SIMPLIFY, PLEASE!

A recent item at TheStreet.com 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?

RDF

IS THERE ANY REAL VALUE TO THE RTRP COMPETENCY TEST?

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?

RDF

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