Our Taxing Times

4th of July

Forget taxes for a day and have a safe and fun day.

Time Flies

While looking for a file from my old ibook, I found an Appleworks presentation I built 5 years ago on blogging. I had just started blogging and following blogs and the presentation was based on what I had learned. 

5 years later, Our Taxing Times is still going. It is not the most revolutionary blog and I am not the most constant blogger but hopefully I have added something to the discussion about taxes and small businesses. I have seen lots of blogs fall by the wayside. In that presentation, I highlighted two blogs I enjoyed following; I R US and Cracked Cauldron Spillings.  I R US was a tax blog written by a former Tax Delinquent who has seen the light and was an advocate for the IRS. The second, Cracked Cauldron Spillings, documented the attempted start up of a bakery in OKC. Both are gone now which is too bad since both were interesting with unique points of view.

I'm not a natural essayist. I'm better at writing up research from notes. It's also taken me a while to be comfortable with expressing my opinions. The sub title of Our Taxing Times explains that this is a blog about US taxes, tax system and the tax preparation business from my perspective. That is what blogging has been about, giving individuals a voice. My reason for blogging is not to answer tax questions or post reminders. Clients pay me for that and there are a lots of other free info sources. This blog is my way to comment on our tax system. And my opinions are based on years of practical experience dealing with taxpayers, the system and other preparers. That is not going to change. Our Taxing Times will continue to comment on taxes and small business, hopefully, for another 5 years.

No 1040EZ?

The IRS has released a draft of the 1040 Schedule M for 2009 returns. This form is how the Making Work Pay and Retiree tax credits will be computer. You can download the form here.

Once all the calculations are done, the amount on line 14 is taken to either 1040, 1040A or 1040NR. There is no mention of the 1040EZ. Does that mean the form will be limited to only taxpayers who don't qualify for the credit like dependents? Or, is the form going away for a couple of years? Or, will a revised form have the credit go to the 1040EZ also. Interesting!

Too Convenient?

I'm wondering if in our effort to make things easy for our clients we can end up hurting ourselves. Are we in danger of losing clients because we make tax preparation look easy? 

I just finished doing office orders. Most tax supply vendors offer discounts this time of year and by ordering my return folders now I can save 25%. Nice. But this year, Image One decided to "help" us by using a drop down box for quantity. It was set for 50, 100, 250, 500, 1000... but I wanted 600 (Ever the optimist, I still have part of last year's 600). I chose 500 hoping that I could change that in the checkout process. That didn't work so I thought about just ordering 100 as a separate item. But that 100 would cost $23 more than a hundred from the 500 quantity. (The price for an individual folder goes down the more you buy.) I didn't like that idea so I finished checking out with only 500 folders. By helping us with a drop down box, Image One lost a sale on 100 folders. 

That brings me back to taxes. In this economy, some clients have to make the choice if they will do their own taxes or pay someone to do it for them. These are intelligent people who can do their basic return. They get the confidence to choose self-preparation because I make it look easy. A prior client with 1 W-2 could walk out with a completed return in 30 minutes. The problem is that we have lost some basic selling points with the box and online tax software. A taxpayer can be confident about a return they prepared and filed themselves using the software. It may take more time for them than an office visit with me but it can be much cheaper. 

I can put on a little performance. Reach for the TaxBook and look something up when I know the answer. Make the process more mysterious and drawn out. Make them think they need me or face the IRS alone. But that isn't my way and I don't think it is a way to grow a long term business. As I see it, my job is to give them more value beyond the preparation of the return. They can put the numbers into a computer but I can warn them about a new law or the tax consequence of the retirement they mention in passing. I can make them feel welcome if they come back (even if it is with a notice for a mistake they made preparing a return.) 

Convenience can be good if the business understands that it can hurt them as well as help them grow. All Image One had to do was configure their checkout with the ability to override the quantity ordered and they would have made a little more money. A tax office can keep their simple returns in tough times if they make sure they are offering more value than just the return.

Assumptions

We have all heard the old saying that "assume" can make an ass out of you and me. But in the case of the IRS assuming can get you a letter. Generally, the letter is everyone's favorite oops notice the CP2000. 

The CP2000 notice is generated when the return the IRS completes from the 1099s and W-2s submitted with your SS number is different from the return you submitted. For example, you forget all about a W-2 and submit your return without it. In a year or so, you will be receiving a CP2000 from the IRS proposing changes to your return based on this other information. Generally, they will be wanting more money. The CP2000 will tell you what was not on the return, how it changed the original return, and how much is now due (with interest and penalties, of course.) There is a response form where you can agree with the changes and make arrangements for paying the amount due or you can challenge the proposed changes. 

I have discussed these notices before and how not to assume the IRS is correct. That is not what this post is about. The issue is the assumptions that generated the notices themselves. Too many of these notices are self-inflicted by a taxpayer who made a bad or self-serving assumption. 

• The 1099 is just for information and I don't have to report it assumption. No. I see this a lot with people who have had a debt, usually credit card, forgiven. A 1099C is generated and it is generally taxable. Anytime you get a form strange to you you need to read it and the instructions (generally on the back.) If you still don't understand, it is time to talk to someone who does.
• The taxes have already been paid assumption. There are two issues here. First, there may have been withholding but that does not mean the amount withheld will cover the tax. Gambling winnings and retirement income, especially premature distributions, have set amounts that are withheld. 20% may taken for Federal withholding on a 1099R but the penalty is 10% and if you are at 15% tax that is 25% and you are short. Even if the withholding covers the tax, remember the missing income is triggering the IRS to look closer at your return. It is better to have it on the return in the first place and take credit for the withholding. The other "taxes have already been paid" issue concerns stock options and gifts that the employer has included in a W-2. Sale of stock triggers a 1099B that needs to show up on the return. When it doesn't, a CP2000 is generated. The IRS has no way of matching the sale with the stock included on the W-2. You have to tell them by properly reporting it on a Schedule D. This also goes for the - I sold some stock/land/property but I lost money so I don't have to report it assumption. 
• If I don't get a W-2/1099, I don't have to report it assumption. If it is taxable income, you have to report it whether you receive the form or not. Failure to do so can result in a letter and cost more in the long run. It's better to wait for the W-2 and call the employer if you are not sure if a W-2 will be issued. A side note. Whenever you are in a new financial situation, it is your responsibility to make sure you understand that how your taxes will be effected and what forms you will be getting. Do the research or talk to your preparer first.

The bottom line is that with taxes, assumptions can come back to hurt you a year or so down the road. It is much easier to do some checking first and handle the issue correctly that deal with a notice later. And it is cheaper. Interest and penalties do add up. And that includes the assumption the IRS notice is correct, check that too.

 

It's Back! Again!

The regulation that Congress can't seem to pass - tax preparer licensing - is back in the news. IRS Commissioner Doug Shulman has announced that by the end of 2009 his office will propose recommendations to better "leverage" tax practitioners. The idea to increase tax compliance and ethical standards. Possibly to include preparer licensing. Nothing new there. Nina Olson, the National Taxpayer Advocate, has been recommending licensing for years now. In fact, there have been bills before the last 3 Congresses which would require licensing. They have all died when that Congress ended because there were other more pressing issues distracting lawmakers. Even before Mr. Shulman office releases their recommendations, I would not be surprised if a new licensing bill is introduced. There is considerable interest in tax preparer regulation. Why? Because there are people who are preparing returns that are incorrect and costing the government millions is missing revenue. Some mistakes are mistakes of knowledge some are fraud. A good licensing program should cut both types of mistakes down. But what is good licensing regulation?

The IRS does have some preparer regulations. Professionals who are approved to practice before the IRS; Attorneys, CPAs and EAs, are guided by the Office of Professional Responsibility and Circular 230. There are also some guidelines for non-enrolled preparers in Circular 230 but for the most part anyone can prepare taxes for others without any training or oversight. Everything that has been proposed starts with testing preparers for basis competence in taxes. Then making sure that they keep up to date with continuing education. Finally, oversight to keep everyone following the rules in Circular 230. Sounds good, a preparer who knows what he/she is doing is less likely to make mistakes. But ...I have some questions and concerns.

Kansas Tax Refunds Delay - Again.

Looks like Kansas has put a hold on tax refunds again. Tax revenues are down due to  the economy. Current estimate is about a month delay.

Advance on Homebuyer's Credit

HUD has announced that it will allow qualified homebuyers purchasing a new home through the FHA program to use the potential of their First Time Homebuyer's credit to help with their down payment or closing costs. FHA approved lenders will be allowed to advance the credit for those purposes. HUD is not waiving the traditional down payment requirements. The home owner will still have to have to be able to provide, from their own funds, at least 3.5% of the appraised value. The new program will allow homebuyers take actions that will allow them to save money on interest over the life of the loan. HUD is hoping that these changes will help taxpayers to buy a home now and help grow the housing market and the economy. More info can be found in the HUD press release.

Nothing in the Mortgagee letter (linked from press release) states if the taxpayer has to file for the credit by amending their 2008 tax return or if they can wait until filing 2009. While the taxpayer has to sign a doc that their credit will not be subject to offset and submit a copy of their completed 5405, the lender bears the burden of due diligence. That alone might make a lender think twice about program participation.

Where do the Paper Clips Go?

I just grabbed a new box of paper clips and realized that this is the fifth box I have opened since the first of the year. I use a lot of clips when working on a tax return. I use them to separate information and papers. But when I finish with a return, I replace the clips with staples. That leaves me with a stack of paper clips to go back into the dispenser. In an ideal world, I should get back all almost all the clips I put into a return. But this isn't happening. Yes, I do send some home with clients; holding the envelope to a return that has to be mailed (Oklahoma), or the payment voucher to the front where they can find it quickly. But that does not account for the massive losses especially taking into consideration the clips I get from clients with their information. May be we need a Paper Clip Taskforce to look into this. Are the being held with all the socks that don't comeback from the dryer? Or do I just need to stop procrastinating on a minor issue and start working on CPE?

It's Not Easy

I am as independent as they come. I always have been. It was something my father used to joke about all the time. But the keys to being independent are doing your homework and knowing when you can't do it yourself. I could change the oil in my car myself. But I know I wouldn't like doing it and would procrastinate until I was doing real damage to the car. So I pay a professional to do it for me when it needs to be done.
Over the last few tax seasons, I have seen an increase in clients switching to online or box tax software and preparing their own taxes. That is part of the process of this business, you lose clients but you also get new clients to replace them. And sometimes they come back because they decide the money is worth not having to do it themselves.
The real problem in the process are the taxpayers who don't want to do the homework necessary to do the job correctly. It isn't just taxes. You see the same issue in bookkeeping, playing the stock market, starting a business or taking a vacation. They learn enough to be dangerous. When they run into a problem, they ignore it or patch over it. They don't prevent or solve the issue. How many business die because the owners don't really understand payroll, labor laws, health laws or something easily preventable? How many vacations are a disappointment because the trip planner didn't check on attraction times or what the weather is usually? How many taxpayers have received a heart stopping letter from the IRS because they didn't fully understand what the software was asking?
Just because there is a computer program or app that will help you complete a task, doesn't release you from making sure you understand the choices you make with that program.