What Responsibilities Do Tax Preparers Have in Assessing ACA Penalties?

Robert Flach at his “The Tax Professional” blog asks the following question regarding Affordable Care Act penalties assessed on tax clause-370928_1280returns against people who do not carry health insurance:

What is our legal responsibility as tax preparers when it comes to calculating the new convoluted and potentially expensive Obamacare penalty for clients who are not covered by health insurance?

Or perhaps a more inclusive question –

Are we as tax preparers legally required to assess a client an IRS penalty “up front” when preparing a tax return?

It appears from Robert’s statements elsewhere that he’s “not gonna” when it comes to calculating the penalty on tax returns he prepares. Robert also says he doubts the penalty will apply to any of his clients anyway. I’m in the same situation. I estimate that I might have literally 1 or 2 clients who this will apply to (and it may be 0).

I agree the ACA penalties are convoluted and potentially expensive. But I disagree with a preparer saying they’re “not gonna.”

Just because we think a law is stupid doesn’t mean we don’t deal with it. I think a lot of the things the government makes me do are stupid … but I do them because I don’t want to lose my license!

This reminds me of an ex-client who was operating a business in multiple states. I discovered that he had never filed tax returns in those states nor collected sales tax like he was supposed to. When I told him about this, he launched into a profanity laced tirade toward me about how much he hates the government and how unfriendly the government is to small businesses.

His exact words to me, regarding collecting sales tax, were: “F@ck it. I’m not doing it. I’m not gonna serve as a f@cking collection agency for the G@ddamned government.”

I parted company with that business after that exchange. I understand the anti-government sentiment. I really do. But you can’t just ignore the law.

If “I’m not gonna” was a concerted effort of AICPA or NAEA telling the IRS “Our members aren’t going to calculate this penalty,” then there might be some traction. If either organization were to say this, I would support it and would jump on the “I’m not gonna” bandwagon.

But the lone preparer saying “I’m not gonna” isn’t going to change the world, they’re just going to make problems for themselves and for their clients.

So are we as preparers required to calculate the penalty on people’s tax returns? Probably.

Robert mentions that he never calculates the underpayment penalty on client tax returns. But that’s okay because the instructions to the Form 1040 specifically state, regarding the underpayment penalty:

Because Form 2210 is complicated, you can leave Line 77 blank and the IRS will figure the penalty and send you a bill.

Perhaps the IRS will have similar instructions for the ACA penalties. If not … I think we’ll need to calculate the penalty on tax returns we prepare.

Image courtesy of Geralt on Pixabay.com

Tax Preparer Ethics: Miscellaneous Deductions

secret-379428_1280Scenario: a taxpayer works as an employee somewhere. The taxpayer insists that their purchase of (insert something personal in nature that’s clearly not deductible) is deductible as a work-related expense.

If it was a legitimate work-related expense, it would be considered a “miscellaneous itemized deduction” and would only benefit the taxpayer if:

  1. They itemize deductions and
  2. The total of their miscellaneous deductions is greater than 2% of their income

In most cases with average taxpayers, their miscellaneous deductions are nowhere near 2% of their income.

Question: Let’s assume that the taxpayer gets crabby when you tell them that their purchase isn’t deductible.

Is it okay to show the purchase as a miscellaneous deduction if the amount is less than 2% of their income and thus isn’t deductible anyway?

That way, the taxpayer sees it on their tax return but technically the government hasn’t been harmed because the amount was too small to actually be deducted. Is this okay?

My Thoughts

First of all (since I know of at least one IRS representative who reads my blog!): I have never done this before (okay maybe I have once or twice with things that I think are in the gray area); I’m asking hypothetically!

My thought is: it might technically be “okay” in that there’s virtually no way the IRS would audit a return that shows a $0 deduction. But I wouldn’t do it. Here’s why:

  1. It trains the preparer that it’s okay for clients to boss you around (I struggle with this as it is)
  2. It trains the client that they can boss the preparer around and get what they want
  3. It trains the client and the preparer that it’s okay to fudge now and then … which could lead to the fudging happening more often and in much bigger ways
  4. What if the taxpayer’s situation changes in future years? Their income drops, or they suddenly start wanting to claim the same illegitimate expenses AND they now have legitimate expenses too, so they suddenly meet the 2% threshold. How will the preparer talk himself out of the box he’s put himself in with this client?

Proper Documentation of Business Expenses

file9411346624378Keep your receipts.

When I talk to business owners or anyone who needs to document expenses or deductions, that’s the number-one piece of advice I give. So I’ll repeat it in bolder type:

Keep your receipts.

The IRS doesn’t really say what a business should keep in order to prove expenses. See, for example, IRS Publication 583, starting on page 11 (“Recordkeeping”).

Basically, you can use a variety of methods in order to prove your income and expenses.

But my professional opinion is that receipts in conjunction with bank statements, canceled checks, etc. are the ideal way to go.

Receipts will show the date of the purchase, the amount of the purchase, and what was purchased. This, combined with proof of payment (bank statements, canceled checks, credit card statement, etc.) provides the ideal documentation. Not just for the IRS but also for basic recordkeeping and business management purposes.

Sometimes you need to keep receipts for certain expenses, such as for meals and entertainment expenses.

It’s sometimes necessary to keep receipts in non-business settings too. One example is the the tax credit for daycare expenses. Keep the receipt from the daycare.

One time Iowa audited a client’s daycare credit that was claimed on the Iowa return. The client handed the auditor a stack of carbon-copies of checks written to the daycare, but the client couldn’t find the receipts. For whatever reason, the daycare couldn’t or wouldn’t provide receipts.

The state rejected the daycare credits for several years worth of tax returns because there were no receipts.

In most circumstances, you can prove your expenses even if you don’t have a receipt. But again, I feel that receipts AND other documents are the safest way to go.

PS: If you don’t like the idea of massive stacks of paper, you can scan your receipts, so long as the scanned copy contains a complete copy of the receipt, is legible and is easily accessible.

Rare Home Office Deduction Win in Tax Court

A taxpayer recently won a Tax Court case involving the home office deduction. workstation-405768

The taxpayer worked for a PR firm based out of Los Angeles, but the taxpayer lived in New York City and was expected to grow and develop the firm’s New York business.

The firm maintained no formal offices in New York. The taxpayer worked out of her 700-square-foot studio apartment.

On her 2009 tax return, she took a sizeable deduction for home office expenses. The IRS audited her, and the case ended up in Tax Court.

Review of Home Office Rules

The rules for taking the home office deduction are generally that you must have an area of your home used regularly and exclusively for business purposes. Exclusively generally means 100%, though as we’ll see in this case, the courts have made exceptions to this rule.

If you’re an employee working from home, there’s an extra hurdle to clear before you can take the deduction: you must be working from home for the convenience of your employer.

In other words, flexible work arrangements where you can choose to work from home don’t qualify because you could also choose to work in your employer’s office.

The Case

In the taxpayer’s case, she had no other location to work from in New York, so the “convenience of the employer” part was met. But she lived in a small studio apartment, and had to pass through the office area to get to her bedroom. Does this blow the “exclusive use” part?

Not according to the Tax Court:

Although petitioner admitted that she used portions of the office space for nonbusiness purposes, we find that her personal use of the space was de minimis and wholly attributable to the practicalities of living in a studio apartment of such modest dimensions.

The Court cited a 1981 ruling of theirs in which the Court ruled that de minimis personal usage of office space is impossible to avoid in a studio apartment.

Here’s a link to the full ruling: Lauren E. Miller , TC Summary Opinion 2014-74

Taxpayer Advocate Says IRS Issues Too Many FAQs

ID-10094159This was recently in my e-mail inbox from PPC:

National Taxpayer Advocate, Nina Olson, spoke at a recent accounting conference, addressing the IRS’s practice of increasingly providing significant guidance in the form of Frequently Asked Questions (FAQs) and other formats that aren’t published guidance. There are a number of ways that this can be problematic, including the fact that such guidance can be changed without notice. It is also unclear who writes FAQs (i.e., no contact name is listed, which is typically provided in published guidance), what type of vetting process they are subject to prior to online publication, and the extent (if any) to which taxpayers can rely on them, which is especially problematic when the FAQs are the primary guidance available on a topic.

From PPC’s “Five-Minute Tax Update” on 7/30/14

I agree. Too many FAQs and not enough facts.

Take the example of something I wrote about a few weeks ago regarding same-gender marriages and the impact of last year’s DOMA ruling where DOMA got struck down.

My take on the official IRS response to the DOMA ruling (Notice 2013-17) is that any tax return filed with the IRS after September 16, 2013, by a person in a same-gender must use a filing status of “married.”

But then the IRS — in a news release (!) — later said that using a status of “married” was optional on prior-year amended tax returns. This was in a paragraph tacked onto the end of a news release about something completely unrelated to same-gender marriage.

I won’t belabor the point here because I already wrote about it in this blog post from June.

But the overall point is, things like FAQs and news releases are  no substitute for coherent, authoritative guidance.

Can one cite a FAQ or news release as defense in an audit? Doubtful.

I’ll be interested in seeing if the IRS responds to Ms. Olson’s statements. That seems doubtful too.

Image courtesy of Stuart Miles / freedigitalphotos.net