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New Preparer Requirements on Earned Income Credit = Higher Fees for Clients

The IRS has placed new requirements on tax preparers who prepare tax returns that claim the Earned Income Credit. As Robert Flach (aka, “The Wandering Tax Pro”) says, the IRS is basically making tax preparers become social workers.

For example, if someone who claims the EIC has a qualifying child, we — the preparer — must ask for, and keep copies of, documentation that proves that the child lived with the taxpayer. Examples of documentation we must ask for and keep copies of include: school records, medical records, child care provider records, etc. (You can see the entire list of insanity by viewing the full Form 8867, “Paid Preparers Earned Income Credit Checklist.”)

Preparers have always been required to review data, ask questions, and verify anything that seems suspicious. But we’ve never before been asked by the IRS to play the role of auditor by forcing clients to submit documents such as school records to us to review.

Thankfully I don’t prepare too many EIC returns. But the few that I do prepare will be billed at a much higher rate than in the past.

My fee for returns claiming the EIC will increase more than $30 over what I have charged for EIC in the past. There’s simply too much work involved, and too much risk on my end of me being hammered by the IRS if I don’t check the right boxes on the Form 8867.

An Example of What Could Happen if an AMT Patch Isn’t Passed

Update 1/2/13: Mercifully, Congress did indeed pass an AMT patch, and it looks like the patch is permanent this time, so we won’t have to go through this every couple of years. So, this blog post is now a moot point, but makes for an interesting read about what would have happened if we had gone over the “fiscal cliff”.

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Congress will surely pass a “patch” to the alternative minimum tax for 2012 … won’t they? ID-10078737

One would hope so, or a lot of people will get hit with a surprise when they file their tax return.

Here’s an example.

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Setup:

“John and Mary” are a fictional married couple, but their situation is based on a situation one of my clients in real life would face if an AMT patch isn’t passed.

Relevant information:

  • Combined salaries: $77,000
  • They have 1 child
  • They do own a home and make charitable contributions, but they don’t have enough expenses to itemize deductions, so they claim the standard deduction instead.

If an AMT patch is passed, John and Mary won’t owe AMT. If a patch isn’t patched, they WILL owe AMT. (But scroll down to the comment section for a discussion of another option John and Mary may have that would result in them owing more tax but not being subject to AMT.)

Calculation (If AMT Patch is Passed):

  1. $77,000 wages – $11,900 standard deduction – $11,400 personal exemptions ($3,800 x 3)= $53,700 taxable income.
  2. Gross tax owed on $53,700: $7,185
  3. Net tax owed: $6,185 ($7,185 minus $1,000 child tax credit)
  4. Alternative minimum tax calculation: in John and Mary’s case, there are no AMT adjustments to make. Their AMT taxable income (“AMTI”) is their $77,000 gross income minus the $77,000 “patched” AMT exemption (estimated and rounded) = $0 subject to AMT.
  5. AMT doesn’t apply.
  6. John and Mary’s tax owed = $6,185
  7. $6,185 / $77,000 = 8.0%

Calculation (If No AMT Patch):

  1. The first three items above are the same ($7,185 gross tax/$6,185 net tax)
  2. Here’s where the differences kick in. Their AMTI is now $77,000 gross income minus $45,000 “unpatched” AMT exemption = $32,000 AMTI
  3. AMT is essentially a flat tax that imposes a 26% flat rate (or 28% at higher incomes). John and Mary are in the 26% range. $32,000 x .26 = $8,320 gross AMT
  4. $8,320 AMT is $1,135 more than the $7,185 “regular” gross income tax owed, so AMT does apply to John and Mary
  5. Their net tax owed = $7,320 ($8,320 AMT minus $1,000 child tax credit)
  6. $7,320 / $77,000 = 9.5%

So the short version is: John and Mary — a solidly middle class family that doesn’t even itemize deductions — would owe $1,135 more in taxes if Congress doesn’t pass an AMT patch.

According to my calculations, a married couple with income as low as $66,700 would be subject to AMT (just $2 of AMT, but subject to AMT nonetheless).

Image courtesy of www.freedigitalphotos.net.

Are Donations to a 501(c)(4) Deductible?

The question of whether a person can deduct donations to a 501(c)(4) organization comes up periodically. The answer is, no, you can’t deduct those donations as a charitable contribution. Only donations to 501(c)(3) entities are deductible as charitable contributions.

Donations to 501(c)(4) organizations are not deductible as charitable contributions. The only exception is for donations to 501(c)(4) volunteer fire companies — those donations ARE deductible. But otherwise, you can’t deduct contributions to a 501(c)(4).

Businesses that make donations to a 501(c)(4) might be able to take a deduction as a business expense, such as an advertising expense, depending on the nature of the donation.

For more tax considerations to think about before making a donation, check out William Perez’s article “Tax Tips for Charitable Giving” at the About.com Tax Planning website.

That E-mail From the IRS Isn’t Really From the IRS

A client called me yesterday to say they received an e-mail from the IRS. The e-mail said my client was owed an additional $169 refund, and that my client would need to provide bank account information before the IRS would pay the refund.

My client wisely deleted the e-mail without opening any attachments or responding in any way.

The IRS never, ever sends e-mails to taxpayers. If you get an e-mail from the IRS … the IRS didn’t send it. It’s a phishing scam. 

In my client’s case, if she really had been owed an additional refund, the IRS would have sent a letter. Same goes for audits or requests for additional information. Those requests will come by regular mail, not e-mail. The IRS also will not send text messages to you.

In rare cases, you might get a call from the IRS, but that’s extremely rare. I’ve only had the IRS try calling (unsuccessfully) a client one time, and that was in a unique circumstance (this was my client going through the identity theft saga with the IRS).

The IRS does investigate phishing scams, so if you receive an e-mail claiming to be from the IRS, you can forward it on to the IRS’s “phishing department” at: phishing@irs.gov.

You can learn more about phishing scams involving taxes by visiting this page on the IRS website.

Taxpayer Identity Theft — Part 10

I’ve been telling the story of Wendy Boka and the identity theft nightmare she’s going through with the IRS. Her husband Brian died at age 31 in 2010. Someone stole his identity and filed a fraudulent tax return in his name.

The IRS still has not processed Brian and Wendy’s final joint tax return for 2010.

Brian and Wendy were native Iowans. After Brian died, Wendy — a widow at age 29 — moved to Texas. The names are real and are used with Wendy’s permission.

You can read the other parts of this series here: 12345678, 9

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(This is a continuation of Part 9, posted earlier today. I decided to break Part 9 into two segments, to make it easier to read.)

Friday Call, Part 2

At least on the second call we got through to a representative whose computer was working.

The rep told us that when we submitted the Form 14039 (affidavit of identity theft) to the IRS, we put the form in Wendy’s name. But the IRS thinks the form should have been in Brian’s name, because technically it was his identity that was stolen, not Wendy’s.

They are insistent that we send them another Form 14039, in Brian’s name this time, along with a copy of Brian’s Social Security Card.

Note that all we are trying to do is get the IRS to process Brian and Wendy’s 2010 tax return and have them send Wendy the refund she is owed from that return, so she can finally put a painful year (2010) to rest.

Common Sense Too Much To Ask

I pointed out that the IRS’s demands are ridiculous. It’s blatantly obvious that the 2010 tax return that we submitted in April 2011 is a “right and proper” return.

The return we submitted shows Brian and Wendy filing together under a filing status of married filing jointly, same as the prior 5 or 6 years. The income sources are the same as in prior years. I am listed as the paid preparer, same as in prior years. So can’t the IRS use common sense and just pay this poor widow her tax refund?

I then proceeded to point out that it’s been 33 months since Brian died, 18 months since we filed the tax return, and 12+ months since we sent the original Form 14039 to the IRS. Again, can’t they use common sense and wrap this up?

The answer was, no.

They must have the Form 14039 and Brian’s Social Security Card before they can proceed.

And then this fascinating tidbit came out of the rep’s mouth: “Once we receive the form, it could take up to 200 days to process.”

Apparently the awkward silence that followed (I was too angry to even force words out of my mouth) caused the rep to clarify by saying that it might “only” take 90 days, since they already had a lot of our information on file.

Right. Somehow I think 90 days will pass and the IRS will have no clue what’s happening.

I would like to point out: we sent the original Form 14039 last fall. The IRS decided in September 2012 that they needed the form to be in Brian’s name, not Wendy’s.

And they tried calling Wendy in September to tell her to send a revised form. But this was unsuccessful because they dialed an old, out-of-service number. And with that, they apparently gave up.

(And gee, why not TRY CONTACTING THE PERSON WHO HAS POWER OF ATTORNEY ON THIS CASE, INSTEAD OF THE TAXPAYER?!?!?!?! But I digress.)

Paperwork More Important Than People

So I guess here’s the thing to know about the IRS’s opinion of “helping” people who have been the victim of identity theft: paperwork trumps common sense.

Paperwork is more important than people.

Taxpayer Identity Theft — Part 9

I’ve been telling the story of Wendy Boka and the identity theft nightmare she’s going through with the IRS. Her husband Brian died at age 31 in 2010. Someone stole his identity and filed a fraudulent tax return in his name.

The IRS still has not processed Brian and Wendy’s final joint tax return for 2010.

Brian and Wendy were native Iowans. After Brian died, Wendy — a widow at age 29 — moved to Texas. The names are real and are used with Wendy’s permission.

You can read the other parts of this series here: 1234567, 8

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As documented in Part 8, the Identity Theft Unit won’t talk to practitioners, even under power of attorney. They told me Wendy would need to call. I didn’t really want to drag her into this, so I tried calling the IRS “practitioner hotline” to see if they could help.

Of course, they couldn’t.

They told me the same thing — Wendy would need to call the Identity Theft Unit. “Because there might be information that she hasn’t told you,” was the reason the representative on the practitioner line gave me.

The IRS’s logic on this escapes me. But whatever. I had to get Wendy involved.

Friday Call, Part 1

We got on a conference call and called the Identity Theft Unit on Friday morning.

What a fiasco.

The IRS representative took my information and Wendy’s information, and then put us on hold. After a lengthy delay, we had to give the rep information about Brian. This led to another lengthy wait on hold.

The rep finally came back and said her system was down and she was unable to access any information. We would need to call back and hope that our call got routed to a call center in a different location, where maybe the computers would be working.

It’s not like Wendy and I have anything better to do with our time than call the IRS, sit on hold forever listening to annoying piano music, deal with a rep who can’t help us and then have to call back and sit on hold forever again just to try to find answers about a tax return that was filed 18 months ago. So, sure, why not try calling again?

I’ll detail that call in Part 10, also set for publication today.

Taxpayer Identity Theft — Part 8

I’ve been telling the story of Wendy Boka and the identity theft nightmare she’s going through with the IRS. Her husband Brian died at age 31 in 2010. Someone stole his identity and filed a fraudulent tax return in his name. We’re still waiting for the IRS to sort this out.

Brian and Wendy were native Iowans. After Brian died, Wendy — a widow at age 29 — moved to Texas. The names are real and are used with Wendy’s permission.

You can read the other parts of this series here: 123456, 7

Mid-October rolled around, and it was time for my “every 60 days” call with the IRS. Hooray!

There was good news and bad news on this call.

The good news is, the IRS has finally gotten its systems coded correctly to show that Wendy did file a 2010 tax return. They won’t be sending any more “collection” notices to her, and I don’t have to call the collections department every 60 days.

The bad news is, I now have to figure out how to deal with the IRS Identity Theft Unit.

The collections department told me that there was a note in Wendy’s file that the ID Theft Unit had tried calling Wendy recently. Apparently the paperwork we sent to them last fall (that would be, 12 months ago) was missing some information, so they had called Wendy in September of this year — on an old, no-longer-in-service number — to ask her to send that information. The collections department said I should call the ID Theft Unit to find out what was going on.

So I called.

The IRS representative who answered the phone took my information, and then abruptly interrupted me when I started talking about Wendy. She said she had to put me on hold so she could “review the rules about power of attorney.”

I waited on hold for more than 15 minutes before the representative finally came back and told me that the Identity Theft Unit will not, “under any circumstances,” talk to a representative of a taxpayer, even under power of attorney.

I asked what we needed to do to get this wrapped up. I was told that Wendy would need to call. They will only talk to her.

This is utterly ridiculous. I am not dragging my client into this. Wendy is paying ME to handle this. She should not have to make calls. This is an emotional issue for her. It involves her deceased husband – who died 33 months ago. The tax return in question was filed 18 months ago. The information that the ID Theft Unit says is incomplete was sent to them 12+ months ago.

Rather than making my client call the IRS, I am spending this week making phone calls myself and seeing if I can work around the ID Theft Unit and get this resolved.

More updates to come as this ridiculous saga continues to unfold.

Small Business Health Insurance Credit — Nice in Theory But Not in Execution

Like a lot of tax credits, the credit available to small businesses that provide health insurance is nice in theory but is horribly executed.

That may be why less than 12% of eligible businesses are claiming the credit.

Who is Eligible for the Credit

Small businesses, defined as those employing less than 25 full-time employees, may be eligible to claim a credit for providing health insurance to their employees. Specifically, the credit is available to companies:

  1. That employ less than 25 employees AND
  2. Pay those employees less than $50,000 of average annual wages AND
  3. Pay more than 50% of the insurance premiums for their employees.

The credit is 35% of premiums paid in 2012 and 2013. The credit increases to 50% of premiums paid starting in 2014.

Sounds great, right? Well … not so fast.

There are many, many problems with this credit. One,  it’s quite possible that a business might be better off NOT taking the credit and instead just taking a deduction for the premiums paid. In other words, some businesses might owe more tax by claiming the credit! (I have run the numbers on this, and it’s true.)

In addition, the credit has unfriendly phaseouts: as soon as your employee count gets above 10 or average wages tick above $25,000, the credit starts to phase out. Plus, the calculation of full-time employees, and the calculation of the credit in general, is cumbersome.

With these things in mind, it’s no wonder that most businesses aren’t taking the credit.

I sense that this blog post will get lengthy, so I am going to break it up into several parts, which I’ll post over the next few weeks. I’ll be mixing in other stories along the way, though, so that this blog doesn’t get bogged down in talking about multiple parts of this story for weeks on end.

Would a Name Change Help Enrolled Agents? Part 3

I’ve been writing about a possible name change for enrolled agents. Today I conclude my thoughts by examining whether a name change would really help EAs.

The short answer is, I don’t think a name change would change much of anything.

Yes, I have written before that the word “agent” is problematic because it creates an automatic assumption that we work for the IRS, and doesn’t really tell people what it is that we do.

But the name isn’t the problem. The problem is that no one has heard of us! Like I wrote in Part 2, 87% of the population has never heard of an enrolled agent.

Enrolled agents have never had a centralized effort to get the EA “brand” out there.

The National Association of Enrolled Agents is a great organization and I am a proud member. Their bi-monthly publication, The EA Journal, is a fine publication. They also offer a the best training out there on audit defense and representation issues at their “National Tax Practice Institute.”

But NAEA has done little to push the EA brand.

When I’ve brought this up, I’ve been told that NAEA is primarily a lobbying organization. And I do think NAEA does a great job of protecting EA interests to the IRS and Congress.

But EAs need a voice to the public, too.

And yes, EAs ourselves bear some responsibility. We need to be less crabby and resentful of CPAs and embrace the uniqueness of our designation.

When I give presentations, I always include a slide at the beginning where I talk about my designation. One of the bullet points on the slide says, in bold words: “I don’t work for the IRS!” This helps break the ice and often draws chuckles from the audience.

But, most EAs operate solo (or at least very small) practices. There’s only so much we can do ourselves.

Yes, we can try changing our little corner of the world. But that has its limitations. It would be much more efficient to have a national group that could push the EA brand, too.

Think about it this way: say you change the EA name to something like “Licensed Tax Practitioner.” That’s a nice, concise name that accurately conveys what it is that EAs do.

But unless there’s a National Association of Licensed Tax Practitioners pushing public awareness of the designation, the “LTP” would remain as anonymous as the current EA designation.

Sure, we wouldn’t have to spend as much time explaining the designation to people, but chances are, the public’s reaction to seeing the “LTP” (or whatever the new designation would be called) would be to say “what the hell is that?”.

Just like they say with the EA designation now.

Connecting Strange Baseball Rules to Taxes

I can find connections to taxes in strange places, such as baseball.

I’m a fan of the St. Louis Cardinals, so I watched their one-game, winner-take-all, postseason matchup with Atlanta on Friday night. In the 8th inning of that game, there was a play where it appeared that the Cardinals had bungled a popup and left Atlanta with the bases loaded.

But the umpires ruled that the Atlanta batter was out on the “infield fly rule.” After a lengthy delay, the call stood and the Cardinals held on to win the game. You can read more, and watch a video of the play, here.

St. Louis fans will say the umps got it right. Atlanta fans will say the umps got it wrong.

And it’s entirely possible that both groups are right.

I won’t get into a deep discussion of the infield fly rule here. It took me 5 to 10 minutes to explain it to my wife, and while she eventually said she understood, I’m not sure if she really understood or if she just said that to get me to stop talking.

The issue at debate on this call is: the baseball rulebook says an umpire can only call an infield fly on a popup that “can be caught by an infielder with ordinary effort.” The rulebook goes on to say that, as soon as the umpire determines that the infield fly rule will apply, he must “immediately declare ‘infield fly’”.

Atlanta fans could make a solid argument that, because the shortstop had to run into the outfield to get under the ball, the play was not routine, and thus not “ordinary.” They could also argue that the umpire did not “immediately” make the call.

St. Louis fans could counter that the play was ordinary because such plays occur routinely at least once in almost every game all year long. They could also argue that the rulebook says the umpire must make the call as soon as it becomes apparent to him that the infield fly rule will apply — in this case, that happened when the shortstop ran to the outfield and waved his arms as if to indicate that he was going to make the play. At that point, the umpire made the “infield fly” call.

What in the world does this have to do with taxes? Well, the oddities of the infield fly rule remind me of navigating tax law.

Five-thousand pages of tax code, 20,000 pages of regulations, and tens of thousands (or maybe even hundreds of thousands) of pages of IRS revenue rulings and procedures, IRS notices, court cases, etc. make some tax situations more complicated than the infield-fly rule could ever be.

Two competent, ethical tax pros can look at the same situation and reach two different conclusions. And if audited, different IRS auditors may have different viewpoints on the situation.

Now that I think about it, a good project would be to compile a list of all the different parts of tax law where a person could make multiple compelling arguments over how a particular item should be treated for tax purposes and make a series of blog posts about that topic. Hmm….

That’s just my (lengthy) takeaway from a strange baseball play.

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