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Increased Tax Preparer Oversight

2010 January 6
by dtolleth

In a press release on 4 January 2010, the IRS outlined plans to step up oversight of tax preparers.  For taxpayers seeking help to prepare their tax returns this is good news. Finding qualified tax preparers will be easier.

Exempted from the new oversight procedures are Enrolled Agents, CPAs, and Attorneys who are already subject to more stringent IRS oversight. Included are a large group of previously unregulated tax preparers who may or may not possess the requisite knowledge to correctly prepare a taxpayer’s return.

IRS Proposes New Registration, Testing and Continuing Education Requirements for Tax Return Preparers Not Already Subject to Oversight

Higher Standards to Boost Protections and Service for Taxpayers,
Increase Confidence in System, Yield Greater Compliance with Tax Laws

WASHINGTON –– The Internal Revenue Service kicked off the 2010 tax filing season today by issuing the results of a landmark six-month study that proposes new registration, testing and continuing education of tax return preparers. With more than 80 percent of American households using a tax preparer or tax software to help them prepare and file their taxes, higher standards for the tax preparer community will significantly enhance protections and service for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term.

To bring immediate help to taxpayers this filing season, the IRS also announced a sweeping new effort to reach tax return preparers with enforcement and education. As part of the outreach effort, the IRS is providing tips to taxpayers to ensure they are working with a reputable tax return preparer.

“As tax season begins, most Americans will turn to tax return preparers to help with one of their biggest financial transactions of the year. The decisions announced today represent a monumental shift in the way the IRS will oversee tax preparers,” said IRS Commissioner Doug Shulman. “Our proposals will help ensure taxpayers receive competent, ethical service from qualified professionals and strengthen the integrity of the nation’s tax system. In addition, we are taking immediate action to step up oversight of tax preparers this filing season.”

Based on the results of the Return Preparer Review released today, the IRS recommends a number of steps that it plans to implement for future filing seasons, including:

Requiring all paid tax return preparers who must sign a federal tax return to register with the IRS and obtain a preparer tax identification number (PTIN). These preparers will be subject to a limited tax compliance check to ensure they have filed federal personal, employment and business tax returns and that the tax due on those returns has been paid.
Requiring competency tests for all paid tax return preparers except attorneys, certified public accountants (CPAs) and enrolled agents who are active and in good standing with their respective licensing agencies.
Requiring ongoing continuing professional education for all paid tax return preparers except attorneys, CPAs, enrolled agents and others who are already subject to continuing education requirements.
Extending the ethical rules found in Treasury Department Circular 230 — which currently only apply to attorneys, CPAs and enrolled agents who practice before the IRS — to all paid preparers. This expansion would allow the IRS to suspend or otherwise discipline tax return preparers who engage in unethical or disreputable conduct.
Other measures the IRS anticipates taking are highlighted in the 55-page report released today.

Currently, anyone may prepare a federal tax return for anyone else and charge a fee. While some preparers are currently licensed by their states or are enrolled to practice before the IRS, many do not have to meet any government or professionally mandated competency requirements before preparing a federal tax return for a fee.

First Step: Letters to 10,000 Preparers

The initiatives announced today will take several years to fully implement and will not be in effect for the current 2010 tax season. In the meantime, the IRS is taking immediate action to step up oversight of preparers for the 2010 filing season.

Beginning this week, the IRS is sending letters to approximately 10,000 paid tax return preparers nationwide. These preparers are among those with large volumes of specific tax returns where the IRS typically sees frequent errors. The letters are intended to remind preparers to be vigilant in areas where the errors are frequently found, including Schedule C income and expenses, Schedule A deductions, the Earned Income Tax Credit and the First Time Homebuyer Credit.

Thousands of the preparers who receive these letters will also be visited by IRS Revenue Agents in the coming weeks to discuss their obligations and responsibilities to prepare accurate tax returns. This is part of a broader initiative by the IRS to step up its efforts to ensure paid tax return preparers are assisting clients appropriately. Separately, the IRS will be conducting other compliance and education visits with return preparers on a variety of issues.

In addition, the IRS will more widely use investigative tools during this filing season aimed at determining tax return preparer non-compliance. One of those tools will include visits to return preparers by IRS agents posing as a taxpayer.

During this effort, the IRS will continue to work closely with the Department of Justice to pursue civil or criminal action as appropriate.

Steps Taxpayers Can Take Now to Find a Preparer

In addition to the stepped-up oversight of preparers, Shulman also announced a new outreach effort to help make sure taxpayers choose a reputable preparer this filing season. That’s particularly important because taxpayers are legally responsible for what is on their tax returns — even if those returns are prepared by someone else.

“Taxpayers should protect themselves from unscrupulous preparers,” Shulman said. “There are some simple steps people can take to choose a reputable tax preparer.”

Most tax return preparers are professional, honest and provide excellent service to their clients. Shulman offered the following points for taxpayers to keep in mind when selecting a tax return preparer:

Be wary of tax preparers who claim they can obtain larger refunds than others.
Avoid tax preparers who base their fees on a percentage of the refund.
Use a reputable tax professional who signs the tax return and provides a copy.
Consider whether the individual or firm will be around months or years after the return has been filed to answer questions about the preparation of the tax return.
Check the person’s credentials. Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters, including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.
Find out if the return preparer is affiliated with a professional organization that provides its members with continuing education and other resources and holds them to a code of ethics.
More information about choosing a tax return preparer and avoiding fraud can be found in IRS Fact Sheet 2010-03, How to Choose a Tax Preparer and Avoid Tax Fraud.

Taxpayer Advocate Annual Report

2010 January 6
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by dtolleth

Nina Olsen, National Taxpayer Advocate, released her annual report to Congress yesterday.  The Internal Revenue Code requires the National Taxpayer Advocate to submit its report each year and “to identify at least 20 of the most serious problems encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems . Thus, the statute requires that the report focus on problems and areas in need of improvement.”

At the conclusion of the Executive Summary she writes:

As I see it, the IRS is subject to three diverging forces – increased responsibility for non-core tax administration duties, increasing demand for taxpayer service (including telephone assistance) and declining resources for that demand, and collection policies that mask a laissez faire attitude to taxpayer harm under the guise of “efficiency .” The taxpayer is wedged in the middle of these forces, being pulled in all directions, but never the right one. How the IRS weathers this storm depends on its willingness to candidly reassess its taxpayer service and enforcement strategies and commit to necessary changes, as well as on congressional oversight to ensure that this happens.

The report is chocked full of insightful observations and recommendations about how the IRS can better service taxpayers, improve taxpayer compliance, and how Congress can improve legislation to make administration of how the Treasury and IRS administer the tax collection process.

You make want to take a look at the Executive Summary: Preface, and Highlights. (You must have a copy of Adobe Reader to view this document.)

Paper Filed Tax Returns – 10 Times Higher Error Rates

2009 October 5
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by dtolleth

Many taxpayers prefer mailing a paper copy of their tax return to the Internal Revenue Service, rather than e-filing their return. According to a 10 September 2009 report issued by the Treasury Inspector General for Tax Administration, error rates are

historically, less than 2.5 percent for e-filed tax returns versus more than 25 percent for paper-filed returns.

So, there is a much lower chance that the IRS will contact you to correct errors if you e-file.

Autos Purchased in 2009

2009 September 25
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The “Cash for Clunkers” program this summer was a big hit with consumers. Today the Department of Transportation announced that almost 700,000 cars were purchased under the program, netting consumers credits of $3400 – $4500 off the purchase price with no federal tax consequence. In most states, the sales tax was charged on the full price of the automobile, before the credit was applied. This was not popular with some buyers who viewed the credit as a reduction in the price of the auto, rather than as a government assist in paying the full price of the car.

In any event, sales and excise tax on new automobiles has long been a deductible item on Schedule A for those eligible to itemize. The great news is, for new vehicles purchased between 17 February and 31 December 2009, these taxes may be deductible, even for those who do not itemize. The deduction is limited to taxes paid on vehicles valued up to $49,500; it is phased out for high income taxpayers.

Taxpayers living in states with no sales tax, such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon, can deduct “fees or taxes … assessed on the purchase of the vehicle and … based on the vehicle’s sales price or as a per unit fee.”

Should I Upgrade to Windows 7?

2009 September 25
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Windows 7 is launching on October 22 with the big marketing blitz already underway. By many accounts it is the best operating system Microsoft has ever produced. So, the question is, “Should I upgrade?” The short answer is, “Not right away.”

For a business owner, there are just too many issues and risks associated with being an “early adopter” of something that can profoundly affect the operation of your business. It is best to take a wait and see approach to these things.

Among the many issues you must address, compatibility with existing computer hardware and with applications you use to run your business are primary concerns.

  • From a hardware perspective, if you are running Windows XP, your hardware probably does not support Windows 7. Even if it does, the upgrade process – Microsoft calls it a “custom install” – is not for the faint-of-heart. You will need to copy all of your files to a backup device, wipe out everything on your hard drive, install Windows 7, copy all of your files from the backup, and then to reinstall all of your applications from their original CDs. If you are running Microsoft Vista, and if you choose just the right upgrade path, you may be able to do an “in-place upgrade” which does not require wiping your hard drive.
  • From an applications perspective, while Microsoft has given software developers ample time to prepare, the norm is for some to be ready and some not. If your software maker is ready, it may require a paid upgrade to get a Windows 7 compatible version. For example, Intuit, maker of QuickBooks accounting software used by many small businesses, is only supporting the just-released QuickBooks version 2010 on Windows 7.

Our advice for most business owners is to wait until you are ready to buy new hardware and then buy it with Windows 7 already installed. Of course, be sure your business applications will run under Windows 7 before you upgrade your systems.

The Wall Street Journal’s Walt Mossberg writes excellent technology columns for non-techies. His Windows 7 upgrade articles are here, here, and here.

In summary, unless you have very new hardware running Windows Vista and your business applications already support Windows 7, do not upgrade.

If you really want to migrate from Windows XP to Windows 7, in most cases you should buy a new computer with Windows 7 already installed and plan on purchasing upgrades to your business applications.

But, we recommend waiting until the initial bugs are shaken out of Windows 7 and until all of your vendors have produced Window 7-compatible versions of their software.

Which browser do you use?

2009 August 27
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Robert Vamosi at Windows Secrets today posted a very helpful (and concise) rundown of things you can do to keep your computing environment safe in the face the continuous threats from internet attacks.  Among the recommendations are to choose a security suite that does not overburden your system, but provides up-to-date protection, choosing the best way to keep your Windows environment up-to-date, and choosing the most secure browser.  I want to expand on this last topic.

In my experience, most small business users rely on Internet Explorer as their browser of choice.  And they often use an older version of IE, leaving them even more vulnerable to attack.  It may surprise you to know that security experts have long recommended alternatives such as Mozilla’s Firefox, Apple’s Safari, and Google’s Chrome, all of which have fewer security vulnerabilities.  The annoying part of this is that some websites are written so that they will only work with IE.  This means you really should have two browsers on your desktop, IE to use only when you really need it and one of the other three for normal use.  One real benefit of the alternate browser choices is they have a MUCH cleaner user interfaces.  This means you get more screen space to view the website you want to see with less of the clutter I see with most IE installations.  (Many IE interfaces I see use up 30-40% of the space on the computer screen with Google bars, Yahoo tools, security add-ons or whatever…annoying.)

Finally, keep your browser up-to-date.  Upgrade from IE 5 or 6 to IE 7 today.  Firefox and Safari will automatically tell you when there is a new update.  For Chrome, you need to manually check for updates.

IRS Features Recovery Tax Credits on YouTube, iTunes

2009 August 24
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Last Friday the IRS announced a YouTube video site and an iTunes IRS podcast site covering the American Recovery and Reinvestment Act of 2009 (the stimulus package).

Subjects covered include

  • IRS Undelivered Refunds & Economic Stimulus Payments 2008
  • IRS Tax Breaks for 2009-2010
  • IRS Vehicle Tax Deductions
  • Home Energy Tax Credits
  • Dirty Dozen – 12 Common Tax Scams
  • Education Tax Credit

Report of Foreign Bank and Financial Accounts

2009 August 22
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With all the recent news about secret Swiss bank accounts (see for example this IRS posting about the IRS/UBS agreement, this NY Times article, and this Wall Street Journal article), it is worth noting an easy-to-overlook section of on your tax return.

Schedule B questions about ownership or control of foreign accounts

Form 1040, Schedule B - Questions about ownership or control of foreign accounts

According to the IRS:

If you own or have authority over a foreign financial account, including a bank account, brokerage account, mutual fund, unit trust, or other types of financial accounts, then you may be required to report the account yearly to the Internal Revenue Service. Under the Bank Secrecy Act, each United States person must file a Report of Foreign Bank and Financial Accounts (FBAR), if

  • The person has a financial interest in, or signature authority (or other authority that is comparable to signature authority) over one or more accounts in a foreign country, and
  • The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.

A United States person is not prohibited from owning foreign accounts. The FBAR is required because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions. The FBAR is a tool to help the United States government identify persons who may be using foreign financial accounts to circumvent United States law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.

Identity Theft and the IRS

2009 August 19
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by dtolleth

The Internal Revenue Service Office of Privacy, Information Protection, and Data Security Actively supports Taxpayers in their efforts to protect their identities, particularly as this relates to Identity Theft, falsely filed tax returns and other taxpayer information. If you suspect you are a victim of identity theft call

  • IRS Taxpayer Advocate Service at 877-777-4778
  • IRS Identity Protection Specialized Unit at 800-908-4490

Alternately, you may prefer to ask your tax professional to make these calls on your behalf.

The IRS also suggests you file a police report, contact your financial institutions, contaact all three major credit reporting agencies, and the Federal Trade Commission.

Experian

Equifax

Transunion

Federal Trade Commission