CONTINUING THE ETHICS DISCUSSION

I received several responses to my post on ethics from various sources.  Many agreed with me -

 

ü “I read your Ethics essay and totally agree. Ethics is within a person's DNA. There are a lot of Circular 230 practitioners who stretch the law. I question their taxation morals and ethics. Yet, they sit next to me at Ethics Seminars. Same goes for Insurance, Real Estate and Financial Planning. What I've figured out is that the elected officials can better keep their jobs if they tell the public the assorted professionals go through Ethics training on a regular basis. It's a smoke and mirrors routine that we get stuck with.”

 

ü “Let's see. All the questions on ethics tests boil down to "Should I lie?" If you're an honest bloke, the answer is obvious. If you're a cheating scoundrel, the answer is STILL obvious. Both groups say No although only one of the groups mean it. Thus, mandatory ethics classes are a waste of everyone's time.”

 

ü “I agree ethics should NOT be part of most CE programs. In addition to your statements, for the 'enrolled' who must have 72 CE each three years (including 2 CE per year), we cannot use excess CE. If we take more than 2 CE of ethics in a year, the excess CANNOT be counted as 'federal courses'. Rather the credits are lost. I am a frequent speaker for the IRS at annual tax updates, and they allow me 50 minutes for ethics. I have explained until I am blue in the face that since most ethics programs are 2 CE (to meet the requirements), a 1 CE class is a true waste for all.

 

I would rather see a triennial requirement. I also think ethics should be presented as case study and not lecture, allowing the professional to truly think about 'real world' applications of ethics.”

 

And some took some exception to my opinion -

 

“First I disagree a bit on WHY we have ethics requirements. I think they exist more as a way to prevent an unethical tax professional, when being prosecuted, from having the defense of ‘I didn't know any better”’.

 

That is possible – but still doesn’t justify requiring at least 2 CPE per year.

 

“. . . my opinion is that a reminder never hurts anyone. The news is filled with stories of preparers who did not get the message. And I find it a little troubling that you describe the CE course you took as "cheating" you by including the ethics requirement as part of the day.”

 

A reminder – yes.  But, again, not requiring at least 2 hours per year.  And why is it troubling?  I pay for 8 50-minute hours of potentially useful tax information to help me to properly prepare 1040s and I get only 6.

 

I am still interested in hearing more thoughts and comments of fellow tax pros.

 

While we are on the subject of ethics let me share another opinion of mine (taken from my SO YOU WANT TO BE A TAX PREPARER, reviewed here) -

 

During the redundant ethics preaching that tax professionals are forced to sit through each year at CPE offerings I have found that much of what the instructors teach regarding privacy is, to me, totally ridiculous.

 

What am I talking about?

 

Say I was talking to a friend, who was also a client, in a public place and another client, let’s call him George, who my friend coincidently also knows, happened along, saying hello to us in passing.  If my friend asked me, “How do you know George,” I would normally think nothing of replying, “I have been doing his taxes for years”.

 

But by doing so, I am told, I would be seriously violating “privacy” rules!

 

The issue of privacy applies to what the client tells me about his personal finances, and not the fact that he is a client or friend.  Obviously I am not allowed to discuss the details of George’s Form 1040, or any other financial or personal information I was told in confidence in the course of preparing his return, with my friend.  But not being able to simply mention that he is also a client is pure nonsense.

 

If a friend or fellow client asks the question in casual conversation I do not see a problem.  If a stranger comes up to me out of the blue and asks if and how I know a client I will be on my guard and ask why they want to know.  And if a stranger, to me, or only a casual acquaintance, comes up to the two of us and asks how we know each other I will let the client with me respond first and take my lead from him or her.

 

Many tax professionals have “waiting rooms”, which are often crowded during the tax season.  We do not segregate clients in individual cubicles so they do not see each other, or ask them to wear masks while sitting in the waiting room.  Often in the past, when I had an office open to the public, I had a client enter my waiting area and be surprised to see a friend or co-worker sitting there.  Nobody ever ran out of the office in fear because they were seen there.    

 

I am certainly not going to take out a full page ad with my client list in the local newspaper.  But the fact that a person is my client is not a state secret.

 

It is different with a doctor, whose specialty may “betray” personal medical information that the client does not want known.  And perhaps, for the same reason, with certain lawyers, such as the divorce attorney.  But there is nothing revealing in the mere fact that a person uses a professional to prepare his tax return, other than the intelligence of that person.

 

Looking forward to your thoughts and comments on this aspect of “ethics”.

 

TAFN

 

 

 

 

A COUPLE OF QUESTIONS FOR FELLOW TAX PROS

 

I came upon an interesting topic for discussion while reviewing the August issue of ACCOUNTING TODAY at dinner last week.

 

What caught my eye was a highlighted quote from Chuck McCabe, president of Peoples Income Tax and The Income Tax School, from Roger Russell’s article “Filling the time between April 18th and January” –

 

“It’s a good idea to provide multiple services.  The more services you provide, the less likely your clients will be to leave.  Retention rate is critical.”

 

Back in 2009 I first published a post on advice to those starting out in the accounting world, which I have included in my new e-book SO YOU WANT TO BE A TAX PREPARER (read a review of this book by Andy Frye of PRONTO TAX SCHOOL by clicking here).  My advice involved a song lyric and two advertising slogans –

 

* “You See You Can’t Please Everyone, So You Got to Please Yourself”  

 

* “Only Sherwin Williams Can Cover the Earth”

 

* “Just Say No!”

 

For “Only Sherwin Williams Can Cover the Earth” I said –

 

“When I first began my own practice, many, many, many years ago, I thought that I should offer, either personally or via relationships with consultants in other fields, all kinds of financial services to clients, not just 1040 preparation, so that their tax business could not be stolen away by their insurance agent or broker or another financial professional.

 

Then I remembered what a wise old Texan (my boss at the Summit YWCA) once told me – ‘Only Sherwin Williams can cover the earth’. You can’t be all things to all people. Don’t spread yourself too thin and try to offer the world to your clients”

 

My advice here is the exact opposite of the advice offered by Chuck in the article.

 

Roger’s article concerned what tax professionals do between filing seasons.  One of the things that first attracted me to the tax preparation profession was its seasonal nature.  Ideally you can work 10-12 hours a day, 7 days a week for 2½ to 3 months and only 1-2 days a week the rest of the year.  I would truly be as happy as the proverbial pig in reality tv if that was true for me. 

 

Looking back over my 45 years in the business, if I were to start all over again I think I would limit my practice to 1040s.  Period.  No 1065s.  No 1120s.  No 1041s.  No 990s.  Just 1040s.  Not only to make the yearly schedule I suggested above a reality, but also to limit my need for ongoing CPE to 1040 issues only, and to limit my exposure to agita and liability.  There is certainly more potential for problems with business entity returns than with 1040s. 

 

The article also introduces another interesting concept –

 

“For tax preparers who aren’t interested in expanding their tax business beyond the tax season, but would like to keep themselves and their staff employed in some meaningful activity, some accountants have found a solution – go into another seasonal business.”

 

This is an idea I have thought of over the years, but never followed through on.

 

So here are the questions I ask my fellow tax pros –

 

Do you limit your business to tax, or just 1040, preparation, or do you also offer other services – insurance, investments, real estate, college financial aid preparation, etc, etc?

 

And -

 

Do you have a second, totally different, seasonal business during the summer of other parts of the “normal” year?

 

I am looking forward to your thoughts and comments.

 

TAFN 

 

 

 

 

 

A QUESTION OF ETHICS

 

All “enrolled” tax preparers – Enrolled Agents, CPAs, and those who participate in the IRS Annual Filing Season Program – are required to complete a defined number of CPE hours annually or periodically to maintain their “enrollment”.  The defunct IRS Registered Tax Return Preparer regulation regime also required annual ethics CPE.

 

The main reason for required annual ethics CPE can be traced to the Enron scandal.  Bureaucrats somehow believed that the CPAs who created the Enron scams would have miraculously become honest and ethical, and would never have attempted to defraud the government, if only they had sat through a 2 hour session explaining ethics.

 

These bureaucrats seem to feel that unless tax preparers are forced to sit through at least 2 hours of redundant ethics preaching each and every year they will suddenly begin to create large fictional employee business expense deductions for clients, or add erroneous dependents and false EIC claims, to client 1040s.

 

Ethics is defined as “moral principles that govern a person's behavior or the conducting of an activity”.  Ethical behavior is really just common sense.  Basic ethics is taught by our parents, in school, and in Sunday School, Hebrew School, and the equivalents of other religious organizations.  The specific ethics of individual trades and professions – legal ethics, medical ethics, ethics related to accounting, architecture, and engineering – are imparted in the formal education for that trade or profession.

 

I have been preparing 1040s for 45 years.  If I ain’t “ethical” by now, having 2 hours of preaching thrust upon me isn’t going to suddenly turn me honest.

 

Come on – how many times does a tax preparer have to be told not to knowingly report false or misleading information on a tax return or not to share or discuss the confidential personal financial information of clients with others without their approval.

 

In most cases the annual ethics CPE requirement is 2 hours (100 minutes) each year.  But in reality tax preparers are forced to waste time and money on 4 to 6 hours of sermons each year, as CPE providers seem to feel that they must include 2 hours of ethics in almost every offering.  I was told by a provider a few years back that if 2 hours of ethics were not offered attendance would drop.

 

For example, I recently signed up for NATP’s annual “The Essential 1040” year-end tax update seminar.  I paid for 8 hours of education on new tax law, rules and regulations, inflation and COLA adjustments, and developments – but I will be cheated because I will only receive 6 hours of actual update CPE.  Each year 2 hours of this seminar is devoted to redundant ethics preaching, during which I either “zone out” and daydream or read the newspaper.  Like other “unenrolled” tax preparers, and those who choose not to participate in the AFSP, I have no requirement to sit through any ethics preaching.

 

NATP should remove the 2 hours of ethics preaching from “The Essential 1040”.  The association’s annual National Conference (I went this year) and Tax Forums (I will attend next month) always include several good sessions on ethics issues (none of which I attended or will attend), each 100 minutes or 2 CPE hours.  For those who do not attend the conference or Forum NATP could make available to the local chapters the course materials for these sessions and the individual chapters could offer a half day seminar on one or more of these offerings, or a combination of ethics and another tax topic.   

 

Should “enrolled” preparers and AFSP participants be required to take any ethics CPE?.  Perhaps 2 hours of ethics CPE in the first year of enrollment or participation, with maybe at most a 1 or 2 hour required ethics update every 3 or 4 years thereafter.  CPE providers should, however, continue to offer ethics sessions as optional offerings at annual conferences and forums for those who feel the need to be reminded to remain honest.

 

I am very interested in hearing what my fellow tax professionals think about this.

 

TAFN

 

 

TAX REFORM - A BETTER WAY

Now that the Republicans have been unable to accomplish anything with health care they are moving on to tax reform.

 

I firmly believe that the current “mucking fess” that is the US Tax Code should be completely shredded and we should start from scratch.  And I firmly believe that this new Tax Code must not be used for social engineering, to redistribute income or wealth, or to deliver social welfare and other government benefits.

 

One of the biggest problems with the current system, and a large source of its complexity, is the erroneous use of the tax return to deliver government benefits.  The Internal Revenue Service, and the tax professional community, should not be required to act as Social Workers and administer and verify government program benefit payments.  This practice is not only inappropriate, but it also invites and encourages tax fraud. 

 

I am not saying the government shouldn’t provide financial assistance to the working poor and college students, provide encouragements for purchasing health insurance, making energy-saving purchases and improvements, and other ‘worthy’ actions.  What I am saying is that such assistance and encouragements should not be distributed via the Form 1040.

 

The benefits provided by the Earned Income Tax Credit and the refundable Child Tax Credit should be distributed via existing federal welfare programs for Aid to Families with Dependent Children. The benefits provided by the education tax credits and deduction for tuition and fees should be distributed via existing federal programs for providing direct student financial aid. The benefits provided by the Premium Tax Credit, the energy credits, and other such personal and business credits should be distributed via direct discount payments to the appropriate vendors or direct rebate programs, similar to the successful Cash for Clunkers program of a few years ago, funded by the budget of the appropriate Cabinet departments.

 

Distributing the benefits in this manner is much better than the current method for many reasons:

 

1. It would be easier for the government to verify that the recipient of the subsidy, discount or rebate actually qualified for the money, greatly reducing fraud. And tax preparers, and the IRS, would no longer need to take on the added responsibility of having to verify that a person qualifies for government benefits.

 

2. The qualifying individuals would get the money at the “point of purchase,” when it is really needed, and not have to go “out of pocket” up front and wait to be reimbursed when they file their tax return.

 

3. We would be able to calculate the true income tax burden of individuals. Many of the current “47 percent” would still be receiving government benefits, but it would not be done through the income tax system, so they would actually be paying federal income tax.

 

4. We could measure the true cost of education, housing, health, energy and welfare programs in the federal budget because benefit payments would be properly allocated to the appropriate departments.

 

So what do you think?

FYI - I have written a "review" of the 36th annual National Conference of the National Association of Tax Professionals at the Marriott Wardman Park in Washington DC. that will appear in 2 parts at THE WANDERING TAX PRO.  Part 1 appears today and Part 2 will be posted on Wednesday..

 

TAFN

 

 

I have been preparing 1040s since 1972. Over the years I have developed a collection of forms, schedules and worksheets that have proven very helpful in my practice. 

 

Some of my forms are given to clients to help them provide me with the information I need to properly prepare their returns. Some are used as “memos” to the client’s copy and my office file copy to back-up items reported on the returns. Others are used as attachments to the returns.

 

I offer this compilation to you for only $7.95!

 

Click below for more information-

http://robertdflach.blogspot.com/p/blog-page.html

 

IF I HAD MY DRUTHERS

I am sure we all have a “wish list” for clients – a list of things we wish they would do.  Here is mine - 

(1) I wish that when a client receives a letter or notice from the Internal Revenue Service, or a state tax authority, about a tax return I prepared they would put it in the mail to me, fax it to me, or include it as an attachment in an email to me IMMEDIATELY.

I still have some clients who insist on trying to call me first to tell me that they got a notice from the IRS. This is a total waste of time. My telephone answering machine is turned off during the “regular” year – it is only on during the tax filing season (January 15 to April 15).

And what would happen if they did manage to reach me by telephone? They would tell me that they got a notice from the IRS or the NJ Division of Taxation or whoever and I would tell them to mail, fax or email it to me!

Here is an example. A client tried repeatedly to call me with no success. So he told his mother to try to call me, which she did for a week or so, again without success. The mother mailed me a note saying that her son was trying to get in touch with me. I mailed a note to the son, along with a self-addressed envelope, telling him to mail me the notice.

The notice, which was from the NJ Division of Taxation, was dated October 1st. I received the notice in the mail from the client, finally, on November 10th. Look at how much time was wasted!

And I do have clients who just pay the balance due on the notice without consulting with me first.  I only learn about the notice when the client sends me his or her “stuff” at tax time.  Now I have to try to get the money they erroneously paid back from the IRS or the state.

I have found, as I am sure you have also, that more often than not a notice from the IRS or a state tax agency is wrong – and even more so with state notices.

(2) I wish clients would keep track of the cost basis of all their investments and give the information to me at tax time when they have sold investments.

Or at the very least tell - not ask – their brokers to provide them with – or send directly to me - a detailed Profit and Loss Statement showing dates of purchase and cost basis for every investment sold during the tax year.

Some clients do it right. They set up a file folder for each investment at purchase and put the original purchase confirmation in the file.

If dividends are reinvested they put the annual DRP statements in the file each year. If the investment spins-off or merges or whatever they put any related correspondence, notices and statements in the file.

If they purchase real estate they put the Closing/Settlement Statement in the file along with any receipts for expenses involved in the purchase that were not paid through the closing. They also place any receipts for capital improvements in the file each year.

If they receive an investment (including real estate) by gift they ask the giver to provide them with the cost basis of the investment gifted. If they inherit an investment (including real estate) they ask the Executor of the estate to provide them with the market value or appraised value on the date of death that was used in filing the federal estate, if required, and/or state inheritance tax return or filing.

When the investment is sold they put the sale confirmation, or Closing Statement, in the file and give me the file folder with their tax “stuff”.

To be honest, I would prefer a Profit and Loss Statement from the broker, to save me the time of actually determining the gain or loss on each investment. However, the individual file folder system discussed above would provide more complete and accurate information.

While the new 1099-B reporting requirements have been a big help, the mandatory cost basis reporting only applies to relatively recently purchased securities.    

(3) I wish clients would provide me with specific numbers for deductions they are claiming – instead of telling me “claim the maximum” or “whatever I am allowed” or “same as last year”.

The maximum is what you actually paid. You are allowed what you actually paid. It is very rare that an expense or number of miles driven for an activity is exactly the same as it was the previous year.

I need clients to tell me “$1023.50” or “$20.00 per week for 50 weeks” or “4638 miles”!

Each year I include in my January client mailing worksheets that apply to specific clients’ individual situations – for medical expenses, charitable contributions, rental income and expenses, employee business expenses, etc. I wish clients would fill them out completely and accurately – or provide me with a detailed listing of deductions in any other format.

When clients do not give me the proper information and I have to email or write them, this wastes valuable time and delays the completion of the return.

I want to make sure my clients take advantage of all the deductions and credits to which they are entitled – but I can only do this if I am given complete and accurate information.

(4) I wish clients would make and keep a photocopy of all their Form W-2s for the year before sending me their “stuff” – as I clearly instruct in my annual January client mailing.

Each year during the season I get two or three frantic calls or emails asking me to fax photocopies of the W-2s to a bank, Mortgage Company or to the client. This is not a big thing, but anything that takes time away from actual 1040 preparation is bad.

(5) My invoices all clearly state “payment due upon receipt”. This means once the client receives the invoice and not “30 days net”. I wish my clients would sit down and write my check, and put it in the mail, as soon as they have finished reviewing the finished returns

This is only the beginnings of my client “wish list”. I could probably fill several more posts - and may just do that.

So what is on your client “wish list”?

BTW – as you are reading this I am in Washington DC attending the annual NATP National Conference.  I will post about the conference next Monday.

 TAFN

HELP YOUR CLIENTS KEEP TRACK OF MORTGAGE INTEREST

In my opinion the area of the Tax Code where proper documentation and strict adherence to the law is perhaps the most overlooked (or actually ignored) is the deduction for mortgage interest – both on Schedule A and Form 6251.

 

Taxpayers are required to keep separate track of acquisition debt and home equity debt, to make sure that the deduction on Schedule A does not include interest on debt principal that exceed the statutory maximums, and to determine what interest deduction to add back on Form 6251 when calculating Alternative Minimum Taxable Income.  However, I firmly believe that 99.5% of taxpayers do not do this.  I do not know of any taxpayer who does.  And I expect that many tax preparers do not do this for their homeowner clients.

 

As we know, a deduction for mortgage interest is only allowed on acquisition debt of up to $1 Million and on home equity debt of up to $100,000.  And home equity debt is not deductible in calculating the dreaded AMT.  The acquisition debt limit may not be an issue, but how many clients do you know who keep track of the extent of home equity debt – or even know that there is a need to so do?

 

I have created a MORTGAGE INTEREST GUIDE.  In it I explain the various types of mortgage debt and the deduction limitations, and go into detail on how refinancing an acquisition debt mortgage can result in home equity debt.  I include in this guide two worksheets – one for Acquisition Debt Activity and one for Home Equity Debt activity – and provide a detailed example of how to use the worksheets.

 

I am offering limited “reprint rights” for my Mortgage Interest Guide to my fellow tax professionals to purchase and use for just such purposes.  The reprint rights are for use in your own practice only – for free distribution to current or potential clients.  You cannot use the reprint rights to sell the guide to the public.

 

Give this guide to clients who have just purchased their first or a new home - so they can learn how to keep track of the two different kinds of mortgage debt, and make your job easier at tax time.  Or you can offer the guide, with an included promotional message, as a free gift to new home owners as part of your marketing program

 

Here is what one satisfied customer said about this guide in the newsletter of the PA chapter of NATP –

 

"I ordered the guide 'the limited reprint rights' version for $11.95. I must say that it was the best $11.95 I have ever spent. There is a wealth of information in that guide, some I knew and some I didn’t."

 

The normal cost of the limited license and right to reprint the Mortgage Interest Guide is only $14.95, with a 25% discount for members of the National Association of Tax Professionals.  But for all orders of reprint rights postmarked during the month of August the price is only $9.95!  The NATP discount does not apply to this special price.  

 

The guide will be sent to you as a word document email attachment.  The signed reprint rights license will sent via postal mail.

 

You can order a pdf review copy of this report to for only $1.00, which can be deducted from the $9.95 if you subsequently order reprint rights.

 

To order your reprint rights to this report send your email address and a check or money order PAYABLE TO TAXES AND ACCOUNTING INC (very important) to –

 

TAXES AND ACCOUNTING, INC

MORTGAGE INTEREST GUIDE SPECIAL OFFER

POST OFFICE BOX A’

HAWLEY PA 18428.

 

TAFN

 

 

 

 

 

 

 

TRIPLE CHECK ALL TAX RETURNS

As a tax professional you have the obligation and responsibility to make sure all returns you prepare are correct.

Any tax preparer – regardless of training, experience, or “initials” – can make a mistake.  Even I have made mistakes on 1040s I have prepared over the years (a surprise, I know).

The mistake can be mathematic or involve the proper application of tax law or regulation.

A tax preparer can unintentionally omit reporting or entering income or deductions from an information return or client worksheet. 

A tax preparer can unknowingly understate or overstate taxable income or legitimate deductions.  A tax return is prepared based on information supplied by the taxpayer, and this information can be, purposefully or not, faulty.

Over the years I have found that tax preparers who use tax preparation software – which I expect is now about 99% of all tax pros (I am truly one of the last of the dinosaurs) – tend to become lazy when it comes to checking software-generated tax returns.

There is nothing to guarantee that a tax return generated using tax preparation software package is correct, mathematically or otherwise. 

I triple check all finished returns before giving them to the client. This should not be limited to returns prepared manually. Tax returns generated by software must also be triple checked in the same manner.

Here is what I do -

I run three series of adding machine tapes – verifying net taxable income three different ways.

The first is a tape adding and subtracting, as appropriate, the numbers on pages 1 and 2 of the Form 1040.

I next run a continuous tape of all the numbers on all the forms and schedules in the return – Schedules A, B, C, D, and E and so on – and any unattached worksheets used to determine entries on the 1040 in the order the information appears on Page 1 and 2.

For example, I would add the wages and other income numbers of Page 1 (that are not carried forward from an internal form or schedule or unattached worksheet) and the individual entries from each internal form and schedule and unattached worksheet that are carried over to Page 1, subtract the adjustments to income in the same way (using the individual entries from any internal forms and schedules and unattached worksheets), subtract either the individual components of the Standard Deduction or the individual items from Schedule A, including any individual items of deduction or adjustment from unattached worksheets, and each personal exemption individually.

The total from both of these first two sets of adding machine tapes should be exactly the same. If they are not I go back and check the additions and subtractions of individual items on each of the internal forms and schedules and unattached worksheets to verify the carryforward numbers.

I run the last tape directly from the original source documents of the information reported on the return – W-2s, 1099s, K-1s, 1098s, bills and receipts, and any worksheets either prepared by myself or provided by the client. Here I use the complete dollars and cents for each item. The total of this tape should be within a couple of dollars (and change) of the totals on the first two – considering there would be minor rounding adjustments.

In the case of a Schedule D with a loss, where the total of all the individual items results in a net loss in excess of the $3,000 allowable maximum, I first run separate tapes of the Schedule D items – both from the return and the source documents – to verify the net capital loss and then use the $3,000 loss deduction in each of the 3 “triple-check” tapes. I would also do the same with Schedule E if a passive loss is limited.

Once the net taxable income has been verified I double check the actual tax calculation, using the number on the tax return and the net taxable income from the third adding machine tape process.

This triple check process is not as time consuming as it may seem from the explanation.

 

Any questions, or suggestions for additional checks?

TAFN