Rubbed the wrong way

The new paid tax preparer regulations and competency examinations have caused quite a stir in the tax preparation community, but most agree that some regulation of tax preparers will be beneficial. However, what has some tax professionals fired up is the list of exemptions for who doesn’t have to pass a competency examination, and Robert Flach is no exception:

My strongest objection to the proposed regulations comes from exempting attorneys and CPAs from the competency examination and continuing professional education requirements. This is a big mistake.

I happen to think he makes a valid point.  Being a CPA or attorney does not mean that you are a tax professional proficient in tax law in the same way that passing the medical boards does not make you a brain surgeon.  You may make a better attempt than the average lay person, but you’re not necessarily a tax expert.

However, he starts getting a little aggressive in his anti-CPA stance later on in the same post:

And as far as I know, while CPAs and attorneys are subject to CPE requirements that vary by state, there is no requirement for either to take even 1 CPE in federal 1040 taxation to maintain their license to practice.

and again in a post a week later about choosing a tax professional to prepare your return:

In my 38 years of preparing tax returns I have found more mistakes on 1040s prepared by CPAs than by any other class of preparer, including the taxpayer himself.

Now I’m not out here in professional blog world to call people out and make enemies, but this series of posts from someone who I like to read and learn from just kept bothering me.  I’m a CPA, yes, but the majority of my experience has been in tax. I had 56+ hours of CPE that was taxation CPE last year.

I’m not required to take all my CPE hours in taxation, but since so much of the work I do is tax work, it only makes sense.  I’m required to have 80 hours of CPE every 2 years.  Everything I do from January to April 15 is tax, do you honestly think I’m not going to take any of that CPE on tax topics?

I’ve also seen my fair share of mistakes made by the prior preparer, but I’ve never really sat down and tallied up the number and severity of mistakes by class of preparer.  Is it that he didn’t expect to see some of these errors from CPAs, and so those have stuck in his mind, while an error from the taxpayer himself was more understandable and less noteworthy in long-term memory?

He also seems to have found a tax professional that is preparing tax returns for auditors and attorneys in his comment bag, because I don’t know of any CPAs running a tax practice who would not prepare their own returns:

Truth is many CPAs and attorneys have little tax experience. I should know. I prepare tax returns for them.”

So, I agree that being a CPA does not guarantee that you are a tax professional, but a CPA does have professional standards that demand competence before agreeing to perform professional services.  If a CPA is signing tax returns, but taking no CPE in taxation and making obvious mistakes, perhaps he or she is in violation of professional standards.  Maybe Robert should bring some of his concerns to the AICPA regarding these preparers, rather than indict all CPAs as less than professional tax preparers.

Lawyers don’t get Walmart

I sat in on an enlightening chat today thanks to a heads up from Joe Kristan’s Tax Update Blog with Sen. Joe Bolkom and Rep. Jeff Kaufmann, lawmakers involved in setting Iowa’s tax policy, regarding the future of some of Iowa’s generous tax credits.  The biggest thing that I learned today was how the legislature has viewed the state of Iowa: like a law firm that is fighting to retain its biggest clients, rather than focusing on its value proposition.

That’s the essence of the tax credits, to attract or retain what government officials feel are the best clients for the state of Iowa.  I propose that the state of Iowa take more of a Wal-Mart approach, which is well summarized in the Quick and Dirty Iowa Tax Reform Plan at the Tax Update Blog.

The state government needs to strip down unnecessary (notice I’m not talking about waste, fraud or abuse) spending and get back to the basics of what the state government is obligated to provide to its citizens.  Then with this lean and mean philosophy, pass that savings along to the customers (taxpayers) and grow revenues for the state by attracting new customers, not by charging more to the current customers for something they don’t value.

New Homebuyer Tax Credit Form Available

For those who purchased a home after November 6, 2009, the wait is finally over, you can now apply for your first time homebuyer tax credit with the new and improved form 5405 and its related instructions.  You can use this new form with either your 2009 tax return or an amended 2008 tax return.  However, you will not be able to e-file your 2009 tax return if this form is attached.  If you are expecting a refund in addition to the credit, filing on paper and the additional verification of form 5405 and its attachments will slow down that refund as well.

With the new form 5405, the IRS is asking you to attach proof that you actually bought the house to help deter fraudulent claims.  Examples of what they consider proof:

  • A copy of the settlement statement, preferably form HUD-1
  • A copy of the executed retail sales contract for mobile home purchases
  • For a newly constructed home, a copy of the certificate of occupancy

On these documents it is important that every line indicating the need for a signature is signed.  The IRS may reject tax returns that do not have all supporting documents signed.

The new form 5405 includes sections for long-time resident homebuyers to claim their credit as well, up to $6,500 if they have lived in the same residence for a period of 5 consecutive years out of the last 8 year period.  The IRS is also looking for some proof that you lived at the same residence for 5 consecutive years in the last 8 years so they would like you to attach the following for the 5 consecutive year period you assert:

  • Form 1098 or other mortgage interest statement
  • Property tax records
  • Homeowner’s insurance records

For more detail about the requirements refer to the instructions for form 5405 or read the IRS press release.  If you find you need additional help, please consult a licensed tax professional regarding the best decision for your specific situation.

Hurry up and wait for your home buyer tax credit!

If you bought your new home after November 6, 2009, be prepared to wait before being able to file an amended 2008 return to claim your refund for the new and improved  home buyer tax credit. The changes made to this legal provision on November 6, 2009 prompted the IRS to revise the form 5405 that is required to claim the refund.  The IRS expects this form to be available by January 8, 2010, and then you can submit your amended 2008 returns to begin the process of applying for the credit.

It is expected that the new form will require additional documentation to be attached to substantiate the legitimacy of the credit as significant fraud with regard to this credit has been suspected.  It is also notable that any tax return that has the new form 5405 attached will likely be required to file in paper.  While this is not an issue for an amended 2008 return that must be filed on paper anyway, taxpayers who include this form on their 2009 returns may experience significant delays in receiving refunds due to the delay in paper processing and the scrutiny surrounding this credit.

Really Share the Wealth

Over the last week I have heard some replays of statements from our sharing is caring President regarding his ideas about “sharing the wealth” and “redistributive justice.”  It seems to me that he and his friends have somewhere in their childhood missed this wise old saying, “Give a man a fish, feed him for a day.  Teach a man to fish, feed him for a lifetime.”  I understand that there is a social good we all receive from reducing poverty in our great nation, but we need to do so in a way that is sustainable and does not create a prolonged burden on those that are out “fishing.” 

There are a good many people in our country that have wandered down a path of negativity in life and are seen by many as a menace.  However, I think that we can find some positive qualities in most that will help us in determining what type of fishing we should teach them.  Take a high level drug dealer for instance, talk about a menace to society.  Most people would write this person off and not care if they were killed on the street.

What if this person is really just an enterpreneur that never learned to work in the legitimate system or didn’t have financing for capital to start a profitable venture.  This person definitely has to understand quality control, sales and marketing, distribution management, vendor relationships, and customer satisfaction.  Thinking about the skills they may have acquired illegitimately may help us to find a good fit for them and provide long-term rehabilitation.  Do you think a person formerly running their own drug enterprise is going to find long-term fulfillment working on the line at Burger King for peanuts per hour?  No wonder they relapse into being their own boss and making real money.

There also seems to be a prevailing attitude that we can just educate people and that the path to good jobs is always through more education.  Now that has worked out well for me, but what if we are dealing with an entrepreneurial person that truly will never be happy working for someone else no matter how good the job is?  A job and a nifty resume aren’t always the answer to economic woes.  Sometimes it’s more about acquiring some useful skills or making some quality connections that give people a foot in the door to the life they really want.

At the end of the day people need to understand how to add value to our legitimate economic system in a way that compensates them well for the skills and connections they have.  Stop complaining about not being able to find someone to give you a job or give you some education or give you some of their wealth, but learn how to add value and create your own wealth.  We should focus our efforts on helping people understand themselves and how they fit into the picture of value creation as independent contributors, not dependent hand holder outers.  Remember, the hand you hold is the hand that holds you down.

Extending and Expanding the Homebuyer Tax Credit

The new and beefed up homebuyer tax credit will likely help home sales continue to improve, but does it help in a temporary or long-term manner?  While a temporary boost makes us all feel warm and fuzzy, the real focus of any economic program needs to come back around to long-term fixes.

An area of the expanded program I have a real problem with is the extension of the credit to those that already have a home.  They need to have lived there for at least five years, but I don’t know how this matters much when you’re giving someone money to take one home off the market and put another one right back on.  This may stimulate home sales and inflate prices a bit, but it actually has a net zero effect on home inventory.

Another conceptual problem that I have had with the credit from the first time it rolled out is that we are trying to fix a market that suffered inflated prices due to outside manipulation by trying to stimulate inflated prices with outside manipulation, because we liked the higher prices better.  Higher home prices made us all feel wealthier and to the extent that you could take a loan on the inflated equity on your home and spend that cash, it truly did inflate your wealth.

The problem is that the wealth created by inflating home prices wasn’t real wealth, it was a glitch in the system that distorted the market with inflated, but unsustainable prices.  To the extent we are trying to restore that false market, the homebuyer tax credit only delays the day that we have to face the real market.

The long-term fixes to the market are the ones that are taking place on the lending side of the equation with tighening lending standards and honest loan evaluation.  More conservative valuation estimates for homes.  Making loans that will most likely be repaid, not making loans with the intent to refinance on a higher valuation in a few years.

The government throwing credit money around to help home sales will mostly leave us with temporarily inflated home prices and a bigger tax bill to pay in the future.  As if there weren’t plenty of other plans for spending all of our future income.

Keeping Good Records Reduces Stress at Tax Time

August 28, 2009 IRS Summertime Tax Tip 2009-23

Although most people won’t be filing their tax returns for several months, the dog days of summer are actually a great time to start planning for the tax filing season by ensuring your records are organized.  Whether you are an individual taxpayer or a business owner, you can avoid headaches at tax time with good records because they will help you remember transactions you made during the year.

Here are a few things the IRS wants you to know about recordkeeping.

Keeping well-organized records also ensures you can answer questions if your return is selected for examination or prepare a response if you are billed for additional tax. In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, you should keep any and all documents that may have an impact on your federal tax return.

Individual taxpayers should usually keep the following records supporting items on their tax returns for at least three years:

  • Bills
  • Credit card and other receipts
  • Invoices
  • Mileage logs
  • Canceled, imaged or substitute checks or any other proof of payment
  • Any other records to support deductions or credits you claim on your return

You should normally keep records relating to property until at least three years after you sell or otherwise dispose of the property. Examples include:

  • A home purchase or improvement
  • Stocks and other investments
  • Individual Retirement Arrangement transactions
  • Rental property records

If you are a small business owner, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Examples of important documents business owners should keep Include:

  • Gross receipts: Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC
  • Proof of purchases: Canceled checks, cash register tape receipts, credit card sales slips and invoices
  • Expense documents: Canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments
  • Documents to verify your assets: Purchase and sales invoices, real estate closing statements and canceled checks

For more information about recordkeeping, check out IRS Publications 552, Recordkeeping for Individuals, 583, Starting a Business and Keeping Records, and Publication 463, Travel, Entertainment, Gift, and Car Expenses. These publications are available on the IRS Web site, or by calling 800-TAX-FORM (800-829-3676).


Health care reform that will work

I agree that health care reform is desperately needed.  I also agree that prices have spiraled out of control and we need to stop it.  I don’t think that the government running the health care system or being a larger player than they already are will help anything.  According to the Kaiser Foundation in 2004 there were 42 million people covered by Medicare and 52 million people covered by Medicaid. There are about 87 million total covered between the two programs as 7 million are dual eligible.  So with our population of 300 million people, almost a third already have access to an existing public option.

Another public option is not the solution, but systematic reforms could change the way consumers consume health care, reducing costs for us all.

  1. Front the money. If individuals had to front the money for their own health insurance, it’s more likely that they would consider the price of a procedure, and actually demand this information before moving forward.  Not that it will change their mind on the necessity of the procedure, but the awareness of price may lead to competition on price, delivering lower costs for us all.
  2. Extend tax benefits to individuals. Keeping the benefits of providing health insurance on the employer side has kept the policy in the employer’s hands.  Extend tax benefits to individuals the same way you would to the self-employed so that opting out of your employer’s group option can make cents.  This is especially true for young employees in aging organizations where the young may pay higher premiums than they would in the private insurance market to subsidize the older participants in their group.
  3. Encourage competition in insurance. This issue is so complicated that it’s hard to know where to start, but some common sets of regulations that allow competition to flow more freely from state to state would be a great place to start.  This should not come as a federal mandate, but as a cooperative of the states utilizing what is already working best in various parts of the country to make some uniform guidance and grounds for competition.

These reforms would help to put market pressure downward on prices for both care and insurance as well as upward pressure on quality of care.  There are efficiencies under development in the health care market that are not being exploited because of the regulatory state of affairs and third-party payer system.  Telemedicine holds great promise to deliver care more efficiently, but may be held back if insurance companies do not give doctors a code to be paid for this service.

However, innovations such as this would take hold more quickly if the perception of health insurance were to change drastically in the marketplace.  Currently, health insurance is viewed as a way to avoid paying anything for medical care, so that the consumer can consume health care freely and let someone else pay for it, so long as they can ante up with the monthly premiums.

If health insurance were perceived more like homeowners insurance, where you take care of maintenance yourself and use the policy for major damages, doctors and patients would have more control over care than the insurance companies.  This would also drive down the cost of health insurance as much more of the health care spending would be cash from the patient to the doctor instead of from the insurance company to the doctor.

MACRS Half-year convention Depreciation Schedule

This Excel spreadsheet uses lookup functionality to pull in the proper MACRS Half-year convention rate from a table to use in the depreciation schedule.  The lookup that is functionally used is the VLookup as I felt this was the simpler method of accomplishing this functionality, but in column H it has also been demonstrated using the Index function just to drive home the point that there is more than one way to get the job done.

I don’t know if this has a lot of practical application as it will certainly not replace any type of tax depreciation software, but it is a fun exercise to gain additional familiarity with the uses of lookup and index functions.  It may be useful to do some quick entry of a few items to see what the impact may be on some planning issues or for clients to track some of their purchases throughout the year.  This spreadsheet will also function rather well within Google documents for those that do work in the cloud.

MACRS Half-year convention depreciation schedule

$1.3 Billion for 2005 Non-Filers

The IRS has $1.3 billion in unclaimed property for 2005 tax filers who have merely failed to file a return.  Some of these filers were not required to file a return, but may have had with-holding or made estimated payments in excess of their tax liability.  These returns are due by April 15, 2009, before the window of opportunity closes.

The IRS estimates that half of those who could claim a refund would receive more than $581, definitely a couple tanks of gas and some groceries to help out the folks in tough economic times.  In Nebraska there are approximately 5,900 individuals with a median refund estimated to be $548, and in Iowa there are approximately 11,800 individuals who have not filed with a median refund estimated to be $587.