A POTENTIAL DISASTER

Russ Fox recently discussed a real potential problem for tax preparers and taxpayers alike In the upcoming 2013 tax filing season in his TAXABLE TALK post “Why the 2013 Tax Season May Give Me Lots More Gray Hair”.

Here is what Russ had to say –

“Today, President Obama reiterated that he won’t sign a bill to block the year-end tax hikes unless there are tax hikes on the wealthy. If President Obama wins reelection, he’ll end up having to negotiate with the Republican House (and possibly a Republican Senate in January).

But what happens if Mitt Romney wins? In today’s Gallup Poll, he’s up by 7 among likely voters so this definitely could happen. And what were to happen if the Republicans also win the Senate (or it ends in a 50-50 tie, to be decided by whichever party holds the Vice Presidency), also a definite possibility? Republicans would wait for President Obama to leave office and on January 21st legislation might pass extending many of the Bush tax cuts.

There’s a problem here, though: The IRS won’t be able to update their computer systems until after the legislation passes in late January. A few years ago, there was a tax season where we couldn’t file most returns until mid-February because Congress waited until mid-December to pass extender legislation. Yes, it could be mid-March before we’re able to file many tax returns. Imagining a compressed one-month “normal” tax filing season is not pleasant for a tax professional.”

As Russ, and other tax bloggers, has pointed out, it is a very real possibility that the idiots in Congress will do nothing to address the various “extenders” that expired on December 31, 2011, including, most importantly, the dreaded Alternative Minimum Tax (AMT) patch, until early 2013. 

And, as Russ has also pointed out, this means that the IRS will have to “go to press” with incorrect or incomplete information on 2012 forms, schedules and instructions, and that its computer systems for processing returns will include this incorrect or incomplete information.

The IRS will either have to correct its computer systems mid-season, seriously delaying the processing of 2012 income tax returns and the issuance of 2012 tax refunds and perhaps requiring the extending of the initial filing deadline from April 15 to perhaps May 15 - or require taxpayers to file original returns under the law that existed when they went to press and then file amended returns once the computers have been properly updated.

Either option will cause mass confusion among the taxpaying public and generate massive agita or tax preparers.  It will most certainly cost the IRS a fortune and increase the cost of preparing a 2012 tax return.

As I cannot submit my clients’ returns electronically, and do not usually begin preparing returns until February 1st, my practice will not be as affected as most (assuming that the extenders are passed in January).  It would not stop me from properly preparing the return under a normal tax-season schedule – but the processing of these returns and issuing of any refunds would certainly be delayed.

While I expect I could deal with it, I would not want to be forced to wait until March to begin to prepare returns and would not want the season extended a month.  I would probably prefer filing initial returns under old law and then preparing 1040Xs in April and May to correct them as needed.  Hey, this would certainly increase my income.

 

As for the issue of gray hair that Russ brings up - I have been gray for years, so at least that is not a concern for me.

 

One alternative for the idiots in Congress - address the "extenders" ASAP, so the IRS can properly go to press almost on time, and then wait until early 2013 to deal with the "Bush" and other tax breaks that expire 12/31/2012.  But then again - they are idiots!

What do you think? 

 

RDF

THERE MUST BE GRANDFATHERING!

Saturday’s BUZZ installment at my TWTP blog will lead off with the following item -

The IRS has issued “Return Preparer Office Federal Tax Return Preparer Statistics” with up-to-date data current as of 10/01/2012.

It appears that there are still 325,203 “preparers with provisional PTINs who have not yet passed the RTRP test”.  I am not alone.

This past summer I attended the National Association of Tax Professionals’ annual conference in Baltimore.  The keynote speaker was former IRS Tax Pro Regulation “czar” David Williams, who talked about the progress of the new regulation regime.  In my post “Greetings from Baltimore” here at TPP I reported on the statistics provided by David in his address -

“There are currently 3,269 previously unenrolled tax professionals who have taken and passed the initial competency test to receive the new RTRP (Registered Tax Return Preparer) designation.  This leaves almost 339,000 RTRP “candidates” – previously unenrolled preparers who need to take and pass the test by December 31, 2013 (I am in this number).  That is a lot of tax preparers.”

The current data indicates that as of October 1^st there are 22,332 Registered Tax Return Preparers.  So since the summer only 19,000 more previously unenrolled, and some Enrolled Agents who did not need to take the test, have taken and passed the test.

There are only about 14½ months left before the December 31, 2013 deadline for “provisional” tax return preparers to take and pass the RTRP competency test.  Will that be enough time for the 325,000+ to do so?  To be perfectly honest, I doubt it very much.  It may be a logistic impossibility.

Yet the IRS and its new regulation regime czar continue to state that it will not extend the deadline.

So what will happen if on December 31, 2013, there are still 250,000 or more tax preparers have not taken the test?   Will the IRS put them, many if not most of whom will no doubt be veteran experienced and highly competent and ethical tax professionals like me, out of business?

To do so would be a disaster for both taxpayers and the IRS. 

The issue is not that the deadline should be extended – but that the IRS must enact some kind of “grandfathering”.

Why has the IRS resisted such grandfathering?  They already exempt all CPAs, attorneys, and “supervised employees”, regardless of ability, training, or experience in 1040 preparation, from having to prove any degree of competency by taking the test, which is about 42% of the current PTIN-holder base.  So they cannot really be that concerned about the competence of registered tax return preparers.

The main purpose of the regulation regime was to establish a registry of tax return preparers.  The requirement to register and receive a PTIN takes care of this.  The creation of a RTRP designation is good for the taxpaying public, as is the requirement for minimum annual CPE in federal taxation to maintain the designation.  And, going forward, it may also be a good idea to require new individuals who are entering the business to be tested as part of the RTRP process.

But, as I have said all along, why should I, who have been preparing 1040s continually without incident for 40 years, and others like me be forced to take a test now to prove that I knew what I have been doing all these years?

I have suggested that the IRS exempt from the initial competency test all paid tax return preparers who have consistently been preparing 1040s full time (I mean during the tax season – not 40 hours a week all year round) for at least 5 full years (60 months) prior to registering for a PTIN, and who have earned a minimum of 50 hours of CPE in federal income taxation topics during the previous 3-year (36 months) period.  As the current annual requirement is 15 hours of CPE per year, I would accept a minimum of 45 hours over 3 years.

Unless the IRS is truly planning to put perhaps a quarter of a million qualified and ethical tax return preparers out of business it must accept grandfathering!

RDF  

A MILESTONE

“Tax preparer Robert D Flach celebrates 25 years of professional affiliation with the National Association of Tax Professionals (NATP), a nonprofit professional association founded in 1979, and committed to excellence in taxation. NATP members dedicate themselves to continued education and a high code of ethics and professional conduct

Members of the National Association of Tax Professionals (NATP) work at offices that assist over 11 million taxpayers with tax preparation and planning. The average NATP member has been in the tax business for over 20 years and holds a tax/financial designation and/or a college degree. NATP has more than 20,000 members nationwide. Members include individual tax preparers, enrolled agents, certified public accountants, accountants, attorneys and financial planners. As a nonprofit professional association, NATP serves professionals working in all areas of tax practice through professional tax education, tax research and tax office supplies. The national headquarters, located in Appleton, WI, employs over 50 staff members. Learn more at www.natptax.com.”

All previously unenrolled tax pros who will now become RTRPS, who are not already members, should join the National Association of Tax Professionals.  In my opinion, NATP is perhaps the best provider of continuing professional education (CPE) for tax preparers.

Its annual reasonable-priced year-end tax update seminars, the pairing of “The Essential 1040” and “Beyond the 1040”, offered around the country each year in November and December, is the perfect way to comply with the new CPE requirements.  The 2 days add up to 16 hours of CPE,  They offer more than 3 hours of detailed tax updates (information on what is new for taxes for the current tax year– this year 2012 – and the next one – i.e. 2013), in depth coverage of specific tax topics, and includes the unfortunately necessary 2-hour Ethics time waster.

The various print and email publications and Research Department are also excellent and essential resources for tax professionals.

To receive membership information please email me at rdftaxpro@yahoo.com with “NATP Membership Info” in the “Subject Line”.

TAFN

LET THE DEBATE BEGIN

Enrolled Agent, and fellow tax blogger, Jason Dinesen of Iowa has responded to the recommendations I offered in “My Letter to Carol Campbell” in a post titled “RTRPs, CPAs, Attorneys and Grandfathering” at his excellent blog DINESEN TAX, INC, formerly known as DINESEN TAX TIMES.

He takes on two of my recommendations -

“Many, if not most, RTRPs and enrolled agents seem to believe that CPAs and attorneys should be required to take the RTRP exam in order to prepare tax returns.

Not me.

I am open to Robert Flach’s idea of grandfathering unlicensed tax preparers such as himself, who can demonstrate a certain amount of experience and a certain amount of continuing education.

I am not open to the idea of requiring a CPA or an attorney to take the RTRP exam.”

Why?

“I agree completely that it’s wrong for the public to automatically assume that CPA equals ‘tax expert’. As an enrolled agent, I am as annoyed as anyone over that misconception.

But forcing a CPA or an attorney to take an open-book exam over basic tax law would be insulting to CPAs and attorneys.”  

CPAs have been insulting EAs and competent previously unenrolled preparers for years by perpetuating the “urban tax myth” that CPAs are the only tax experts and that CPAs “own” the area of taxation. 

Fellow blogger Marilyn Lawver, who just happens to be a CPA, wrote the following in a blog post a few years back (the highlight is mine) –

“Robert is correct that a CPA is not specifically licensed for tax preparation, rather ‘a CPA is a licensed accountant, authorized to certify audits of financial statements’. Just a couple of months ago, I was pondering this exact issue. I was thinking about all the fancy credentials the AICPA offers for CPAs in other specialties - financial planning, fraud examination, business valuation - and wondering how to become a certified tax expert.

So I emailed the AICPA asking about it. Here's the exact wording of the response I received:

’We do not offer a credential in taxation. In general, our approach has been not to develop credential programs around areas for which the public already believes CPAs to 'own'. In addition, we do not endorse a particular tax credential.’”

Exempting CPAs from proving competence or remaining current (they are also exempt from required CPE in federal taxation) in 1040 preparation continues to perpetuate this “urban tax myth”.

I do agree with Jason that CPAs and attorneys “have already passed much, much more rigorous tests”.  There is no doubt that the CPA and bar exams are much more extensive and difficult than the RTRP competency exam (as is the Special Enrollment Exam for EAs).  But the CPA and bar exams have nothing to do (or at most only minimal to do) with 1040 preparation.  I expect that an engineer or architect must also take a rigorous test to be licensed, but would you want an engineer or architect preparing your tax return?

Jason goes on to say – “And anyway, what would it prove? The RTRP exam is an open-book test over basic tax law.”  And he explains that the RTRP test is “a test over basic tax law – it’s not designed to be a ‘tax expert’ test”.

That is not the issue.  Regardless of whether there is any real value to requiring the test of anyone, the issue is that the Internal Revenue Service wants anyone who intends to prepare more than a minimal number of tax returns for compensation to demonstrate some degree of competence in federal 1040 tax law.  By exempting CPAs and attorneys from this test the Service is saying that the CPA and bar exams are tests of competence in 1040 preparation – which is just not true.

It is true, as Jason points out, that CPAs and attorneys are “held to ethical standards by their state boards, and I believe one of those standards is to not practice in an area in which they don’t have knowledge.”  But professional ethical standards did not prevent Enron or other CPA or attorney created tax fraud.  And the ethical standards of doctors and other professionals do not prevent malpractice.

Does Jason also believe that CPAs and attorneys should be exempt from required CPE in taxation because they are already required to maintain CPE (although none of the required CPE has to be in taxation) to maintain their current designation?

Talking about “insulting” CPAs and attorneys – I believe it is an insult to someone like me, who has been preparing 1040s without incident for 40 years and who has maintained an average of 20+ hours per year in CPE in federal taxation for at least the past 25 years, to be forced to take a test to prove that I know what I have been doing all these years.

Jason promises “more to come in future blog posts”.  I look forward to his future posts on the subject, and to a continued debate on this subject.

The floor is open for discussion.

RDF

MY LETTER TO CAROL CAMPBELL

Below is the text of a letter I have mailed to Carol Campbell, David Williams’ replacement as Director of the IRS Return Preparer Office -

Dear Ms Campbell:

Congratulations on your recent appointment as the new Director of the IRS Return Preparer Office.

I have been preparing 1040s for individuals in all walks of life without incident since February of 1972.  FYI - during my 40+ years in “the business” I have never used flawed and expensive tax preparation software to prepare an individual income tax return.  Each year I prepare about 400 sets of income tax returns manually. 

I am the author of the popular tax “weblogs” THE WANDERING TAX PRO (http://wanderingtaxpro.blogspot.com), around since the summer of 2001, THE TAX PROFESSIONAL (http://thetaxprofessional.blogspot.com), and the NEW JERSEY TAX PRACTICE BLOG (http://njtaxpractice.blogspot.com), and also write on tax planning and preparation topics for TheStreet.com and its sister site MainStreet.com, and the publications of the National Association of Tax Professionals, of which I have been a member for 25 years, and its New Jersey chapter.

I have been a vocal supporter of the concept of registering and regulating tax return preparers, and of the Registered Tax Return Preparer designation, since it was first introduced by Commissioner Shulman, although I do take serious exception to some of the requirements of the current regulation regime.

I very strongly believe that long-time experienced tax professionals who remain current in tax law, like myself, should be exempt from the initial competency examination as a requirement for receiving the RTRP designation under some kind of “grandfathering”.

I am not saying that years in the business automatically equals competency.  There are preparers who have been around for 3 or 4 decades who are not sufficiently competent and current in today’s tax law.  My formula for “grandfathering” is years of experience + proof of extensive ongoing professional education.   

I would exempt from the initial competency test all paid tax return preparers who have consistently been preparing 1040s full time (I mean during the tax season – not 40 hours a week all year round) for at least 5 full years (60 months) prior to registering for a PTIN, and who have earned a minimum of 50 hours of CPE in federal income taxation topics during the previous 3-year (36 months) period. 

To be perfectly honest - after preparing tax returns competently, professionally, and ethically for over 40 years I find it somewhat demeaning to be forced to take a test to prove that I know what I have been doing all this time.

The fact that 300,000+ potential RTRPs have not yet taken the initial competency exam with less than 16 months left before the clock runs out almost demands some kind of grandfathering.  It does no good for the IRS, or the taxpayer public, to force tens of thousands of competent and experienced tax professionals out of business, or cause them to go “underground” and become “phantom” preparers.

I also strongly believe that CPAs and attorneys who want to prepare federal income tax returns for compensation, and who would not be exempt under the previously discussed grandfathering, should be required to take the initial competency examination and maintain the required annual 16 hours of continuing professional education in federal taxation topics in order to do so – just like the rest of us.  Only Enrolled Agents should be exempt from the RTRP requirements.

For years Certified Public Accountants have unduly benefited from an erroneous “urban tax myth” that a CPA is automatically a tax expert by merely possessing the initials.  The current exemption of CPAs from demonstrating competence and currency in federal individual income tax only adds to this myth.

Your predecessor, David Williams, and other high-level IRS officials have acknowledged that the CPA exam and the bar exam are not tests of 1040 tax knowledge, and “blame” the exemption from testing and CPE requirements on a federal statute and an erroneous  confusion of “preparing tax returns” with “practicing before the IRS”.

I am aware that there are many competent tax experts currently in practice who are CPAs.  However this is because of the specific training, experience, and continuing education of the individual, and has absolutely nothing to do with having once passed the CPA exam.

I have absolutely no problem with the 16 hour annual CPE requirement for maintaining one’s PTIN and RTRP status.  I have taken, on average, much more than 16 hours of CPE in federal and state taxation per year for at least the past 25 years.  My only concern is requiring preparers to waste time and money on 2 hours of “ethics” each and every year.  2 hours of ethics in the first year of registration and 1 hour of ethics updates every two or three years thereafter would be sufficient.

While I feel that regulation of professional tax preparers would be better handled by an independent industry-based organization, such as an “American Institute of Registered Tax Return Preparers”, I certainly prefer having the Internal Revenue Service regulate preparers as it now does to having Congress legislate regulation.

I would like to see the IRS create a “civilian advisory committee” to its Return Preparer Office, similar to the “civilian advisory committees” already in existence for other IRS functions, and would gladly volunteer to serve on such an entity.

Thank you for allowing me to give you my thoughts on the IRS tax return preparer regulation regime.  If I can be of any help to you or your office in the future please do not hesitate to contact me.

Sincerely yours,

Robert D Flach

Any comments?

RDF

ANOTHER ENDING OF ANOTHER CONFERENCE

The NATP National Conference in Baltimore has come to an end.  In my 25-years as an NATP member (and 41 seasons as a paid preparer) I have attended probably 20 of these conferences.  At this point I find that I really do not learn anything new of consequence at Conference - but I do pick up, or am reminded of, an occasional deduction, credit, loophole, technique, or strategy that would apply to a client.  

However, despite my personal reaction, I do say to tax pros - like Iowa, “You Ought to Give the NATP National Conference a Try”!

And many did this year.  I heard that this was the highest attendance in Conference history, with over 1300 attendees.

First and foremost - attending the annual NATP National Conference is an excellent way of taking a tax-deductible vacation (see my recent TWTP post).  Over the years I have visited Anaheim, Atlanta, Arlington, Alexandria, Austin, Boston, Corpus Christi, Minneapolis, Orlando, Sans Antonio, Diego and Francisco, Washington DC, and other locations as a registrant at the NATP and other membership organization tax conferences.

You can arrange your schedule so as to have a full or half-day off for sightseeing.  Here in Baltimore the conference was Monday through Thursday.  I worked it so that I did not have any educational sessions on Tuesday.  While I choose to “sleep in” and start my classes at 10AM and end after 4PM, I could have begun at 8AM and finished by 3PM.  You also have the day before and the day after for local activities.  And of course there is always the evening for dining, theatre, concerts, and the local nightlife.  

The cost of a room is the same whether there is one person in the room or two – so you can bring your spouse and still deduct the full cost of the room.  And, while on a vacation, your primary purpose for being where you are is attending the tax conference, so all of your travel is deductible.

If staying an overnight on a Saturday results in a reduced airfare an IRS ruling allows you to deduct all of your out-of-pocket costs of staying the extra day, even though there are no business activities on this additional day.

The tax savings from the deduction will usually cover at least the cost of the Conference fee, and often ends up providing “reimbursement” for some of the actual travel costs.

While Conference offers the opportunity to stay at a luxury hotel, often excellently located in downtown or waterfront areas, at a discount, sometimes a deep one, you do not have to stay at the host hotel.  Here in Baltimore (on the waterfront) the Marriott room rate was $149 for conference attendees (actually over $170 per night after taxes and other charges).  I stayed in the Mount Vernon Cultural District at a mid-level chain for just under $70 per night (total cost) and about $20 per day in taxis to and from Conference. 

If I were in better shape/condition I could have taken a free bus from my hotel to the waterfront area and walked to the host hotel.

Now that the IRS requires RTRPs to maintain at least 15 hours of annual CPE in federal taxation, the Conference allows you to fill some, or all, of these credit hours.  You can easily earn more than 15 hours of CPE at Conference.  And the offerings include the required 3 hours of “updates” (I.e. Current Developments for both individual and business tax issues) and several hours of ethics preaching.

I am unique.

·      I do not accept any new 1040 clients, and I do not do any partnership, sub-S corporation, or estate tax returns.  

·      I have no desire to represent taxpayers in dealings with the IRS (other than to attend the audit of a return I have prepared). 

·      While I do believe that you can teach an old dog new tricks, this old dog does not necessarily want to learn new tricks, especially when it may apply to only one or two, or none, of my current clients once or twice. 

·      Because I write extensively during the year on tax topics I must keep abreast of “current developments” as they happen via independent reading and research.  And I always attend the NATP’s year-end “Famous 1040 Seminar” (or as it is now called “The Essential 1040”), which covers current developments through November.

So there are only so many sessions offered at Conference of interest, or actual value, to me. 

However, for a younger preparer, or one wishing to develop or expand his/her practice, there is a multitude of sessions on a wide variety of tax preparation and planning and practice management topics taught by, in most cases, excellent speakers who are experts in their particular topic.

FYI – the 2013 conference is July 8 – 11 at the JW Marriott Desert Ridge Resort & Spa in Phoenix, Arizona, and the 2014 conference is August 11 - 14 at the Marriott World Center in Orlando, Florida (again, extremely hot locations, weather-wise, at the hottest times of the year – my main complaint with NATP about the conferences).

RDF

GREETINGS FROM BALTIMORE!

I am in Baltimore attending the National Conference of the National Association of Tax Professionals, held this year at the Baltimore Marriott Waterfront.  See my post on the conference at THE WANDERING TAX PRO (and my afterthought).

The Keynote Speaker at the opening ceremonies was David R Williams, Director of the IRS Tax Preparer Office, who is in charge of the IRS new regulation regime.

David began by telling us that the impetus behind the regulation of tax return preparers is the fact that the Tax Gap has grown to $450 Billion.  It is the hope of the IRS that improving the quality of tax return preparers will result in more correct tax returns being filed, and ultimately help to make a dent in this Tax Gap.

When the regulation regime officially kicked off last year there were almost 848,000 PTINs issued by the IRS.  Only 715,000 renewed for calendar year 2012 – a loss of 133,000.

There are currently 3,269 previously unenrolled tax professionals who have taken and passed the initial competency test to receive the new RTRP (Registered Tax Return Preparer) designation.  This leaves almost 339,000 RTRP “candidates” – previously unenrolled preparers who need to take and pass the test by December 31, 2013 (I am in this number).  That is a lot of tax preparers.

David says that the IRS wants potential preparers to “demonstrate basic competency”, by passing a test and maintaining minimal annual CPE in taxation, before being allowed to prepare 1040s for compensation.  This is a bold-faced lie! 

The IRS has no interest in being sure that all preparers “demonstrate basic competency” - because about 300,000 of the 715,000 current PTIN holders do not have to demonstrate any competency and do not have to remain current by taking annual CPE in taxation.  I am, of course, talking about the CPAs, attorneys, and “supervised employees” who are exempt from the test and CPE requirements.

David does not address this serious issue – quickly glossing over it by implying that CPAs and attorneys demonstrate competency by virtue of having taken the CPA and bar exams – another bold faced lie.

David stated in his presentation that the IRS does not plan to extend the 12/31/13 deadline for passing the RTRP test.  He also says it is not the intention of the IRS to take away the ability to make a living from previously unenrolled preparers – but will the IRS do this when the deadline passes and 100,000 or so RTRP “candidates” have still not taken and passed the test?

I wonder if the 339,000 “candidates” have not taken the test yet because they want to make sure the IRS gets all the “bugs” out before doing so, or if they are waiting in hopes that the IRS will eventually embrace common sense and provide some kind of “grandfathering” – both good reasons for procrastination in this matter, and both reasons why I have not yet sat for the test.

David told us that CPE requirements will be enforced for RTRPs, and RTRP candidates, for calendar year 2012.  The IRS has arranged for authorized CPE providers to provide information, based on PTINS, directly to the IRS – so at renewal time required CPE can be automatically verified.  There will, no doubt, be some glitches (i.e. CPE taken in December may not be uploaded in time) and tax professionals will be able to “attest” to their 2012 CPE, without immediate IRS verification, when renewing their PTIN for 2013.

He also put our minds at ease by affirming that fingerprinting of PTIN holders has been put on indefinite hold while the IRS investigates alternate methods of conducting “background checks”.

And he announced that the IRS hopes to have a public online database of RTRPs available after the 2013 tax filing season (when 2012 returns are prepared).

To be honest - as I pointed out to an NATP staffer at the NJ-NATP luncheon on Monday afternoon – with all its flaws I would rather have the IRS regulate tax preparers as it currently does than have the idiots in Congress legislate regulation.  As you know full well, the idiots in Congress could “f**k up a High Mass”.  And David Williams is an excellent choice for Director of this process.  He is intelligent and sincere.  We certainly could have done much, much worse.

However the current regulation regime has serious problems with its refusal to grandfather and its exemption of CPAs, attorneys, and “supervised employees” from testing and CPE.  We must continue to publicize and criticize these gross inequities in the system.

RDF