Tuesday, June 30, 2009
Monday, June 29, 2009
Saturday, June 27, 2009
- The employer informed the employee that the tip credit is being taken;
- The employee keeps all tips unless they participate in a tip sharing arrangement;
- The employee customarily and regularly receives more than $30 per month in tips.
The youth minimum wage also remains the same. Employees under 20 years of age may be paid $4.25 per hour during their first 90 consecutive days of employment."
* Another victory in the battle against usurious Refund Anticipation Loans (RALs) pushed on clients by fast food tax preparation chains! This time is wasn't against Henry and Richard. WebCPA reports that "Liberty Tax Services Loses Deceptive Ad Suit."
According to California Attorney General Jerry Brown-
"Liberty Tax Service lured cash-strapped Californians into paying for high-cost loans, when they could obtain tax refunds free from the IRS just weeks later. This ruling bars Liberty from deceptive advertising that blurs the line between IRS tax refunds and pricey loans."
The article states that -
"Liberty Tax Service's print and television ads misled customers by promising 'Most Refunds in 24 Hours', according to Brown. In reality, Liberty was selling refund anticipation loans, not a tax refund. Customers had to pay an upfront fee of about $30 plus interest, at a rate that could be as high as 395 percent annually. According to the IRS, refund anticipation loans target low-income taxpayers, especially those who receive the Earned Income Tax Credit. Approximately 70 percent of Liberty's refund anticipation loan customers in 2006 and 2007 received this credit."
The ruling requires Liberty to pay $1.16 Million in civil penalties, $135,886 in restitution, and the Attorney General's costs.
Brown had reached settlements with Jackson Hewitt in 2007 and with Henry and Richard in 2009 over RALS.
Right on, Jerry!
* A "tweet" from NATP "turned me on to" this website on the new Car Allowance Rebate System (CARS) - aka the Cash for Clunkers program - which was recently signed into law by BO.
Friday, June 26, 2009
Thursday, June 25, 2009
Monday, June 22, 2009
Saturday, June 20, 2009
“No need to worry, my accountant handles that!”
* I join Pete Pappas of THE TAX LAWYER’S BLOG in questioning BO’s commitment to closing the Tax Gap (not a store selling jeans with 1040 emblems) in his post “Tax Gap Closer Obama Appoints Native American Woman with No Tax Experience to Head Up DOJ Tax Division”.
Pete suggests, and I have no reason to disagree, that the reasons for appointing Mary Smith (real name?) as head US Tax Attorney at DOJ is –
1. Ms. Smith was a partner in women-owned law firm; and
2. She is a Native American.
If the only reason for appointing Ms Smith is that she is a Native American isn’t that discrimination, however reverse? And isn’t discrimination in federal hiring illegal?
* In a later post Pete provides us with a lesson in taxation on the 7 most important “ubiquitous tax concepts” in his post “7 All Time Tax Concepts”.
* Kristine McKinley is back with a new blog – YOUR GUIDE TO SOCIAL SECURITY RETIREMENT INCOME. “It's my goal to make this blog your ultimate guide to understanding Social Security retirement benefits.” Check it out.
* Richard Close, the IRS HITMAN, dispels some “urban tax myths” concerning deductible medical expenses in his post “IRS Tax Issues: Medical Deduction Myths to Avoid, Stay out of Trouble With the IRS”
* Be sure to provide your comments to TAXGIRL Kelly Phillips Erb on her Friday question – “Fix the Tax Code Friday: What About Amnesty?”
Friday, June 19, 2009
The AICPA issue briefing “Federal Regulation of Tax Preparers” that I mentioned in this morning’s post included the following item –
“An 1RS study of 1999 tax returns suggests that - out of the $31 billion in EITC claims by taxpayers that year - between 27 and 32 percent of those claims were erroneous.”
If that was the number back in 1999 I can imagine what it is today!
I have come across comments and statements from state CPA organizations and the AICPA itself (i.e. AICPA issues briefing on “Federal Regulation of Tax Preparers”) that, while supporting “the implementation of high professional standards for tax practitioners”, they are basically against government registration and regulation of unenrolled practitioners. The AICPA briefing mentioned above states “we are not convinced that Congressional proposals calling for the regulation of unlicensed tax practitioners will accomplish the stated objectives advanced by the proponents of such proposals”.
One wonders why the AICPA would be against the regulation of unenrolled preparers.
There is a serious misconception among the general public, and especially, it seems, among journalists, that only CPAs are qualified tax professionals. This is seen in print during tax season and throughout the year when “CPA” is used whenever the term “tax professional” or “qualified tax professional” or “competent tax professional” would be more appropriate.
When discussing tax issues we are told to “check with your CPA first”, or “be sure to consult with your CPA”, or “see a CPA” when what is actually meant, or should be meant, is “check with your tax professional first”, or “be sure to consult with your tax professional”, or “see a tax professional”.
To be sure just because a person has the initials CPA after his/her name does not mean that he/she is a tax expert. As I have said time and again - in my 37 years in “the business” I have seen more errors on tax returns made by CPAs than by any other “class” of preparer.
If unenrolled tax preparers are required to be registered, licensed, and regulated, with required initial proficiency exams and annual minimum CPE credit hours, the result would be a “licensed tax preparer” or some similar federal designation. And, presumably, only “licensed tax preparers” would be allowed to professionally prepare tax returns.
Now I am not talking about practice before the IRS. “Licensed tax preparers” would be permitted to prepare tax returns only. Practice before the IRS, I expect, would continue to be limited to EAs, CPAs and attorneys. And I also expect that EAs, CPAs and attorneys would be automatically “grandfathered” in as “licensed tax preparers”.
However, while CPAs would be exempt from any initial proficiency test, those who want to be able to prepare tax returns should be subject to the same annual CPE credit requirements as the newly enrolled practitioners. If “licensed tax preparers” are required to take 30 CPE credits in “federal income taxes” each year to maintain their status, then CPAs who want to prepare tax returns should be required to take the same credits in federal income tax topics, and not just general accounting.
Enrolled Agents already have strict CPE requirements in federal taxation. And, to be honest, I doubt very many individuals have their 1040 prepared by a lawyer – who could afford it? Tax lawyers are generally used by individual taxpayers when it comes to the area of “problem resolution” – dealing with problems resulting from faulty, or considered faulty, 1040s or collection issues.
It is my firm belief that one of the main reasons why CPA organizations are against the creation of a “licensed tax preparer” designation, via the regulation of unenrolled tax practitioners, is that this will once and for all do away with the misconception that only CPAs are qualified tax preparers. Now journalists will be saying “check with your licensed tax preparer” and “be sure to consult with your licensed tax preparer” and “see a licensed tax preparer”.
I have read credible opinions on both sides of the issue by individual CPAs, attorneys, CPA-Attorneys, Enrolled Agents and unenrolled tax professionals, and do not doubt one bit that the individuals expressing these opinions are sincere and not just self-serving. There are legitimate arguments both pro and con.
But one thing I do know is that if all tax preparers were regulated via a “licensed tax preparer” designation it would rightfully put all qualified and competent tax professionals on an equal footing in the eyes of the public, and do away with the erroneous “urban tax myth” that CPAs, and only CPAs, are tax experts.
Thursday, June 18, 2009
In some respects TIGTA is like the “Internal Affairs” department of the IRS. It also issues reports and makes recommendations to both the IRS and Congress, and, like the Taxpayer Advocate Office, submits a semi-annual “Report to Congress”.
In one recent report TIGTA made the following suggestion to the IRS -
“The Internal Revenue Service (IRS) should increase its efforts to educate elderly taxpayers about potential exemptions from withholding tax on certain retirement payments in order to reduce unnecessary tax return filings, according to a new report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).
While the IRS' public website, www.irs.gov, instructs taxpayers on how to determine whether to file a Federal tax return and if income tax withholding is necessary, printed publications, such as the instructions for filing IRS Form 1040, do not expressly state whether taxpayers should continue to have income tax withheld on Social Security, pension and annuity payments.
In August 2007, TIGTA issued a report examining the characteristics of unnecessarily filed individual income tax returns (Reference Number 2007-40-130, August 17, 2007). That report found that more than 8 million tax returns were unnecessarily filed in 2003, 2004 and 2005. Eighty-five percent of those returns were filed to obtain a refund of taxes withheld.”
Basically the report says that 8 Million + unnecessary tax returns with no tax liability are filed by senior citizens each year, most of which are simply to get a refund of federal income tax withheld from pensions.
This is similar to the fact that there are also many unnecessary tax returns filed by dependent children simply to get a full refund of federal income tax withheld. I discussed this issue in some detail back in 2007 in my post “Dependents and Income Tax Withholding”.
I also agree that many seniors should also refrain from having federal income taxes withheld from pension income if they consistently have “0” tax liabilities on the Form 1040 (or 1040A) each year. However I also realize that there are seniors who would rather be “safe than sorry” and have tax withheld as an arse-covering measure “just in case” so they will not have to write a check to their Uncle Sam at tax time.
I do advise clients who do not need to have tax withheld from pensions and annuities to stop doing so, but do not make an issue of it if they want to cover the arse. The problem I have is not with senior clients who have tax withheld from such income unnecessarily – but with those with tax liabilities who do not have any, or enough, federal or state tax withheld.
In another report TIGTA told the IRS that changes should be made in the layout and typeface of 1040 individual tax forms, including more use of boldface, colors and explanations, to help reduce taxpayer errors.
According to the report, each year the IRS sends out more than 7 Million notices to taxpayers informing them of math errors on their tax returns. TIGTA thinks that more than 2.3 Million of those errors could have resulted from unclear or inadequate forms and instructions. An analysis of taxpayer errors on 2005 tax returns identified three areas where modifying the 1040 and its instructions could reduce errors - computing the deduction for personal tax exemptions, the omission of dependent Social Security numbers or Individual Taxpayer Identification Numbers, and children claimed for the Child Tax Credit who exceeded the age limit.
The report says that taxpayers made more than 210,000 errors computing their exemption amounts. Another 170,000 taxpayers failed to include their dependent’s SSN or ITIN on the 1040, and approximately 137,000 taxpayers were denied the Child Tax Credit in 2006 because the child’s age exceeded the age requirement.
TIGTA recommends that the IRS use improved labeling and include the use of bold type to draw attention to instructions. Other suggested changes to the Form 1040 include adding language explaining the purpose and description of the exemption line, a statement that a SSN or ITIN is required for each dependent claimed, and the inclusion of the qualifying age requirement necessary to claim the Child Tax Credit. TIGTA also recommended that the IRS seek Congressional approval to use additional colors on tax returns and instructions to highlight important warnings and information.
I don’t know – a multi-color 1040? I am used to the light blue color of the form, just as I am comfortable with the red color of the NJ-1040 (appropriate – considering NJ’s financial situation). While I would agree that in some cases IRS instructions and “prompts” could be improved or more effectively highlighted I don’t think I would want a “more colorful” 1040.
Wednesday, June 17, 2009
Q. This may be a stupid question, but I just want to be sure. Between the $1,700 tax credit for the hybrid I will receive, as long as it is delivered by 9/30/08, and the sales tax credit of about $2,900 I will exceed my total tax liability for the year. In addition, because of my medical expenses, and I am having dental work done now also, property taxes, new home equity interest, and the usual I will have lots of deductions. If I exceed my tax liability will I still receive the balance of the tax credits as a refund? If not, I could always cash in some more bonds.
A. There is no such thing as a stupid tax question – only stupid taxpayers (who don’t consult a competent tax professional)! The question actually brings up an excellent tax-planning point.
First of all, the “sales tax credit of about $2,900” to which he refers is not actually a credit (a credit is a dollar-for-dollar reduction of tax liability). He is talking about the “above the line” tax deduction for sales or excise taxes paid on the purchase of a new automobile. His Adjusted Gross Income (AGI), and not his tax liability, will be reduced by $2,900. He also mentions excessive medical expenses, so the $2,900 “above the line” deduction will increase his allowable medical deductions by $218!
He is basically asking if the $1,700 energy tax credit for purchasing a hybrid car reduces his tax liability to below “0” will he be able to receive a refund of the unused credit. The answer is no.
Most tax credits are not “refundable”. Only the Earned Income Credit, BO’s new Making Work Pay Credit, a portion of the new American Opportunity Credit for tuition and fees, and possibly the Child Tax Credit are “refundable”. By “refundable” I mean they are treated as additional withholding and can be applied against “other” taxes, such as the self-employment tax and the penalty for early withdrawal from a pension account, and ultimately added to the taxpayer’s refund.
In the case of my friend – he is single with no children, recently retired (late 2008) - though not receiving Social Security or Railroad Retirement - and will be reporting some nominal net earnings from self-employment for 2009. The only “refundable” credit to which he will be entitled is the Making Work Pay credit, which is based on 6.2% of his self-employment income. The MWP credit can be applied against his self-employment tax for the year.
However with reduced income due to retirement and excessive deductions due to special situations it is very possible that the $1,700 hybrid credit will exceed his federal income tax liability. In such a case the excess hybrid credit would be lost.
In this particular case the taxpayer has a large “inventory” of US Series E savings bonds, both purchased and inherited, that are still earning interest. He plans to cash in a certain amount each year, determined by tax planning, to supplement his income until Social Security kicks in. He has already cashed in the bonds scheduled for 2009.
What we will do is prepare a “preliminary” 2009 tax return in late November or early December as part of regular year-end tax planning. If at that time we determine, based on year-to-date information, that his tax liability before the hybrid credit will be less than $1,700 he will cash in enough additional savings bonds to generate the amount of taxable interest income needed to use up the excess credit. By doing this the additional savings bond interest will be totally tax free (US savings bond interest is already tax free on the NJ-1040)!
FYI, my friend and client uses the Savings Bond Wizard software available online to properly “inventory” his bonds so that he knows how much interest each bond will accrue for the year.