CONGRESS GETS INTO THE ACT

Fellow tax blogger Kay Bell, who I like to refer to as “the yellow rose of taxes” has brought to our attention the latest development in the Internal Revenue Service’s attempt to regulate/license paid tax return preparers.

 

The Service’s required RTRP program was shot down by the U.S. District Court in Loving v US because, according to the Court, the IRS does not have the authority to regulate tax professionals.

 

Kay tells us, as the title of her post states, a “House bill would give IRS authority to regulate tax pros”.

 

HR 1570, the “Taxpayer Protection and Preparer Fraud Prevention Act of 2013”, which is only 3 pages in length, does not go into detail on how to regulate tax pros.  It merely changes the Tax Code provide authorization, and pretty much gives the Secretary of the Treasury, and therefore the IRS, carte blanche in establishing the details of regulation/licensure.    

 

The bill provides the authority the Court says is lacking by adding the following to the current US Tax Code –

 

“The Secretary of the Treasury may –

 

(A)   regulate tax return preparers who do not practice as representatives of persons before the Department of the Treasury; and

 

(B)   before licensing or certifying a person as a tax return preparer, require that the person demonstrate –

 

(i)  good character;

(ii)  good reputation;

(iii) necessary qualifications to enable the person to provide to persons valuable service; and

(iv) competency to perform the functions of a tax return preparer.”

 

It is funny that a body such as Congress, without good character, wants to make sure we tax preparers have good character.

 

The Senate would also consider providing the needed authorization.  As Kay points out, in its paper “Simplifying the Tax System for Families and Businesses” the Senate Committee on Finance says about the regulation of tax return preparers -

 

“Due to tax law complexity, taxpayers increasingly rely on third parties to prepare their returns, thereby increasing their exposure to preparer misconduct or error.  In 2011, the IRS started regulating tax return preparers by requiring registration and imposing minimum competency standards.  The District Court of Washington, DC recently ruled (Loving, No. 12-385 (D.D.C. 1/18/13)) that the IRS lacks the authority to regulate tax return preparers.  If the IRS does not prevail in its appeal of the Loving case, it will lose an important tool to increase tax compliance and protect taxpayers from unethical tax return preparers.”

 

Before I go any further I want to take exception to the statement “taxpayers increasingly rely on third parties to prepare their returns, thereby increasing their exposure to preparer misconduct or error”.  Taxpayers increasing reliance on professional tax preparers results in more accurate and correct tax returns being filed.  There would be much more error if taxpayers prepared their own returns or simply relied on tax preparation software! 

 

As stated here in previous posts, I would accept a voluntary IRS-sponsored RTRP regime, as suggested by the Court, as perhaps part of a two-tiered certification that would combine the new voluntary RTRP designation and the existing EA designation into a two-tiered certification program.  A preparer would first apply for and be granted the RTRP designation by way of a test that is limited to tax preparation (perhaps more involved than the current basic open-book basic test).  After a year or two that person can then take a second test, with added emphasis on taxpayer representation issues and other advanced topics, to become an ETRP (Enrolled Tax Return Preparer – the old Enrolled Agent).  The ETRP designation would replace the RTRP (or whatever) designation.  One would not be both an RTRP and ETRP – but either an RTRP or an ETRP.  

 

I still believe the optimal source of tax preparer regulation/licensure/certification, whether mandatory or voluntary, would be an independent industry-based organization, not unlike the AICPA or ABA, such as the National Institute of Registered Tax Return Preparers I have proposed.

 

I have always said that while I agree that having the Internal Revenue Service regulate tax preparers is not the best option, it is without a doubt a far superior option to having Congress legislate regulation.  My opinion of the intelligence, competence, and ability, or rather lack of intelligence, competence, and ability, of the members of Congress is well known.  As I have said, HR 1570, thankfully, does not dictate the details of regulation/licensure, leaving that to the Treasury Department.  However we do not know what would be in any Senate bill.  Hopefully it would just echo HR 1570.

 

I do not support HR 1570.  I do not want Congress to give the IRS the authority to institute its required RTRP program.  I would hope that the decision in Loving v IRS is upheld and that the IRS either continues the RTRP program as a voluntary one or gives up trying to regulate preparers so that an independent industry-based program can be instituted.

 

If the IRS wins, one way or the other, I would still campaign for a “grandfathering” exemption from the initial competency test for long-time preparers like myself, and to see that CPAs, attorneys, and “supervised employees” thereof, are NOT exempt from testing, unless covered under grandfathering, or mandatory annual CPE in taxation.

 

Kay ends her post with a reference to my post TAX RETURN PREPARER REGULATION, LICENSURE, AND/OR CERTIFICATION, which she calls “a good synthesis of what's at stake and what should be done”.  Thanks, Kay!

 

TAFN

DIRECT DEPOSIT - IS THERE A PROBLEM?

I have been recommending direct deposit to my 1040 clients for years now.  I tell clients –

 

“Uncle Sam gives you the option of having your federal income tax refund directly deposited into a checking or savings account.

 

By choosing direct deposit you should receive your refund about 10 DAYS EARLIER than by mail.  PLUS you avoid any problems or delays caused by the US Postal Service

 

You will NOT receive a special acknowledgement from your bank that the money has been received.  You must check your bank balance or statement to verify receipt.”

 

I have never used Form 8880 for a client, but with this form you can “directly deposit your tax refund to either two or three of your accounts at a bank or other financial institution (such as a mutual fund, brokerage firm, or credit union) in the United States”. 

 

You can have your refund directly deposited to a checking account, savings account, IRA, Coverdell Education Savings Account, or a Treasury Direct account to use the money to buy US Savings Bonds.

 

Over the years I have never heard from a client of any problems with a direct deposit, other than taking longer than expected for the refund to be deposited – until now.

 

So far two clients have contacted me to report an issue – one with a 2011 refund and one with a 2012 refund.  In both cases the refund was not directly deposited to the requested account.  Instead it was applied to the subsequent year’s estimated tax.  It was as if the taxpayer, or I, had entered the full amount of the refund on Line 75, although we clearly did not.

 

In both cases the client discovered this FU when it called the IRS directly after checking the status of the refund using the Service’s “Where’s My Refund” tool.  In both cases the IRS eventually directly deposited the refund to the requested account, after being told to do so by the taxpayer.

 

I am curious – have any other tax professionals come across this problem with 2011 or 2012 returns?  Is this a systemic problem that needs to be brought to the attention of the IRS?

 

TAFN

CAUSES OF TAX PRO AGITA

During the second half of the recent tax season I received an email from my editor at NATP asking if I wanted to contribute to an article for the TAXPRO JOURNAL on what causes the most agita for tax pros during tax time.  Since during the tax season, especially toward the end, I barely have time to relieve myself, let along work on anything other than current 1040s, I passed on the opportunity.

 

But now that the tax season is over I can take the time to muse about the topic.

 

I used to say that the biggest time waster during the tax filing season was having to track down cost basis info for investment sales made by clients.  But lately more brokerage houses have been including supplemental gain and loss reports in their Consolidated Year End Tax Statements.  With the new requirements for cost basis reporting things are getting even better.  And over the years I have built up relationships with the brokers of most of my clients and have usually been able to get any missing information from them.  Of course I continually attempt to train clients to keep records of stock and mutual fund purchases, and have been more and more successful.

 

There are still occasions where I must do detective work – such as when a client sells an investment that was inherited years ago, or in the case of mergers and spin-offs. 

 

However since the mid-2000s, when the new category of “qualified dividends” was created, the biggest source of tax season agita has been the fact that brokerage houses now have until February 15^th to send out the Consolidated Year End Tax Statements, and in almost every situation at least one “corrected” report is issued as late as mid-March. 

 

As a result, clients who would have normally sent me their “stuff” in early to mid-February now do not do so until mid-March, at the height of the season.  Instead of being able to work on these returns, which are usually more involved, during February, when I have more time, I must wait until almost the tail end of the season, when time is especially tight.  The bottom line is I end up with more GD extensions. 

 

Of course those damned K-1s have always been a true PITA, and nothing has changed.  If I were still accepting new clients I would add to my list of returns I would not accept, in addition to returns with Earned Income Credit claims, returns of taxpayers who have limited partnership investments that issue K-1s. 

 

The amount of work required to properly report the information from these damned K-1s, for a minimal if any effect on the bottom line of the actual tax return, is truly a waste of valuable time (see my post “The K-1 Blues”).  And, of course, these damned things usually don’t arrive until sometimes April.  If I never saw another K-1 during my last eight tax seasons I would truly be a happy man.

 

I have no idea if these things are actually good investments.  Methinks the brokers get a higher commission for selling them. 

 

If corporations were allowed to claim a “dividends paid” deduction, and all the industry-specific loopholes were closed, I would not have to deal with these problems.

 

So, fellow tax pros, what causes the most agita for you during tax season?

 

TTFN

BEFORE I GO - MY "CRUSADE"

My one “crusade”, if you will, has always been to educate the often misled, sometimes purposely and sometimes as a result of ignorance, taxpaying public, and ignorant financial journalists, of the fact that a CPA is not AUTOMATICALLY a tax expert by the mere existence of the initials.  CPA does not = tax expert!

Having the initials CPA after one’s name is no indication that the person knows his/her arse from a hole in the ground when it comes to preparing 1040s.  The only initials that have any bearing on 1040 competence and currency is EA (for Enrolled Agent) and, had the IRS regulation regime not been shot down, RTRP (for Registered Tax Return Preparer).

The “urban tax myth” that CPA = tax expert is unfortunately perpetuated by ignorant financial journalists and bloggers who, when reporting on a tax deduction, credit, strategy, or technique, will tell readers to “consult your CPA”.  What they should be saying is “consult your tax professional”.

A particular CPA may indeed be a tax expert – and many are.  But it has nothing to do with the initials CPA.  This person will be a tax expert only because of his/her individual education, training, and experience and his/her remaining current via annual CPE in federal taxation.

My support for a certification program for tax professionals, whether mandatory or voluntary, has always been because I believed such a certification, whether it be RTRP or CTRP or something else, would grant the competent, experienced, and current “previously unenrolled” paid tax preparer with the recognition and respect due his/her education, training, and experience.

If I may be permitted to ask a favor –

Whenever you come across a tax-related article, column, or blog post that says “consult your CPA” please submit a comment to point out the error and explain that the proper advice is “consult your tax professional”.

Thanks!

RDF

I COULDN’T LEAVE WITHOUT POSTING THIS

I know I said I was “gone” for the tax season, but it is still slow, and I felt this recent development needed commenting in light of my editorial “It’s Time for Independent Certification for Tax Preparers” (like many of the items I write for portals, the title is written by the editor – my original title was “Do we really need to license or regulate tax return preparers”) at ACCOUNTING TODAY.

The National Association of Tax Professionals (NATP) and other tax-related membership organizations (NSA and NAEA) have been good at providing members with updates and information on the continuing Loving vs IRS “story”.  Here is what the NATP sent members via email on Saturday (highlight is mine) -

“On February 1, 2013, United States District Court Judge Boasberg issued a Memorandum and Opinion Order. In this order he clarified two points:

1.    Defendants’ {IRS – rdf} Motion to Suspend Injunction Pending Appeal is DENIED; and

2.    The Injunction is MODIFIED to make clear that the IRS is not required to suspend its PTIN program, nor is it required to shut down all of its testing and continuing-education centers; instead, they may remain, but no tax-return preparer may be required to pay testing or continuing-education fees or to complete any testing or continuing education unless and until this injunction is stayed or vacated by the Court of Appeals.”

The court did not stay the injunction.  The mandatory RTRP program is dead.

The PTIN requirement, which is really all the IRS needed in the first place, is intact.  All individuals who want to prepare federal tax returns for compensation must register with the IRS and be issued a PTIN.  But “non-exempt” (what I call “previously unenrolled”) preparers are not required to take a competency test to receive the designation of RTRP and maintain required annual CPE in order to renew their PTIN.

The court suggested that the IRS can continue its RTRP designation program, with required testing and CPE, on a voluntary basis, similar to its Enrolled Agent (EA) program.  PTIN-holders may choose to receive the certification/designation of Registered Tax Return Preparer by meeting the requirements, just as they have been able to choose to be certified/designated as an Enrolled Agent.  This way the money spent by the IRS in developing the program would not be lost, and those who have already received the RTRP designation will not have wasted their time and money.

An IRS-maintained RTRP voluntary certification program would negate, and make academic, the need for the National Institute of Certified Tax Return Preparers that I proposed in my editorial.  While I still contend the best source of administration of such a voluntary certification program would be an independent industry-based organization, I could live with the IRS running the program – as long as it was voluntary.

Three things:

First -

The original need for a $64.50 initial and $63.00 subsequent annual PTIN registration fee was to fund the annual renewal process that would include verification of required CPE and maintaining a system to independently track CPE.  Since PTIN-holders no longer need to maintain CPE as a requirement for renewal there is no longer a need for such a fee.  The Service could charge a more nominal fee, no more than $25.00, to cover the basic costs of maintaining the PTIN registry.  Prior to the initiation of the regulation regime, when PTINs were voluntary as an alternative to having to use one’s Social Security number, there was no charge for applying for a PTIN, and there was no need for annual renewal.  With the RTRP requirement gone, the PTIN would not need to be renewed annually – perhaps renewal could be every three years so the registry would remain relatively current.

The $64.25 initial and $63.00 annual fee would apply to only those who apply for the voluntary RTRP status.  The IRS, while continuing the annual 15 hour CPE requirement, could also maintain a 3-year renewal period similar to that currently in affect for EAs, so the $63.00 renewal fee would not be annual.

Technically, PTIN-holders who did not go on to earn the RTRP designation should be entitled to a refund of the difference between the new nominal registration fee and the amounts they had paid.  

Second -

We still have the problem of naming the voluntary certification designation.  The term “Registered” Tax Return Preparer is really no longer appropriate.  Since all paid tax preparers are still required to “register” with the IRS, all PTIN-holders are, in effect, “registered” tax return preparers.

Ideally the IRS could make the designations of “?TRP” and “EA” similar to identify that they are different levels of the same program.  Originally I had suggested ETRP (Enrolled Tax Return Preparer) as the new designation for current Enrolled Agents.  This designation keeps the historical “Enrolled” component, but properly identifies the holder as a Tax Return Preparer and not an “Agent” of the IRS.  This is still a valid option.

The term “certified” will always cause problems, and would appear to be a step higher than “enrolled” when it is actually just the opposite (ETRP is a step higher than RTRP).  And “licensed” does not apply because a license is not required to prepare tax returns, and this would appear that those preparers who choose not to apply for the new voluntary designation are not really “kosher”.  Perhaps “Regulated Tax Return Preparer”, though I do not really like the sound of that.  Or maybe “Accredited Tax Return Preparer”.

I expect that if the IRS does indeed decide to keep its RTRP program as a voluntary certification it will keep the term “Registered Tax Return Preparer”, however inaccurate, only because keeping it in place would be cheaper than having to rewrite its programs for a new name.  Whatever it does I would still recommend that the EA designation be changed to ETRP.

The IRS could combine the new voluntary RTRP (or whatever) program and the existing EA program into a two-tiered certification program.  A preparer would first apply for and be granted the RTRP designation by way of a test that is limited to tax preparation (perhaps more involved than the current basic open-book basic test).  After a year or two that person can then take a second test, with added emphasis on taxpayer representation issues and other advanced topics, to become an ETRP.  The ETRP designation would replace the RTRP (or whatever) designation.  One would not be both an RTRP and ETRP – but either an RTRP or an EtRP.   

And third –

When the RTRP designation was mandatory the IRS exempted CPAs and attorneys from the requirement.  This is because, as David Williams originally explained to me, the Service felt it was “statutorily prohibited” from regulating CPAs and attorneys ability to “practice” before the IRS (this was when the Service confused preparation with practice).

Just as with my proposal for a NICTRP, under the new voluntary RTRP (or whatever) program CPAs and attorneys who prepare tax returns could elect to apply for this new designation to properly identify their competence and currency in 1040 preparation.  A person could be both a CPA and an RTRP (or whatever).  Currently there are CPAs who are also EAs.  And, as with CPAs who choose to become EAs, CPAs and attorneys who apply for this designation would be required to take the competency test and maintain CPE in federal taxation.

OK, now back to my 1040s.  But before I go – what do you think about my three points?

RDF

SO LONG, FAREWELL, AUF WIEDERSEHEN, GOOD NIGHT!

Joy to the world - tax season’s here.

I’ll soon be flush with cash!

Let every client be organized,

and give me all I need, and give me all I need,

and give me all I need to prepare their returns!

My 42nd tax season will officially begin tomorrow - let the deluge begin!

As is my custom, due to the demands of the filing season I will be taking my annual “tax season hiatus” from posting to THE TAX PROFESSIONAL and THE WANDERING TAX PRO from tomorrow through April 15th.

Between now and April 15th I will barely have time to relieve myself let alone blog!  Nor will I have time to respond to comments. If a comment requires a response I will do so after April 15^th.

I promise that once the tax season is over I will be posting more frequently here at TTP.   

“Talk” to you when it is all over!

RDF

BTW – be sure to stop by THE WANDERING TAX PRO tomorrow for the annual posting of my TWELVE DAYS OF TAX SEASON!

THE INSTITUTE FOR JUSTICE RESPONDS TO THE DEPARTMENT OF JUSTICE

As you know, on January 18, 2013, in a move that surprised the tax preparation community and, I expect, the Internal Revenue Service as well, the U.S. District Court for the District of Columbia shut down the IRS tax return preparer regulation program.

In his decision in Sabina Loving, et. al. v. Internal Revenue Service, Judge James E. Boasberg said the Internal Revenue Service had overstepped its authority by regulating tax return preparers. Congress never gave the IRS the authority to license tax preparers. The judge's order included an injunction that bars the IRS from continuing its implementation of the RTRP program.

The Justice Department subsequently filed a motion on behalf of the IRS requesting that the court suspend the injunction and allow the Service to continue its RTRP program, pending resolution of an appeal to be filed within 30 days.

In the latest development in this story, yesterday the Institute for Justice filed a response in federal court to the Justice Department’s request for a stay of the injunction.  

In briefly reviewing the Institute for Justice filing I discovered that a blog post by me here at TTP, which talked about the impossibility of the 300,000+ still untested potential RTPS to be able to take and pass the test by the December 31, 2013 deadline, was referenced in the latest filing by the Institute for Justice, in a footnote (#11 on Page 10).  Posts by Joe Kristan of THE ROTH AND COMPANY TAX UPDATE BLOG, Jason Dinesen of DINESEN TAX TIMES, and Kelly Phillips Erb of FORBES’ “TaxGirl” are also referenced in the footnotes.  

In discussing the Department of Justice motion, fellow “twit” (we follow each other on Twitter) Dan Alban, attorney for the Institute for Justice, explains that –

“The IRS has repeatedly and grossly misrepresented how the court’s ruling in this case will affect this tax season, tax payers and the IRS itself.”

To quote the introduction to the January 29 filing -

“The sky is not falling. Despite the dire claims of Defendants (hereinafter “the IRS”), the world of tax administration will not come to an end if this Court’s injunction against the IRS’s unlawful licensing scheme for tax preparers remains in place while on appeal. In fact, the absence of the registered tax return preparer (“RTRP”) licensing regulations will make this income tax season no different from every prior tax season. For the 100-year history of the modern income tax, tax preparers have always been free to assist taxpayers in preparing returns without obtaining a license from the IRS or any other federal agency, and taxpayers have always been free to hire whomever they pleased to prepare their tax return.”

The IFJ contends the the Department of Justice motion made “several misleading claims and unsettling arguments, including inflating the monetary cost of the ruling to the agency by over 2,000 percent”.

Dan points out -

“But even taken at face value, the IRS’s arguments are truly appalling.  The IRS told the court that their licensing scheme is a cash cow, and the agency must be permitted to continue milking hapless tax preparers, despite a federal court declaring their scheme unlawful.”

I originally supported the IRS regulation regime, mostly as a “lesser of two evils” alternative to having regulation legislated by Congress.  I supported the concept of the RTRP designation, and felt that this certification would provide experienced, competent, and ethical “previously unenrolled” preparers like myself with the respect and recognition we deserved.  But all along I believed the best option would be certification and oversight by an independent industry-based organization (I discuss this option in detail in an editorial that will appear in TAXPRO TODAY either tomorrow or Friday).

While I respected the original lawsuit’s “libertarian” arguments, I did not agree that the IRS regulation regime would force tons of serious and legitimate tax professionals out of business.  I do agree that the regulation would result in the loss of many probably good intentioned and ethical part-time seasonal “casual preparers” (as Joe Kristan has called them) with minimal training and competence – but I also feel that this is not necessarily a bad thing.

At this point I do support the court’s decision.  I feel that the injunction should stand and the IRS RTRP program should remain shut down for good.  The court should not grant the Department of Justice motion.  There would be no real “damage” to the IRS if the injunction stands, while, as I mentioned in an earlier post here, there would be much potential “damage” to tax preparers if the regime were to temporarily continue and the court decision is eventually upheld, as I expect it will be.

RDF