Taxable Talk

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.

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!

The story you are about to read is true. Only the names have been changed to protect the stupid. This is not an April Fools joke.

This past week I spoke with a new client, call him Tom. Tom had been using a tax preparer named Jim. Last year (2012), wasn’t a good year; Tom’s business lost money. Yet Jim told Tom that he should report positive income so that, “[Tom] can collect social security in the future.”

Tom signed the tax return with the wrong income. Unlike a story that Joe Kristan reported last week, this has nothing to do with the Earned Income Credit; Tom didn’t qualify for that. (I don’t mean to diminish the issues with the Earned Income Credit: They’re very real. Credits like that do lead to fraud.) Tom paid a couple of thousand dollars in tax that he shouldn’t have. We’ll be amending Tom’s returns so in the end all will be well with him.

A tax return is supposed to report your income–accurately. If you make $50,000, that’s what should be on the return. If you lose $5,000, that’s what should be on the return. As an IRS auditor told me years ago, “One of the goals of an audit is for the taxpayer’s return to be reported accurately: no more, no less.”

There is plenty of Bozo behavior in this story. First, Jim (the tax preparer) should go back to basics. Yes, Jim is a licensed tax professional so he supposedly has taken continuing education courses. He might want to stay awake for them this time.

Second, you need to always review your tax return. The income and deductions reported on your tax return should match what you actually earned and spent. If you have questions about anything on your return, ask. Your tax professional should be happy to answer any questions you have.

Finally, if a tax professional tells you to add extra income to your return either add income so that you can qualify for social security or the Earned Income Credit, run, not walk, the other way.

Living in Las Vegas gives me, at times, a very jaded perspective on life. I see individuals who otherwise pinch pennies spend $100 on bottle service at a club (or $4.95 for a thimble-sized amount of alcohol). You can still find $4.95 meal specials in the late night/early morning hours at many casinos in town. The latter, if you’re hungry, is a far better use of $4.95 than the former.

Another use of $4.95 is to purchase Robert Flach’s My Best Tax Advice. The 27 pages of tax advice within the ebook (a pdf document) are full of good, common-sense advice. While I don’t agree with everything Robert has written, any individual who follows Robert’s advice will be far, far better off than those who don’t. I especially like his comments about notices from the IRS; as Robert states, “Do not ignore an IRS or state tax notice. The problem will not just go away.” I used basically the same line in my book.

In any case, for less than five dollars you can get some common-sense advice that if followed would help most taxpayers. You can order the book through Robert’s website.

Two Georgia tax preparers may have prepared their last returns. Larry Heath and Andy Heath are brothers. Both own and operate tax preparation businesses in northern Georgia. Both have prepared lots of returns, and they likely have very satisfied customers. Of course, when at least 86% of all returns obtain refunds, and over 94% of the returns analyzed by the IRS require adjustments, perhaps there’s an issue.

The Department of Justice alleges that there are lots of issues with the Heaths’ businesses, Heath’s Income Tax II and Excellent Tax Service. Among the items listed in the government complaint, the DOJ alleges that the Heaths, “…concoct bogus losses, expenses, education credits, business expenses and charitable contributions.” The DOJ is asking for an injunction against the brothers, stopping them from preparing any returns. The DOJ also wants to force the Heaths to notify all of their clients about the alleged tax fraud.

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 $2295 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.

Come Monday will be our last Bozo Tax Tip of the Year. It’s a brand new tip for this tax season, too, and it’s actually the first Bozo Tax Tip that in some bizarre way actually works (well, for a while).

I say that because of news that comes from the small (California) Central Valley town of Livingston. The Department of Justice announced that Nohemi Villarreal Noriega of Patterson has been arrested on charges of tax evasion and structuring. Ms. Noriega is accused of not paying her own taxes of $167,000 from 2006 – 2008. But there’s more:

In addition, the indictment charges that Noriega structured more than $1 million of withdrawals from her bank accounts in amounts designed to avoid filing Currency Transactions Reports, which might have disclosed her unreported income.

Note that all California tax preparers have to be registered with CTEC (or be a CPA, EA, or attorney). Registration and continuing education didn’t stop Ms. Noriega from allegedly violating two laws nor did it stop Ms. King (a post from earlier this week). Having all tax professionals register with the IRS won’t change things…but it will establish another bureaucracy in Washington.

I have more information on the coding issue: The problem lies with my software company, not the IRS. It seems that in a limited number of cases, my software (ProSeries, made by Intuit) returns a code “5″ indicating that an electronic payment has been rejected when the actual transmission from the IRS is a code “4″ indicating that the payment was accepted.

What is making me upset is that when I called Intuit this morning that they were aware of the problem and were working on it. They apparently do not consider this serious enough to proactively tell their user base about it. I asked for a supervisor to call me back; I have yet to get that call today.

Consider a hypothetical client, John Smith. Mr. Smith owes the IRS at the extension deadline $20,000. He chooses to have the funds electronically debited. His return is filed electronically and accepted, but the electronic funds payment is supposedly rejected. You tell Mr. Smith he needs to mail a check to the IRS for the $20,000 which he dutifully does. However, the payment was really accepted.

The client discovers two days later that the IRS has debited his account. Meanwhile, does he put a stop-payment on the check he sent the IRS (incurring fees from the IRS and his bank)? Or perhaps the check is cashed by the Treasury and now Mr. Smith is out an additional $20,000 for a few weeks. (The IRS will send a refund for the double-payment, but Mr. Smith loses the use of that money for a while.) Or perhaps the check bounces as Mr. Smith only had $30,000 in his bank account. Is Intuit going to cover Mr. Smith’s fees?

As best as I can determine, I had four clients impacted by this. I assume there are hundreds if not thousands impacted nationally. It will be very interesting to see how Intuit responds to this major issue.

I enjoy college football. Today, my school won a thrilling game in overtime.

Way back when, there were only a few college bowl games. And their names were simple: Rose, Sugar, Cotton, and Orange. The second tier games also had simple names: Blue-Bonnet, Fiesta, Peach, and Gator. Now, we’re treated to the [name your favorite sponsor]‘s bowl. Well, TaxSlayer.com will now be the official sponsor of the Gator Bowl for the next three years.

TaxSlayer.com is what you’d expect from the name: income tax software. A partnership between a tax firm and a college bowl makes some sense; after all, income tax season follows the new year.

So on January 2nd, you and I will enjoy the TaxSlayer.com Gator Bowl in Jacksonville.

Hat Tip: Don’t Mess With Taxes

This morning, Joe Kristan posted about an Iowa couple who had a unique method of preparing tax returns. I made the mistake of reading the actual court decision while drinking my morning coffee:

According to [the defendants], if you believe that looking successful helps make you successful, your clothes, hair care, and manicures are deductible. If your dog barks while you are away from your home based business, it’s deductible. If your child’s nanny ever answered the business phone, the nanny is deductible. If you visit a business associate while on vacation, it is deductible. If you pay rent to yourself, or even if you don’t, it’s deductible. If you have a six year old child, payments to the child are deductible employee expenses. If you have used your living room television in a business meeting, it’s deductible. And your hobbies, like scuba diving, pet cats and flying, easily deductible.

The trouble was that I was laughing so much that the coffee hit the carpet. As you hopefully know, none of the items noted by the Court are deductible; the defendants in this case absolutely deserve their permanent injunction.

On a more serious note, Joe noted,

The case is noteworthy in another respect: it shows how useless competency exams and CPE requirements are in stopping rogue preparers. One of the preparers — the one who signed all of the disputed returns — was an Enrolled Agent. That meant he had to pass a competency test that is certainly more difficult than any that will be imposed by the new IRS preparer regulation regime. He also had to take continuing education to maintain that status. [emphasis in original]

I disagree somewhat with Joe regarding competency exams, but agree with him regarding CPE.

Competency exams will weed out the lowest of the low hanging fruit. There are undoubtedly some preparers who are so incompetent that they have no chance of passing any exam. In that respect, the RTRP exams will have an impact.

However, CPE is what you make out of it. For most tax professionals, CPE gives us a chance to learn new material in tax. True tax professionals attend courses and want to learn.

That said, it’s relatively easy for an incompetent preparer to obtain CPE. Just go to courses, doodle on the materials presented, and go home still believing that petting your dog is deductible. As long as you attend the full course (typically, your badge is scanned upon entering and leaving) you will get CPE. Attend enough CPE and your license can be renewed.

Joe would prefer that the money being spent on building a new bureaucracy be used to spot rogue preparers. Originally, I was indifferent about the new PTIN and registration requirements. (For the record, the National Association of Enrolled Agents, of which I am a member, strongly supports both.) I am now moving more towards Joe’s opinion (that this is more or less a power grab by the IRS with no real benefits to taxpayers or tax professionals).

Ah, Spring is in the air. And with that come the inevitable wedding invitations. I was supposed to be in a wedding this weekend, but the three extra days of tax season put an end to that.

With weddings comes changes in tax status. Your marital status on December 31st determines your marital status for the year. If you are married, you file as Married Filing Jointly or Married Filing Separately. (In some rare cases, if you’re married you can file as Head of Household.) But you can’t file as single. Likewise, if you’re single you can’t file as married.

Perhaps it’s something in the water, but this year Aaron and I have seen multiple cases of individuals who have ignored that marriage license and filed as single if married. There’s a good reason for that, of course: They save on taxes. A big issue is rental real estate: If you’re actively involved in rental real estate you get to take losses of up to $25,000. But there’s an income cap (the deduction begins to phase out at an income of $100,000 and completely phases out at $150,000). This particular deduction is neither indexed for inflation nor does it vary if you are single or married.

There’s a problem taking deductions you’re not entitled to: tax evasion. It’s a Bozo act to claim things you’re not entitled to.

Marriage has its ups and downs. Claiming you’re single on your tax return will in the long-run cause you nothing but downs.