WHAT SOME OF YOU WOULD KEEP

A while back in “What Would You Keep?” I discussed how I would rewrite the Tax Code, and asked my fellow tax professionals to identify “What current ‘tax expenditures’ would you want to see remain in a new, simpler Tax Code?”.  

I heard from only two tax pros – disappointing.  Their responses were published as comments to the original post.  However,  as comments are rarely overlooked, I thought I would report on, and respond to, these guys in a post.

Here is what my two colleagues had to say –

(1) Bruce McFarland, the MISSOURI TAX GUY:

“I would disagree with the SS income.  This should remain leveled as a lot of SS recipients don’t get receive much and truly would be more desolate by the burden of losing 15% to our crooked government.  { What I had said was “I would tax Social Security and Railroad Retirement benefits the same way that other retirement income is taxed, amortizing employee contributions over the recipient’s assumed lifetime”.  My tax code could have a generous personal exemption to wipe out much of the tax for the elderly living on Social Security – rdf} 

USA – “Universal Savings Account”. This is a great idea.  {Not my idea – actually I think Dubya had proposed it – rdf}

A fair tax solution would need to take COLA into effect/thought by geography. Currently like you mention it does not. I don’t believe it would be that hard to solve this as this country is divided really well geographically. Our US Postal code Zip code does this for us. The idea of using homeowners’ mortgage interest is decent enough, but I fear is not a plausible solution. The amount of one’s house payment is the same, month after month, generally, yet on a fifteen year loan, the interest paid reduces considerably year to year. Thus in your proposed plan would raise the taxpayers AGI, (I am assuming that your “acquisition debt” mortgage interest paid on a residence, is above the line). {Yes – there would be no more “line”.  Determining some kind of geographical adjustment by Zip Code still appears to me to be too complicated and would not necessarily accomplish the same result.  The deduction for state and local taxes, including real estate taxes, would help to “equalize” the geographical differences more than the mortgage interest deduction. – rdf}

The one thing I would rid ourselves of is the financial assistance program our tax code offers those who have nothing better to do with their time then have babies. EIC is a good program but we need to get our children out of the equation and make it more of a program that helps low-income taxpayers. If not do away with it all together. {Do away with it altogether – at least in the Tax Code. – rdf}”

(2) dbltall -

“Foreign Earned Income Credit or Foreign Tax Credit. People working outside the US shouldn't have to pay taxes twice to two different governments on the same income.  {I do not support any kind of double-taxation, so I would agree with the inclusion of some kind of foreign earned income adjustment. – rdf}

As to Bruce's comment about EITC, NO REFUNDABLE CREDITS!

Seriously. No refundable credits of any kind to anyone. No getting back more than you paid in. It's an invitation to fraud. If Congress wants to give money to people they can find another mechanism than the income tax return.  {Right on, dbltall!  NO REFUNDABLE CREDITS!  That would be non-negotiable. – rdf}”  

I am still interested in hearing more on this subject from my fellow tax professionals.  So once again I ask - What current ‘tax expenditures’ would you want to see remain in a new, simpler Tax Code?

RDF

TAXPRO BUZZ

A belated word of thanks - I am thankful that I live in a country where I can publicly identify the members of Congress as the idiots they are without fear of being thrown into prison.

+ My friend Bruce McFarland, the MISSOURI TAX GUY, often writes about QuickBooks issues at his blog.  He recently explained “When To Use Classes or Types in QuickBooks”.

When visiting the MISSOURI TAX GUY be sure to check out his Products Page and Free Downloads Page.

+ Trish McIntire has a few posts on 1099 issues at OUR TAXING TIMES – “New 1099 Checkboxes” and “Actually Reporting 1099K Income”.

+ Trish also discusses the new IRS Refund Cycle Chart, something that would concern those who efile (but not me – as I cannot), in “Still Batching”.

+ TAX GIRL Kelly Phillips Erb discusses a tax pro who wrote back to the IRS regarding the Notice 4809 recently sent to 21,000 tax preparers in “Dear IRS: A Tax Pro Fires Back” at FORBES.COM.

Before publishing the tax pro’s response Kelly talks about who received the letter and why -

“Tax return preparers who received one of the more than 21,000 letters which were sent out were targeted because they ‘complete large volumes of tax returns’ which have ‘a high percentage of attributes associated with returns typically containing inaccuracies and misinterpretations of tax law’.

So, that means foreign tax credits? EITC? AMT? What are those confusing attributes?

Why, the popular schedules A, C and E, of course. Schedule A is for itemized deductions. Schedule C is for the self-employed or business owners. Schedule E is for landlords. Clearly, dangerously confusing.”

+ CCH has published a guide to the “Three Percent Withholding Repeal and Job Creation Act”, signed into law by BO on November 21^st.  Click here to download.

+ We have been told that the “IRS Moves to Next Phase of Return Preparer Initiative: New Competency Test to Begin”

“The fee for the competency test is $116, which includes the IRS portion of the fee and the fee for Prometric Inc., a third-party test vendor. The test covers preparation of the Form 1040 and its related schedules. Test scheduling begins next week. Initial test takers won’t receive their test scores for two to six weeks to allow the IRS to validate the exam and determine the pass/fail cutoff. Once validation is complete, around mid-January, those taking the computer-based test will receive their scores at the test center immediately upon completing the test.

Prometric will eventually administer the test at more than 260 centers nationally, but the test is not available at all locations currently. Test sites will be added daily and international locations may be added in the future.

Over 750,000 tax return preparers have obtained PTINs. The IRS estimates that approximately 350,000 people may be initially subject to the Registered Tax Return Preparer test requirement.”

Kelly Phillips Erb shares my skepticism about the initial test in her post “IRS Begins Competency Test Scheduling” –

“It’s clear that there are some kinks to be worked out. I know a lot of tax pros have concerns about how smoothly the testing will go – especially after the fiasco that was the initial PTIN registration. It has to be better this time, right?”

As I have said before, since I have until 12/31/13 to pass the test I will wait until at least the fall of 2012 before I sit for it.  Who knows - maybe the IRS will change its mind and provide “grandfathering” by then and I will be off the hook.

RDF

HAPPY THANKSGIVING!

PRACTIVE VS REPRESENT CONTINUED

As a belated follow up to my post “Practice Vs Represent” Enrolled Agent Hal Leahy has sent me the following email -

It took a while to find it but here is the IRS's justification for including tax preparation under representation {highlight is mine – rdf}

"The IRS believes that increased oversight of paid tax return preparers does not require additional legislation. As discussed more fully below, the IRS’ intention is to require paid tax return preparers to register with the IRS through the issuance of regulations under section 6109 of the Internal Revenue Code. Further, the IRS considers the preparation of a tax return for compensation as a form of representation before the agency. Thus, the IRS intends to amend the regulations under 31 U.S.C. 330 to clarify that any person preparing a tax return for compensation is practicing before the agency and, therefore, must demonstrate good character, good reputation, and the necessary qualifications and competency to advise and assist other persons in the preparation of their federal tax returns."

IRS Return Preparer Review, Publication 4832 (Rev. 12-2009) Catalog Number 54419P, Department of the Treasury Internal Revenue Service, page 33.

Once a regulation is final, Congress can overturn it. The regulations related to the Return Preparer Initiative (RPI) were finalized in several IRS regulations and Circular 230. Congress held hearings on the RPI and did not overturn any of them. Therefore the regulations are law.

It would take a federal court case to overturn them. That is unlikely given the Supreme Court's Chevron or Administrative Deference Doctrine.

See Wikipedia Chevon ...

http://en.wikipedia.org/wiki/Chevron_U.S.A.,_Inc._v._Natural_Resources_Defense_Council,_Inc.

So tax preparation is practice before the IRS, unless a federal court states otherwise. The latter outcome is unlikely.

Hal Leahy EA

My response to Hal – The DFBs (clean version = damned fool bureaucrats).

RDF

THE REPORT OF THE INTERNAL REVENUE SERVICE ADVISORY COUNCIL

The IRS recently released the GENERAL REPORT OF THE INTERNAL REVENUE SERVICEADVISORY COUNCIL.

“The purpose of the IRSAC is to provide an organized forum for discussion of relevant tax administration issues between Internal Revenue Service (IRS) officials and representatives of the public.  Advisory council members convey the public’s perception of professional standards and best practices for tax professionals and IRS activities, offer constructive observations regarding current or proposed IRS policies, programs, and procedures, and suggest improvements to IRS operations.”

IRSAC draws its members from the tax professional community and members of academia.

Below are some of the recommendations in the report.  Any highlights are mine.

According to the report, the Council feels “The IRS must receive adequate funding commensurate with its ever-increasing responsibilities and workload to remain effective. The IRSAC is concerned that both taxpayers and the tax system will suffer without consistent and adequate levels of funding”, and recommends -

“Congress should appropriately fund the IRS to assure continued success in service, compliance and enforcement. Without adequate funding, both taxpayers and the tax system will continue to suffer. IRS personnel must receive the appropriate tools and technology to perform effectively. Advances in private sector technology are outpacing a resource challenged IRS at a time when it is most important for the IRS to continue to improve its technology (and increase its full-time staff) if it is to operate effectively. The IRS will continue to face difficult decisions with respect to allocating limited resources between the compliance, enforcement and service functions. While IRSAC recognizes the extreme importance of service to taxpayers, we also recognize that increased compliance and enforcement efforts are critical to the proper functioning of our voluntary tax system and cannot be ignored due to budgetary constraints.

The IRSAC recommends that resource allocation decisions focus on ensuring that the service, compliance and enforcement efforts of the IRS are properly balanced. Inappropriately allocated limited service or enforcement resources may serve only to foster future noncompliance. Encouraging future compliance is of parallel importance to punishing prior non-compliance. Tax administration is a constantly evolving process that must be able to react quickly, efficiently and effectively.”

Regarding the new Schedule D procedures, with the new Form 8949, the Council recommends -

“Encourage the brokerage houses providing substitute Forms 1099-B to be consistent in reporting with the format of Form 8949. This will aid the taxpayer and preparer in uploading multiple transactions in a standard spreadsheet or other electronic format, thereby making reporting as error free as possible.”

I am pleased that the Council made the following recommendation concerning the Form 1098-T issued by educational institutions -

“Require that Form 1098-T report payments received during the year. With the change to only payments received being reported, the IRS will need transition rules so that amounts billed in the prior year do not get counted twice as amounts billed would be payments received in the subsequent year.”

As I have said in the past - the Form 1098-T as currently issued by most colleges is basically “tits on a bull”.  For the most part the Form 1098-Ts that I get from clients are totally useless.  The form tells how much was billed – but not how much was actually paid.  Who cares how much was “billed” - I need to know how much was paid!  

The report also made this suggestion -

“Require eligible educational institutions to distribute two Forms 1098-T to any student that is both an undergraduate and graduate student in the same calendar year. Alternatively, the 1098-T could be redesigned to provide a box for undergraduate payments received and a box for graduate payments received, along with applicable checkboxes.”

RDF

PTIN UPDATE

Just thought I would let you know.

Yesterday (Tuesday) morning I mailed out my Form W-12, with a check, to renew my PTIN, having waited a month for the promised notice from the IRS explaining how to renew online.

Yesterday afternoon after jury duty I went to my mail drop to look for checks (none were there).  Included in my mail was the notice from the IRS telling me how to submit my application online.

FYI - New York State is now accepting renewal applications for its annual $100.00 tax preparer extortion fee online.  Click here to log-on. 

RDF

FYI

(1)  It has been a while since the IRS opened up online renewal of PTINs.  However, as I manually “refreshed” my PTIN last year, via Form W-12, I could not just go to the website and renew.  I was told that I would need to wait for a letter in the mail with some kind of code before I could renew online.

Guess what?  I have still not received any letter or notice from the IRS regarding PTIN renewal.  So I printed out and completed a Form W-12 to renew my PTIN for another year.  It will go in the mail, with a check, later this morning.

Who wants to bet me that the letter from the IRS will arrive in today’s mail?

(2)  Rather than print the same post on both blogs – I just want to bring your attention to today’s post at THE WANDERING PRO titled “A Discussion on Reforming the Tax Code”.

The topic concerns re-writing the Tax Code and should be of interest to tax professionals.

I welcome your comments on the discussion.

RDF

TAXPRO BUZZ

+ There was apparently a problem with my “settings”.  When I set up THE TAX PROFESSIONAL blog I failed to indicate that comments would be accepted from anybody.  As a result my TWTP follower Tom could not submit a comment at TTP.

Tom, instead, submitted the comment to my TWTP blog, and here it is –

Since your comment part isn't working on the other site for some reason I'll post my comment here - "Wonderful suggestions and I'm printing them out just to remind myself of these basics of life and work".

Thanks, Tom!

FYI – I have fixed the problem and now all comments should be accepted.  So if you tried to submit a comment on an earlier post and were unable to do so please try again – I welcome and encourage the comments of my fellow tax professionals. 

Remember, this blog is meant to be a kind of forum for discussion of issues relating to the business of preparing federal individual income tax returns.

+ We all know what a great resource the IRS website can be.

Trish McIntire reviews two methods of getting answers to tax questions at the IRS website in “Interactive IRS” at OUR TAXING TIMES.

+ Have you checked out my collection of “Tax Pro Forms, Schedules and Worksheets” yet?  You certainly can’t beat the price.

+ Kay Bell, the yellow rose of taxes, publishes a “Tax Carnival” at least once a month.

What is a “Blog Carnival”?  According to blogcarnival.com -

“Blog Carnivals typically collect together links pointing to blog articles on a particular topic. A Blog Carnival is like a magazine. It has a title, a topic, editors, contributors, and an audience. Editions of the carnival typically come out on a regular basis (e.g. every Monday, or on the first of the month). Each edition is a special blog article that consists of links to all the contributions that have been submitted, often with the editors opinions or remarks.”

Kay describes her carnival as –

“A continuing compendium of tax-related postings, ranging from tax news to commentary on taxes (and the politics and politicos who create them) to filing tips and tax-saving strategies.”

“Tax Carnival #92: Tax Standard Time” is Kay’s latest offering.

If you write a tax blog you should consider submitting a post for inclusion in Kay’s Tax Carnival.

+ Russ Fox discusses Linzy v. Commissioner, T.C. Memo. 2011-264 to remind us that “The Tax Court Expects a Tax Preparer to Know How to Substantiate Deductions” at TAXABLE TALK.

His bottom line –

“All tax professionals are held to a high standard if you end up at Tax Court: We are supposed to know the rules of substantiation. If we don’t, the Court isn’t going to be sympathetic at all.”

Along the way he mentions –

“There are some good unenrolled preparers (Robert Flach, for example), so being unenrolled isn’t necessarily a bad thing.”

Thanks, Russ!

+ ACCOUNTING TODAY talks about the IRS’s online EITC Due Diligence training module, and explains the increased penalties for failing to exercise due diligence, in “IRS Offers Practitioner Training to Avoid EITC Penalty”.

+ The post “The New York State Task Force on Regulation of Tax Return Preparers” at my NJ TAX PRACTICE BLOG discusses proposed requirements for tax pros who want to prepare NYS income tax returns.

 

+ For those of you who are interested – 2011 W-2 and 1099-MISC forms (dot matrix compatible and software compatible) are now available at Staples – earlier than usual.  FYI – I spend Christmas Eve and New Year’s Eve each year typing my clients’ (and my own) W-2s and 1099s.  

+ No surprise here – TAX GIRL Kelly Phillips Erb tells us “New W-2 Reporting Requirements for Health Care Confusing Taxpayers (Already)”, which provides a reminder for all of us who will soon be preparing W-2s.

“It is true that for the calendar and tax year 2011 employers must report employer-provided health care benefits for employees. The amount of benefits paid on your behalf will appear on your W-2 in 2012 as a report. It will not affect your taxable income for the calendar and tax year 2011.”

+ One of the many benefits of membership in NATP is its weekly email newsletter TAXPRO WEEKLY.

This week’s edition announced a new member benefit –

“New – NATP White Papers

Each day members call us with their toughest tax questions and we get them the answers they need. We often see a pattern of specific topics that tax pros would like to have a little more in-depth information on. For this reason, we have created white papers – a FREE member benefit. Our library has just begun and we are starting it off with these two documents:

•IRA and Qualified Plan Distributions to Trusts

•Small Employer Health Insurance Tax Credit

To access these white papers, go to the Media Center at Member to Member.”

If you are not already a member of NATP send me an email at rdftaxpro@yahoo.com (with NATP Membership in the subject line) and I will send you membership information.

+ A “tweet” (I am @rdftaxpro) led me to IRS Headliner Volume 315, which announced that “IRS Live Presents Updates from the Office of Professional Responsibilityand the Return Preparer Office”.

“The Internal Revenue Service presents an IRS Live webinar, Dec. 14 at 2 p.m. E.T. featuring updates from the IRS Office of Professional Responsibility and IRS Return Preparer Office.”

RDF

WHAT YOU TALKIN' 'BOUT, DOUGLAS?

I would like to take exception to some of the “Prepared Remarks of IRS Commissioner Doug Shulman at the AICPA Fall Meeting in Washington, D.C., onNov. 8, 2011”.

“From the beginning, we planned to exempt CPAs, attorneys, and enrolled agents from the testing and continuing education requirements as you already have more stringent testing and education requirements.”

This is very misleading – if not an outright lie.   The CPA exam and the bar exam are obviously more “stringent” tests, and CPAs, and I expect attorneys, have more stringent CPE requirements in terms of actual hours.  But only EAs are tested on federal taxation and are required to maintain CPE in federal taxation.  The CPA and bar exams may have a few tax questions, but these are, again I expect, questions on business taxation and not on 1040 issues.  This is like saying that Architects, Medical Doctors and Engineers should be exempt from the RTRP exam because they have already been subject to stringent testing. 

There is nothing in the CPA or bar exam that comes anywhere close to the RTRP competency test when it comes to preparing 1040s.  If the IRS will eventually require different tests for corporate and partnership tax preparation I would very likely support exempting CPAs from this separate test.

The only possible reason for even considering exempting CPAs and attorneys from testing and CPE has been mentioned, and discounted, in my earlier post on “Practice Vs Represent”.  Shulman’s above-quoted comment is just arse-kissing horse puckey! 

“But we received valuable input from stakeholders, including the AICPA, that helped us create what I think is a better overall final product. Let me highlight a few examples.

First, is the creation of a “supervised preparer” category which makes a lot of common sense to us …and to you. We refined the rules that we initially proposed to provide greater flexibility for people who work in a professional firm and prepare returns under the supervision of an accountant, enrolled agent or attorney.

These supervised preparers must obtain a PTIN and renew it each year, but they will be exempt from competency testing and continuing education requirements. You’ve been helpful to us in determining how to define the supervised preparer category… how to program our online system regarding it …and how we should notify the supervisors.”

The exemption of “supervised preparers” makes even less sense than the exemption of CPAs and attorneys.  From my experience, albeit many years ago, the actual “supervision” by CPAs is minimal, if there is any true “supervision” of the actual 1040 preparation.  The “non-CPA” employee is the person who actually prepares the 1040, with the CPA merely signing off on the return. 

When I was an employee of one of the at the time “big eight” firms I came across a tax return that was prepared by a “non-CPA”, and signed-off by a supervisor CPA, a CPA from the firm’s Tax Department, and the CPA “partner-in-charge” of the department.  The return was prepared incorrectly.

The “supervised” employees have no required formal training or education in 1040 preparation, and their competence is not validated by any testing or CPE requirements.

“Second, while we want to ensure a minimum level of competency in the preparer community, we do not want newly-registered return preparers to oversell what this means. Therefore, we created a disclaimer statement for individuals who will be future Registered Tax Return Preparers. This was to ensure that registration with the IRS is not viewed as an endorsement by the IRS.

And so, Registered Tax Return Preparers will need to include a clear statement on any paid advertising involving print, television or radio that ‘the IRS does not endorse any particular individual tax return preparer’, and that more information is available about this on IRS.gov.”

I agree that the IRS should not “endorse” the fact that an RTRP is automatically competent or ethical by virtue of being endowed with the initials, just as I believe that the IRS should not in any way “endorse” the CPA or JD credentials as being a guarantee of competence, currency or ethical conduct. 

But I do not want this “disclaimer” to in any way continue the “urban tax myth” that a person with the initials CPA is automatically a tax expert.

A person receiving the initials RTRP, like one designated an EA, has proven basic competence and currency in 1040 preparation, while a person with the initials CPA or JD has not.  This should be included in the disclaimer.

To be fair, I applaud the Commissioner’s statement (the highlight is mine) –

“And fourth, we have received input on the recent background check and fingerprinting proposals. While we all share the same goal of ensuring that there is adequate due diligence on people entering this field, the AICPA and others have made a number of important points that we need to think through regarding how best to do this.

And so we’ve decided to hold off on fingerprinting as we consider the issues that have been raised, and have further discussions with interested parties.”

I trust that Shulman refers to the fingerprinting of all registered tax preparers, and not just CPAs and attorneys.

He also speaks of –

“Therefore, we have a comprehensive strategy to focus on preparer enforcement and compliance. This year, we are focusing on two categories of preparers. First, are those preparers whose clients’ returns send out a warning signal of serious problems with accuracy and errors. We are also focusing on those preparers who are not signing returns and identifying themselves with a PTIN, also known as “ghost preparers.”

Shulman talks about of sending letters to and investigating preparers “who have been identified as ‘high risk’” and “whose clients’ returns contain traits commonly associated with highly questionable Earned Income Tax Credit claims”.  And he promises “in-person visits focused on return preparers we’ve identified as ‘egregious’ with high error rates”.  This is fine, but it only one area or approach.

He talks about “ratcheting up our efforts to identify ‘ghost preparers’”.  But what about the letters to taxpayers with complicated or questionable “self-prepared” returns to verify that these individuals did not engage “ghost preparers” who did not sign the return, as promised by Dave Williams at the NATP Conference in Austin? Taxpayers who use unregistered preparers should be penalized and fined for so doing.

RDF

SO WHAT WOULD YOU KEEP?

There has been much talk lately of tax simplification – and doing away with “tax expenditures”.

According to the Joint Committee on Taxation (the highlight is mine) -

“Tax expenditures are defined under the Congressional Budget and Impoundment Control Act of 1974 (the ‘Budget Act’) as ‘revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.’ Thus, tax expenditures include any reductions in income tax liabilities that result from special tax provisions or regulations that provide tax benefits to particular taxpayers.“

One proposal is to completely scrap the current Tax Code and start from scratch with “everything is taxable” and “nothing is deductible” - and add back only those very few “excepts” that are considered to be appropriate.  This was what was suggested by BO’s “National Commission on Fiscal Responsibility and Reform”, whose final report sits in an archive somewhere gathering dust, along with the similar report by Dubya’s commission.

My question to you, as fellow tax professionals, is - “What current ‘tax expenditures’ would you want to see remain in a new, simpler Tax Code?”

I will begin the discussion with what I would keep and otherwise change.  FYI, I would, like Romney, do away with Schedule A and allow the deductions that remain be deductible against gross income.

(1)    I would do away with the special tax rates for “qualified” dividends and long-term capital gains.  However I would return the 50% “capital gain deduction” that had appeared on Schedule D decades ago.  On the corporate side I would permit a “dividends paid” deduction to do away with double taxation.

(2)    I would tax Social Security and Railroad Retirement benefits the same way that other retirement income is taxed, amortizing employee contributions over the recipient’s assumed lifetime.

(3)    I would do away with the deduction for depreciation of real property on all Schedules – A,C, E, F – as well as on corporate, partnership, estate, and trust returns.

(4)      I would replace the IRA, ESA, HSA, and MSA with one USA – “Universal Savings Account”. I would also replace all of the various retirement savings options for self-employed taxpayers (i.e. Keogh, SIMPLE, SEP, etc) with one SERSA – “Self-Employed Retirement Savings Account”.

(5)    I would allow deductions for state and local income taxes, real estate taxes paid on the taxpayer’s primary personal residence only, and mortgage interest on acquisition debt for a primary personal residence only.    

The Internal Revenue Code taxes Americans based on income measured in pure dollars. However it is a fact that the “value” of one’s level of income differs, sometimes greatly, based on one’s geographical location. A family living in the northeast or California that has an income of $150,000 may be just getting by, while a similar family that resides in “middle America” lives like royalty on $150,000. Many components of the Tax Code are indexed for inflation, but nothing is indexed for geography. To be honest I have no idea how one would even begin to index for geography.

It costs an awful lot to live in New York, certainly New Jersey, Connecticut, and California. State and local income and property taxes are the highest in the country. The cost of real estate is also excessively high. As a result one must earn a lot more money to be able to live in these states – and salaries are arbitrarily increased to reflect the increased cost of living. Yet $150,000 in income is taxed by the federal government at the same rate in New York City as it is in Hope, Arkansas.

Taxes and the cost of a home, and therefore also the amount of “acquisition debt” mortgage interest paid on a residence, are higher in the Northeast, and California. Since we pay taxes on “net income” after deductions, allowing an itemized deduction for these items would help to somewhat geographically “equalize” the tax burden.

(6)    I would continue to allow a deduction for certain “employee business expenses”.  Some employees receive a salary and are reimbursed in full for “employee business expenses” via an “accountable plan”. Others, generally outside salesmen, receive a base salary and/or commissions, and perhaps a flat monthly “expense allowance” which is included in W-2 wages, and all employee business expenses are truly “out of pocket”. Allowing a deduction for unreimbursed employee business expenses assures that the true net economic benefit is being taxed.

However, I would change the current rules for deducting business use of an automobile – which would apply to employee business expenses and Schedule C, E and F – to remove the deduction for depreciation, either actual or as a component in the standard mileage allowance.  For the most part, taxpayers who use their car for business, other than commuting, would own a car whether or not one was needed for business. The business use, however extensive, is basically secondary to personal use.

There would be one standard mileage allowance for all deductible travel, which would be indexed annually for inflation in the same manner as everything else in the Tax Code is indexed for inflation, and not based on a separate calculation.

In the case of motor vehicles used 100% in a business – trucks, vans, limos, cars that are leased out to others (including one’s corporation) or used exclusively by couriers or for deliveries – a deduction will be allowed for 100% of the actual costs of maintaining and operating the vehicle, including depreciation.

(7)    I would continue to allow gambling losses, to the extent of reported gambling winnings to be deducted, as well as all contingent legal fees related to an award of settlement, so that these items of income would be reported as “net”.

(8)    And I suppose I would continue to allow a deduction for charitable contributions.

Current “tax expenditures” for items like college tuition and energy-efficient purchases would no longer be included in the Tax Code.  But these benefits are certainly worth continuing in another form.  The tax deductions and credits would be replaced by direct “point of purchase” grants or rebates out of the budgets of the appropriate agencies.  Additional tuition grants could be provided via the current system, and there could be “Cash for Clunkers” like rebates for energy efficient purchases.

So now it is your turn.  I look forward to reading your comments and discovering what you would keep.

RDF

TAXPRO BUZZ

TAXPRO BUZZ is a regular, usually weekly on Friday, post similar to my twice-weekly (Wednesday and Saturday) WHAT’S THE BUZZ posts at THE WANDERING TAX PRO.  It provides links to, and comments on, recent blog posts, online articles, and other items I have come across during my “wanderings” on the internet.  Not much BUZZ this first time out.

+ Trish McIntire gives us an update on “RTRP Test - The Rules” at OUR TAXING TIMES. 

She apparently has seen a copy of the “Candidate Information Bulletin” that Prometic put together and gives a detailed list of what she “gleaned”.

Her reaction –

“I know that Prometric is an expert at this kind of thing and all of these procedures have been developed for a reason but the rules read like High School detention.”

As I have said over at TWTP, I am not going to rush to be among the first to take the test.  I have until 2013 to pass it – and I think I will wait until Prometic has a few series of tests “under its belt” before I sign up.  In the meantime, maybe the IRS will realize the error of its ways and decide to grandfather experienced tax pros (I can dream, can’t I).

+ Here are some resources for continuing professional education -

According to the IRS - “Tax professionals can earn continuing professional education credits online through seminars filmed at the 2011 IRS Nationwide Tax Forums. The seminars are now available on the IRS Nationwide Tax Forums Online (NTFO). The 14 self-study seminars provide information to tax professionals using interactive videos synchronized with slides. Each seminar includes downloadable PowerPoint slides and a transcript.” 

“Playback NATP” lets you listen to the educational seminars offered at the 2010 and 2011 National Conference and the 2011 TOP Conference for free online, or pay to download a session to MP3 or Audio Point.

+ Just as fees for tax preparation vary by region, so do bookkeeping and accounting fees, as shown by CPA TRENDLINES in “Bookkeeping Billing Rates Region-by-Region”.

RDF

NATP’S FEE, COMPENSATION, AND PRACTICE MANAGEMENT STUDY

One of the many benefits of membership in the National Association of Tax Professionals is their periodic studies of tax preparation fees, the most recent being the “2010 Tax Professional Study: Fee, Compensation, and Practice Management”,

According to the introduction -

“This study doesn’t just give you the bottom line on what people are charging in your area, it gets even more specific about why other tax professionals charge what they do. These are the details that every successful business person needs to know, but for a sole proprietor or a small business owner it is virtually impossible to accomplish on your own.”

NATP members can download this study free or order a printed copy for a small fee.

The study results confirm what I have been saying for years – the fees for preparing individual federal income tax returns (1040 and 1040A) charged by CPAs are higher than those charged by other categories of preparers. 

The average “minimum fee charged” for tax preparation by a CPA, or PA, is more than twice the fee charged by a “previously unenrolled” preparer ($154 vs $75).  The average minimum fee charged by EAs is only about 30.667% more than that of the previously unenrolled ($98 vs $75). 

And, obviously, fees in general are greater in urban areas and in the Northeast (where I live and work – though you couldn’t tell it from my fee schedule) and the West.

If you are not already a member of the National Association of Tax Professionals you should be.  Email me at rdftaxpro@yahoo.com, with “NATP Membership” in the “subject line”, and I will send you membership information.

RDF

PRACTICE VS REPRESENT

Below is an extended email “conversation” I recently had with Hal Leahy, EA, a reader of THE WANDERING TAX PRO blog, concerning my objection to exempting CPAs and attorneys from the testing and CPE requirements of the new tax preparer regulation regime.

The issue at hand is the fact that I had been told by IRS Tax Preparation Czar David Williams that attorneys and CPAs could not be required to take the test and maintain specific CPE because there was a “statutory” prohibition.

What it comes down to is – do attorneys and CPAs have a statutory right to “practice” before the IRS or to “represent a person” before the IRS.

Please note that the highlights in Hal’s first email are mine, but the highlights in his subsequent emails are his. 

Robert,

I found the exemption for attorneys and CPAs in the US Code.

First, here is an excerpt from the IRS publication A. REPRESENTATION OF TAXPAYERS BEFORE THE INTERNAL REVENUE SERVICE, http://www.irs.gov/pub/irs-tege/eotopica86.pdf

"Background

Public Law 89-332, 1965-2 C.B. 640, enacted by Congress on November 8, 1965, was designed to do away with agency-established bars for attorneys who appeared before certain federal administrative agencies. The new law was also intended to wipe out agency-established admission requirements for licensed attorneys, and to allow persons to be represented before all federal agencies by counsel of their choice. Additionally, the law eliminated the special enrollment requirements for certified public accountants in representing others in accounting matters before the Service.

Before the enactment of the new law, the rules and regulations governing the right of attorneys to represent others before the Service included a cumbersome admission procedure, which required disclosing whether or not the applicants were persons of good moral character. All applicants desiring admission to practice before the Service were obligated to submit to a background investigation before being enrolled to practice. In addition to having to become familiar with the seventy provisions contained in Circular 230, the applicants were also required to affirm that they would conduct themselves in accordance with the laws, regulations, and rules of the Service.

In liberalizing the rules, Congress felt that there was a presumption that members in good standing of the professions of the law and certified public accounting were of good moral character {ha! ha! ha! – rdf}, and that the surveillance by State bar associations and State associations of public accountants were sufficient to insure the integrity of practice by such persons before the Service."

The following is the state of the law in the US Code today:

“5 USC Sec. 500 Administrative practice; general provisions –

(a)    For the purpose of this section –

(1) "agency" has the meaning given it by section 551 of this title; and

(2) "State" means a State, a territory or possession of the United States including a Commonwealth, or the District of Columbia.

(b) An individual who is a member in good standing of the bar of the highest court of a State may represent a person before an agency on filing with the agency a written declaration that he is currently qualified as provided by this subsection and is authorized to represent the particular person in whose behalf he acts.

(c) An individual who is duly qualified to practice as a certified public accountant in a State may represent a person before the Internal Revenue Service of the Treasury Department on filing with that agency a written declaration that he is currently qualified as provided by this subsection and is authorized to represent the particular person in whose behalf he acts."

Note that attorneys may represent clients before any federal administrative agency but CPAs are only authorized to represent before the IRS. A later section of the US Code removed the carte blanche for attorneys to appear before the Patent Office. 

The above is why the IRS cannot require attorneys or CPAs to be subject to any further licensing or testing, they are already authorized to practice.

Hal Leahy, EA

HL-

Thanks much for the citations.  I understand that this is what Dave Williams was talking about when he referred to a "statutory prohibition".

The question here is - is preparing tax returns considered "representing a person before the IRS"? 

Previously unenrolled preparers like me, who will eventually become RTRPs, will not be allowed to "represent a person before the IRS" - with the minor exception of representing a client whose 1040 I prepared at an audit under a Power of Attorney.  We are not required to take the test and maintain specified CPE in order to represent a client before the IRS - but to be able to prepare a federal income tax return.

Nobody is asking that CPAs and attorneys, or EAs, take on additional requirements to be able to continue to "represent a person before the IRS".  The test and CPE is to verify that the CPA and attorney are competent to prepare federal income tax returns.

I see it as apples and oranges.  What do you say?

RDF

Preparing a tax return is "practice before the IRS". Representation is a different matter. See (bolding added) Circular 230 http://www.irs.gov/pub/irs-pdf/pcir230.pdf, 10.2 Definitions.

"(4) Practice before the Internal Revenue Service comprehends all matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such presentations include, but are not limited to, preparing documents; filing documents; corresponding and communicating with the Internal Revenue Service; rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion; and representing a client at conferences, hearings, and meetings."

Practice means "all matters" and includes but is not limited to preparing and filing document with the IRS. That includes tax returns. The term practice is all encompassing and includes preparing returns. That is why the IRS cannot require CPAs or attorneys to take a test, they have unlimited practice rights from the US Code.

Section 10.3 gives unlimited practice rights to attorneys, CPAs and EAs. The same section gives limited practice rights to Enrolled Actuaries, Enrolled Retirement Plan Agents, and RTRPs. This is best seen by how Circular 230 restricts the rights of RTRPs in Section 10.3

"(f) Registered tax return preparers

(2) Practice as a registered tax return preparer is limited to preparing and signing tax returns and claims for refund, and other documents for submission to the Internal Revenue Service. A registered tax return preparer may prepare all or substantially all of a tax return or claim for refund of tax. The Internal Revenue Service will prescribe by forms, instructions, or other appropriate guidance the tax returns and claims for refund that a registered tax return preparer may prepare and sign."

It does not say RTRPs can only prepare tax returns. It states that their practice is limited to that. Therefore "practice" includes but encompasses more then tax prep. The next section restricts the representation rights of RTRPs so "practice" is not limited to just representation.

“(3) A registered tax return preparer may represent taxpayers before revenue agents, customer service representatives, or similar officers and employees of the Internal Revenue Service (including the Taxpayer Advocate Service) during an examination.”

Hal Leahy, EA

HL -

You have said “Representation is a different matter”.  The US Code you had previously quoted gives attorneys and CPAs the statutory right to “represent a person”.  The term “practice” is not used in the Code reference.

Does an attorney and CPA have a statutory right to “practice” or to “represent”?  I see it as a statutory right to “represent”, which is fine with me.  I would not change that.  If the right is to “represent” only I would think the IRS can require testing and CPE for the other aspects of “practice”, such as tax preparation.  Just as the IRS treats RTRPs differently for representing and preparing tax returns.  Am I wrong in my thinking?

Thanks!

RDF

As of this writing I have not heard any more from Hal.  I certainly thank him for providing me with the citations regarding this issue.

So here is my point. 

(1)  Section 500 quoted above is “statute”.  Congress writes “statute.  Circular 230 discusses “practice”.  Circular 230 is regulation.  The IRS writes regulation.

(2)  There is no question that attorneys and CPAs have the statutory right to “represent a person” before the IRS, and additional requirements cannot be placed on this statutory right.

(3)  IRS Regulation describes what “practice before the IRS” means, and determines the requirements that must be met to be able to so “practice”.  They have determined that individuals who want to prepare federal tax returns must pass a test and maintain specific annual CPE. 

(4)  So, while they are statutorily permitted to represent persons before the IRS without additional requirements, if attorneys and CPAs want to prepare federal tax returns they should also pass the same test and maintain the same specific annual CPE.  And they should be given the additional initials RTRP to indicate to the public that they are authorized to prepare 1040s. 

I look forward to hearing from my fellow tax professionals on this issue.  So comment away!

RDF