Archive for the ‘Tax Preparation’ Category

Bozo Tax Tip #5: Use a Bozo Accountant!

Monday, April 9th, 2018

Here’s another Bozo Tax Tip that keeps coming around. The problem is, the Bozos don’t change their stripes. In any case, here are some signs your accountant might be a Bozo:

– He’s never met a deduction that doesn’t fit everyone. There’s no reason why a renter can’t take a mortgage interest deduction, right? And everyone’s entitled to $20,000 of employee business expenses…even if their salary is just $40,000 a year. Ask the proprietors of Western Tax Service about that.

– He believes that the income tax is voluntary. After all, we live in a democracy, so we don’t have to pay taxes, right?

– Besides preparing tax returns, he sells courses on why the Income Tax is Unconstitutional or how by filing the magical $2,295 papers he sells you will be able to avoid the income tax.

– He wants you to sign over that tax refund to him. After all, he’ll make sure you get your share of it after he takes out his 50% of the refund.

– He believes every return needs at least three dependents, no matter whether you have any children or not.

If your tax professional exhibits any of these behaviors, it’s time to get a new tax professional.

Bozo Tax Tip #10: Email Your Social Security Number

Monday, April 2nd, 2018

It’s time for our annual rundown of Bozo Tax Tips, strategies that you really, really, really shouldn’t try. But somewhere, somehow, someone will try these. Don’t say I didn’t warn you!

This is a repeat for the fifth year in a row, but it’s one that bears repeating. Unfortunately, the problem of identity theft has burgeoned, and the IRS’s response has been pitiful. (To be fair, it has improved somewhat over the last year, but that didn’t take much.)

I have some clients who are incredibly smart. They make me look stupid (and I’m not). Yet a few of these otherwise intelligent individuals persist in Bozo behavior: They consistently send me their tax documents by email.

Seriously, use common sense! Would you post your social security number on a billboard? That’s what you’re doing when you email your social security number.

We use a web portal for secure loading and unloading of documents and secure communications to our clients. As I tell my clients, email is fast but it’s not secure. It’s fine to email your tax professional things that are not confidential. That said, social security numbers and most income information is quite confidential. Don’t send those through email unless you want to be an identity theft victim or want others to know how much money you make!

If I send an email to my mother, it might go in a straight line to her. It also might go via Anaheim, Azusa, and Cucamonga. At any one of these stops it could be intercepted and looked at by someone else. Would you post your social security number on a billboard in your community? If you wouldn’t, and I assume none of you would, why would you ever email anything with your social security number?

A friend told me, “Well, I’m not emailing my social, I’m just attaching my W-2 to the email.” An attachment is just as likely to be read as an email. Just say no to emailing your social security number.

If you’re not Internet savvy, hand the documents to your tax professional or use the postal service, FedEx, or UPS to deliver the documents, or fax the documents. (If you fax, make sure your tax professional has a secure fax machine.) If you like using the Internet to submit your tax documents, make sure your tax professional offers you a secure means to do so. It might be called a web portal, a file transfer service, or perhaps something else. The name isn’t as important as the concept.

Unfortunately, the IRS’s ability to handle identity theft is, according to the National Taxpayer Advocate, poor. So don’t add to the problem—communicate in a secure fashion to your tax professional.

Driver’s Licenses and Tax Filings

Monday, February 5th, 2018

Nevada Driver's License

Many states are now requiring we obtain your driver’s license information (or state ID) in order to file your return. Currently, these states are requiring this information:

– Alabama
– California
– Colorado
– Illinois
– Kansas
– Louisiana
– New York
– Ohio
– Virginia
– Wisconsin

States are using this in order to combat identity theft. So if you are filing one of these state’s tax returns, your tax professional will need your driver’s license number, date the driver’s license was issued, and the expiration date. (If the driver’s license or state ID is from New York, the first three characters of the New York document number will also be needed.)

While I’m generally for anything that reduces identity theft, I’m not thrilled with this. Of course, I should point out that this adds extra work for tax professionals which just might be why I have this opinion….

Court Rules IRS Cannot Charge for PTINs

Friday, June 2nd, 2017

Back in 2010 to 2011 the IRS ordered all tax professionals to obtain a PTIN–a Preparer Tax Identification Number. The IRS stated this was necessary to track tax professionals, and would help in regulating the tax professional community. There is a fee to obtain a PTIN (now $50 initially, with a renewal costing the same $50). A group of tax professionals challenged the PTIN regulation and the fee in a class action suit. Can the IRS force tax professionals to obtain a PTIN? And can the IRS charge for PTINs?

The PTIN regulations came about at the same time as the IRS’s ill-fated efforts to regulate tax professionals. The IRS was challenged on the ability to regulate tax preparation professionals (see Loving v. IRS); the IRS lost the ability to regulate tax preparers. These regulations happen to also contain the IRS’s justification for charging a user fee to obtain a PTIN: As the Court yesterday noted,

As authority for requiring these fees, the IRS relied on the Independent Offices Appropriations Act of 1952 (“IOAA”). The IOAA provides that agencies “may prescribe regulations establishing the charge for a service or thing of value provided by the agency.” The IRS stated that a PTIN is a “service or thing of value” because without a PTIN “a tax return preparer could not receive compensation for preparing all or substantially all of a federal tax return or claim for refund,” and “[b]ecause only attorneys, certified public accountants, enrolled agents, and registered tax return preparers are eligible to obtain a PTIN, only a subset of the general public is entitled to a PTIN and the special benefit of receiving compensation for the preparation of a return that it confers.” [citations omitted]

The first part of the case was whether the IRS can mandate tax preparers use a PTIN. The Court ruled that the IRS can do so.

[P]laintiffs’ arguments fail step one of Chevron. Chevron states that “if Congress has directly spoken to the precise question at issue … that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” The statute specifically says that the Secretary has the authority to specify the required identifying number to be used on prepared tax returns. (“The social security account number issued to an individual for purposes of section 205(c)(2)(A) of the Social Security Act shall, except as shall otherwise be specified under regulations of the Secretary, be used as the identifying number for such individual for purposes of this title.” (emphasis added)). The Court must give effect to the unambiguous intent of Congress that the Secretary may require the use of such a number. [citations omitted]

The second part of the case is whether the IRS has justification for charging a fee for obtaining PTINs. The plaintiffs had two arguments: That because of the decision in Loving the IRS no longer had a rationale for charging PTIN fees, and thus charging such fees was arbitrary and capricious. Second, because Congress did not grant the IRS licensing authority (confirmed by Loving), tax return preparers don’t receive a benefit in exchange for the fees; thus, they are unlawful under the IOAA. The government disagreed:

The government argues that the PTIN and user fee regulations are separate from the regulations imposing eligibility requirements on registered tax return preparers. It argues that the PTIN requirements are not arbitrary and capricious because they make it easier to identify tax return preparers and the returns they prepare, which is a critical step in tax administration, and because PTINs protect social security numbers from disclosure. In support of its position that it may charge fees for PTINs, the IRS states that PTINs are a service or thing of value because the ability to prepare tax returns for compensation is a special benefit provided only to those people who obtain PTINs, who are distinct from the general public. Individuals without PTINs cannot prepare tax returns for compensation. In addition, the IRS argues that PTINs protect the confidentiality of tax return preparers’ social security numbers, and that protection itself is a service or thing of value.

The court found that PTINs are not a “service or thing of value.”

First, the argument that the registered tax return preparer regulations regarding testing and eligibility requirements and the PTIN regulations are completely separate and distinct is a stretch at best. While it is true that they were issued separately and at different times, they are clearly interrelated. The RTRP regulations specifically mention the PTIN requirements and state that PTINs are part of the eligibility requirements for becoming a registered tax return preparer…Furthermore, the overarching objectives named in the PTIN regulations indicate a connection to the RTRP regulations. They were 1) “to provide some assurance to taxpayers that a tax return was prepared by an individual who has passed a minimum competency examination to practice before the IRS as a tax return preparer, has undergone certain suitability checks, and is subject to enforceable rules of practice;” and 2) “to further the interests of tax administration by improving the accuracy of tax returns and claims for refund and by increasing overall tax compliance.” The first objective clearly relates to the RTRP regulations regarding eligibility requirements for tax return preparers. The second objective is less explicit, but it does not stretch common sense to conclude that the accuracy of tax returns would be improved by requiring tax return preparers to meet certain education requirements. [citation omitted]

This results in a problem: What’s justifying the user fee?

The Loving court concluded that the IRS does not have the authority to regulate tax return preparers. It cannot impose a licensing regime with eligibility requirements on such people as it tried to do in the regulations at issue. Although the IRS may require the use of PTINs, it may not charge fees for PTINs because this would be equivalent to imposing a regulatory licensing scheme and the IRS does not have such regulatory authority. Granting the ability to prepare tax return for others for compensation—the IRS’s proposed special benefit—is functionally equivalent to ranting the ability to practice before the IRS. The D.C. Circuit has already held, however, that the IRS does not have the authority to regulate the practice of tax return preparers. In coming to its conclusion, the Circuit considered the statutory language that the Secretary may “regulate the practice of representatives of persons before the Department of the Treasury.” The court found that the IRS improperly expanded the definition of “practice . . . before the Department of Treasury” to include “preparing and signing tax returns” because to “practice before” an agency “ordinarily refers to practice during an investigation, adversarial hearing, or other adjudicative proceeding.” The Loving court concluded that “[t]hat is quite different from the process of filing a tax return” in which “the tax-return preparer is not invited to present any arguments or advocacy in support of the taxpayer’s position . . . [and] the IRS conducts its own ex parte, non-adversarial assessment of the taxpayer’s liability.” The ability to prepare tax returns is the “practice” identified by the IRS in Loving, but the court found that such an activity does not qualify as practicing before the IRS. Therefore, it appears to this Court that the IRS is attempting to grant a benefit that it is not allowed to grant, and charge fees for granting such a benefit.

This ruling disagrees with another case (Brannen v United States), but that was pre-Loving (as the Court notes). The Court also noted that if the IRS were allowed to regulate tax professionals, the ruling might be quite different. Additionally,

The Court is unaware of similar cases in which an agency has been allowed to charge fees under the IOAA for issuing some sort of identifier when that agency is not allowed to regulate those to whom the identifier is issued, and the government has not pointed to any.

Thus, the Court ruled that the IRS can require PTINs but cannot charge for them. I do expect the ruling to be appealed, so it’s likely nothing will change for several months.

Case: Steele v United States

UPDATE: The court also ordered that the IRS refund all PTIN fees to all class members.

Again, I expect this ruling to be appealed, so any refunds are many months in the future.

That Was the Tax Season that Was

Sunday, April 23rd, 2017

April 15th, err, make that April 18th, has come and gone. Every Tax Season is different, and this one had its ups and downs. So let’s take a look at eight observations I have of the first part of the 2017 Tax Season:

1. The IRS did a good job with telephone service for tax professionals. My average wait time on hold with the Practitioner Priority Service was three minutes. That’s superb. I was told by several agents that the IRS added personnel to help tax professionals. That made my life easier, but…

2. The IRS didn’t do as good a job with taxpayers. I had a couple of clients who called the IRS note the hour-plus hold times.

3. The new law mandating interviews with taxpayers claiming the Earned Income Credit, the Child Tax Credit, and the American Opportunity Credit is annoying for tax professionals and will only stop the lowest of low hanging fruit of tax cheats. Most tax professionals know their clients, and simply aren’t committing tax fraud. My clients were more bemused than anything else with some of the questions I had to ask about their children.

4. More of my clients filed without extensions than in the past. This result appears to differ from the national average (the latest report I saw was that there were five million fewer returns filed year-to-date than last), and differs from the long-term trend that I’ve seen the last few years (that more returns were going on extension).

5. The new FBAR deadline will make my life far easier. Officially, the deadline coincides with the tax filing deadline, but there’s an automatic six-month extension. This will allow FBARs to generally be filed coincidentally with tax returns.

6. It would be impossible to run our tax practice without using tax software; however, tax software isn’t a panacea for thinking about the returns themselves. I’ve seen some self-prepared returns this Tax Season that were, to be kind, amusing. Tax software is great in automating the mundane but not so great in thinking for you.

7. We need tax reform, and soon. The Tax Code is far, far too complex. I’m now preparing returns that are close to “basic.” And I practice in a state where there’s no income tax. (Yes, I prepare returns for many states, but my local clients generally don’t have to deal with state income tax.) Yet these clients find the Code so complex that they can’t do their own returns.

8. Deadlines matter. Almost every tax professional I know sets deadlines for receiving paperwork from clients; ours was set at March 15th. We did get to many returns that came after that date, but for the client who wondered why I stifled a laugh when he dropped his paperwork off on April 17th and said he’d be in tomorrow to pick up his completed return. He’s on extension, of course. If you’re using a tax professional to prepare your returns, he almost certainly has also set a deadline for receiving paperwork prior to the October 16th extension deadline. You should pay attention to that, and get your paperwork in to your professional timely.

I’m hopeful my thoughts in October will be just as kind about the second half of the Tax Season; only time will tell.

Bozo Tax Tip #8: Lie to Your Tax Professional!

Tuesday, April 4th, 2017

Like almost all tax professionals, we use an Engagement Letter. The Engagement Letter has grown from one page to three pages. Some of this relates to items that my attorney wants on the document; some of the growth is from my insurance company. However, most of it is from IRS rules. One item that has been in every one of my Engagement Letters is the following:

You agree that you have provided us with and will provide us with all requested documents, that the information is and will be accurate and truthful, and that you will answer all of our questions fully so that we can properly prepare your returns.

Most tax professionals have similar language in their Engagement Letters. If we are to best prepare your tax returns, we have to know what’s going on. I’ve been told by my physician clients that their patients often don’t tell them the entire story. I can’t imagine doing that; how is my doctor going to do prescribe the best treatment if he only has half the picture? Tax professionals are no different; we can’t properly prepare your returns if we only have half the picture.

But if you want a tax return that’s inaccurate, and doesn’t have all the deductions and/or credits you’re entitled to, go ahead and deceive your tax professional. Don’t say I didn’t warn you!

Please Don’t Do This!

Tuesday, January 10th, 2017

Joe Kristan tweeted the following last weekend:

As I was going through my emails this morning, one of my clients (she shall remain nameless) sent me an email with her CP01A notice attached. The CP01A notice is the IRS notice giving a victim (or potential victim) of identity theft his or her Identity Theft PIN. I suspect Joe made that post on Twitter because one of his clients did the same thing as my client.

Meanwhile, another client of mine faxed me his CP01A notice. That’s a far, far safer method of sending the Identity Theft PIN to your tax professional. You can also hand it to your tax professional or upload it using their web portal (or file transfer system—the name isn’t as relevant as the method). Mail is considered a secure means of sending things, too.

Do not email anything containing personally identifiable information such as social security numbers or dates of birth. Of course, if you want to be a victim of identity theft, go right ahead and do so. But don’t say I didn’t warn you.

The Time for Procrastination Is Over

Tuesday, September 6th, 2016

Labor Day, the unofficial end of summer, has come and gone. It even felt like Autumn this morning here in Las Vegas (it was below 70). For those who filed an extension and have waited to prepare their tax returns, it’s time to get going.

But Russ, you say, the deadline isn’t for another 41 days. Very true. Still, it takes time for you to gather all the information and for your tax professional to prepare the return. It will take time for you to review the return. It’s better to start sooner than later. And if you wait too long, it will be too late.

But Russ, you say, I still haven’t received that last K-1. I understand; my mother’s still waiting for her last K-1. However, why can’t you get everything else ready? It’s easy to add that final K-1 into the return; it’s a lot harder to add in the myriad of other forms, income, deductions, and other information.

Most tax professionals have set deadlines for returns on extension. I can guarantee you that if you drop off your paperwork on October 14th, your tax professional will, at best, charge you an arm and a leg; at worst, your return won’t get done by the 17th. Make a tax professional happy: Get started now, and turn in your information soon.

Bozo Tax Tip #2: Use a Bozo Accountant!

Thursday, April 14th, 2016

Here’s another Bozo Tax Tip that keeps coming around. The problem is, the Bozos don’t change their stripes. In any case, here are some signs your accountant might be a Bozo:

– He’s never met a deduction that doesn’t fit everyone. There’s no reason why a renter can’t take a mortgage interest deduction, right? And everyone’s entitled to $20,000 of employee business expenses…even if their salary is just $40,000 a year. Ask the proprietors of Western Tax Service about that.

– He believes that the income tax is voluntary. After all, we live in a democracy, so we don’t have to pay taxes, right?

– Besides preparing tax returns, he sells courses on why the Income Tax is Unconstitutional or how by filing the magical $2,295 papers he sells you will be able to avoid the income tax.

– He wants you to sign over that tax refund to him. After all, he’ll make sure you get your share of it after he takes out his 50% of the refund.

– He believes every return needs at least three dependents, no matter whether you have any children or not.

If your tax professional exhibits any of these behaviors, it’s time to get a new tax professional.

What Part of “Permanent Injunction” Didn’t You Understand?

Sunday, March 6th, 2016

Last September, Gerardo Herrera found himself the target of the IRS and the US Department of Justice. Mr. Herrera owned a tax preparation business, El Lobo Multiservicios Professionales Inc. in Colorado. According to the indictment issued last September, Mr. Herrera and his business invented dependents, claimed personal expenses as business expenses, and added phony deductions. The DOJ press release notes that the IRS audited more than 200 of their returns and found misrepresentations on more than 99 percent of them.

It reads like “normal” return preparer fraud.

Come January, a federal court issued a permanent injunction:

A federal court has permanently barred a Colorado man and his tax preparation business from preparing federal tax returns, the Justice Department announced today. The United States filed a civil complaint against Gerardo Herrera and his business, El Lobo Multiservicios Professionales Inc., contending that they fraudulently reduced their customers’ tax liabilities by reporting extra dependents and claiming bogus deductions. After the defendants failed to respond to the complaint, on Jan. 7, 2016, Judge John L. Kane entered an order permanently banning Herrera from preparing returns.

Again, what you would expect. Mr. Herrera was told to stop preparing returns and to turn over his customer list (he had 45 days to do that).

He didn’t do either. He continued to prepare returns and he didn’t supply his customer list. If a federal court orders you to stop doing something, you don’t get a choice (other than the right to appeal that decision).

The injunction also directed Herrera to provide a list of his customers to the United States, notify his customers of the injunction and file a sworn statement attesting that he had complied within 45 days of the injunction. The United States asked the court to hold Herrera in contempt for his failure to comply with these provisions and alleged that he continued to operate two tax preparation offices and/or assist others in operating the offices. After hearing testimony from two Internal Revenue Service (IRS) witnesses who had visited Herrera’s offices, Judge Kane found Herrera in contempt and ordered that he be held in custody until he purges his contempt by, among other things, notifying all his prior customers of the permanent injunction, providing a list of his customers to the United States, surrendering his Preparer Tax Identification Number (PTIN) and posting a copy of the injunction in his place of business.

Mr. Herrera is being held at ClubFed until he closes his business and complies with the injunction. Mr. Herrera earned one other thing: He’s the first nominee for the 2016 Tax Offender of the Year Award! Congratulations!