Taxpayer Identity Theft — Part 19

IMAG0318The National Association of Tax Professionals picked up on Wendy Boka’s identity theft saga through my blog and asked me to condense my blog series into an article for their Spring 2014 Tax Pro Journal. The finished product is the cover story of the Journal, which is hitting tax pro mailboxes soon (mine arrived Thursday).

If you’re not a tax pro (or not a member of NATP) you can read my blog series — click here to find Part 1, and from there you should be able to find links to take you through the entire series.

Hold the Phone on the IRS E-file Outrage Machine

UPDATE 5/21/14: I was wrong. Don’t hold the phone on being outraged. We all should be outraged. See my updated blog post here.


Earlier this week, the tax pro community — myself included — were outraged at apparent new IRS requirements for tax pros who e-file. Read Russ Fox’s posts here and here for further background.

This all stems from revisions the IRS made to the e-file handbook (Publication 1345). A quick glance at the revisions appeared to show the IRS saying:

  1. All tax pros who e-file must take copies of government-issued ID, and furthermore …
  2. Pull credit reports on their clients in order to verify the client’s identity

I was outraged when Russ broke this news on Monday. Here’s what Russ, Robert Flach and I had to say on Twitter that morning:

On Wednesday, I killed a tree and printed Publication 1345 so I could read through it with a highlighter in hand.

Here’s what I discovered: we may have jumped the gun on the outrage machine.

I don’t think Publication 1345 is saying ALL tax pros get photo ID and pull credit reports. The publication says we must do those things if the e-file authorization is signed electronically (meaning, not signed with paper and pen).

Electronic signatures are now allowed on e-file authorizations. This means, a client signs via their computer, or a saved signature dropped into a document (see Page 22 of Publication 1345 for a list of what constitutes an electronic signature). This is the situation where the pro would need to get a photo ID and maybe pull a credit report.

For those of us who have our clients sign with a regular old pen and then mail, scan or fax the authorization form back, I don’t think anything changes and these new requirements don’t apply to us.

This isn’t to say I think the IRS’s new requirements are good (I agree with the photo ID part but the credit report part seems over the top), but these new requirements make much more sense when one realizes that it applies only to limited situations involving electronic signatures only.

Tax Refunds and “Not Owing Tax”, Part 2

In Part 2 of this series, I want to explain more about the tax calculation and how getting a tax refund doesn’t necessarily mean you “didn’t owe taxes.”

In Part 1, I explained the tax calculation:

This is highly simplified but I think it covers the basics well enough. Here’s how the tax calculation works:

Minus student loan interest, if any
Minus standard deduction or itemized deductions
Minus personal exemptions
Equals taxable income

Next, you calculate the amount of tax owed on your taxable income.

To clarify: you calculate your gross tax owed before any credits are taken into consideration.

Once you’ve calculated your gross tax, you subtract out non-refundable credits. These are things like:

  • The child tax credit
  • The credit for daycare expenses
  • The Lifetime Learning Credit
  • Part of the American Opportunity education credit
  • The credit for energy efficient windows and doors

Non-refundable credits cannot drop your tax liability below zero.

Next, you add any additional taxes, such as self-employment tax. This gets you to your “total tax.”

From your total tax, you subtract your refundable credits. These are things like:

  • Withholding from your paycheck
  • Estimated tax payments
  • The earned income credit
  • The refundable portion of the American Opportunity Credit
  • The refundable portion of the child tax credit

Refundable credits are how you end up with a refund.

So if you get a refund, it’s possible that you “didn’t owe taxes,” but only if your “total tax” before refundable credits equaled zero.


John’s total tax is $1,000. His refundable credits total $1,500. John will get a refund of $500, but it’s not accurate to say John “didn’t owe taxes.” He owed $1,000 of taxes for the year but because of his refundable credits, he got a $500 refund when he filed his return.

On Tax Refunds and “Not Owing Tax,” Part 1

Let’s talk about tax refunds.

No, I’m not going to opine on whether getting a tax refund is a good thing or a bad thing (though that’s a good idea for a future blog post).

Instead I want to explain how tax refunds work, and how it’s not always accurate to say you “didn’t owe taxes this year” just because you got a refund.

How the Tax Calculation Works

Time for a mathematical formula. (Try to contain your excitement!)

This is highly simplified but I think it covers the basics well enough. Here’s how the tax calculation works:

Minus certain adjustments to income, such as student loan interest
Minus standard deduction or itemized deductions
Minus personal exemptions
Equals taxable income

Next, you calculate the amount of tax owed on your taxable income.

I know what you’re saying now:

“Wait a minute, ‘tax owed’? That can’t be right. I always get a refund when I file my return!”

Ah, that’s the rub. Just because you got a refund it doesn’t necessarily mean you didn’t owe taxes.

I’ll explain more in Part 2.

Preparer Regulation and Judging Preparers Based on Size of Refund

A sad fact of being a tax pro is that a certain percentage of your clients will judge you based on how big of a refund you get them, as opposed to your knowledge and expertise.

Anyone who’s worked in this business has experienced the irate client who thinks the preparer screwed up because their refund was less than their friend/co-worker/hair dresser, etc.

But is this a reason to regulate tax preparers?

The National Association of Enrolled Agents seems to think it is. Here’s a quote from last July’s “EA Journal” published by NAEA:

Let’s Face it. In far too many instances, return preparation is a “race to the bottom” where taxpayers judge their preparers by the size of the refund they generate, not by the accuracy of the return. Because of this race for the bottom, amongst other reasons, NAEA has long supported the notion that IRS should have a cop on the beat.

I have written in many blog posts about how I disagree with NAEA’s stand on preparer regulation. But in this post, I’m focusing on the part about preparers being judged based on the size of refund.

I agree with NAEA that this is a problem. But I disagree that the solution is to require licensing of preparers.

The source of the problem is that the public doesn’t understand how taxes work. And the source of that problem is two-fold: 1) the complexity of the tax code and 2) (perhaps to a lesser extent) refundable tax credits that people don’t understand but that they become addicted to.

Those problems need solutions. But requiring preparers to have licenses isn’t a part of the solution.