Lo, The Plight of the Unknown EA

The local business directory for my town was just published.

I’m an Enrolled Agent. Commonly abbreviated as “EA.” But apparently the publishers of the directory were confused:


Apparently I’m actually an extended-play record.

I haven’t called the local group that published the directory yet. It was a free listing, and it made me laugh, so I’m not angry.

It was probably just a typo or just an honest mistake.

But would a mistake like this be made with a CPA?

I doubt it.

Then again, CPAs have major name recognition.

Meanwhile, 90% of the population has never heard of an EA.

Taxation of Credit Card Benefits

A few weeks ago I got a booklet in the mail from my credit card company. The booklet was sent as a reminder that I have a “credit defense” benefit on my credit card.

I pay a premium $0.39 per $100 of ending balance in my account. For that payment, I get to use a variety of benefits provided by the credit card company.

For example, if my wife or I were to get laid off or become disabled, the credit card company would make our minimum monthly payment each month for a certain period of time. Other benefits include reimbursements for medical expenses, car repair, taking the pets to the vet, and moving expenses.

I’ve never actually used any of these benefits, but I don’t mind paying the premium because I’m paranoid about sudden loss of jobs or becoming disabled.

At any rate, what are the tax consequences of these types of benefits?

I did quite a bit of research for this post, but turned up little when it comes to reimbursement of auto expenses, pet expenses and moving expenses. There is, however, guidance on the unemployment benefit part.

Let’s break this into two pieces.

One: Unemployment or Disability Payments

If you become unemployed or disabled and the credit card company makes your monthly payments for you, those payments are taxable if the payments exceed the amount of premiums you paid during the year.

This part is clear (see page 94 of IRS Publication 17).

Two: Reimbursements

What’s less clear is what happens if the credit card company reimburses you for things such as car repairs.

For example, under my credit card’s benefit program, they will pay up to $250 of car repairs once a year. The way it works is, I pay for the car repair using the credit card, and then the credit card company will issue me a credit on my account for up to $250. Same concept for medical expenses, pet expenses, etc.

I couldn’t find anything definitive about this, but I think this type of benefit is not taxable. Unlike with the unemployment/disability payments, these benefits are a reimbursement for expenses actually incurred.

The credit to the account does reduce the amount of credit card debt owed, but unlike in typical debt cancellation, this is not really an acquisition of wealth because it’s a reimbursement of an expense.

The only tax implication I can think of is if you’re reimbursed for a deductible expense. In that case, you would reduce your deduction by the amount paid by the credit card company.

Why is the AICPA Filing a Lawsuit Against Lame IRS Preparer Program?


We all get gold stars in the IRS’s new “Annual Filing Season Program.” Woo hoo.

Time to wade into the IRS preparer regulation fray again.

The IRS is plowing forward with a voluntary program for tax preparers that falls well short of “regulation.” And for some reason, the AICPA has filed a lawsuit against the IRS.

My understanding of the program is that if a preparer sits through 18 hours of continuing education and passes some sort of test administered by a CPE provider, they get a gold star and an “attaboy” from the IRS.

As my 6-year-old son would say: “Seriously? Lame!”

CPAs, EAs and attorneys get our gold stars by virtue of our licensure.

Apparently all of us: CPAs, EAs and attorneys, along with all of the gold-star unlicensed preparers who get a lame certificate of participation, will be listed in a database on the IRS website.

Counting the days til we all get our gold stars and online listing from the IRS!

Counting the days til we all get our gold stars and online listing from the IRS!


Why on earth would AICPA file a lawsuit about a voluntary program that doesn’t even involve granting a designation or special privileges?????

As long as the database explains what it means to be an EA, CPA, attorney, or “gold-star unlicensed preparer,” I don’t see what the big deal is.

With the RTRP program (voluntary or involuntary) I was worried that EAs would get lost in the shuffle.

But with this program, how are the unlicensed people who achieve a gold star going to market themselves? Again, they get no designation and no special privileges.

I really am not too worried about losing potential customers to some unlicensed guy who sat through CPE and now has a worthless piece of paper and a warm and fuzzy feeling about himself.


The gold star and online listing is sure to ignite the self-esteem of all of us in the preparer community.

What’s he going to say about himself? “Look at me, I satisfied the IRS Annual Filing Season Program! Look at my certificate of completion and (almost-certain-to-be) confusing listing on the IRS website!”

I bet all of us in the preparer world will start getting spam from places offering to give us framed certificates, just like we get from that PTIN place that says they’ll sell us a framed PTIN “certificate.” More e-mails for me to delete without reading.


AICPA’s lawsuit is just as ridiculous as the IRS program. As I’ve written before, CPAs have the least to lose in any sort of preparer regulation system.

I’m an EA, as unknown of a designation as there is. We are Liechtenstein to the CPA’s United States. But even I am not worried about this lame-o IRS program.

So why is AICPA worried about it?

“Gold star”image courtesy of Boians Cho Joo Young / freedigitalphotos.net

“Calendar” and “Yes You Can” images courtesy of Stuart Miles / freedigitalphotos.net

Deducting Losses in Retirement Accounts

The general tax rule is that market losses in retirement accounts are never deductible. That statement is true, but as with everything relating to the taxes, there’s a “but.”

In rare circumstances, you might be able to deduct losses from these accounts.

Basic Requirements for All Types of Accounts

  1. All accounts of the same type must be fully paid out. For example, if you have 3 IRAs, all 3 accounts must be fully paid out.
  2. You must have after-tax basis. This means amounts put into the account with after-tax dollars. With Roth IRAs, your basis is whatever you have paid into the account. In traditional IRAs and 401(k) plans, your basis would be any non-deductible contributions you have made. Most 401(k) plans will never have non-deductible contributions in them.

The Mechanics of Figuring the Deduction
Assuming you meet the above two requirements, you then have to calculate your loss. To do this, you take the amount of cash you receive and compare it to your basis. If the cash received is less than your basis, you are eligible for a deduction.

Example: You close out a Roth IRA account. It is the only Roth IRA you have. Through the years, you paid in $5,000 into the account. You received $4,000 when you closed out the account. The amount of loss eligible for a deduction is $1,000 ($4,000 received minus $5,000 basis).

Hurdles to Clear
In the example above, you are still not in the clear for taking a $1,000 deduction. Tax law puts three hurdles in place that make it hard to actually take the deduction.

  • Hurdle #1: losses on retirement accounts are not considered capital losses. Instead, they are considered miscellaneous itemized deductions. This means: you only get the deduction if you itemize deductions.
  • Hurdle #2: because it’s a miscellaneous itemized deduction, the amount of the loss has to exceed 2% of your income in order to be deductible.
  • Hurdle #3: Only the portion of the loss that exceeds 2% of your income can be taken as a deduction.

Example: continuing with the above example of a $1,000 loss – if your income is $40,000, you take $40,000 x 2%, which equals $800. You subtract $800 from the $1,000 loss, which equals $200. You can put $200 as an miscellaneous itemized deduction on your tax return.

Have an HRA? Deadline for Patient-Centered Outcomes Trust Fund Fee Looms

Below I am re-publishing a blog post I wrote last July (with edits and updates) regarding the “Patient Centered Outcomes Trust Fund” fee that is assessed against employers who have health reimbursement arrangements (HRAs).

The only change for this year is that the fee is now $2 per person (it was $1 per person last year).


Originally published July 15, 2013. Edits and updates are in italics

If you have a health reimbursement arrangement plan (HRA, sometimes called a “Section 105 plan”), you probably owe a “Patient-Centered Outcomes Trust Fund Fee.”

Most people reading this blog post are probably saying, “What the heck is that?”.

The Patient-Centered Outcomes Trust Fund Fee is part of the Affordable Care Act. The fee is imposed on businesses or insurance companies at a rate of $1 $2 per participant in a health plan. A “health plan” of course includes traditional health insurance plans, but it also includes HRAs.

(Side note: on an employer-provided health insurance policy [not an HRA], whether the employer or the insurance company owes the fee depends on the nature of the plan; I am not an expert on health insurance plans so I won’t get into that here.) Updated to add: in most cases, the employer will NOT owe a fee on the insurance policy itself.

Back to HRAs: for purposes of this fee, an HRA is considered a health plan, thus making HRAs subject to the fee.

Here’s what’s annoying for businesses with an HRA: there’s no exemption for small businesses — and almost all HRAs (at least that I deal with) are with small businesses, oftentimes sole proprietors who have hired their spouse.

Updated to add: HRAs may be dying out for many small businesses because of other changes to HRA rules

So you have a sole proprietorship. You hired your spouse and you set up an HRA because of the tax advantages (self-employment tax savings) of running medical expenses through the HRA as deductible business expenses via your spouse. Before July 31, you’ll need to fill out a Form 720 and send a $1 $2 check to the U.S. Treasury ($1 $2 x the number of participants in the HRA).

This is insane, of course. An abject waste of a small business’s time. But it’s what the Affordable Care Act calls for.

Certainly a $1 or $2 fee is no reason to eliminate your HRA. But it’s yet another piece of paperwork to keep track of and another form to fill out.

Glossary of Tax Terms: Head of Household

The term “head of household” refers to a filing status on a tax return available to unmarried people caring for children or parents.

In simple terms, head of household creates a standard deduction and a tax bracket that is halfway between the single and married filing jointly filing statuses.

Here are the requirements for filing as head of household:

  • You must be unmarried at the end of the year
  • You must pay more than half the maintenance and upkeep of a home
  • A qualifying person lived with you (generally your children or your parents)

The “qualifying person” doesn’t always have to live with you (a parent, for example, doesn’t have to live with you).

Special rules apply in cases of separated parents who lived apart for the last 6 months of the year but who aren’t officially divorced yet.

For more information, consult IRS Publication 502, pages 8 and 9.

ROBS Transactions – Be Very Careful of Using Retirement Funds to Start a Business

True scenario that happened a couple of years ago:

A client asked the following: I have $20,000 in a retirement account with a former employer. My husband wants to start a new business. We were thinking that he could hire me as an employee, and then form a retirement plan under the business.

I would transfer the money from my old retirement account into my husband’s company’s retirement plan and purchase stock in my husband’s company through the plan. This would give him startup funds without having to pay taxes on the $20,000. Will this work?


This type of transactions is called a “ROBS” transactions (ROBS = Rollovers as Business Startups). Theoretically, it can work.  

The key word is “theoretically.”  There is a risk that the IRS could place ROBS on the list of “abusive tax transactions.”  ROBS are not on that list yet, but the IRS has issued guidance that states that ROBS are on a watch list.
There are many issues:
  1. Valuation. You’d have to figure out some way of valuing the stock so you knew how much your account was worth.
  2. Getting cash out when you want it or need it. What if your account balance is higher than the cash the company has in the bank when you’re ready to take your money out?
  3. What if the company is a flop? You’ve just lost your retirement account.
  4. What if the business needs to hire employees someday? Non-discrimination rules apply to retirement plans, meaning you can’t have special benefit programs just for the owner and his or her spouse. You’d have to let the other employees into the plan and probably give them access to purchasing company stock.
  5. Issues with UBIT (“Unrelated Business Income Tax”), which could be assessed against the retirement plan.
ROBS are workable in theory, but the transaction and maintenance of the plan need to be done just right. Attorney fees would be steep. 

What I Told the Client

I told them all of these things. I then went on to say that it made more sense, if they really wanted to use the retirement funds to start the business, to just withdraw the money and pay the taxes and penalties on the $20,000. Doing this wouldn’t have been a great option, either. But the taxes and penalties were likely to be in the same neighborhood as the compliance costs over time.

In the end, after learning of the complications, the client dropped the idea entirely and went on to find other means of getting the business off the ground.

Life After DOMA: A History of Marriage in the Tax Code

One of my special research projects has been to research the history of marriage in the U.S. Tax Code.

I started this project nearly 3 years ago. Around this time, my practice became heavily involved in helping couples in same-gender marriages navigate the tax complexities they faced when the Defense of Marriage Act existed.

A common theme in the media and among clients was (and still is) that marriage will “always” result in bigger refunds at tax time. This simply is not true.

I knew about the so-called “marriage penalty” and how, historically, approximately 50% of married couples will see their tax liability increase as a result of getting married.

But I didn’t know why there was a marriage penalty. I don’t like not knowing why.

So I set out to find out.

Three years later, I’m still researching but have created a draft manuscript and have more than 4,000 words written on a lengthy essay about the history of marriage in the tax code.

Over the months to come — okay, probably the years to come — I’ll be sharing parts of this manuscript. It’s an ongoing project and I don’t know yet how often I’ll be posting parts of it here. I also don’t know when it will be finished or what the finished product will look like.

But I think it’s fascinating stuff, so I have to share it. Stay tuned.

From the Archives: Patient-Centered Outcomes Trust Fund Fee – An Exercise in Bureaucratic Futility

It’s a holiday week, so I’m re-publishing popular blog posts from the past.

This is a timely re-post: the Patient-Centered Outcomes Trust Fund Fee is due by July 31!

(*-The post below was written last year, when the fee was $1/person. The fee is now $2/person for 2014 filings.)


Originally published July 19, 2013


ID-10036412Here’s a blow-by-blow example of the folly of there not being a small employer exemption to the “Patient-Centered Outcomes Trust Fund Fee” imposed on insurance plans.

This is a real example. One of my clients has an HRA. Total lives covered under the HRA = 3, so the client is paying a $3 fee.

Here’s the total time spent on this ridiculous exercise in paper pushing:

  • Initial phone call to the client to discuss the fee: 5 minutes
  • E-mails and phone calls to the client to verify that the insurance company and not client owes the fee on the health insurance policy the client offers (the client owes the fee on the HRA, the insurance company owes on the health insurance): 7 minutes
  • Reviewing the 21-page instructions to Form 720 to verify that we are supposed to call the Form 720 a “second quarter” filing even though the PCOT fee is based on a 12/31/12 year-end: 3 minutes
  • Preparing Form 720: 6 minutes
  • Reviewing Form 720, including another check of the instructions to verify that the non-applicable schedules on Pages 3-6 of the form need to be sent even if they don’t apply: 4 minutes
  • Fixing a typo I made on the client’s address on the form: 1 minute
  • Printing Form 720: 2 minutes
  • E-mail to the client asking them to please review Form 720 and explaining to the client that they should not be intimidated by the sheer volume of lines and weird codes on Form 720, that I just need them to verify their name and EIN: 4 minutes

Total time: 32 minutes. Assuming a billing rate of $100/hour, that comes to $53 of time. Note that I still have to sign the form and put it in the mail to the client for them to sign and send on to the IRS. When you add that time in, plus the value of the client’s time spent on this, you’ve got at least $100 of time invested by the client and me in complying with this ridiculous fee.

Even if we factor out the initial phone calls and e-mails and the scouring of the instructions, and just focus on the preparation of the form itself, you’ve got a good $25+ of time.

All so the client can pay a $3 fee.

And some sole proprietorships with an HRA will be going through this exercise so they can pay a $1 fee.

It’s pointless bureaucracy at its finest.

Image courtesy of ningmilo / FreeDigitalPhotos.net

From the Archives: Iowa Deduction Finder — Insurance Premium Tax Deduction

It’s a holiday week, so I’m re-publishing popular blog posts from the past. This is a popular story about the deduction available on Iowa tax returns for after-tax insurance premiums.


Originally published March 28, 2012

One overlooked deduction on Iowa tax returns is the deduction on Line 18 of the Iowa 1040, for health insurance premiums. You can deduct, in full, the amount of health insurance premiums you pay with after-tax money.

Eligible expenses include any medical/vision/dental premiums paid after-tax; Medicare Part B or Part D premiums; and long-term care premiums.

One key is that the premiums must be paid with after-tax money. So if you pay for part of the premium on your employer-provided health insurance premiums, but the premiums are deducted from your pay pre-tax, you DO NOT get a deduction (because your taxable income has already been reduced by the amount of the premiums you paid). Also, any premiums you deduct on Line 18 cannot be included as medical expenses on Schedule A if you itemize deductions on your Iowa return.

This is a great deduction for people who have their own, private insurance policy because you can take it without having to itemize deductions.

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