Friday, November 30, 2012


Earlier this week I attended the NATP’s annual year-end tax update seminar, as I have been doing for more than 20 years.  It used to be “famous”, but now it is “essential” - and is therefore titled “The Essential 1040”.  I attended one of the several offerings located in New Jersey.

I talked about the items of interest to 1040 filers over at THE WANDERING TAX PRO.

One of the items of special interest to tax professionals was the new expanded Form 8867 “Paid Preparer’s Earned Income Credit Checklist”.

I just posted about the fact “that the IRS is getting more out of hand with its ‘due diligence’ requirements for tax preparers who are claiming the Earned Income Tax Credit for clients” here in “WE ARE NOW NOT ONLY TAX PREPARERS, BUT SOCIAL WORKERS AS WELL!”, which was a response to Trish McIntire’s post “EITC Checklist Expanded” at OUR TAXING TIMES.

At the seminar we reviewed in detail the new Part IV “Due Dilligence Requirements” on Pages 3 and 4 of the form.  In my opinion the new hoops that we are required to jump through are TOTALLY RIDICULOUS!

Here we go again!

As I have said time and again, we must call a spade a shovel.  The Earned Income Credit is a federal welfare program.  Period.  In terms of dollars distributed it is, I believe, the largest federal welfare program.

At this point in the discussion I must always make the following statements of personal beliefs -

(1)  There is nothing wrong with the concept of the government providing “welfare” to qualified, “deserving” citizens.  And there is nothing wrong with the government providing encouragements or “rewards” to the working poor with dependent children.

(2)  The government has the fiduciary responsibility to make sure that those who are receiving public assistance, benefits, or “encouragements” are truly “deserving” and meet the requirements established for receiving such benefits.  

Using the Tax Code to distribute welfare, or other government assistance, benefits, or “encouragements, is not good tax policy and not good fiscal policy.

And forcing tax preparers to be Social Workers and do the government’s job of verifying that an individual qualifies for welfare benefits is a bad idea.  It is a job we tax professionals should not accept.

The following are excerpts from my series on MY OBLIGATIONS posted here at TTP in November of 2011, which discussed what I consider to be my obligations to my clients, my practice, and the Internal Revenue Service as a professional tax preparer.  I have highlighted certain statements -

When a client “engages” me to prepare his/her individual income tax returns he/she is basically asking me to assist him/her in preparing a government report.

When preparing tax returns I assume that, unless I have direct personal knowledge to the contrary, the client is telling me the truth.

If a client tells me or indicates on a worksheet that the gross income from a part-time sideline business was $3,525, or that the total medical expenses for the year were $6,257, or that he/she drove 4,206 miles for business I will believe this to be true (again, unless I have direct personal knowledge to the contrary). It is not my responsibility to personally verify all the numbers or statements given to me by a client. I have no obligation, legal or ethical, to audit your return. This is up to the IRS, if they so choose. I am simply preparing the return, to the best of my ability, “based on information supplied by the client”.

It is my obligation, and responsibility, to tell clients about the IRS standards and requirements for documenting income, deductions and credits. But that is where it ends.

Due diligence requires me to ask questions of the client if there is something about which I am unsure, or which appears to be “questionable”, and to make sure that I have all the facts necessary in order to determine whether a deduction, exclusion, or credit is allowable or appropriate.  It also requires me to, as quoted above, tell clients about the IRS standards and requirements for documenting income, deductions and credits.  It DOES NOT require me to personally verify each and every item of income, deduction, or credit claimed on the return.   

The benefit provided by the Earned Income Credit should NOT be distributed via the Tax Code.  It should be distributed the same way as other forms of welfare, with the same safeguards and regulations that are administered by the federal or state employees who administer these other forms of welfare.

Considering the ridiculous new “hoop jumps” required by the IRS, if I were still accepting new 1040 clients I would must definitely refuse any returns that included an Earned Income Tax claim.  As it is, I will not prepare the 2012 Form 1040 (or 1040A) for an existing client who appears to qualify for, and wants to claim, the EIC.  There is too much work, and agita, involved, and too much potential for substantial penalties.

While the NATP and other membership organizations do a good job of speaking on behalf of tax preparers before the federal government and its agencies and representatives, what tax pros of all designations need is an organization whose sole purpose is to actively and aggressively campaign against such abusive and inappropriate rules and regulations like the excessive EIC due diligence requirements (and for a grandfathering exemption from the RTRP test for experienced tax pros).

If the Earned Income Credit must continue to exist in the Tax Code, the very most that tax preparers should be required to do is have taxpayers claiming the credit personally fill out Part I and Part II or Part III of the Form 8867 and sign it under penalty of perjury.  The signed form would be attached to the 1040 (or 1040A).

The seminar also wasted 2 hours that could have been devoted to more important and beneficial federal tax information on the topic of ethics.  Unfortunately this must be done at this seminar to cover the IRS demand that EAs and RTRPs (and potential RTRPs) sit through 2 hours of ethics each year as part of the annual 15 hour CPE requirement.

Regardless of how well the topic was presented by the instructor, the ethics component was truly redundant.  I have sat through the same presentation time and time again.  And I am no more, or less, ethical than I was five years ago.

One item that is covered in this presentation is totally ridiculous and makes absolutely no sense to me.

I am at a local store or restaurant and I run into longtime client Joe.  While we are smoozing Jim, another client of mine, enters and sees us.  Jim knows Joe, but was not aware that I also know Joe.  Jim shows surprise and asks how we two know each other.  From what the instructor said, I am not allowed to say, “Joe has been a client for years”. 

As long as I do not reveal personal and confidential financial or tax information about Joe to Jim, and vice versa, which I would not do, who gives a flying sex act if I happen to tell Joe that Jim is also a client?  Regardless of what the instructor said, in such a situation, unless Joe specifically asks me not to tell Jim, I am certainly going to say, “Joe has been a client for years”.  The IRS be damned!

I would like someone to give me a good reason why I should hide the fact that Joe is a client from Jim.
Your comments on both, or either, issue are solicited.

As usual the NATP seminar was a good, and except for the ethics component, productive one.  I do believe that NATP is the best provider of federal tax CPE.    


Wednesday, November 21, 2012


In her post “EITC Checklist Expanded” Trish McIntire, thankfully back to blogging at OUR TAXING TIMES after taking some time off, explains that the IRS is getting more out of hand with its “due diligence” requirements for tax preparers who are claiming the Earned Income Tax Credit for clients.

The current form 8867 not only acts like a check list for each EITC qualification but now asks about what documentation was provided and what follow up questions the tax preparer asked. For example, one new question ask if the tiebreaker rules were explained when the qualifying child could be claimed by more than one taxpayer. The new page wants to know what documentation, if any, the preparer saw to verify EITC issues like residency, business income and child disability.”

Trish correctly points out that “Preparers have always been told that we aren’t responsible to audit the records taxpayers bring in to us.”  But this is apparently not the case with the EITC.

Here is the story.  The EITC is a welfare program – the largest federal welfare program.  Because this particular form of welfare is “distributed” via the Tax Code, and it often “refundable”, allowing a taxpayer to actually make a profit by filing a tax return (and distorting the federal budget and creating a big part of the “47%”), it is, as Trish properly identifies, “a fraud magnet”.  Various reports over the years have suggested that as much as 30% or more of all EITC claims are erroneous, resulting in billions of dollars of fraudulent payments.

And because it is “distributed” via the Tax Code, and the resulting huge amount of fraud involved, the tax professional has been forced to become a “social worker” and do the government’s work in verifying that the claimant is truly entitled to the welfare benefit – more so than for any other tax deduction or credit.

Is this fair or proper?  Certainly not!

In my specific tax practice it is not too much of a problem.  I no longer accept new clients, so I do not have to deal with any new EITC claimants.  And most of my existing clients are older with grown children, so I have very few EITC claims to deal with, and with those very few I am well aware of the claimants’ situation as I have been preparing their returns for years.

But if I were still “open to the public” and soliciting new clients I honestly believe that I would refuse accepting any EITC returns.  It would not be worth the potential agita or the potential penalty liability.

Trish believes the “EITC is a good program and helps a lot of families”.  But in reality it is NOT a good program.  The idea of providing financial assistance to the working poor with dependent children is a good one – but doing it via the Tax Code is definitely not.

Clearly the idiots in Congress must deal with this problem when they decide to seriously address the need for substantive tax reform, hopefully early in 2013.


Monday, November 19, 2012


Back in September I wrote a letter to the Carol Campbell, the new Director of the IRS Return Preparer Office regarding my issues with the IRS tax preparer regulation regime – specifically the need for a “grandfather” exemption from the initial competency test for experienced tax professionals like myself and the error in exempting CPAs and attorneys from the testing and CPE requirements.

I posted a copy of this letter here at TTP in “My Letter to Carol Campbell”.

On November 17th I received a letter, dated November 13, 2013, from Preston B Benoit, Deputy Director of the Return Preparer Office in response to my letter to Ms Campbell.  Here is the text of the letter -

“Dear Mr. Flach:

I am responding to your letter dated September 10, 2012.  You requested an exemption from the new testing requirements for federal tax return preparers.  You believe that experienced tax professionals who remain current in tax law should be exempt of “grandfathered” in the Registered Tax Return Preparer designation.

Before finalizing these requirements, we requested extensive input and held a series of public meetings in 2009 soliciting written public documents.  We received over 500 responses to IRS Notice 2009-60.  On August 19, 2010, we published proposed regulations on the competency test and continuing education (CE) requirements.  We received more than 60 written comments on the proposals, including comments from organizations representing a substantial number of tax return preparers.  We also held a hearing on the proposals on October 8, 2010.

After carefully weighing all input, we published final regulations on June 3, 2011, that officially exempted Attorneys, Certified Public Accountants, and Enrolled Agents from the new testing and CE requirements.  We also separately issued guidance exempting certain non-signing supervised preparers and individuals who do not prepare any Form 1040 series returns.

I appreciate your experience and suggestions, but we cannot approve your request for an exemption from the new IRS testing requirements.

If you need further assistance, please call me at (202)927-6428.


Preston B. Benoit
Deputy Director, Return Preparer Office"

If you read my letter you can see that I did not request a specific exemption from the testing requirements for myself.  I was suggesting that ALL experienced preparers like me be exempt from the test under “grandfathering”.

I am well aware of the process that the IRS underwent before issuing its final regulations.  My response, in which I said pretty much the same things I said in my letter to Ms. Campbell, was among the “over 500 responses to IRS Notice 2009-60”.  I believe it is actually published somewhere in an IRS document.

While of no real value, the response at least acknowledges the receipt of my correspondence and indicates that someone, perhaps not the person to whom it was addressed, may have actually read it, although not carefully.  It did not address the reasoning behind the IRS decisions not to grandfather and to exempt CPAs, attorneys, and “supervised employees” from the requirements, or suggest that these decisions might be reviewed.

When I write a letter to a specific person I usually expect a response from that person.  Oh well, at least the response came from the Deputy Director and not some clerk or secretary considerably lower on the ladder.

The need to “grandfather” experienced tax preparers is more important than ever, considering the huge number of “potential RTRPs” who have not yet sat for the test (as I pointed out in my post “There Must Be Grandfathering”).

As of November 5th there are still 314,860 “preparers with provisional PTINs who have not yet passed the RTRP test”.  Since the test was first offered about a year ago only 32,902 have passed the test.  So in the past month only 10,343 preparers have taken and passed the test.

Is the IRS really willing to refuse potentially between 150,000 and 200,000 individuals the ability to continue to make a living in their chosen profession?  Forbidding the taxpaying public access to so many competent and experienced preparers is not good for anyone!

I continue to urge membership organizations like NATP to take up the cause of “grandfathering” and actively campaign for it.  And I urge my fellow tax professionals to write to Ms. Campbell requesting that grandfathering be instituted.

It will be interesting to see who BO appoints as the new Commissioner of the IRS, hopefully in January.


Thursday, November 15, 2012


A recent item at on the effects of possible tax simplification on the H+R Block stock told us -

BTIG analyst Mark Palmer writes that ‘some clients have ‘expressed concern’ about ‘the possibility that the U.S. government will embark on a new program of tax simplification that would obviate much of the need for tax preparation assistance’."  

I do not think tax preparers have anything to worry about.  It is true that increased complication does increase business (The Tax Reform Act of 1986, a major rewrite of the Code, was properly nicknamed “The Accountant’s Full Employment Act) - but the opposite is not necessarily true.

While I have little hope that there will be true substantial tax reform or a true simplification of the mucking fess that is the Tax Code in 2013, I, a veteran tax professional, would truly welcome it.  I have said over and over again that dramatically simplifying the Tax Code would NOT affect my business.

If I were to spend each day during the tax season preparing nothing but 1040A forms, I guarantee that I would bill more fees, spend less money, reduce my potential liability, and have less agita to deal with both during and after tax-time. While I obviously charge a higher fee for more complicated returns, I make less profit per hour on these returns. I honestly believe that a truly simple Form 1040 would increase both my efficiency and my bottom line.

If tax returns were much easier to prepare I do not see my clients leaving me en mass to do their own returns.  Many of my current 1040 clients could probably prepare their own tax returns under current law.  They come to me because they do not want to be bothered with the task of doing it themselves.  Because my fees are reasonable it is easier, and more cost and time effective, to have me do it.  Plus they want to be sure they do not miss anything.

And with any tax simplification there would still remain enough complexity in certain areas of the Code to keep us busy.  We would still need to prepare a Schedule C for business income, a Schedule D for capital gains and losses, and a Schedule E for rental income.   

So tax professionals should not fear tax simplification.  We should embrace the possibly and actively campaign for it.

What do you think?


Monday, November 12, 2012


Currently, in order to be allowed to prepare 1040s for compensation, you must register with the Internal Revenue Service and receive a PTIN, and, unless you are a CPA, an EA, an attorney, or a “supervised employee”, pass an initial competency test and maintain at least 15 hours of Continuing Professional Education (CPE) in federal taxation, with at least 3 hours in updates and 2 hours in ethics, each year.

The initial competency test is required regardless of how long you have been preparing 1040s.  But is there really any value in this initial competency test? 

Thanks to Congress the mucking fess that is the Tax Code is constantly changing.  And, hopefully, in 2013 it could change even more so if Congress does the right thing (but don’t hold your breath) and enacts serious and substantive tax reform.

If I, who has been preparing 1040s without incident consistently for over 40 years, am forced to sit for the test I will not be doing so until after the 2013 tax filing season (when 2012 tax returns are filed).  The test will be based on the Tax Code as it is in effect for 2012 returns, or 2011 returns (I am not sure). 

Let us say I pass the test and shortly thereafter, before the end of 2013, the Tax Code is substantially rewritten.  I will have proven basic competence in tax law that, for the most part, is no longer applicable.  

The CPE requirement is much more important than the initial competency test.  Being required to remain current in tax law by taking at least 15 hours of CPE each year is certainly a better indication of competence than any test that is, regardless of what happens in Congress, at least partially obsolete once passed.

While I may be able to accept CPAs and attorneys being exempt from the competency test, since it is really not of much value anyway, it is a huge mistake to exempt these so-designated professionals who want to prepare 1040s for compensation from the 15 hours in federal taxation CPE requirement. 

It is true that these professionals already have CPE requirements within their individual designation – but none of the required CPE has to be in federal taxation.  If a CPA wants to be a compensated 1040 preparer then he/she should be required to include 13 hours of CPE in federal taxation in his/her existing annual CPE requirement to maintain certification as a CPA, and the same for attorneys.  CPAs and, I expect, attorneys are already required to take the annual 2 CPE hours in ethics preaching.  This would certainly not be an added burden for these professionals, as they are already required to take CPE.  To be honest, many CPAs who do prepare 1040s already take some, if not 13 hours, CPE in federal taxation each year.

It is correct for the IRS to want to register tax return preparers via the PTIN system.  And it is proper for the IRS to require that these preparers remain current on federal tax issues via required CPE.  The CPE requirement is not an added burden on serious and legitimate preparers – as I have said all along, if a serious tax preparer is not already taking at least 15 hours per year in tax CPE he/she certainly should be.  But the initial competency test is indeed a burden that in reality has minimal value.

The IRS should do away with the initial competency test for becoming a RTRP.  If it does not do away with it completely, it should at least initiate a “grandfathering” exemption for experienced tax preparers. 
And CPAs, attorneys, and “supervised employees” should not be exempt from the CPE in taxation requirement.  These individuals should be subject to the same requirements as the "previously unenrolled" and also be issued the separate RTRP designation.

So what do you think?