leaves me with a stack of paper clips to go back into the dispenser. In an ideal world, I should get back all almost all the clips I put into a return. But this isn't happening. Yes, I do send some home with clients; holding the envelope to a return that has to be mailed (Oklahoma), or the payment voucher to the front where they can find it quickly. But that does not account for the massive losses especially taking into consideration the clips I get from clients with their information. May be we need a Paper Clip Taskforce to look into this. Are the being held with all the socks that don't comeback from the dryer? Or do I just need to stop procrastinating on a minor issue and start working on CPE?

Brokers Late Again

The IRS says that Brokers have to February 17, 2009 to send out composite 1099s. The Energy Improvement and Extension Act of 2008 gives Brokers until 2/15 to get out Form 1099-B. The Service has expanded this to include interest and dividends that are normally reported on composite statements with 1099-B.

Point Well Taken

Please check out this Don't Mess With Taxes post. I wish I was that sharp. (I had to read the post twice to get it.)

Very Creative Deductions

I have some very creative clients. Some are creative because of their jobs or hobbies. Others are creative in the way they try to reduce their taxes. But I have not seen any this creative.
Thanks to the TaxProf Blog for the link.