An Obligatory 1099-K Post for 2013

January 30, 2013 in Potpourri of Tax Topics with 1 Comment

Last year I posted a few little stories about Form 1099-K, and suddenly people from all over the internet came out of the woodwork, e-mailing me with questions.

Some people wrote paragraph after paragraph after paragraph, telling me waaaayyyy too much information about their financial situation and asking me for help on what to do with the 1099-K that they received.

Examples of things random people e-mailed me include: “I’m on unemployment, will getting this 1099-K screw up my unemployment?”, or “those actually were my friend’s transactions; they just used my PayPal account so what should I do?”, and I even got one tax-protester-type argument of “I don’t have to report the 1099-K because it doesn’t have statutory force.”

Of course, none of those people intended to pay me to respond to their questions.

The whole experience of getting these types of e-mails made me regret ever posting anything about 1099-K! So I suppose I should just leave well enough alone. But for 2013, I feel obliged to wade into 1099-K territory and make one post in which I address Form 1099-K.

If you get a 1099-K, you can’t just ignore it.

The answer to “what do you do with the 1099-K” is: “it depends.”

If it relates to business income, it goes with all your other gross receipts on the appropriate line of your business return. If it’s hobby income, report it as hobby income. If it relates to things you’ve sold on-line, you might have Schedule D transactions.

If you’re unsure what to do, you should probably pay a professional to help you.

Taxpayer Identity Theft, Part 11

January 28, 2013 in Potpourri of Tax Topics with 5 Comments

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: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10

—–

This ridiculous saga may be coming to an end.

But fittingly, the IRS is going out with a bang.

Wendy, an attorney by trade (and also a Realtor, superstar blogger, and aspiring author), has taken up an offensive against the IRS on her own behalf. Her efforts have resulted in her case being assigned to an IRS representative who specializes in “long-term or difficult cases.”

This has resulted in positive movement on her case. In fact, the IRS is mailing her the refund she’s owed from this pesky 2010 return.

Woo hoo!

It’s over!

Right?

No.

This next part is so amazingly, pathetically, ridiculously, jaw-droppingly (insert your own adjective) stupid. You won’t believe it, but this is true.

Here’s how the IRS is going to handle getting Wendy her refund:

  • On February 1, the IRS will mail the check to Wendy’s 2010 address, when she lived in Iowa.
  • The IRS rep told Wendy she could try calling the post office in Iowa and see if they could re-route the envelope to her in Texas (WHERE SHE’S LIVED SINCE LATE 2010!!!!!). Or,
  • Barring that, the IRS is assuming that the post office in Iowa will return the check to the IRS, and after one month, the IRS will re-issue the check and send it to Wendy’s current address.

So the IRS is going to KNOWINGLY AND WILLFULLY mail Wendy’s refund check to a 2 1/2 year old address — even though she:

  1. Moved away from Iowa in LATE 2010,
  2. Filed a change of address form with the IRS in 2011 that gave the IRS her new address,
  3. Filed a 2011 tax return that showed her new address,
  4. And has filed various other documents with the IRS (estimated payments, and other such things) showing her new address.

In one of my text-message exchanges with Wendy about this, I said: “They’re knowingly going to mail your refund to an old address even though they have your current address? WTF?”

WTF indeed.

One of Wendy’s friends is an ex-employee of the IRS. Wendy and I have corresponded with this friend a few times regarding this case. I asked if she thought there was anything I could have done differently as a practitioner through all this to maybe have reached a speedier and more sensible conclusion. The friend’s response was, no, Wendy and I have both done all we could do.

To paraphrase the friend: the IRS is just inept and has no clear program in place to deal with identity theft cases.

So Wendy is spending her Monday trying to work this out with an Iowa post office, to see if they can re-route this refund check that the IRS — for reasons known only to the IRS — is mailing to an old address even though they have her current address on file.

So it seems appropriate to ask again: WTF?

Home Office Deduction: IRS Offers a Simplified Calculation Option, But the Qualifying Rules Haven’t Changed

January 23, 2013 in Small Businesses Taxes with 4 Comments

ID-10067211The IRS recently announced a new “standard deduction”  option for people claiming the home office deduction. People claiming the deduction will have the option (starting with tax returns for 2013) of taking a flat $5/square foot of office space (up to a maximum deduction of $1,500), or calculating the deduction based on actual expenses. It appears that taxpayers will have the option of choosing from year-to-year which method to use.

This is all well and good, I suppose. It seems like a taxpayer-friendly move. Rather than having to pro-rate your utility bills, mortgage and property taxes, you can just take a flat dollar amount per square foot.

But my concern is, people will be led astray into thinking that it’s now “easier” to qualify for the deduction. Take the misleading headline to this article in Business Week: “Why You Might (Finally) Take the Home Office Deduction.” The implication is, more people will qualify. This is not true.

Already, I’ve talked to taxpayers who have said “I heard about the IRS’s home office ruling. That’s good news for me – I can finally write off my office, right?”

Let me shout this from the highest hill:

THE IRS HAS UNVEILED A SIMPLIFIED CALCULATION OPTION, BUT THE RULES TO QUALIFY FOR A DEDUCTION REMAIN THE SAME. IF YOU DIDN’T QUALIFY FOR THE DEDUCTION BEFORE, YOU WON’T QUALIFY NOW.

We all have some part of our house or apartment that we call a “home office.” But for tax purposes, you only have a true “home office” if you have an area used regularly and exclusively (as in, 100%) for business purposes. If you’re an employee, you have to be using the space “for the convenience of your employer.” These rules have not changed.

You can read the specifics of the home office rules in IRS Publication 587.

So, is this standard deduction a good thing? Yes, it might be, from a simplification standpoint. But it’s not some sort of miracle “new” deduction available for all to take. You have to qualify for the deduction in order to take it, and those rules have not changed.

Image courtesy of Stuart Miles / FreeDigitalPhotos.net

Further Thoughts on Preparer Regulation

January 22, 2013 in Editorial Commentary with 12 Comments

It’s been a long, long time since I’ve written a long, rambling, stream-of-conscience blog post full of side notes and parenthetical references. But when I sat down to write this post, a whole lot of thoughts came out. So here, in 600+ words, is my opinion on the apparent death of the RTRP designation, and what the future holds, especially for Enrolled Agents like me.

—–

The IRS lost a court case on Friday that basically dismantles the entire preparer oversight system the IRS had tried to implement.

No more RTRP exam. Apparently the RTRP designation itself — at least as envisioned by the IRS — goes away.

I haven’t posted anything about this ruling because 1) I didn’t get a chance to post my thoughts right away, and by now, this topic has been covered by many others (click here to see Joe Kristan’s opinion on the ruling; Joe provides links to more than 10 other articles on Friday’s ruling); and 2) my opinion hasn’t changed from what I’ve consistently said before — the IRS’s attempts at preparer oversight were doomed to failure and created unneccessary beuracracy in the form of a useless RTRP examination.

National Institute of RTRPs?

Robert Flach (aka The Wandering Tax Pro) responded to the ruling by proposing the creation of an independent organization called the “National Institute of RTRPs” that would issue and oversee the RTRP license.

Robert’s idea has a lot of merit. An independent overseer of the RTRP designation would be more likely to be successful than the IRS’s lame attempt. And certainly there needs to be some way to hold the unlicensed accountable, especially in regards to continuing education.

But as an EA, I will always be concerned with defending the EA “brand” — what little “brand” we have.

The EA designation was/is superior to the RTRP designation in every way, yet there was and still is a very real possibility that EAs would get steamrolled and pushed even further to the fringes of the tax world — even though we should be at the FOREFRONT of the tax world, instead of being treated as the equivalent of Liechtenstein.

Outnumbered 12 to 1

As of January 3, there were 48,000 EAs, 53,000 RTRPs, and another 320,000 unlicensed preparers who needed to take the RTRP test.

Add in 225,000 CPAs in the tax world and the numbers are: nearly 600,000 preparers who are unlicensed/RTRP or CPA.

And just 48,000 EAs.

We’re outnumbered 12 to 1.

CPAs already have the backing of the AICPA. If RTRPs get the legitimacy of a national, independent organization, they could easily join CPAs as the “United States of the tax world” (read my “Lichtenstein” article to understand my comparison of designations to countries).

We’re outnumbered by designations that have, or could have, the backing of large, national organizations to tout the wonders of their designation.

So where do EAs fit in?

I Refuse to Become an RTRP

Some will say “well, just become an RTRP.”

But why should I have to get a LESSER DESIGNATION?

We’re equals to CPAs (in the tax world) but I guarantee that most people think EA is a lesser designation than CPA. And I have a feeling most people will think EA is a lesser designation than RTRP or whatever the hypothetical independent organization would choose to call it.

We have a major branding problem, and I’m not sure how to fix it.

It’s Not About “Going Out of Business”

Whatever happens, my practice will be fine. I’m not worried about going out of business.

I’ve never had a client question my designation.

(I did have an investment advisor tell me one time that I need to become a CPA if I “want to make it” in this business. I just smiled politely back at him.)

Upwards of 90% of my new business comes from referrals from other clients, from professionals I’m connected with, or from professional groups I belong to. I’m not going head-to-head with CPAs, RTRPs or unlicensed preparers for clients, not really. I’ve made connections, and those connections funnel business to me.

I’ll keep chugging along.

My concern is more for the EA name itself. I really fear that EAs are getting pushed further and further to the margins. We’ve always been on the margins, so how much further can we be pushed?

The problem is, there’s no good solution for how to enhance and protect the EA name, because there’s so few of us.

So again, where do EAs fit in? There’s just not a good answer or good solution.

How the Fiscal Cliff Deal Affects Teachers

January 17, 2013 in Potpourri of Tax Topics with 1 Comment

I originally wrote this article for the Iowa World Language Association’s blog. IWLA is a statewide organization for teachers of foreign languages from the kindergarten level up through the college level.

My wife, who is a professor of Spanish at Simpson College, is currently the president of IWLA. I’ve been asked to blog about various tax issues for teachers and college professors. My first post is about the fiscal cliff deal. More posts about other topics will be coming in the weeks ahead.

—–

(originally published January 5, 2013, on the Iowa World Language Association blog)

Congress passed a “fiscal cliff” bill on January 1. Here are some of the key provisions of interest to educators:

$250 “Above the Line” Deduction for Classroom Expenses
The bill extends, through December 31, 2013, the deduction for classroom expenses of K-12 teachers and teacher’s assistants. This deduction can be taken even if an educator claims the standard deduction.

Tuition and Fees Deduction
The deduction of up to $4,000 of qualifying tuition and fees for college expenses has been extended through December 31, 2013.

Student Loan Interest Deduction
The allowance of a deduction of up to $2,500 of student loan interest has finally been made a permanent part of the tax code.

American Opportunity Credit
The American Opportunity Credit (formerly known as the HOPE Credit) has been extended through 2017. This credit is available to students in their first 4 years of undergraduate studies.

Employer-Provided Educational Assistence
The bill makes permanent the ability of your employer to pay up to $5,250 of tuition, tax-free, on your behalf (for example, if you are pursuing a masters degree and your employer helps pay your tuition).

Other Things to Know About the Fiscal Cliff Bill
Here are some general-purpose items about the fiscal cliff bill of interest to anyone:

  • The “Bush Tax Cuts” are made permanent, except for a new tax bracket of 39.6% created for taxpayers with income above $400,000 (if single) or $450,000 (if married). The top rate under the Bush Tax Cuts had been 35%.
  • The capital gains rate of 0% for people in the 10% and 15% tax brackets has been made a permanent part of the tax code. The capital gains rate of 15% for people in the 25%-35% tax brackets has also been made permanent. A new capital gains rate of 20% has been created, but will only apply to people in the 39.6% bracket.
  • The child tax credit is permanently set at $1,000 per child (it had been set to drop to $500/child in 2013).
  • The credits available for adoptions and for daycare expenses have been made permanent.
  • The Earned Income Credit remains expanded through 2017, allowing more taxpayers to qualify for this credit.

Rental Properties and Basis Allocation

January 16, 2013 in Potpourri of Tax Topics with 0 Comments

One common mistake I see on tax returns involves rental properties. Specifically, the allocation of basis between the house and the land.

In almost all cases, people have allocated 100% of the purchase price toward the house, instead of allocating the purchase price between the house and the land.

For example, say you buy a rental house for $100,000. Part of the purchase price should be allocated to the house and will be depreciated over 27.5 years. Part of the purchase price should be allocated to the land and will be an asset but will NOT be depreciated.

How do you determine what the allocation should be? I usually use the property tax valuations. Those valuations seldom reflect the true market value of the property, but I use them to get the ratio. For example, if the county is allocating 75% of the assessed value of the property to the house and 25% to the land, I’ll use those percentages for allocating the purchase price.

This is the preferred method of the IRS (see pages 7-8 of the 2011 Publication 527). I have heard other accountants say they “always use 80% to the house and 20% to the land.” I disagree with the “always” part, but I suppose the 80/20 method is okay as long as it’s reasonable for the situation.

The IRS — Putting Paperwork Ahead of People

January 9, 2013 in Editorial Commentary with 1 Comment

For more than 4 months, I’ve been blogging about one of my clients who’s going through a nightmare trying to get the IRS to resolve an identity theft case involving her deceased husband.

The husband — his name is Brian — died in mid-January 2010. That’s almost 3 years ago.

I filed the 2010 tax return for Brian and his surviving spouse, Wendy, in April 2011. This is when the we discovered the identity theft. April 2011 was 20 months ago.

In October 2011, We sent the IRS some paperwork that they said they needed in order to resolve the identity theft. That’s 14 months ago.

The IRS says the paperwork we sent them in October 2011 had an error and needed re-sent. We didn’t find out about this from the IRS until November of this year. In September of this year (11 months after the paperwork was filed), the IRS had tried calling Wendy to tell her about the problem. But they dialed an old, out-of-service number and didn’t get ahold of her.

And with that, they apparently gave up.

When I talked to the IRS in November and they told me about needing the paperwork re-sent, I told them that they were being ridiculous. It’s obvious that the 2010 tax return that Wendy filed is the correct tax return. Common sense tells you that. So can’t they just process the return and pay this poor widow her refund so she can get on with her life?

The answer was no, they couldn’t. They needed the paperwork. And once we sent the paperwork, it would take up to 200 days to process! (Though the IRS rep told me it might take “only 90 days” to process since they already had some of Wendy’s info in their system.)

Pointless paperwork.

The only difference between what we sent them in November 2012 versus October 2011 is swapping out Wendy’s name for Brian’s name. This was the “error.”

A clerical issue.

So here we are. Months — YEARS — later. No resolution, because the IRS needs its paperwork to be just so.

I don’t begrudge the IRS its need for paperwork. I really don’t.

But at some point, after they’ve jerked a widow around, and months and months and months have passed, shouldn’t common sense trump a clerical issue on a piece of paper?

So that’s the Internal Revenue “Service.”

Putting paperwork ahead of people.

Let There Be Wine (And Taxes)

January 8, 2013 in Same-Sex Marriage and Taxes with 1 Comment

I’ll be giving a presentation called “Wine and Taxes” on Tuesday, January 15, at 5:30 pm at the offices of One Iowa in Des Moines.

This is an action shot of me giving my same-sex marriage presentation in 2012.

This is an action shot of me giving my same-sex marriage presentation in 2012.

The topic of the presentation is the tax issues of same-sex marriage: the complexities of navigating the differing laws that apply at the federal and state level, and what will happen with taxes if the Defense of Marriage Act is repealed (which could happen as soon as this summer).

Perhaps most importantly — free wine will be served! Wine and light snacks and desserts.

One Iowa’s address is 419 SW 8th Street in Des Moines. The event starts at 5:30 pm and will last about an hour, with plenty of time for questions, answers, and mingling.

Pre-registration is requested but not required. To register, click here or contact me.

And did I mention there will be free wine?

Tax Predictions for 2013

January 4, 2013 in Editorial Commentary with 1 Comment

It’s time for me to make my tax predictions for 2013. Last year, I made 6 predictions. This year, there’s only 3:

1. No tax reform at all in 2013.

It looks like the “fiscal cliff” bill Congress passed extends almost all major tax provisions at least 2 years, and in some cases 4 years, so we won’t see tax reform or tax simplification this year, and probably not at all during the rest of the Obama administration.

2. Some sort of gimmick tax break will be enacted to make up for the payroll tax holiday expiring.

I don’t think a lot of folks have grasped that the payroll tax holiday went away 1/1/13. For a person making $40,000/year, this means an $800 decrease in take-home pay in 2013 compared to what people had been used to while the 2% reduction “holiday” was in effect in 2011 and 2012.

While Congress allowed the holiday to expire, I am convinced they’ll replace it with something. My bet is on a revival of the “Making Work Pay Credit.” The only thing I’m not sure of is if the credit will be paid as a lump-sum rebate check, or if it will be paid bit-by-bit through a reduction in income tax withholding.

3. The IRS won’t extend the RTRP testing deadline.

The deadline for unlicensed tax preparers to take the minimum competency exam (the RTRP exam) is December 31, 2013. As of December 2012 there were approximately 300,000 people who still had to take the exam. If they don’t pass the test by the end of 2013, they’ll be forced out of the tax prep business.

Given these numbers, will the IRS extend the deadline? For a long time, I had thought that yes, they would. But now, I think the answer is no, they won’t.

I agree with fellow Enrolled Agent David Fazio, who said (and I’m paraphrasing) in a comment to this blog post, that the IRS would lose authority if it extends the deadline. The IRS would look ineffective and it would give the appearance that people can just ignore the rules and the IRS will cave in.

And even though I don’t really support this whole preparer regulation thing, I don’t weep for the unenrolled who haven’t taken the exam. It’s an open-book test over Publication 17, for crying out loud. And the test and the 12/31/13 deadline have been known about for a long time.

—

As always, my December 31, 2013, blog post will be a review of how accurate my predictions were.

6 Tax Predictions for 2012 — How Did I Do?

December 31, 2012 in Editorial Commentary with 1 Comment

At this time last year, I published 6 tax predictions for 2012. Here’s how I did:

Prediction 1: Congress will extend the “2-month” payroll tax cut for the rest of the year.

Outcome: correct. They extended the 2% reduction in payroll taxes through 12/31/12.

Prediction 2: No tax reform will take place this year. It’s an election year so neither party will want to put forth anything that might rock the boat.

Outcome: correct.

Prediction 3: Once the elections are over, Congress will execute its favorite play — the punt — by extending the “Bush Tax Cuts” for another year or two. This will probably happen, with much drama, right before Christmas.

Outcome: incomplete. I still think they will extend all tax provisions for another year or two, but it obviously didn’t happen before Christmas!

Prediction 4: Most of the tax provisions that expire 12/31/11 (such as the AMT patch) will be extended along with the Bush Tax Cuts.

Outcome: incomplete, but again, I expect this to happen.

Prediction 5: Along with extending the Bush Tax Cuts and other tax provisions into 2013, Congress will either a) extend the payroll tax cut into 2013 or b) let the payroll tax cut expire but replace it with some other gimmick tax break.

Outcome: incomplete. I tend to lean toward option “b”, the “gimmick” option, for 2013 (as in, resuscitating the Making Work Pay credit). More on this when I give my predictions for 2013 in a few days.

Prediction 6: IRS efforts to regulate preparers will not have the desired effect, in 2012 or beyond. I think the result of this bureaucracy that is being created is that more burdens and annoyances will be placed on preparers, with no discernible benefit to consumers.

Outcome: correct. As of December 10, there are 304,077 unlicensed preparers who have not taken the RTRP exam. The deadline for passing the test is one year from today (12/31/13). That’s a lot of people who could be forced out of business if they don’t pass a basic, open-book test. Will the IRS extend the deadline? I was part of a Twitter debate about this last week. No one knows the answer.

Also, all the “buzz” around the RTRP designation seems to be generated from those of us in the blogosphere going back and forth with each other. I have heard NOTHING about the RTRP designation from the public at large. Nothing at all.

The IRS was supposed to launch a public relations campaign about the new licensing/registration requirements. Where has that campaign been? Are they waiting til after the 12/31/13 deadline passes?

I think it would be a stretch to say that these regulations are having the “desired effect.”

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