Our Taxing Times

Bye, Bye Batch Processing

We know the drill. If the taxpayer hasn't received their tax refund by Tuesday, they won't get it until the next week. The IRS mails the checks on Friday because they batch process the returns. Noon on Thursdays the gates open and all the return that have been received since the prior Thursday are admitted to the processing queue. A return arriving at 2pm on Thursday will sit for a week. This system was in place when all returns were mailed and has continued with e-filed returns. In fact, the IRS publishes a chart each year, the Refund Cycle Chart, I use to tell clients when to expect their refund.

This will be changing next year with the introduction of Modernized e-File (MeF). MeF use Extensible Markup Language (XML) and is the industry standard for storing and transmitting data. MeF is not completely new. This is the system the IRS has been using for business (1065, 1120) returns since those programs began. Transmission of the 1040 returns and schedules has been based on a system the IRS created in the mid-1980s. The move to MeF for the 1040 series will speed up processing and integrate with the new CADE (Customer Database Access Engine) system.

All returns I e-file are acknowledged. Either the IRS accepts the return or rejects it for matching issues. Currently, a return I e-file can take a minimum of several hours to a couple of days to be acknowledged. Batch processing applied here also. During tax season, a return I file at 10:50 will make the 11am cut off and I should get an acknowledgment by 4 or 5 pm. Last year, returns were picked up 3 times a day. Off season, an acknowledgment can take several days since pick-up are only once a day Monday through Friday. With MeF, I will receive an acknowledgment in 5 minutes to a couple of hours depending on system workload. The IRS is calling this "real time" processing. Faster acknowledgment means I can fix errors in the return and re-file the return sooner. (There is nothing worse than telling a client their refund will be delayed a week because an entry error caused the IRS to reject the return and the corrected return didn't make the Thursday cut off.) The error message are supposed to be easier to understand, too.

MeF will get a return into the IRS system sooner. I get acks faster and the taxpayer should get refunds sooner. A few years ago, some 1040EZs began being processed using the CADE system (they were still transmitted by the old system). Clients who's return was one of the randomly selected returns said they saw refund Direct Deposited in a much shorter time frame than the 2 week average for a direct deposit.

MeF has a several of other advantages over the current system. Teamed with CADE, MeF will help coordinated between IRS computer systems and allow the IRS to more easily compare return info to data in their computers. XML allows the attachment of PDF files. This will be especially helpful when Congress makes last minute changes to the Code. MeF will allow e-filing of multiple years. I will be able to e-file 2008 return until October 15th of this year. The IRS then closes the e-file system to get ready for 2009 returns. Once the system is fully implemented, I will be able to e-file the current year and the 2 prior years. The system will only close for a couple of weeks (as opposed to the 3 months now).

Modernized e-File is being phased in over the next several years. In January of 2010, Forms 1040, 4868 and 21 related forms and schedules will enter MeF processing. This will cover most of the returns I file. Most notably missing is the Schedule F. The second phase, 2011, doesn't look like it will add forms. The IRS is saying hardware and code optimization's (fixing the bugs?) But the MeF FAQ the IRS has issued do set January of 2011 as when back year e-filing will begin. Finally, in January of 2012, the remaining 1040 forms and schedules will be available for modernized filing.

Modernized e-Filing is going to make major changes to the tax preparation business. But I think that is another post. The IRS has a lot of info about MeF on their web site. The best place to start is here.

TIGTA on Tax Preparers

Tax blogs and message boards have been alive lately on the subject of tax return preparer registration/testing/licensing. While I think it is a necessary step, I'm taking a wait and see position. There has been so much discussion for the last 6 years yet there is still no law. But momentum seems to be building with the IRS's public hearing and the recent Treasury Inspector General For Tax Administration (TIGTA) survey (reference #2009-40-098).

TIGTA has cited inadequate data as an impediment to effective preparer oversight. The IRS's Strategic Plan 2009-2013 includes the objective of all tax practitioners and 3rd parties adhering to professional standards and following the law. TIGTA surveyed the 2008 returns of 139 tax preparers and found systemic problems. First, half of the preparers submitted 6 or fewer returns. This raised concerns that the paid preparer section is being filled out by people who are only filing returns for family and friend. I would caution against ruling out someone as a paid preparer based on number of returns completed. Some of the worse returns I have heard of were done by "preparers" at car lots and pawn shops. They would not have a large count (especially in a small town) but they can do big damage. 

TIGTA also found issues with the ID numbers being used. 6% of the preparers gave an invalid number. Multiple numbers were used in various combinations 67% of the time. As a return preparer, I have the option of using my Social Security number or a Preparer Identification Number (PTIN) for identification a return I prepare. I choose to use the PTIN for my safety. Also in the Paid Preparer section is a line for an Employer Identification Number (EIN). This identifies the business. When I was an employee, returns I signed used the bosses EIN. Now, they use mine. In the TIGTA survey, 93 of the preparers used various combinations of numbers. This is made worse by the IRS's computers. 24 preparers could not be found in any computer. The IRS uses over 20 systems which are not integrated. TIGTA found differences in preparer names and addresses across the systems. Part of their solution would be to require the use of PTINs and to enforce the use of an ID on the return. TIGTA also suggests the development of a system to ID and track tax preparers. This will of course be necessary when tax preparer licensing does become law. I have often wondered why a matching system couldn't be used with PTINs and the preparer name (this is done with names and SSNs of the taxpayers and dependents). But the current IRS can't do this.

The most interesting recommendation TIGTA is making concerns the preparers own tax returns. 5% of the survey preparers were not up to date with filing their returns or owed taxes. Currently, Enrolled Agents, CPAs and attorneys are required to stay current with their taxes to keep representing clients. No one else does. I am sure this will become part of any enforcement when licensing goes through. I don't see it happening before that.

I am in favor of licensing tax preparers but only if Congress is willing to shell out money to do it right. I have been talking about an strong educational campaign so taxpayers know what a preparer can and can't do. It now looks like some serious money needs to be set aside for computer integration. Otherwise, enforcement will be a joke.

Don't Lie To Me

I hate being BS'ed (is that a word?) I expect to be lied to by some clients, it's part of the job. But I hate people telling what they think I want to hear in order to manipulate me.

I get question calls all the time. I try to help anyone I can as long as they don't expect me to do the return for free over the phone. My issue is the people who promise the moon to get my help. This happens a lot this time of year. I have daily office hours and I'm easier to find than most other preparers. The call goes something like: "Hi, I have a tax question. I usually use ______, but I am switching to you and need to find out about (their tax question)." They are not switching and we both know it. I'm not sure if they actually think I buy they are switching preparers but it seems to be something they need to promise. Wrong. If I can answer their question, I will with no strings attached. I want the caller to have a positive experience. So if they really want to change preparers, they have had a sample of my professionalism and knowledge. Feeding me a load of  --it, makes me question if I want them as a client.

The same goes for the other promises I get. I will answer a question about injured spouse allocation even if you still owe me for your filed return (I just won't do the form until we are all caught up). And there is no need for promises of food and other gifts that you are going to forget about the minute you get off the phone. 

If you have a tax question, I will try to help you. I don't need to be manipulated so don't insult us both with false promises.

You Really Like Me!

Poor Sally Fields, she will never live down that statement. (Especially with everyone using it.)

First I want to thank Robert Flach, The Wandering Tax Pro for the heads up about Invesp Consulting's blog rankings for tax blogs. It made my day. Our Taxing Times is 16th in their overall rankings of the top 25 tax blogs. Invesp further breaks this down by hits and links and many other criteria and this blog appears in the top 20 in many of the categories. Considering how infrequently I post and the focus of my ramblings, I am thrilled. I am sure I will be checking this site way too often.

Congratulations to Robert and everyone else in the top 25.

The Audit Letter - First Action

You receive a notice from the IRS, either the CP2000 (oops letter) or a true audit notice. You should know by now not to panic and that you should double check to see if the IRS is correct in the case of the CP2000. Your first action, whichever audit you draw, should be to proceed to where you have stored your copy of the soon to be audited return. Grab the whole return, including the documentation you used to create the return, and proceed to the most convenient copier and copy it all. At least one full set including the state return. Then put a full copy (I suggest the original) in a safe place. Use a copied set to prepare for the audit. 

In the frantic of an audit, papers you currently don't need get put aside and are more easily lost. But those may be papers you will need after the audit. For example, state returns will need to be amended once the audit is completed. This requires a copy of the return as originally filed. You may need a copy of the W-2s for a bank or for financial aid. Or the IRS find another issue with the return. Having a back up of the original return and documents could come in very handy.

If I prepared the return, I will have archived copies of the return. But I am often called upon to handle letters from the IRS or a state for new clients. I have to rely on the client to supply the returns. Too often, they only have part of the return. While I may be able to get what I need from the IRS or state, it will take longer and cost the client more in time. So much easier for all if the client has a full copy of the return.

Take the time to properly store your return and the supporting documents. If you used a paid preparer, make sure you get a copy as filed (paper or digital) and your docs back. If you did it yourself online, print out a copy. Make a copy of a paper return before you mail it. And if the IRS or state comes calling, make a working copy. It could save you or your preparer some grief down the road.

Social Security Numbers Could Be Compromised

The Social Security Administration is working on a system to randomly assign SSN and has long cautioned the private sector against using a SSN as a personal identifier. Which may be a very good idea. Based on research at Carnegie Mellon University, it is possible to guess all nine digits of a SSN according to an article in the Washington Post. 

Social Security numbers are issued based on three basic formulae. One set of numbers is based on the zip where the application is mailed, a second is a regional code that changes as needed and the last set is assigned sequentially. Using public info, the Carnegie Mellon researchers were able to figure out the SSNs for 8.5% of people born since 1988 in less than 1000 attempts. If the number belonged to someone in a smaller state, it could take only 10 attempts. Potentially, tens of millions of SSNs could be compromised. The current "safeguard" of asking for only the last 4 numbers could actually increase the potential harm since these are the only random numbers.

Scary to know that no matter how carefully you try to protect your Social Security number a dedicated villain could figure it out using public records and a computer.

4th of July

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