Roth & Company, P.C. Tax Update Blog
Taxpayer advocate calls for raising taxpayer costs, reducing preparer supply
July 02, 2009
The National Taxpayer Advocate has issued her annual report. Along with a number of sensible recommendations is this clunker:
The Advocate reiterates her longstanding recommendation that the government do more to protect taxpayers by regulating unenrolled federal tax return preparers, including by requiring initial testing and continuing professional education, and recommends that the IRS step up enforcement actions against preparers who fail to perform due diligence or consciously facilitate noncompliance.
The report has a critical unstated assumption: that such regulation would do more good than harm. Not bloody likely. The predictable unintended consequences:
- The supply of preparers would go down as folks will not want to screw around with the bureaucracy for what is for many just seasonal work.
- Unenrolled tax preparers will go underground, not signing returns. It is, after all, legal for folks to do their own returns (for now, anyway). These folks will be very difficult to track. A single mom trying to figure out her earned income credit in a housing project isn't going to lose sleep over whether the lady helping her with the paperwork in her apartment is licensed.
- Honest preparers will get caught up in paperwork mistakes of their own making, or made by the new IRS preparer bureaucracy, and will lose their seasonal income before the problems get ironed out.
- Resources that could be used to develop computerized enforcement tools to identify dishonest filing patterns will instead be used shuffling CPE paperwork and harassing preparers.
Finally, it is highly unlikely that all of this will result in a better product. We all remember when Fortune magazine would have a tax return preparered by different preparers and get as many results as preparers. The real reason for poor return prep quality is a poor quality of tax law. That root problem will exist until my modest reform proposal is finally adopted:
I have the answer to this problem, of course -- require that all Congresscritters do their returns in public themselves via a live webcast. They can use Turbotax or the software of their choice, as long as all input screens and output are broadcast live on the web, with a sidebar for running viewer commentary. Or, perhaps, selected tax pros could do the kibitzing - think "Mystery Science Theater 3000," tax geek version. Naturally, the whole comedy should also be available for playback on YouTube. I think this would have two useful results: Congresscritters would have a stake in tax simplification, and they would learn the difference between a deduction and a credit.
For a contrary view on the Taxpayer Advocate report, see Peter Pappas. Dan Meyer also has more.
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Footloose? Not in Des Moines
July 02, 2009
Des Moines likes to market itself as a hip, happening place. As long as it has an "ordinance to provide for prohibition, license, regulation and supervision of public dances within the city of Des Moines," it's going to be hard to make that claim with a straight face. The Des Moines Register explains:
And for those looking to take away a layer of bureaucracy, repealing the ordinance seems like an easy way to do that. The ordinance states that, "The room where dancing is conducted shall be illuminated to a minimum of two footcandles, as measured by a photometer at a plane 30 inches above the floor."
I suppose a strobe wouldn't count.
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Broke? Just go out and make more!
July 02, 2009
So you've maxed out all of your credit cards, and you find that they aren't letting you just roll the balances into new ones. You buy a new car every year, you have your hair cut at the same place John Edwards goes, you eat at the steakhouse every night, and you can't make your mortgage payments because the credit card companies have cut off your cash advances.
It's off to the credit counselor. He sits you down and lays it on the line: you need to make more money. Maybe knock off convenience stores, or something.
David Brunori is providing just that sort of insightful advice to broke states in his post States Should Raise Income Taxes to Solve their Budget Problems:
The CBPP says that raising income taxes on the wealthiest citizens can help close budget deficits. Indeed, the report says that raising the personal income tax 1 percentage point on households making more than $500,000 would raise a whopping $8 billion nationwide. The CBPP maintains that raising taxes on the really rich is less harmful to the economy than cutting services. The CBPP is right, of course. There's nothing unfair about closing budget deficits by enacting a little tax increase on a guy making $500,000. The people subject to the tax are making more than 99 percent of the population. Call me a big fat liberal, but using that extra tax revenue to support services for the unemployed family needing healthcare and education doesn't bother me one iota.
Because every dollar spent by the states is for unemployed families needing healthcare and education.
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In case you missed the excitement yesterday
July 01, 2009
Heroism and tragedy downtown yesterday, just blocks from my office, as a boat went over the Center Street Dam. The Des Moines Register has the story. It was strange to watch it unfold on the Des Moines Register twitter feed while I worked:
KCCI has harrowing video.
Our thoughts and prayers to the victim's family.
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Tax Court: LLC and LLLP owner losses don't have to be passive
July 01, 2009
The IRS lost a battle it should never have fought yesterday in Tax Court. The court shot down a bid to treat as "per se" passive losses from limited liability companies or limited liability limited partnerships.
Nebraskans Paul and Alicia Garnett invested in LLCs and LLLPs that operated farming businesses in Iowa. The Garnetts claimed that they "materially participated" in the entities and deducted losses shown on the K-1s from the LLCs and LLLPs. The IRS assessed about $360,000 in deficiencies from these losses from 2000 to 2002, saying that the losses were passive no matter what. "Passive" losses are allowed only to the extent of "passive" income, or when the activity is sold.
The IRS applied Sec. 469(h)(2), which says:
Except as provided in regulations, no interest in a limited partnership as a limited partner shall be treated as an interest with respect to which a taxpayer materially participates.
The taxpayers argued that LLCs and LLLPs are not "limited partners" under these rules, and they are therefore subject to the regular "material participation" rules for determining whether a loss is passive. The Tax Court looked at the state law rules governing these entities to sort it out. The court found that Iowa law gives allows powers to LLC members and LLLP owners beyond those allowed traditional limited partners. They also said limited liability wasn't enough to make an owner a "limited partner" under Sec. 469(h)(2):
Thus, while limited liability was one characteristic of limited partners that Congress considered in the enactment of section 469(h)(2), it clearly was not, as respondent suggests, the sole or even determinative consideration. To the contrary, the more direct and germane consideration was the legislative belief that statutory constraints on a limited partner's ability to participate in the partnership's business justified a presumption that a limited partner generally does not materially participate and made further factual inquiry into the matter unnecessary.We do not believe that this rationale properly extends to interests in L.L.P.s and L.L.C.s. As previously discussed, members of L.L.P.s and L.L.C.s, unlike limited partners in State law limited partnerships, are not barred by State law from materially participating in the entities' business. Accordingly, it cannot be presumed that they do not materially participate. Rather, it is necessary to examine the facts and circumstances to ascertain the nature and extent of their participation. That factual inquiry is appropriately made, we believe, pursuant to the general tests for material participation under section 469 and the regulations thereunder.
My view: This is a stupid argument for the IRS to make. When Sec. 469(h) was written, LLCs and LLLPs barely existed. The differences between these new entities and the old limited partnerships are profound, and it is common for LLC and LLLP members to work full time in roles analogous to general partners in limited partnerships. The new entities just aren't comparable to limited partnerships.
Just from the standpoint of the IRS, this is an unwise argument to make. If losses from these entities are per se passive, so is income. An IRS "victory" in this case could open up a world of opportunities for entrepreneurs, who would suddenly find they had lots of passive income from their LLCs that they could shelter with traditional tax shelter partnerships.
Yesterday's ruling doesn't close the case; it was a "summary judgment" motion on the 469(h)(2) issue. The IRS might still challenge the losses under the normal "material participation" standards.
Cite: Garnett, 132 T.C. No. 19.
Below: tax law standards for material participation
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Weapons trial begins for tax holdouts Ed and Elaine Brown
July 01, 2009
Tax-defying couple Ed and Elaine Brown, who held out for months in a fortress-like compound in New Hampshire after they were convicted of tax evasion, were back in court yesterday to face weapons charges arising out of the holdout. It got interesting quickly when Mr. Brown tried to fire his lawyer just as the trial was to begin. The trial judge denied Mr. Brown's requiest.
Mr. Brown said the lawyer wasn't willing to conduct the defense the way Mr. Brown directed. I wonder why? Maybe it has to do with this:
In court filings, the Browns say they are not the people named in the indictment. They sign their motions: “Edward-Lewis:Brown” and “Elaine-Alice:Brown.”“We are not the EDWARD BROWN and ELAINE BROWN,” they wrote, saying if the court continues to deny their contention, “we will again be forced to retreat from this collusive and hostile arena.”
The funky punctuation defense has a poor record in federal courts.
The trial continues today.
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Nerd v. Nerd
July 01, 2009
Two of the esteemed "tax nerds" in our blogroll, Peter Pappas (Tax Lawyer's Blog) and Robert D. Flach (The Wandering Tax Pro) are in the middle of a virtual cage match over what return items increase audit risks and the relative virtues of CPAs vs. other preparers. I hope to post on the battle, but meanwhile I refer you to Monica Lawver's cool-headed coverage.
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July Cavalcade!
July 01, 2009
Summer is in full swing, but you can cool off at the Cavalcade of Risk this week at the Disease Management Care Blog.
The roundup of insurance and risk management blog posts includes an Insureblog must-read on the legal dangers employees may face running "health risk assessments" of their employees.
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It won't work. Let's do it!
June 30, 2009
Robert D Flach, providing his "final word" on why we should license unenrolled non-CPA preparers, says:
First and foremost, it appears that everyone on both sides agrees pretty much that registering and licensing currently "unenrolled" tax preparers (like myself) will do little, if anything, to cut down on fraudulent tax returns and unethical preparers.Just as regulation of CPAs, lawyers, and doctors has not rid us of unethical members of these groups, regulation of tax preparers will not rid us of unethical tax preparers.
Alright then. It doesn't work, but we want to do it anyway. Maybe if I think about it long enough, it will make sense to me.
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FBAR filing due today!
June 30, 2009
Today is the deadline for Form 90-22.1, the foreign financial account report -- otherwise known as the "FBAR" filing. There are severe penalties for failing to file this report on time, up to 50 percent of the value of the account for each year of non-reporting. Criminal penalties can apply to wilful violations.
As if to encourage the rest of us to file, the Justice Department last week announced a guilty plea for FBAR non-compliance by a client of Swiss bank UBS. The TaxProf has a roundup of coverage.
As this plea shows, offshore account secrecy seems to be crumbling. The IRS is offering an amnesty of sorts for those who haven't reported these accounts in the past, and it is very attractive compared to the consequences of getting caught for non-reporting. The amnesty runs through September 23, 2009.
The IRS has unilaterally extended today's deadline for new FBAR filers who have reported all of their foreign-source income but who did not know they had an FBAR filing obligation. Those taxpayers may file without penalty through September 23, but they need to follow special procedures.
If you are filing today, spend the extra four bucks or so and file Certified Mail, Return Receipt Requested. The IRS doesn't save the postmarks, so you need to.
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The 16th Amendment works in Iowa too.
June 30, 2009
Tax Protesters -- or "tax defiers," as they are now known -- like to argue that the 16th Amendment authorizing an unapportioned income tax was never properly ratified, and therefore there is no income tax. Unfortunately for them, the IRS, all federal judges, the U.S. Marshals service, and the Bureau of Prisons have a contrary view.
Elmer Scheckel of Oelwein, Iowa decided to give the argument a try to get out of Iowa income taxes. It didn't go well:
The argument advanced by the Protester is merely a variation upon a claim that has been repeatedly considered and rejected by state and federal courts for decades. The 8th Circuit Court of Appeals and other federal appellate courts from around the country have decisively held that “wages are within the definition of income under the Internal Revenue Code and the Sixteenth Amendment, and are subject to taxation
The Moral: Wishing doesn't make it so.
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Department of Cheap Grace
June 30, 2009
So President Obama was just joshing when he said there would be no tax hike on folks earning less than $250,000. His top aide, Chicago fixer David Axelrod, says those silly promises won't be allowed to stand in the way of the Greater Good. Joseph Thorndike calls this "refreshing":
Weasel arguments trying to square categorical pledges with political realities are dangerous. They encourage (more) voter cynicism and obstruct useful policy development. Better to simply acknowledge the reality. Which, after all, is not such an unpleasant one, at least for Democrats.Which is why Axelrod's admission is welcome. It was also probably unavoidable -- trying to reconcile the health benefits tax with Obama's over-broad campaign promise was never going to fly. But it's still a step in the direction of political truth telling. Which is a refreshing change.
If welshing on campaign promises (less politely known as "lying") is refreshing, we've been well refreshed for lo these many years. What would really be refreshing is if politicians actually were honest before the election, while we could still do something about it.
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Pappas v. Flach
June 30, 2009
Lawyer-Blogger Peter Pappas yesterday listed "5 Slam Dunk IRS Audit Red Flags" increasing risk of an IRS exam. Robert D. Flach, the preparer-blogger from New Jersey, responded. Peter Pappas responds to the response.
UPDATE: And Flach takes another swing! UPDATE II: Pappas parries! And again!
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Will the Department of Economic Development call a press conference for this one?
June 29, 2009
They should:
Business exits Iowa over taxes
The money to subsidize Hollywood has to come from somewhere, but the state will learn that the non-subsidized chumps don't have to stay chumps. They can leave.
Related: IF TRUTH IN ADVERTISING APPLIED TO ECONOMIC DEVELOPMENT AGENCIES
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FBAR deadline relief for new filers
June 29, 2009
The IRS says that folks who didn't know about their foreign financial account ("FBAR") reporting requirements until recently, but who have reported whatever foreign income they have earned for 2008, may file their current report on Form 90-22.1 as late as September 23:
Taxpayers who reported and paid tax on all their 2008 taxable income but only recently learned of their FBAR filing obligation and have insufficient time to gather the necessary information to complete the FBAR, should file the delinquent FBAR report according to the instructions and attach a statement explaining why the report is filed late.Send a copy of the delinquent FBAR, together with a copy of the 2008 tax return, by September 23, 2009, to the Philadelphia Offshore Identification Unit, at the following address:
Internal Revenue Service
11501 Roosevelt Blvd.
South Bldg., Room 2002
Philadelphia, PA 19154
Attn: Charlie Judge, Offshore Unit, DP S-611
In this situation, the IRS will not impose a penalty for the failure to file the FBAR.
Additionally, if all 2008 taxable income with respect to a foreign financial account is timely reported and a United States person only recently learned they have a 2008 FBAR obligation and there is insufficient time to gather the necessary information to complete the FBAR, the United States person may follow the procedures set forth above and no penalty will be imposed.
For everyone else, the deadline is tomorrow. If you haven't filed yet, used certified mail to document your timely filing today or tomorrow.
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Want to read all about preparer regulation?
June 29, 2009
I still need to address Robert D. Flach's thoughts on preparer regulation, but if you want to read all sides of the story in the meantime, Bruce the TaxGuy has put together a good roundup.
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Want to get to know an IRS agent?
June 29, 2009
Peter Pappas tells of "5 Slam Dunk IRS Audit Red Flags."
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IRS Issues Applicable Federal Rates (AFR) for July 2009
June 29, 2009
The IRS has issued (Rev. Rul. 2009-20) the minimum required interest rates for loans made in July 2009:
-Short Term (demand loans and loans with terms of up to 3 years): 0.82%
-Mid-Term (loans from 3-9 years): 2.76%
-Long-Term (over 9 years): 4.36%
Historical AFRs are available at the "links" page at www.rothcpa.com. You can also click here for the rates for prior months as reported in the Tax Update.
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Back at it, for now
June 29, 2009
The Tax Update is back online after a week in the north woods of Wisconsin with mighty Troop 280. While I was battling ticks and learning how to run a climbing tower, Michael Jackson and Dagny Taggart died. The House nearly achieved a first by passing a "Cap and Trade" bill before it was actually written. And a crash on the D.C. subway had a surprising tax angle. I'm still checking for ticks, but more posts will follow. Then I will fade out on a family vacation starting next week.
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Level playing fields?
June 26, 2009
Fine tax blogger Peter Pappas made this comment in his defense of proposals to license tax preparers:
I am merely suggesting that since CPAs, Tax Lawyers and IRS Enrolled Agents are heavily regulated (and by virtue of their education and continuing training are the least likely to engage in unscrupulous conduct) we ought to level the playing field and monitor the rest of the tax preparers, too.
The playing fields are bumpy already. While lawyers have to keep up a certain level of CPE and so on, that can be gamed. One of the most popular schools for lawyers in Iowa is the year-end bar association tax school held at the Marriot. It is popular because it provides lots of CLE in December, when the lawyers are running up against their deadline. It is also popular because it is broadcast closed-circuit in the hotel, so the lawyers can get their CLE without ever leaving their rooms. So the lawyers can do client work, or party, or sleep in, and still get their CLE. Most lawyers take their CPE seriously, but it would be astounding if everyone did. If lawyers can game CPE so easily, how hard could it be for a much larger cohort of licensed preparers?
In return for fulfilling their CPE obligations, the lawyers get a government-enforced monopoly on certain things. They get to draft partnership agreements, even if that really means blessing an agreement actually drafted by the CPA who actually understands the deal and the partnership rules. They get to do wills and contracts and so on. And with attorney-client privilege, they get to operate behind a veil that other preparers would kill for.
Meanwhile, CPAs have a monopoly of their own with the ability to bless audited financial statements. This naturally gives them an opportunity to get tax work ahead of other practitioners. They also get a brand name advantage from the "CPA" designation that drives other practitioners to distraction (in spite of the best efforts of some CPAs to wreck the brand). In other words, the playing field tilts both ways, if I may so butcher the metaphor.
It's in the interest of H&R Block and other private prepares to not screw up too badly; it's bad for business. It's not at all clear that creating an IRS preparer regulation bureaucracy will make things better. In this case, "making the playing field level" works a lot like "suppressing low-cost competition."
It is clear that licensing would cost millions of dollars that could be better used improving IRS information systems so they could spot suspect returns like the credit card companies spot suspect transactions.
Related: Yes, I still don't want to regulate preparers
Next week: is opposing regulation for others just another tool of CPA oppression?
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Wasting money: what's the big deal?
June 25, 2009
Excellent tax blogger Peter Pappas responded to my opposition to preparer licensing in the comments:
I am no way suggesting that the regulation of unlicensed preparers will permanently eradicate bad tax preparation.I am merely suggesting that since CPAs, Tax Lawyers and IRS Enrolled Agents are heavily regulated (and by virtue of their education and continuing training are the least likely to engage in unscrupulous conduct) we ought to level the playing field and monitor the rest of the tax preparers, too.
The regulation doesn't have to be all that involved. It could be as simple as requiring tax preparers to register with the IRS and obtain a preparer number.
In order to renew their registration, each preparer might be required to prove that he or she has obtained a minimal level of continuing education credits necessary to keep up with changing tax laws.
What's the big deal?
...
I am proposing that these new regulations ONLY apply to non-CPA, non-lawyer and non-IRS Enrolled Agents who are already regulated under a different regulatory regime.
If you are not a CPA, lawyer or IRS enrolled agent, then, and only then, would you be required to register with the IRS.
My thoughts:
Peter says " It could be as simple as requiring tax preparers to register with the IRS and obtain a preparer number." But he immediately makes it not so simple by adding a CPE requirerement. That alone will require a major IRS bureau to monitor the CPE and registration of tens of thousands of preparers. The vast majority of the preparers covered will be honest ones that are trying their best to make a living helping folks through the tax maze. The dirty preparers will throw together fake CPE, or get cheap CPE credits online, and still continue to be dirty preparers. Except now they will be dirty tax professionals who can call themselves "Officially licensed tax professionals."
Whan has any regulatory regime not expanded? The next time a tax scam involves a lawyer or accountant -- and it will happen -- the IRS or some congresscritter will say the licensing regime should "at least apply the the minimum standards that apply to H&R Block" to lawyers and CPAs. Any new regulation scheme will eventually cover everyone.
What's the big deal? It will waste resources. The bad guys will quickly adapt to the licensing and go on being bad guys. The IRS will spend millions of dollars shuffling paper and bugging people who are late filing their CPE or whose paperwork goes astray. These millions would be better used upgrading IRS data analysis techniques to enable it to spot bad preparers by their data footprint. Cheaters leave tracks all over their returns; sophisticated data mining will be much more effective than collecting tons of CPE paperwork.
More tomorrow.
Related: Yes, I still don't want to regulate preparers
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Newton's Knopf Knocked for non-filing
June 24, 2009
Back in the day, Iowa lawyers were required to vouch that they had filed their tax returns every time they renewed their bar licenses. I wonder if that rule saved some attorneys from this sort of embarrassment:
Former Newton attorney R. Eugene Knopf has been sentenced to pay more than $26,000 in restitution after pleading guilty to two felony criminal charges for failing to file state income tax returns.Knopf was placed on probation for five years after District Court Judge Glenn Pille suspended two five-year prison sentences and two $750 fines. He pleaded guilty in February to two of the four counts of fraudulent practice in the second degree, a class D felony, filed against him in April of 2008. His sentencing was on June 5 in Polk County.
According to court records, Knopf intentionally committed fraud by failing to file state income tax returns for four straight years — in fiscal years ending in 2001 to 2004.
Mr. Knopf's non-filing may go back as far as 1993.
There's something puzzling when a lawyer or CPA fails to file returns. Sometimes it's a symptom of a life that has gone off the rails. Sometimes it may be a sort of arrogance - they make their living manipulating the system, and eventually they think they can weasel out of any difficulty. Whatever the reason, it's a crummy way to end a career.
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April 15? Feh. Missing the June 30 foreign financial account deadline can be much worse.
June 23, 2009
While the April 15 deadline for 1040s is ugly enough, there are a lot of ways to deal with it. There are extensions, and even installment agreements. If you miss the deadline, the late filing penalty tops out at 25 percent of the underpayment -- not fun, exactly, but often manageable.
Now imagine that the penalty for filing a late 1040 were half the balance in your bank accounts, but no less than $10,000. But that's outrageous - they'd never be that nasty, would they?
Yes they would. And they are. Just not for your 1040.
Foreign Bank Account Reports due June 30
The horrific penalty of 50 percent of the highest balance in a bank account for the year, but no less than $10,000, applies for late filers of Form 90-22.1, the Report of Foreign Bank and Financial Accounts. It is due June 30, and no extension is available. What's worse, you might need to file the form -- sometimes called the "FBAR" form -- even if you don't own a foreign bank account.
You are required to file the FBAR if you are a "United States person" and you have either
- A financial interest, or
- signature authority
over foreign financial accounts exceeding $10,000 in aggregate.
If your business keeps a bank account in Canada or China because you buy things there, the business needs to file -- as does everybody in your company with signature authority on such an account, down to the payables clerk who signs checks attached to your approved Chinese purchase orders. An exception may apply to employees of some larger companies.
Of course you don't have to have a business to have a foreign bank account. The FBAR requirements apply, for example, to personal bank accounts you might have opened while on a temporary overseas assignment. They also apply to accounts with offshore gambling Web sites.
Be sure to document your filing! FBAR filings must be postmarked no later than June 30. While it is always a good idea to send tax filings Certified Mail, Return Receipt Requested, it's especially important with FBAR reports. Practitioners report that the Detroit Service Center, where the reports are filed, throws away the postmarked envelopes the forms come in. Then the IRS (outrageously) asserts penalties for forms that come in as early as July 2. When that happens, a postmarked certified mail receipt, which costs $4.90, can save you $10,000 or more.
If you have missed prior FBAR deadlines, consider taking advantage of the current IRS semi-amnesty that runs into September.
This post originally appeared at Iowabiz.com, the Des Moines Business Record's blog for entrepreneurs.
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