Monday, November 8, 2010


As promised, here are some items of interest that was discussed at last week’s NATP year-end tax-update class -

• Student loan interest reported on a Form 1098-E under the dependent student’s Social Security number can be claimed as an adjustment to income, subject to the statutory limitations, on the parents Form 1040 if the parents actually paid the interest and they are legally responsible for the loan – i.e. they co-signed the loan. Be ready to send the IRS proof of legal responsibility if questioned down the road.

• For 2010 the Adoption Credit is refundable. If the credit is from an adoption initiated in 2010, and not the result of a prior year’s carryover, copies of documenting paperwork must be sent in with the return, much the same as the documentation required for those claiming the Homebuyer’s Credit.

• Non-prescribed “over the counter” medicines can no longer be paid through an employer-sponsored medical expense Flexible Spending Account beginning in 2011. So if there is money left in your FSA stock up before year-end. Such items were never deductible as a medical expense on Schedule A.

• Cell phones are no longer considered “listed property” for purposes of the special record-keeping.

• And here is a bit of info that has apparently been passed along to NATP from a reliable insider source - the IRS is looking more closely at self-prepared tax returns generated by Turbo Tax software. It seems the Service is aware of the many failings of the Turbo Tax 1040 preparation software. Just another reason to forget about preparing your return yourself using a software package and seek the services of a competent tax professional.
We talked about the new requirements for small businesses and landlords to send a Form 1099-MISC to everyone to whom they pay more than $600 during the year. One excellent comment - if these requirements remain it will mean that hundreds of thousands, if not millions, of individual taxpayers will be applying for Employer Identification Numbers.
Currently sole proprietors, one-person LLC owners, and landlords who do not have employees don't need to get a separate EIN for their business or rental. These taxpayers could use their Social Security Numbers for bank accounts. However I, and my fellow tax pro participants, doubt if these taxpayers, faced withing having to send out a multitude of 1099-MISC forms, will want to make their Social Security Number public knowledge by including it on these 1099s. So they will need to get an Employer Identification Number to use instead.
I am sure the idiots in Congress did not take this into consideration when passing the ridiculous new requirements.
During a discussion of “who is a tax preparer” in regard to the new tax pro regulation regime the instructor gave the following scenario –

She has a client whose only income is from self-employment. He has no investment income or activity and does not itemize. Each month the client brings in his business checkbook, account statement and other related information to the instructor’s office and an employee of the instructor’s firm inputs the necessary information into Quickbooks. This employee also reconciles the client’s business checking account. In January the employee prints out a profit and loss report for the business from Quickbooks. The instructor “imports” this P+L to her tax preparation software and the software spits out the 1040 and Schedules C and SE.

In this scenario who is a tax preparer – the instructor, the employee, or both.

If you ask me the answer is neither - the return was prepared by the software!

The text explained that included in the definition of a tax preparer is –

A non-signing tax return preparer who renders advice (written or oral) to a taxpayer (or to another tax return preparer) on a position that is directly relevant to the determination of the existence, characterization, or amount of an entry on a return that constitutes a substantial portion of the return." And -
"A person who furnishes to a taxpayer, or another preparer, sufficient information and advice so that completion of the return is largely a mechanical or clerical matter.”

Let us also look as some “scenarios” from the IRS FAQ page on the subject -

“* I am a tax return preparer, and I have a PTIN. My firm employs a bookkeeper. She gathers client receipts and invoices, and organizes and records all information for me. Although I use the information that our bookkeeper has compiled, I prepare my clients’ tax returns and make all substantive determinations that go into computing the tax liability. Does my bookkeeper need to have a PTIN? (posted 9/28/10)

No, she is not a tax return preparer, and is not required to have a PTIN.

* I am a tax return preparer, and I have a PTIN. Every tax filing season I hire two paid interns from the accounting program at a local college to help me during the busy season. The interns perform data entry from the tax organizer that my clients fill out, and assemble the documentation that the clients have submitted. Where clients have submitted incomplete information, or more information is needed, the interns may call clients to gather information missing from the tax organizer, but they are not allowed to provide advice or answer tax law questions. I prepare and sign all my clients’ returns. Do my interns need to have a PTIN? (posted 9/28/10)

No, the interns are not tax return preparers, and are not required to have a PTIN.

* I am a tax return preparer, and I have a PTIN. I have an administrative assistant in the office who also performs data entry during tax filing season. At times, clients call and provide him with information, which he records in the system. Using the data he has entered, I meet with my clients and provide advice as needed. I then prepare and sign their returns. Is my administrative assistant required to have a PTIN? (posted 9/28/10)

No, the administrative assistant is not a tax return preparer, and is not required to have a PTIN.”

I am sure that there is more to the scenario in question than the instructor presented. I expect that the instructor reviews the P+L statement before importing it, and makes any adjustments for items such as Section 179 expensing, discussing the report with the client if she has any questions. I also expect that she determines the amount of contribution that the client could make to a SEP self-employed retirement plan and discusses this with him. And she would also ask him for the amount of health insurance premiums he paid for himself and his family, and other questions to see if there are any additional items to report or deduct. And I am sure she at least double-checks the return that is “spit out”.

In any case it is my belief that simply preparing an internal financial statement does not constitute preparing a “substantial” portion of the tax return – and therefore the employee of the instructor’s firm that does the Quickbooks input is not a tax preparer.

An internal financial statement, such as the P+L discussed above, whether prepared by the client or by an employee of the preparer, is merely a piece of documentation that is used by a tax pro to prepare the return. It is the same as a Form W-2, 1099, or K-1. It is the same as if the client simply provided a handwritten sheet of paper with his business income and expenses for the year – only a more formal presentation.

The P+L is not the Schedule C – several adjustments may need to be made in transferring the information from the P+L to the Schedule C – and being able to generate a P+L from a GL software package does not mean one knows how to prepare a Schedule C. So in this case the instructor, who actually “prepares” and signs the return, is the only tax preparer.

What do you think?


1 comment:

James said...

Thank you for the information!