Friday, July 31, 2009


Let us look at the different categories of “enrolled” and “unenrolled” practitioners and their individual and specific qualifications as they apply to the practice of preparing 1040s.

An Enrolled Retirement Plan Agent and an Enrolled Actuary have absolutely nothing whatsoever to do with the preparation of a 1040. Such “enrolled” practitioners do not prepare 1040s, although that is not to say that a person who is either an Enrolled Retirement Plan Agent or an Enrolled Actuary may not also prepare 1040s. When looking for someone to prepare your 1040 you should not be looking at these types of “enrolled” practitioners.

Even their ability to “Practice Before the IRS” is “limited to certain Internal Revenue Code sections that relate to their area of expertise, principally those sections governing employee retirement plans.”


While tax returns deal in numbers, the practice of tax is in reality the study and application of a specialized Law (the Tax Code) and not Accounting. Just because a person can add and subtract, or is highly proficient in keeping books and preparing financial statements, does not mean he/she knows a thing about tax law.

An attorney is “enrolled” to “Practice Before the IRS” by virtue of passing the bar exam. Just because a person has passed the Bar does not mean that he/she is proficient in the specialized field of 1040 Tax Law.

Regarding 1040 preparation and the Bar exam, I have been informed by a tax attorney –

Tax is not a subject on the MBE (which is the national multiple choice portion) but can be included on the individual state essay exam. PA does include tax on its essay portion as a general rule (which is why most PA law schools suggest you take a tax course). There were sample tax questions on the 2009 model Q&A for PA {these involved business organization and estates and trusts and one item on taxation of scholarships – rdf}. I don't believe NJ or NY test on tax, though.”

As there are specializations in the field of medicine there are also specializations in law - labor law, divorce law, transportation law, criminal law, corporate law, etc. Proficiency requires additional specialized education and experience in the chosen area of practice.

I had a 1040 client who was a labor lawyer. He was excellent in representing labor unions and their members in arbitration and other related areas, but felt he was ignorant when it came to preparing his own 1040, let alone the 1040s of his clients.

It has been proven time and again that there exist divorce lawyers, highly proficient in the legal aspects of the divorce process, who are totally ignorant to the tax implications of divorce.

One does not need a JD to be proficient in the study of the Tax Code. Real estate sales involves knowledge and application of real estate law, but a real estate broker or agent does not have to have a JD. And one does not need a JD in order to prepare a 1040.

I am sure no one will dispute that an Attorney would be the most expensive of all categories of tax practitioners. Do you know of any lawyer who does not charge at the very least $200.00 per hour plus expenses!

As a general rule attorneys do not offer tax season preparation services to the public. A tax attorney would more likely come into play in the area of “problem resolution” and when one needs representation before the IRS after a tax issue has gone far beyond the basic audit process.

One should seek out a tax attorney for 1040 preparation only in extremely unique, complicated and involved situations that involve the application of extremely unique, complicated, involved and highly interpretive aspects of 1040 tax law. Attorneys may need to be involved when it comes to more complicated estate, trust, partnership and corporate preparation issues.


Just what is a CPA?

According to Wikepedia – “Certified Public Accountant (CPA) is the statutory title of qualified accountants in the United States who have passed the Uniform Certified Public Accountant Examination and have met additional state education and experience requirements for certification as a CPA”.

Merrian Webster defines a CPA as “an accountant who has met the requirements of a state law and has been granted a certificate”. And the free online dictionary says a CPA is “public accountant who has been certified by a state examining board as having met the state's legal requirements”.

The Investor Glossary gets more to the point (the highlight is mine) – “A Certified Public Accountant (CPA) is a person licensed by a state board of accountancy to practice public accounting. The primary distinction between a Certified Public Accountant and all other accountants is that only a Certified Public Accountant can issue an opinion on audited financial statements.”

In order to become a CPA one must pass a difficult and lengthy exam. There are also certain education and “apprenticeship” requirements, and a CPA must earn a minimum amount of CPE credits each year to maintain his/her initials, although there is no specific requirement that any of these CPE credits be in the area of 1040 preparation. The individual education, apprenticeship and CPE requirements may vary from state to state.

As seen above, basically the only thing that a CPA is authorized to do that a non-certified Public Accountant, or an unenrolled practitioner, is not is to “certify” the audit of financial statements. The CPA designation has nothing whatsoever to do with 1040 preparation.

Because numbers are involved many accountants, CPAs included, are drawn into tax practice, although, as I have said above, tax preparation is the application of “Law” (the Tax Code) and not “Accounting”. FYI, in my case I became an accountant - by practice and not by "designation" (also self-taught, except for basic ACC 101 in college) - because of preparing tax returns.

A Certified Public Accountant is “enrolled” to “Practice Before the IRS” by virtue of passing the CPA exam at the very beginning of his/her career. I can’t seem to find a CPA who can remember what percentage of the exam they took involved 1040 preparation – so it couldn’t have been significant.

The general public has the misconception, however erroneous, that the initials CPA are synonymous with tax expert. The AICPA is well aware of this public misconception and encourages it.

Fellow tax blogger Marilyn Lawver, who just happens to be a CPA, wrote the following in a blog post (the highlight is mine) –

Robert {meaning me–RDF} is correct that a CPA is not specifically licensed for tax preparation, rather ‘a CPA is a licensed accountant, authorized to certify audits of financial statements’. Just a couple of months ago, I was pondering this exact issue. I was thinking about all the fancy credentials the AICPA offers for CPAs in other specialties - financial planning, fraud examination, business valuation - and wondering how to become a certified tax expert.

So I emailed the AICPA asking about it. Here's the exact wording of the response I received:

’We do not offer a credential in taxation. In general, our approach has been not to develop credential programs around areas for which the public already believes CPAs to 'own'. In addition, we do not endorse a particular tax credential.’

The public misconception is perpetuated by uninformed print and online journalists who when writing on a 1040 topic will say “see your CPA” or “check with your CPA” or “consult a CPA” when, instead, they should be saying “see your tax professional” or “check with your tax professional” or “consult a tax professional”.

As we discussed with Attorneys, CPAs also “specialize”. 1040 preparation is one of many areas of specialization that a CPA may choose to practice. Many CPAs specialize in audits or other areas, as mentioned by the CPA blogger above, and have no interest in keeping current on how to prepare 1040s.

I have said it before and I will say it until the day that I go to my final audit – the mere existence of the initials CPA after an individual’s name does not mean, nor should it automatically suggest, that the individual is proficient or current or competent or even knowledgeable in the specialized area of applying and interpreting the US Tax Code in the preparation of 1040s.

In my 38 tax-season tenure I have come across more errors on 1040s made by individuals with the initials CPA then by any other category of tax preparer, including individuals who have prepared their own return and employees of the fast food tax preparation chains!

A specific individual with the initials CPA after his/her name may indeed be an excellent 1040 preparer (and during my years in the business I have come across quite a few that indeed are 1040 experts) - but only because of the specific education, training, and experience of that specific individual. It has absolutely nothing to do with the existence of the initials.

During my business life I have also been an accountant, both private and public, and even worked for a brief period of time many, many, many years ago for one of the then “big eight” international CPA firms. I have never had any desire to audit financial statements, so there was never any reason for me to attempt to acquire the initials CPA.

It is common knowledge that CPAs charge more for their services than non-CPAs, especially in the area of tax preparation. The larger the CPA firm the greater the fees. In the area of tax preparation the statement “you get what you pay for” is not always true. Higher fees do not necessarily mean better service or more accurate returns.

According to the 2008 NATP Tax Professional Fee Study, “CPAs and PAs typically charge the highest minimum fees for tax preparation”. The study indicated that the minimum fee charged for preparation by an EA was a little less than 2/3 of that charged by a CPA or PA, and the minimum fee of an “unenrolled” practitioner was only slightly more than half of the CPA/PA charge.

Many years ago a student in one of the tax classes I taught at local adult schools asked me what was the difference between a 1040 prepared by someone like myself (“unenrolled”) and a return prepared by a CPA. My answer at the time was, “about $100.00”. That answer needs to be seriously adjusted for inflation.

With regards to a Schedule C filer, as I have said in an “add on” to a post at the taxguy blog –

Depending on the size and nature of your business you may also need the year-round services and guidance of a public accountant, or perhaps just an experienced bookkeeper. Obviously there is a big difference in the costs involved with a public accountant vs that of a bookkeeper or bookkeeping service. Many tax professionals offer year-round bookkeeping, accounting and payroll services for their small business clients, while others do not. You should look for a tax professional, and/or an accountant or bookkeeper, with experience in your specific type of business.

If you feel you need an accountant be aware that you do not “need” to use a “CPA”, although there are many qualified public accountants specializing in small business that happen to be “certified”, and there may be situations where a bank or creditor may require financial statements prepared by a CPA (in which case you can hire one for the specific “engagement”).

A qualified and experienced “non-certified” public accountant may be better depending on your individual situation and needs. Many states require the licensing of “non-certified” public accountants. (As a general rule, CPA firms tend to charge a higher fee than a “non-CPA” firm, sometimes substantial, and a small “non-certified” firm may provide more personalized or individualized service.)

You should make your decision on which firm or individual to use based on your specific needs and the specific training and experience of the firm or individual, and not make any false assumptions based on initials or lack thereof

The more involved your business, and if it goes from a Schedule C operation to more complicated entities, the more likely you will need the year-round services of a Public Accountant, and maybe even a CPA. CPAs are more likely to be experienced in 1120 preparation then in 1040 preparation, although, again, the initials mean nothing special in this area.

The same advice I provided for the Schedule C filer may also apply to a taxpayer with involved investments and Schedule D activity – such a taxpayer may need the year-round services of an accountant. Again, you do not “need” a CPA.

And I should point out that, as with the CPA, just because a person is a practicing Public Accountant does not automatically mean that he/she is knowledgeable or competent or proficient or current in 1040 preparation.


Ah, now we finally get to initials that actually mean something when it comes to 1040 preparation. One can be relatively assured that if a person has the initials EA after his/her name then he/she is knowledgeable and current, and presumably competent and proficient, when it comes to preparing 1040s.

Because of the name the public also has some misconceptions about the EA. An Enrolled Agent is not an agent, employee or representative of the Internal Revenue Service. An Enrolled Agent is an independent, private tax professional who is “enrolled” to act as a taxpayer’s “agent” in proceedings with the IRS.

An Enrolled Agent is “enrolled” to “Practice Before the IRS” by virtue of taking the Special Enrollment Examination and maintaining a required amount of CPE credits in the specific area of taxation (and 2 hours per year in ethics).

According to fellow tax blogger, and Enrolled Agent, Trish McIntire the Special Enrollment Examination is – “a comprehensive 3 part test that covers all areas of federal tax and IRS representation (that includes corporations and estates.) All three parts have to been passed within a specific time frame and then the applicant undergoes a background check.”

As I stated in the initial post in the series I do not offer “client representation” services and do not wish to get involved in direct dealings with the IRS regarding returns I have not personally prepared, and therefore have no reason to become an “Enrolled Agent”.

It is also possible to become an Enrolled Agent by virtue of past service and technical experience within the IRS. Such a person must possess the specific years of past service and technical experience identified in Circular 230.


And so we are left with the “unenrolled” practioners – or basically everyone else. To be fair it is true that the basic definition of an “unenrolled” practitioner is a person who prepares tax returns for a fee who is not an Attorney, CPA, or Enrolled Agent (or Enrolled Retirement Plan Agent or Enrolled Actuary).

I like to break down the “unenrolled” practitioner into two sub-categories – the independent practitioner and the employee of a “fast food” commercial tax preparation chain.

1. The Independent Practitioner

There exist hundreds of thousands of knowledgeable, experienced, proficient, current, competent and ethical independent tax preparers who have chosen not to add initials after their names. In terms of 1040 preparation I believe a majority of these independent "unenrolled" practitioners are equal to those who have elected to take the IRS Special Enrollment Exam and become an EA - and also that a majority might be superior in tax knowledge and experience to a great many individuals with other initials or designations. For reasons that may or may not be similar to mine they have just decided there was no reason for them to get any “initials”.

There also exist a very small percentage of “unenrolled” practitioners who are not knowledgeable, experienced, proficient, current, competent, or ethical when it comes to preparing 1040s - just as there are individuals with initials who are not proficient, current, competent, or ethical when it comes to preparing 1040s, preparing or certifying financial statements, or practicing law. Every profession, and "sub-profession", has its share of hacks, crooks and incompetents. Hey, it wasn't an "unenrolled" practitioner who prepared the tax returns for Enron!

Unfortunately there is currently no easy method to tell a “good” independent “unenrolled” practitioner from a “bad” one. If the regulation of “unenrolled” practitioners ever does come to pass, and the process is done reasonably and properly, it should become a little easier.

2. Commercial Tax Preparation Chains

And now we have come to the bottom of the barrel – the “fast food” commercial tax preparation chains. You know full well about whom I am speaking – Henry + Richard, Jackson Hewitt, and Liberty Tax Service. This category of preparer is clearly the worst value for your money in the tax preparation business!

A couple of years ago the Government Accountability Office (GAO) conducted a study which resulted in a report to Congress titled “Paid Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors”. The GAO sent undercover agents with two different tax scenarios to a total of 19 offices of 5 “fast-food” commercial tax chains, including H+R Block, in a metropolitan area. In only 2 instances was the correct refund calculated, but all 19 returns contained errors.

A similar undercover operation was conducted last February and March by the office of the Treasury Inspector General for Tax Administration (TIGTA) with similar results, although the TIGTA scam did include some small independent practitioners along with commercial chains as test subjects.

Earlier this year another undercover "sting" operation that found employees of Henry and Richard and Jackson Hewitt were less than competent and possibly unethical was conducted in Alabama by an independent non-profit organization called Impact America.

In addition to multiple preparation errors the Alabama operation reported that (highlights are mine) - "Simple tax returns with no itemization took only 40 minutes but often cost $400 or more”, and “they were often accompanied by offers of advance payment on refunds. Those advances are actually loans bearing an annual interest rate that can top 800 percent."

You can see that there has been much documentation to suggest that employees of H+R Block and the other commercial chains are neither competent nor ethical.

And, as I have said many times before, Henry and Richard ain’t cheap. When my mentor and I first got a hold of the H+R Block fee schedule, back in the mid 1980s, we were in shock.

You pay fine restaurant prices for fast food service. Actually I should apologize for comparing these chains to fast food operations – I have often gotten good service and received good value at Burger King and McDonalds.

The TIGTA undercover operation among both commercial chain and independent preparers that I mentioned above found that the average price paid to the commercial chain was $100+ more than the average fee paid to the independents.

Plus Henry + Richard aggressively push auxiliary “products” on their clients – usurious Refund Anticipation Loans, additional (and unnecessary) “audit protection” fees, fee-laden debit cards, IRA investments that are guaranteed to lose money, and so on and so on – that can substantially increase one’s “out of pocket”.

While, like anything else, the market affects the price of tax preparation, the major factor affecting the fees charged is overhead. Let’s look at the overhead of these chains.

Because the storefronts where these chains are located are usually in high traffic commercial areas, and often shopping malls, the rent is generally very high. And an important factor – H+R and Liberty and Jackson Hewitt storefronts are only open during the tax filing season, yet they must pay rent on the property for the entire year.

These chains have excessive advertising budgets during the season, spending millions of dollars on constant tv and radio spots as well as print advertising telling you not that they competently prepare accurate tax returns but simply to come into their office and walk out with a check. Hey, doesn’t H+R advertise during the Super Bowl.

H+R Block et al are corporations, and have highly compensated upper level corporate officers and employees with generous employee benefits. The Associated Press recently reported that “H&R Block Inc. CEO Russell Smyth received compensation valued at $5.3 million in fiscal 2009, the year he took over leadership of the nation's largest tax preparer”.

And, most notable of all, Henry + Richard, Jackson Hewitt and Liberty need millions of dollars for legal fees and the settlement payments for the many, many lawsuits for deceptive advertising and other unethical business practices, most of which result from their usurious Refund Anticipation Loan offerings.

With commercial preparation chains I would expect that the actual cost of preparing the return - salaries paid to the seasonal preparers and the training of these preparers - is one of the least expensive items in the budget.

Clearly one should never use the services of a commercial tax preparation chain such as Henry + Richard to prepare a 1040A or 1040 or any tax return. Your chances of getting the return prepared properly are very slim, you will most certainly pay much more then you would pay elsewhere for better and more competent service, and you will be pressured to buy a high fee tax-related “product” that you do not need.

While the fee charged for preparing your return should certainly be a concern, especially in this economy, it should not be the only, or even the major, criteria for choosing a tax professional. However value is important – why should you pay someone $250.00 for a service that can be performed just as competently, and with perhaps more personalized attention, for $125.00.

In my opinion the best way to choose a tax practitioner is by getting referrals from trusted friends, relatives or colleagues. You want to find someone who is experienced in preparing returns for those in your particular trade, profession or type of business.

It is important to end by acknowledging that it may actually be possible that the best tax preparer, at the best price, for your unique particular situation is either an attorney or a CPA, or even an H+R Block, Jackson Hewitt or Liberty employee. But this is only because of the education, experience, ability, temperament, fee structure and other factors that are specific to the individual preparer and nothing whatsoever to do with his/her designation or employer.

‘Nuff said!


Thursday, July 30, 2009


Here is the latest word on the NJ Homestead Rebate from the Division of Taxation.
Non-senior homeowners with incomes of $75,000 or less who were under 65 years of age and not disabled on December 31, 2008, will begin to receive their 2008 homestead rebate applications this week. These homeowners will qualify for a 2008 rebate if they owned a home that was their principal residence on October 1, 2008, and paid property taxes on that home.

With very few exceptions, the homeowner rebate applications must be filed by phone or over the Internet.

The filing deadline for non-senior/non-disabled homeowners is September 1, 2009. Checks for non-senior, non-disabled homeowners are scheduled to be mailed in October. I wouldn’t be surprised if the filing deadline is eventually extended to October 31st.

Non-senior homeowners with incomes between $50,000 and $75,000 will receive checks averaging about $700, while those non-seniors with incomes below $50,000 will receive rebate checks averaging $900. Those with incomes in excess of $75,000 will receive bupkis!

The anticipated delivery dates of the applications, by county, are -

Cape May, Union - July 27
Gloucester, Mercer, Middlesex, Passaic - July 28
Morris, Ocean - July 31
Bergen, Burlington, Cumberland, Warren - August 3
Camden, Hudson, Hunterdon, Salem, Somerset - August 4
Atlantic, Essex, Monmouth, Sussex August - 7

For more information about the Homestead Rebate Program homeowners may call the Homestead Rebate Hotline at 1-888-238-1233 from 8:30 a.m. to 4:30 p.m., Monday through Friday. Homestead rebate information is also available on the Division of Taxation's Web site (click here) and through the Division's Automated Tax Information System at 1-800-323-4400. Text telephone service for the hearing impaired is provided at 1-800-286-6613 or 609-984-7300.


Have you been following my posts on the latest FU by the NJ Division of Taxation at the NJ TAX PRACTICE BLOG? It’s déjà vu all over again!
Back in 2006 there was a serious problem with the NJ Division of Taxation's processing of the payments of balance dues on 2005 Form NJ-1040s.
Beginning in late August of 2006 I had heard from clients who received balance due notices from the Division of Taxation for 2005. In each case the client had remitted the balance due on their 2005 Form NJ-1040 on a timely basis - and each had documentation that the check was received and cashed by the DOT - but they were not given credit for the payment on the balance due notice!
The Division of Taxation had credited each of the 2005 payments to the client's 2004 Form NJ-1040 account!
NJ requires that tax practitioners file all full-year resident returns “electronically”, unless the client elects to “Opt Out”. Since I do not use tax preparation software the only option open to me is NJWebFile. Every single 2005 NJ-1040 that was FU-ed was submitted via NJWebFile.
It is happening all over again. This past Saturday there were two letters in my mail drop from clients that received “Statement of Account – Underpayment” notices from their “Uncle Jon”.
The notices suggested that the taxpayer did not send “Jon” the balance due on the 2008 NJ-1040. It requested payment of the balance due plus, or course, penalty and interest.
Both of the NJ-1040s in question had been submitted via NJWebFile, and the correct payment was made by the April 15th deadline using the online generated 1040-V payment voucher. The clients had in their possession documentation that the check had been cashed by the NJDOT
I emailed a contact in the NJ Division of Taxation regarding this FU, and sent a copy of my email to the new Acting Director of the Division.
I have since heard from three more clients who have received erroneous billing notices.
I have also heard from the Division of Taxation! It seems that the DOT did indeed do it again.
I received two emails. One was from my “contact” (the highlight is mine):
I have reviewed both accounts referenced below. In each instance, a payment was made to the division with the appropriate 2008 NJ-1040-V, but was misapplied to the incorrect tax year. Both accounts have been adjusted to reflect the payments:
We are looking further into the matter to determine if there is an error with the pre-printed forms generated from the NJWebFile system. It is our commitment to minimize the errors in receiving and processing tax payments.
Thank you for bringing the problem to our attention
The other was from the Acting Director of the Division (again the highlight is mine):
Mr. Flach –
Thank you for bringing this to my attention. I also hope that the problem is isolated. My apologies to you and your clients. I will monitor this matter until appropriately resolved.
Cheryl Fulmer
Acting Director

There is hope for the NJDOT yet! I was pleasantly surprised with the prompt reply from the Director. Let us hope that when Corzine is thrown out of office in the upcoming election she continues on as the Director.
This incident is further proof that the best way to get a response from the NJ Division of Taxation is via email. In the past any “snail mail” correspondence to the Division has pretty much been totally ignored. And it also shows that it pays to go to the top!
My course of action in future tax filing seasons is very clear. I will never again submit a NJ-1040 with a balance due via NJWebFile. I will prepare and submit all balance due returns manually. I expect I will have no problem convincing clients to “Opt Out” of electronic filing when I explain that the NJ online filing system is drastically flawed.
So, if you submitted your 2008 NJ-1040 via NJWebFile, as anyone can do online at the NJ Division of Taxation website, and you had a balance due, which you paid in full by the April 15th deadline, do not be surprised if you receive a bill from the DOT for payment of the balance due that you had already paid. If you do call the number on the notice and tell the Division that they FU-ed and applied your payment to the wrong year.


First of all, pardon me for mangling the Bard.
The time seems right for a definitive, and final, series of posts on the topic of “enrolled” income tax preparers vs “unenrolled” income tax preparers.
FYI, much of the background information in this post is taken from the latest editions of IRS Publication 947 (Practice Before the IRS and Power of Attorney), IRS Publication 470 (Limited Practice Without Enrollment) and IRS Circular 230 (Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, and Appraisers before the Internal Revenue Service). You can access these publications at

Let me begin by telling you that the Internal Revenue Service does not currently regulate the actual preparation of federal income tax returns. The above publications have nothing to do with who is authorized, or “enrolled”, or qualified to prepare a Form 1040. The total extent of IRS involvement in the business of actually preparing tax returns is the administration of penalties imposed on tax preparers (aka “preparer penalties”) most of which were created by Acts of Congress.

What the IRS does regulate, and identify who is authorized, enrolled or qualified, is the ability to “Practice Before the IRS”.

Publication 947 tells us that –

The Office of Professional Responsibility is responsible for administering and enforcing the regulations governing practice before the IRS. These regulations are published as Treasury Department Circular No. 230. The Office's responsibility includes making determinations on applications for enrollment to practice before the IRS and conducting disciplinary proceedings relating to those eligible to practice.”

The Pub also tells us that (highlights are mine) –

Practice before the IRS covers all matters relating to any of the following.

• Communicating with the IRS for a taxpayer regarding the taxpayer's rights, privileges, or liabilities under laws and regulations administered by the IRS.

• Representing a taxpayer at conferences, hearings, or meetings with the IRS.

• Preparing and filing documents with the IRS for a taxpayer.

• Corresponding and communicating.

Just preparing a tax return, furnishing information at the request of the IRS, or appearing as a witness for the taxpayer is not practice before the IRS. These acts can be performed by anyone

Who, under Circular 230, is authorized to “Practice Before the IRS”?

Attorneys. Any attorney who is not currently under suspension or disbarment from practice before the IRS and who is a member in good standing of the bar of the highest court of any state, possession, territory, commonwealth, or of the District of Columbia may practice before the IRS.

Certified public accountants (CPAs). Any CPA who is not currently under suspension or disbarment from practice before the IRS and who is duly qualified to practice as a CPA in any state, possession, territory, commonwealth, or in the District of Columbia may practice before the IRS.

Enrolled agents. Any enrolled agent in active status may practice before the IRS.

Enrolled retirement plan agents. Any enrolled retirement plan agent in active status may practice before the IRS. The practice of enrolled retirement plan agent is limited to certain Internal Revenue Code sections that relate to their area of expertise, principally those sections governing employee retirement plans.

Enrolled actuaries. Any individual who is enrolled as an actuary by the Joint Board for the Enrollment of Actuaries may practice before the IRS. The practice of enrolled actuaries is limited to certain Internal Revenue Code sections that relate to their area of expertise, principally those sections governing employee retirement plans

Student attorneys and CPAs are permitted to practice under limited circumstances.

An “unenrolled return preparer” is defined as “an individual other than an attorney, CPA, enrolled agent, or enrolled actuary who prepares and signs a taxpayer's return as the preparer, or who prepares a return but is not required (by the instructions to the return or regulations) to sign the return.”

While the above definition includes someone “who prepares a return but is not required (by the instructions to the return or regulations) to sign the return” – i.e. someone who is not paid for preparing the return, such as a parent preparing a return of a child or a son preparing the return of an elderly parent, or a person who prepares his own return - I must note that whenever I have used the term “unenrolled preparer” in the past, either in TWTP posts, guest posts, or comments on other blogs, I have meant a “paid” unenrolled preparer – an individual other than an attorney, CPA, enrolled agent, or enrolled actuary who prepares tax returns for a fee. I am sure most readers have been smart enough to understand that this is what I meant. However, perhaps I should use instead the term “unenrolled practitioner”.

The “Scope of Authority” of an unenrolled practitioner – the extent to which he/she can “practice” before the IRS - is explained in Publication 470 –

An unenrolled individual who signs a return as its preparer may act as the taxpayer’s representative if accompanied by the taxpayer, or by filing a written authorization from the taxpayer as provided herein in section 6. Such representation is limited to practice before examining officers of the Examination Division in the offices of District Directors and in the Office of International Operations, and may only encompass matters concerning the tax liability of the taxpayer for the taxable year covered by that return, subject to the limitations herein prescribed.”

An unenrolled return preparer who has prepared a taxpayer's return for a year which is under examination by the IRS can continue to deal with the IRS on behalf of the taxpayer during the examination of the specific return. But an unenrolled return preparer cannot represent a taxpayer before any other office of the IRS, execute closing agreements, claims for refund, or waivers; or otherwise represent taxpayers before the IRS.

In the course of my 38 tax season tenure tax returns I have prepared for a client have, on very few occasions, been selected for audit. In such a situation I meet with the client before the scheduled audit to discuss the issues and organize documentation, and, if the client so requests, I will attend the audit with the client to assist in explaining items reported on the return. Once or twice I have attended the audit alone as the client’s representative under a signed “Power of Attorney”. As an unenrolled practitioner I am allowed to do so.

All my clients “check the box” at the bottom of the tax return to allow the IRS to discuss the return with me.

This is the extent of my desire to deal with the IRS – in response to questions about or review of a return that I have prepared. I have absolutely no desire to represent taxpayers before the Internal Revenue Service in any other capacity. I do not offer “client representation” services and do not wish to get involved in direct dealings with the IRS regarding returns I have not personally prepared. So there is absolutely no reason why I should choose to become an “Enrolled Agent”.

I do agree that tax professionals who wish to represent taxpayers before the IRS on a regular basis on matters other than returns they have personally prepared should apply to take the Special Enrollment Examination and become an Enrolled Agent.

Attorneys and CPAs are authorized to “Practice Before the IRS” by virtue of having passed the bar or CPA exams. There are no special requirements for an attorney or CPA to take continuing education in federal income taxes, other than the standard CPE requirements that would apply to the particular “designation”. There is nothing in Circular 230 or any other IRS publication that states that an attorney or CPA is authorized or qualified or enrolled to prepare 1040s, nor is there anything that says that just because a person is an attorney or a CPA he/she is considered to be more knowledgeable or competent or proficient in the actual preparation of individual income tax returns than an “unenrolled” practitioner.

to be continued . . . . .

Before I go – I welcome, and look forward to, comments, both pro and con, from colleagues of all categories (enrolled and unenrolled) among the tax preparation and tax blog communities on this post and the others in the series - as long as you continue the discussion in a civil manner. I would also like readers to point out any true factual errors in my reading or interpretation of the IRS publications or with any other individual law or policy discussed in this series, or to verify that I am “spot on” – again as long as it is presented in a civil manner.


Wednesday, July 29, 2009


Because much BUZZ is time sensitive, and there appears to have been lots from late Friday afternoon through Tuesday afternoon lately, I have decided to make the Wednesday installment a permanent fixture so you can keep current.

* TAX GIRL Kelly Phillips Erb once again correctly answers an oft-asked question in her post “Ask the Taxgirl: Income Tax on Gifts”.
* Bill Perez provides a brief overview of the potentially partially refundable American Opportunity Tax Credit in “Planning for the American Opportunity Tax Credit” at WILLIAM’S TAX PLANNING BLOG.
* Bill also provides some detailed “Tax Planning Tips for Working Abroad” in another post.
* Bruce the taxguy returned to his weekly BUZZ-like “Passing the Week” post on Sunday (I wasn’t complaining, Bruce, just making a comment). As usual it “turned me on” to some interesting and informative posts from the Personal Finance blogs Bruce reads.
Most notable was “Seven Ways to Avoid Banks Taking Your Money in Fees and Charges” by Andy at SAVING TO INVEST.
And Bruce’s link to NO DEBT PLAN’s “Interesting Links for July 21, 2009” led me to “How Much House Can I Afford?” at FRUGAL DAD. “Dad” answers a question that should be asked by anyone considering the purchase of a home, and that should have been asked by a lot more people in the past few years.
As “Dad” puts it – “Unfortunately, many people are still rushing out to sign up for a mortgage without considering the years of financial obligation they are taking on, and what impact that will have to their overall financial plan down the line”.
* NJ tax professionals should check out “It’s Déjà Vu All Over Again”, and the follow-up post, over at my NJ TAX PRACTICE BLOG.
* While I reported on this topic in an earlier BUZZ, Kay Bell keeps us up-to-date on “back-to-school” sales tax holidays, including a great chart, in “Back-to-School Tax Holidays On Tap” at DON’T MESS WITH TAXES.
* New tax blogger TomK, whose blog THE MTBIKING TAX PRO I first introduced to you last week, must have been looking over my shoulder this past week-end. He has beat me to the punch with his two-part series that began with Monday’s “TdF, Tax Talk & the Cake Lady” by tackling a subject that I will also discuss in great detail in my Thursday and Friday posts this week. Under the “Tax Talk” portion he discusses the various types of tax preparers – “CPA’s, EA’s, un-enrolled tax preparers, your cousin Guido, and you. You could also throw in tax lawyers”.
It is always good to find a colleague who agrees with you (highlight is mine) –
I know some CPAs and also have fixed some CPAs messes that they made for some of my clients. In my book, CPAs are just what the letters stand for – certified public ACCOUNTANTS who main business is accounting not taxes. In fact if you go to any college and look at the courses you need to become a CPA – you’ll see it to be about 98% accounting stuff (ledgers, accounts receivable, accounts payable, profit & loss statements, balance sheets, cash flow, etc.) and 2% taxes courses. But yet for some strange wacko way of thinking, the general public thinks that CPAs are top notch tax people. Yes, you have some who do take the time and up-date themselves on new tax laws, etc. but in my book them are far and few between. I know some personal friends who are accountants and they will tell you right off THEY HATE DOING TAXES! So if they have that attitude do you really think their going to do the best they can for you?
And regarding we “unenrolled” practitioners – “The mass majority of them are honest, hardworking people who go to constant yearly tax up-dates and schooling, etc”.
Right on – TomK! BTW – when your title mentioned TdF I thought you were going to talk about the half-price TKTS booth at Times Square.
* Thanks and a tip o’ the hat to TAX RASCAL for including my TWTP “What A Country!” post in his “Free Money, Expensive Raises, School Shopping, and Cheap Guns” list.
The Rascal’s post led me to a related item - “Where are the First Time Home Buyer’s Checks?” at the RAPIDTAX BLOG.
* I came cross an excellent “bottom line” on our current tax system in the “Smart Money 2009 Tax Guide” (highlight is mine) -
The purpose of our federal tax system should be to raise revenue in a reasonably predictable, efficient and fair manner. The current system doesn’t do any of these things – mainly because it’s too complicated to work right. The problem has reached scary proportions, but don’t blame the IRS. It’s the politicians’ fault. Now is a great time to tell them you want a simpler tax system if they want to keep their jobs.”
* Joe Kristan has provided his 2+ cents on my “Manual Labor” discussion in his post “Last of the Mohicans”. As always, be sure to check out the comments.
* Tuesday’s news update at The Small Business Taxes and Management website cites a Tax Court case to remind us that “Deductions for auto use and meals and entertainment require more documentation than other expenses”.
* While it has absolutely nothing to do with taxes I just plain enjoyed GEEKDAD’s nostalgic “100 Things Your Kids May Never Know About”.
I can certainly attest to the fact that the “pay phone” is something that “will not be passed down the line to the next generation of geeks”.

Tuesday, July 28, 2009


A manually prepared tax return is not automatically inferior to or less accurate than a tax return prepared using software. Just the opposite can be true. The basic law of software applies here - Garbage In, Garbage Out. Individuals and tax preparers alike should not rely on tax software as a substitute for knowledge of Tax Law and experience in actually preparing tax returns.

Each tax season I prepare about 400 sets of returns manually. In my 37 years as a paid tax preparer I have never used tax software to generate a 1040, 1040A, or, for that matter, a 990, 1065 or 1120.

Whenever I attend a tax seminar and the instructor asks who still prepares returns manually my hand is among the two or three that go up (on occasion it is the only hand). This is usually followed by a statement by the instructor to the effect – “Well you are the only people here who really know tax law”, or “who really know how to prepare tax returns.” At a National Society of Tax Professionals seminar a few years back the instructor, the Society’s Executive Director, wanted to shake my hand.

Whenever someone asks me what tax software I use I simply point to my head – indicating my brain.

During the session on common mistakes made by preparers at the IRS Tax Forum I attended two years ago the instructor went so far as to say that those who use tax software to generate 1040s have basically become nothing more than glorified data entry clerks. I totally agree!

While I have no problem with tax practitioners using preparation software in their practice, I very strongly believe that all tax preparers must first learn how to prepare 1040s (and 1040As) by actually preparing a variety of different returns manually – either in classroom education or via on the job training – and then, and only then, after they "know what they are doing", learn how to use specific tax preparation software.

I am not alone in this opinion. In a comment to one of my TWTP posts Charles E McCabe, founder and CEO of Peoples Income Tax, Inc, which operates The Income Tax School, said (the emphasis is mine), “I believe computerized tax return preparation is better as long as the preparer first learns how to prepare returns manually, as they do in our courses in The Income Tax School.”

And it is very, very, very important for tax practitioners at all levels of experience and proficiency who use 1040 preparation software to thoroughly check the finished return before signing it – as thoroughly as one would check a manually prepared return. One should never assume that just because a return is prepared using software it is automatically either legally or mathematically correct.

Because I do not use tax preparation software I cannot file federal returns electronically.

As for the advantage of an electronically filed return over a manually submitted one - Russ Fox, E.A. explains in a post at his blog TAXABLE TALK, “I have been told that the process for a printed return (this would include those that are manually done) is that they are transcribed by clerk-typists and then follow exactly the same path as electronically filed returns”.

The reason Russ prefers electronically submitted return, and I agree with his thinking, is – “I trust my ability more than a clerk-typist's. I think that there's a slight advantage for electronic filing versus paper filing for audits, but that's mainly because of the possibility of transcription errors by the clerk-typist.”
Once I am able to submit federal income tax returns electronically without having to purchase expensive and flawed software, and without having to give my fingerprints to the government and undergo a background check, I will happily do so.

UPDATE - Joe Kristan has added his 2+ cents in the post "Last of the Mohicans" at THE ROTH AND COMPANY TAX UPDATE BLOG. Be sure to read my comment!

Monday, July 27, 2009


I just returned from the Post Office where I mailed out to a client my first 2008 Form 1040X (amended return) filed to claim the $8,000 First-time Homebuyer Credit for a home purchased in 2009. Within the next 6 weeks my client will be receiving a check from the Internal Revenue Service for $8,000.00!

What did we have to do to get this free government grant? All we did was enter the taxpayer’s name, Social Security number, date the home was purchased and Adjusted Gross Income on IRS Form 5405.

We did not have to attach a copy of the Closing Statement or a certified copy of the transfer of title. The taxpayer didn’t even have to separately sign the Form 5405 to certify that she purchased a home in 2009 and that the purchase qualifies for the credit.

I had to provide more information to the State of New Jersey to get an $80.00 tenant rebate!

Don’t get me wrong, I am very happy for my client. She met the requirements set forth by Congress and is legally entitled to this free money – so she should by all means get it. If Congress is going to throw away money why shouldn’t some of it get thrown to my clients?

I hope she will make good use of the $8,000 – pay down her mortgage or pay off credit card debt, make capital improvements to the home, purchase a long-term CD or some blue chip stock, or maybe open a ROTH IRA. But even if she uses the money to take a luxurious high-end cruise it is ok – because she will never have to give the money back!

Not so with the handful of 2008 home-buying clients whose timing was not as fortuitous. They qualified for the credit because of a 2008 home purchase and got $500 less and will have to pay the money back! Bummer. I truly hope they made good use of their $7,500.


It is very important for an individual who chooses to have his/her return prepared by a tax practitioner, enrolled or unenrolled, to be aware that you are ultimately responsible for all the information reported on your return.

The cover letter that I include with all finished returns contains the following –

“Please examine these returns carefully to be sure all items of income and deduction have been accounted for properly. You are responsible for all the information reported on the returns. If you find anything that is not in order or that you do not understand contact us immediately.”

I have come across several real-life examples in blog posts recently where practitioners (enrolled and unenrolled) overlooked legitimate itemized deductions but claimed excessive bogus employee business expenses or other deductions. While in these cases the preparer has committed a tax fraud – the taxpayer is equally responsible because they signed and submitted the return.

It is important to review all finished tax returns carefully before you sign and mail them.

If you made a legitimate documented charitable donation of $1,000 to a charity, but the deduction for contributions on Schedule A is only $300 - ask the tax preparer to explain.

If you have never attended a job-related conference in your life and your job does not require any special uniforms, but the return includes $3,000 for conferences and conventions and $500 for work clothes and uniforms – ask the tax preparer to explain.

If you usually get a moderate refund but this year, the first year using a new tax practitioner, you are getting $6,000 back – ask the tax preparer to explain.

Never just automatically assume the return is correct – regardless of whether the practitioner who prepared the return is an Attorney, CPA, EA, enrolled agent, or “unenrolled” practitioner, and especially if it was prepared by a commercial chain!

The error or omission does not have to be a result of incompetence or fraud. Tax preparers are human and can make mistakes just like everyone else. Hey, even I make a mistake or two each tax season (ha! ha!). I would rather have the taxpayer point it out before the return is mailed then having it discovered after the fact and needing to spend unbillable time preparing an amended return, or, worse, have the error discovered by the IRS.

And a word of advice – if you spot something that you do not understand on a finished return do not call the practitioner and tell him/her that he/she has made an error. When you call or email simply say that there is an item on the return that you do not understand.

Just because you do not understand an item on a return, or think that the preparer has understated or overstated something, does not mean that there is an error. You do not know all the intricacies of the Tax Code – presumably your tax preparer does.

I personally hate it when I get a call or email from a client whose return I have prepared and the first words out of his/her “mouth” is, “You made a mistake”!

It is also very important to check all finished returns to make sure that all Social Security numbers entered on the various pages of the return are correct. An error on a Social Security number can at least delay your refund and at worst cause the IRS to "redo" your return removing deductions and credits and changing the filing status.

There is no reason that an obviously bogus return should be submitted to the IRS or the State without the taxpayer being a “co-conspirator”.


Saturday, July 25, 2009


The Internal Revenue Service is inviting the public to submit comments on the regulation of tax preparers.

“We are casting the widest net possible by seeking comment from not only tax preparers and the industry but also from the general public,” announced IRS Commissioner Douglas Shulman. “All ideas are welcome at the table.”

I previously reported that two panel discussions involving representatives of consumer groups and tax professional organizations will take place at the Ronald Reagan Building amphitheater in Washington DC starting at 9 a.m. on July 30. Anyone interested in attending should confirm attendance by sending an e-mail message to:

Comments should be submitted to CCPA:LPD:PR (Notice 2009-60), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. Comments may also be e-mailed to:

I sent my comments directly to Commissioner Shulman a month ago and received a response from a “flunky” acknowledging receipt and telling me that it was being passed on to some lower-level person.



* “Just Tax”, a song parody shown at a recent GOP conference, is making the rounds on tax blogs. Kelly Phillips Erb was the first to bring it to my attention in her post “'Just Tax’ Parody Meant to Encourage the GOP”.
Kelly had previously written a post about the tax troubles of Foxy Brown. While I commented on twitter that I thought “Foxy Brown” was a Pam Grier movie (and it is) I do admit that I have heard of that singer before. But WTF is “Lady Gaga”?
* Kelly also reports on an interesting situation in which the IRS denied a deduction for a taxpayer who donated their home – but not their property – to the local Fire Department to use for training purposes in her post “Liar, Liar, House on Fire”.
Apparently – “While not a common practice, such donations are apparently made from time to time for use in fire department and police department training. The homes can be used for all sorts of training purposes, including learning how to identify arson and search and rescue drills.”
Many years ago I donated my Karman Ghia to the local Police Department for use in demonstrating the “Jaws of Life”. I did not itemize at the time, so there was no tax deduction.
As stated above, the IRS did not allow the deduction, and the taxpayer is taking the Service to Court. I look forward to Kelly’s continued coverage of this item.
This issue is also the basis for her Fix The Tax Code Friday question
* Susan Bradford tells us that, “The states of Alabama, Connecticut, Georgia, Iowa, Mississippi, Louisiana, Missouri, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Vermont and Virginia along with the District of Columbia are offering tax holidays for back-to-school shopping on various days this month and next” in her post “Taxpayers in 15 States Will Enjoy Sales Tax Holidays” at her SUCCESSFUL TAX STRATEGIES blog.
* Stacie Clifford Kitts reminded us that “Federal Minimum Wage Increases to $7.25” yesterday at her blog MORE TAX TIPS.
* Trish McIntire weighs in on the recent TIGTA report on paid preparers in “TIGTA on Tax Preparers” over at OUR TAXING TIMES.
In lieu of or until actual registration and licensure one would think that the IRS would be able to track preparers using the PTIN. I can’t think of any reason why a tax preparer would prefer to use his Social Security number when a PTIN is available.
I do not recall if the report indicated that when an erroneous identification number was discovered this was followed through by a preparer penalty or at least an inquiry.
* When I discover a new tax or related blogger one of the first things I do is to check out their various blogrolls to look for more new tax or related blogs. That is how I came across STUFF ACCOUNTANTS LIKE by pfi and the post “Acronyms, What are Your Favorites?”.
I have always been a big user of acronyms. Clients and readers of TWTP are aware that GDE is God Damned Extensions and that the "clean" version of DFB is Damned Fool Bureaucrats.
I checked through the 92 comments to the post for some new ones. Here are some I liked –
CRAP - Conveniently Rationalized Accounting Principles
CPA - Cut and Paste Artist (I always thought CPA stood for Constant Pain in the Arse)
JFDI – Just F**king Do It
SWAG: Scientific Wild Ass Guess
DILLIGAF- Does It Look Like I Give A F**k (I expect I will be using this a lot in the future)
WITTB – What it takes to balance
I was glad to see others used WTF (2 related meanings - I used it above) and FUBAR.

Friday, July 24, 2009


+ My post “1040 FYI - GROSS PROCEEDS AND COST BASIS” appears under the category “Investing” in the “Carnival of Everything About Personal Finance – 6th Edition” at NIL2MILLION.COM.

The same post is also included in the “98th Carnival of Financial Planning” at LIVING ALMOST LARGE, way down at the bottom under “Taxes”. Actually, like Oliver Twist, I am last on the list – saving the best for last I guess.

And it is also in “Money Hacks Carnival #74 – Saturday Morning Cartoons Edition” over at $UBURBAN DOLLAR. It is the only entry under “Taxes” in the “GI Joe” grouping.

+ “License and Registration, Please”, an adaptation of one of my initial TWTP posts on the subject of regulating unenrolled tax practitioners, appears in the View Point column of the Summer 2009 issue of the National Association of Tax Professional’s quarterly TAXPRO JOURNAL!

This item was written at the beginning of the debate on registering and licensing tax professionals. Much more has been added to the discussion by me since its writing


I just emailed a client with the answer to a question about deducting expenses for a “mixed use” vacation property, and thought it would be a good idea to post my answer here, considering we are in the height of the summer rental season:
“Here is the word -
In general expenses for a "mixed-use" property - i.e. both personal use and rental - are allocated based on the number of days used for each activity.
You take the number of days rented and divide this by the total number of rental and personal use days. For 2007 your property was rented for one week and had two weeks of personal use. So 1/3 of the operating expenses (7 days / 21 days) were deducted against the rental income.
An alternative method is used for deducting real estate taxes and mortgage interest. Since real estate taxes and mortgage interest "accrues" continuously throughout the year these expenses are deducted based on actual rental use as a factor of the entire 365 day year. Since you rented the property for only one week in 2007 we deducted 1/52 (1 week divided by 52 weeks) of the real estate taxes and mortgage interest against the rental income. The remaining 51/52 of real estate taxes and mortgage interest was deducted on your Schedule A.
Of course expenses directly related to the rental use - s
uch as commissions paid to rental agencies, any "merchant" license or registration fees, advertising, cleaning and maintenance before, after or between rentals and additional special "renter's" insurance - are 100% deductible.
When the personal use of a "mixed-use" vacation property exceeds the greater of 14 days or 10% of the days rented the property is considered to be primarily a "home" and deductible expenses are limited to rental income received. If you collect $1,000 in gross rent for the year your deductions are limited to $1,000. Unused expenses can be "carried over" to future years.
Rental expenses for a property considered to be primarily a home are deducted in the following order -
First you deduct the allocated real estate taxes, mortgage interest, and casualty loss and direct expenses.
If the total of these deductions equals or exceeds the gross rental income then you must stop here. No other deductions are allowed.
If the total of these deductions is less than the gross rental income you next deduct allocated "operating expenses", such as insurance and utilities - up to the remaining amount of gross rental income.
If there is any gross rental income remaining after deducting these two types of expenses then, and only then, can you deduct depreciation.
In other words - while allocated real estate taxes, mortgage interest, and casualty loss and direct expenses can create a rental loss, allocated operating expenses and depreciation cannot create or increase a rental loss.
Days you spend at the property that are "substantially" used to clean, paint, or repair the property are not considered to be "personal days" for purposes of either the allocation percentages or determining if the property is primarily a home.
ys used by or rented to family and friends are considered to be personal days, unless the rent paid is considered to be a "fair market" rent. This fair market rent can be less than the actual rent charged to "strangers", as the Tax Court has accepted that family and friends are expected to take "exceptionally good care" of the property and there are no commissions paid on the gross rent. A good number to use is 80% of what you would charge the "great unwashed masses".
ot it?”

Thursday, July 23, 2009


I bet you probably knew that fees paid to tax professionals (and some not so professional, like Henry and Richard) to prepare your federal, state and local tax returns are deductible.

But did you know that the deduction is not limited to the fee?

Let’s begin with the basics.

Tax preparation costs are deductible as a “nontrade or nonbusiness” expense under Internal Revenue Code Section 1.212-1(l) –

Expenses paid or incurred by an individual in connection with the determination, collection, or refund of any tax, whether the taxing authority be Federal, State, or municipal, and whether the tax be income, estate, gift, property, or any other tax, are deductible. Thus, expenses paid or incurred by a taxpayer for tax counsel or expenses paid or incurred in connection with the preparation of his tax returns or in connection with any proceedings involved in determining the extent of his tax liability or in contesting his tax liability are deductible.”

Generally tax preparation costs are deductible as a miscellaneous expense on Schedule A, subject to the 2% of Adjusted Gross Income (AGI) exclusion. Because of this most taxpayers do not receive a tax benefit for tax preparation fees. In the “good old days” before exclusions and phase-outs were all the rage we would tell clients that, if they could itemize, our fee for preparing their tax returns were fully tax deductible – and they would be “reimbursed” by “Uncle Sam” for up to half of the fee (the top federal bracket used to be 50%)!

However IRS Revenue Ruling 92-29 states that taxpayers can allocate tax preparation costs and deduct costs related to a self-employed business on Schedule C, related to a farm operation on Schedule F, and related rental and royalty income on Schedule E.

Tax preparers will know how their fee was determined and can provide a statement to the taxpayer that indicates how much of the tax preparation fee was related to the taxpayer's business, farm, and/or rental and/or royalty income.

A taxpayer who reports rental income on his 2008 Schedule E can deduct, for example, $50.00 of a $150.00 tax preparation fee paid in March 2009 – the cost of calculating depreciation and preparing the 2008 Schedule E – on the 2009 Schedule E and the remaining $100.00 on the 2009 Schedule A.

There is a definite benefit to being able to allocate tax preparation costs. The obvious one is that you get a full deduction for the allocated portion. And, because a Schedule C, E or F deduction will reduce your AGI, you may also increase a multitude of deductions and credits that are affected by AGI. If you are taxed on your Social Security benefits you reduce your AGI by the equivalent of up to 185% of the actual allocated fee. In the case of a profitable Schedule C you will also reduce the self-employment tax liability.

IRS Publication 529 (Miscellaneous Deductions) states that deductible tax preparation fees “include the cost of tax preparation software programs and tax publications. They also include any fee you paid for electronic filing of your return.”

So if you are foolhardy enough to attempt to use a “box” to prepare your tax return you can deduct the cost of the TurboTax or other software package, plus any service fee related to electronically filing a self-prepared return.

If you choose to pay your income tax liability via credit card the processing company will charge you a “convenience fee” of usually about 2.5% of the payment. Initially, as per SCA 200115032 (SCA = Service Center Advice Document), the IRS held that “convenience fees paid by taxpayers in connection with the electronic payment of tax liabilities were not deductible” because these fees were “not related to or necessary to the determination of a tax liability”.

However an Office of Chief Counsel Memorandum issued on January 5, 2009 (PMTA 2009-002) concludes that “a taxpayer may deduct the convenience fee charged for paying individual income taxes with a credit or debit card, as an ordinary and necessary expense under Section 212(3) of the Internal Revenue Code.” The Chief Counsel further concluded “the credit and debit card convenience fees charged for paying individual income tax electronically are expenses paid in connection with the collection of tax.”

The Chief Counsel Memorandum begins with the caveat – “This Chief Counsel Advice responds to your request for assistance. This advice may not be used or cited as precedent.” However it does provide guidance on the current IRS thinking on an issue.

Under “expenses paid or incurred in connection with the preparation of his tax returns” you are also allowed to deduct auxiliary expenses connected with the preparation and submission of your return.

There was, I believe, a Tax Court decision that concluded a taxpayer could deduct round-trip mileage to consult with his tax preparer as well as postage expenses and photocopying expenses related to the preparation and submission of the return. I remember specifically posting about this decision, but a “google” search of the net, and a search of my blog posts at current host “”, could not find the reference. Perhaps the post I wrote on the decision was during my tenure at “”. Can anyone out there provide me with the specific reference?

When I had an office open to the public many clients would drive from their home in South Jersey to my Jersey City location. A round-trip could be 150 to as much as 200 miles. They could deduct the standard mileage allowance for business travel for these 150 to 200 miles as a tax preparation cost, which could add over $100.00 to the deduction!

Currently about 2/3 of the returns I prepare are mailed to me at my “mail drop”. In most cases the tax “stuff” is sent via Priority Mail. These clients can include the $5.00 Priority Mail fee in their deduction for tax preparation.

In addition, as an expense of the “collection” of federal income tax, it appears that a taxpayer can also deduct the cost of postage to mail the finished return to the IRS, or to their state tax authority.

We saw above that IRS Pub 529 says you can deduct the cost of “tax publications”. This includes newsletters (online and print), books and special reports on tax related topics. If you purchase any of my tax-related special reports the cost is deductible.

So, if you didn’t know that the tax deduction for tax preparation costs is not limited to the fee you pay to a tax pro for preparing your return, you do now!


Wednesday, July 22, 2009


* TAXGIRL Kelly Phillips Erb provides a good overview of quarterly estimated taxes in her post “Ask the taxgirl: Estimated Payments”.
While the 4th quarter estimated payment is not due until January of the following year (Jan 2010 for tax year 2009) I advise my clients who are making state estimated tax payments and who will be able to itemize to make the 4th quarter payment in December (Dec 2009 for tax year 2009) in order to get the additional deduction on the current return – unless, of course, they will be a victim of the dreaded Alternative Minimum Tax (AMT).
* Bruce the taxguy decided to pass on his weekly BUZZ-like “Passing the Week” post this Sunday and instead went for an interesting change of pace by addressing his comments to current Accounting students.
Dear Student of Accounting”, which turns autobiographical at the end, was “inspired” by Monica Lawver’s post “Accountant’s Got Talent” at her CONFESSIONS OF A CPA blog.
* Bruce continues in a non-tax vein with his Monday post, a very interesting and informative discussion on “History/Origin of Piggy Banks”.
* I discovered a new (to me) tax blog titled BED BUFFALOES IN YOUR TAX CODE which is written by Mary O'Keeffe (she refers to trickier parts of learning tax law as “Bed Buffaloes”), a professor at Union College in Schenectady County. New York who is involved with the IRS Volunteer Income Tax Assistance (VITA).
She has joined the debate on the regulation of unenrolled preparers in three posts – “The Debate on Regulating Preparers” and “How to Regulate Tax Preparers Part I and Part II”. Be sure to read the comments for the first post – an interesting discussion ensues.
I have added Mary to my list of tax blogs to visit daily.
* It has been said time and time again – but it bears repeating. This time by Joe Kristan of THE ROTH AND COMPANY TAX UPDATE BLOG – “When You Get a Notice From a Tax Agency Make Sure it’s From a Tax Agency”.
And even if you are sure it is a legitimate notice from a true tax agency do not assume it is correct. What Joe says regarding Iowa is also true for NJ – “In fact, it is rare that we see a notice from the Iowa Department of Revenue that is actually correct”.
Welcome back from vacation, Joe. Glad to have you posting again.
* A tweet from a fellow twit lead me to this must read for anyone facing foreclosure – “The Tax Implications of Foreclosures”.
* In the latest IRS Headliner (Volume 271) “IRS Offers Tips on Rental Real Estate Income, Deductions and Recordkeeping” – a very thorough overview of the topic.
I am considering adopting and expanding on it in a series of blog posts.
* I would like to welcome a new tax professional to the “tax blogosphere”. Thomas J. Kaminski, a Tax Consultant from Michigan who has been preparing 1040s since 1987, launched THE MTBIKING TAX PRO on Monday to “update my clients on tax changes”, “spout off and post every now and then about tax changes and laws and all that good stuff”, “throw in some tid-bits from my other blogs (which I'll be doing away with soon) about MTBiking, Chess, favorite books, personal secession, etc. all in one place”.
Tom describes what he does in his practice as “JUST TAXES - no accounting, no bookkeeping, no washing windows, no hair-cuts”.
I have added Tom to my list of tax blogs to visit daily (except, of course, during tax season) and look forward to Tom’s posts – especially when he “spouts off” about tax changes and laws and all that good stuff.
* Jeff Rose gives us a good detailed explanation of the “5 Year Rule for Roth IRA Qualified Distributions” over at GOOD FINANCIAL CENTS.
* Roni Deutch has begun a weekly “Ask the Tax Lady” feature at, where else, THE TAX LADY BLOG, answering questions posed to her on Twitter, MySpace and Facebook.
She answers 4 questions this week. #3 is “When did April 15 become tax day?”. If I may add to her answer –
When Congress completely revised the Tax Code in 1954, the filing deadline was changed to the current April 15. The IRS said the change was made to "spread out the peak workload". However, others have speculated that, as "Uncle Sam" had become aware of more refunds going to the middle class, extending the deadline gave the government more time to hold on to the money.
* The Treasury Inspector General for Tax Administration (TIGTA) is at it again. This time they have issued a report titled “Inadequate Data on Paid Preparers Impedes Effective Oversight” (2009-40-098).
The report suggests that the “Internal Revenue Service (IRS) should require paid tax return preparers to use unique identification numbers when filing tax returns on behalf of clients”.
I thought that the IRS was already doing this with its PTIN registry. But apparently “IRS data on preparers is stored on twenty-two different systems, which are not integrated”.
As a paid preparer I must sign each return prepared and include by business name, address and EIN as well as my personal identification number. This used to be my Social Security number, but a few years ago the IRS created a PTIN registry to assign ID numbers to tax preparers so we would not have to make our Social Security numbers available to the great unwashed masses.
* New found blog APRIL15.COM provides another example of why one should never use one of the “so called "store-front" tax preparation services” (you know who we mean) to prepare your 1040 in the post “A Sure Audit!”.
The cafone who prepared the 2008 return overlooked legitimate deductions while “creating” out of thin air excessive employee business expenses.

Saturday, July 18, 2009


It appears that most of the BUZZ for the week occurred in the beginning of the week. This is what I get for doing a Wednesday BUZZ.

* The Tax Foundation announces the publication of a new “Fiscal Fact” which discusses two previous tax-related court cases where Judge Sotomayor participated in “Report Looks at Past Sotomayor Tax Decisions” at the TAX POLICY BLOG.

* Kay Bell brings us the distressing news that “State + Federal Health Tax = 50%-Plus Rate” under proposed House bill H.R. 3200, “America's Affordable Health Choices Act of 2009”.

A related article from the New York Post reports that a “Terrifying 57% Tax Looms For Biggest Earners” in New York City!

* Want to know “How to Apply for Social Security Benefits”? Kristine McKinley tells you how at her YOUR GUIDE TO SOCIAL SECURITY RETIREMENT INCOME blog.

* I had a very interesting discussion on licensure of unenrolled tax practitioners with Charles E McCabe, founder of The Income Tax School in the comments section of my Friday post on “A LITTLE THIS-A AND A LITTLE THAT-A – WITH THE EMPHASIS ON THE LATTA”.

It seems we share the same views on many aspects of this issue, including the belief that the AICPA is against registration of unenrolled preparers because they “view IRS licensed preparers as a potential threat to sustaining their market share”.

Check out our comments and join in the discussion if you wish, as long as you remain civil.


Friday, July 17, 2009


The NJ Division of Taxation announced that it has mailed out 129,000 reimbursement checks for 2008 to qualified applicants who filed a Property Tax Reimburement application (Form PTR-1 or PTR-2) by the original June 1 deadline yesterday. According to NJDOT, the checks will average a “record high” of $1,132.00.

Those who filed after the original deadline will receive their checks as their applications are processed.
The official press release from Corzine's office states -

Under the Senior Freeze Program, qualifying senior and disabled citizens are directly reimbursed by the State for the difference between the amount of local property taxes paid in the "base year" (the year that applicants became eligible and first filed for the program) and the amount of property taxes paid for the reimbursement year. Applicants originally had until June 1 to file for this benefit, but in order to encourage all eligible residents to apply, Governor Corzine extended the deadline to August 17, 2009.”

Leave it to Corzine, in re-election mode, to take credit for extending the June 1st deadline for filing the PTR application to August 17th. Each and every year the initial deadline is set at June 1, then it is extended to August 15 (or closest business day), then it is finally extended to October 31st.

Applicants with questions or who want to check the status of their reimbursement checks may call the Property Tax Reimbursement Hotline at 1-800-882-6597. Information about the program is also available on the Division of Taxation's Web site. Click here.


A few items of interest -
* I have recently been notified that “The Wandering Tax Pro” is on the list of “Top 25 Tax Blogs by Blogrank”.

Invesp Consulting This list tracks close to 20,000 blogs and evaluates them by category based on 16 different factors. It just took IC over 8 months to develop this process.

Blogs of a category are ranked in “the ultimate rank” and separately by Feedburner RSS membership, by unique monthly visitors, by Yahoo indexed pages, by Google indexed pages, by number of incoming links, by the ratio of incoming links to numbers of pages, by pages per visit, by Google PR, by Technorati rank, by Alexa rank, by Compete rank, and by Social sites.

TWTP is currently #9 on the overall list – and in the top 10 on several of the other more specific lists. The numbers are updated daily, so the rankings could move up or down each day.

* If you have recently gotten married or plan to get married in the near future, the IRS has some tips to help you avoid stress at tax time. Summertime Tax Tip 2009-04 provides “Tax Tips for Recently Married Taxpayers”.

You should pay special attention to Tax Tip #1 -

Notify the Social Security Administration Report any name change to the Social Security Administration, so your name and SSN will match when you file your next tax return. Informing the SSA of a name change is quite simple. File a Form SS-5, Application for a Social Security card at your local SSA office. The form is available on SSA’s Web site at, by calling 800-772-1213 or at local offices.”

I have been telling clients and readers alike to do this as soon as you return from the honeymoon for years now.

* The Internal Revenue Service has announced that it will conduct a series of public forums at which individuals and representatives of “diverse constituent groups” will be able to provide input on the topic of regulating tax preparers.

The public forums, a crucial part of an effort launched in June by IRS Commissioner Doug Shulman to help ensure tax preparers are qualified, ethical and provide a high level of service, will kick off on July 30 in Washington, D.C.

Two panels are scheduled for a forum on July 30. The first panel will give consumer groups an opportunity to provide recommendations. These groups include the AARP, Consumer Federation of America, Center on Budget and Policy Priorities, National Community Tax Coalition and Low Income Tax Clinics.

The second panel will be made up of tax professional groups, including the American Institute of Certified Public Accountants, the National Association of Enrolled Agents, the National Association of Tax Professionals and the National Society of Accountants.

The panels will take place at the Ronald Reagan Building amphitheater starting at 9 AM. If you would like to attend and add your 2+ cents worth to the discussion you confirm your attendance by sending an e-mail message to:

The dates and locations of additional meetings will be announced by the IRS (and here) as they become available. Small groups of tax preparers will also have the opportunity this summer to meet with IRS representatives to present their ideas at the IRS Nationwide Tax Forums.
If you are planning to speak up for registration and licensure of all tax preparers be sure to mention the need for "grandfathering".

Wednesday, July 15, 2009


There has been a lot of good BUZZ lately – which calls for another special Wednesday edition. I may possibly make the BUZZ a twice-weekly event from now on.

* Oi vey! WebCPA reports that “IRS Overlooks Hundreds of Big Overdue Accounts”!

According to the item (highlight is mine), “A new report from the Treasury Inspector General of Tax Administration found that as of Dec. 22, 2007, there were 2,454 individual taxpayers in the IRS’s potentially collectible inventory each owing over $1 million in taxes, interest and penalties. The IRS was actively pursuing 2,006 of the delinquent taxpayers for collection, but TIGTA identified 448 accounts totaling approximately $1.2 billion that were in a queue awaiting field assignment or had been shelved.”

* It seems that TIGTA has been busy. Kay Bell tells us about a TIGTA report titled "An Appropriate Methodology Has Been Developed for Conducting the National Research Program Study to Measure the Voluntary Compliance of Individual Income Taxpayers." In her post “Tax Audits from Hell for Eternity” at DON’T MESS WITH TAXES.

Apparently, according to TIGTA, these “audits from hell”, aka National Research Program (NRP) audits, “are doing their job” and we should “expect these random audits of individual income tax returns to continue indefinitely”.

These audits are random in nature and a version of the real audit from hell from 1980s - the Taxpayer Compliance Measurement Program (TCMP) – in which every single line on a return chosen had to be verified. For example, if claiming Married Filing Joint you had to show the IRS a copy of your marriage certificate.

While I did not have any personal dealings with a TCMP audit, one of my clients was chosen for review under NRP. As I described in an earlier post on the subject - “the IRS couldn’t have made a better choice if they had asked me which of my clients I would want to be selected. They chose a client whose entire life is well documented via computer and hard copy back-up. We didn’t even go to the audit. I prepared a huge mailing of copies of all the requested documentation and mailed it to the auditor. Needless to say there was ‘no change’. I think the volume of my mailing intimidated the auditor. In gathering the information for the review we discovered a $25.00 error which I disclosed in my cover letter – but this was not indicated in the final audit report.”

* And before we leave DON’T MESS WITH TAXES, Kay points out that the “Stimulus Rebate Confusion Continues”, expanding on an item that I mentioned in last Wednesday’s special BUZZ (which Kay credits in her post).

Kay echoes my sentiments when she tells us, “I hate these gimmicky tax breaks”, referring to tax rebates. She goes on to say, quite correctly, “Politicians -- and yes, I use that word pointedly -- make most of these changes primarily for political gain, not because it's good tax policy. And the electorate encourages them, by clamoring for such immediate money-back options.”

Her bottom line is worth repeating again and again -

Instead, federal lawmakers should get serious about making real, constructive and permanent changes to our tax system, like, for example, eliminating the alternative minimum tax. This parallel tax system has been tripping up more taxpayers every year for, uh, forever it seems, but every year, Congress can only seem to manage a temporary fix.

Sure, writing good tax policy is not an easy job, but it's not an impossible one either. And that's what Congress should be doing instead of crafting legislation that's designed simply to get them perpetually reelected

* Now that Bruce, the taxguy, is back to a regular schedule of blogging we can look forward to his weekly BUZZ-like “Passing the Week” post.

As for Bruce’s calling a fellow tax blogger a “Pompous Arrogant Ass” – I certainly concur! I have used much stronger language in my descriptions, although not in print, considering the nasty and derogatory tone the PAA’s responses to my posts and comments on a certain subject took. It turned from a civil discussion (at least on my part) to a personal attack on me. My thanks to Bruce for attempting to come “to my rescue”.

While Bruce and I read pretty much the same tax blogs, he does a bit more “wandering” among the Personal Finance blogosphere, and his Sunday recap always takes me to good tax and financial entries from non-tax bloggers. This past Sunday it took me to “Taxes Must Go Up Eventually” by Kevin at NO DEBT PLAN, a sad commentary on what we have to look forward to.

As to the question why must taxes go up eventually? - “Because no one in Congress is going to brave enough to cut spending in such a dramatic fashion to fix our problem. We’re spending more than we earn. We won’t spend less. There’s only one other side of the equation: earn more. How do governments earn more? Higher taxes.”

* Speaking of Bruce, he starts the week-off at taxguy with a discussion of “Home-Office Deductions”, with some input from yours truly.

* TAXGIRL Kelly Phillips Erb gives us the word that fat naked idiot “Richard Hatch Wants to Leave the Country”, apparently to appear on the 10th Anniversary edition of SURVIVOR, the piece of excrement that launched the so-called “reality show” genre. The cafone is currently under house arrest for tax evasion. Don’t you remember, he forgot to claim the $1 Million prize he won on tv on his tax return!

Actually it is alright with me if he leaves the country - as long as he promises never to come back! And, as Kay Bell tweets, “only if he's prohibited by court order from ever being nekkid again ... for any reason!

However, as it turns out, according to a subsequent news item, “A federal judge in Rhode Island says 'Survivor' winner Richard Hatch cannot leave home confinement early to star in a 10th anniversary edition of the reality show in Samoa.”

* According to an article titled, “IRS Seeking To Tax Your Hobby” at “the Internal Revenue Service has issued a new manual to help its agents ferret out taxpayers improperly writing off the costs of hobbies”. You can click here to check out this new audit technique guide.

A 2007 report - by guess who, yes TIGTA again – “suggested that improper hobby loss claims cost the feds billions of dollars a year in tax revenues."

As I mentioned in earlier posts, the IRS will be paying special attention to Schedule C losses, and categorizing an activity as a “hobby” instead of a “business” changes the rules and greatly reduces any tax benefit.

The article provides some good advice, including –

Keeping good records and operating in a businesslike manner can go a long way toward convincing agents the pursuit is a vocation rather than an avocation. For instance, the IRS manual tells agents to ask during a face-to-face interview if there is an existing written business plan for the activity, suggesting taxpayers would be well advised to develop one at the outset. Agents also are instructed to ask if the activity has its own bank account--something taxpayers would do well to set up before the IRS begins asking for records.”

* The IRS has issued a “draft” version of the 2009 Form 1040A. Click here to download. It has also issued the “draft” version of Form 5405 – First-Time Homebuyer Credit and Repayment of the Credit. Click here to download.

* Among the many surprises that taxpayers who make the mistake of going to H+R Block to have their taxes prepared face is the fact that, as I have pointed out many times in the past, Henry and Richard ain’t cheap! What would you expect? H+R spends millions on advertising each tax season, and it needs millions of dollars for legal fees and the settlement payments of the many, many lawsuits for deceptive advertising and other unethical business practices, most of which result from their usurious Refund Anticipation Loan offerings.

The Asbury Park Press brings us an AP story that identifies another reason why Henry and Richard charge such high fees - “H&R Block CEO gets $5.3M in 2009 Compensation”. Gott in Himmel!

According to the article H&R Block Inc. CEO Russell Smyth “received $712,500 in salary, a bonus of $783,750 tied to his agreement to join the company, and stock and options valued at almost $3.5 million on the day they were granted. He also received $289,978 in other compensation, which included a $200,000 relocation payment and $45,079 in legal expenses tied to negotiating his employment agreement.”

* Attention NJ residents – “P.L 2009 c. 69 provides that New Jersey Lottery winnings from prizes exceeding $10,000 are taxable for New Jersey Gross Income Tax purposes.” This is new for winnings in calendar year 2009. Previously, NJ residents were not taxed on any NJ Lottery winnings.

Click here to download “New Jersey Lottery Questions and Answers” from the NJ Division of Taxation.

* Now that the United States government has a substantial ownership stake in the new GM it can truly be said that, “What’s good for General Motors is good for the USA!” Showing my age again, I expect.