The Tax CPA

Military Thoughts

2011-06-01T22:39:00.003-04:00

Thanks to the Tax Girl for her piece Tax Tips for the Military on Memorial Day. My husband heads overseas in a few weeks for a six-month tour with the Air Force, and I appreciate everyone thinking of the military this past weekend.

I look forward to announcing my husband's safe return around the start of next tax season!

And thank you Kay, as well! ... Memorial Day remembering, planning

Work in Progress...

2011-02-04T00:13:00.003-05:00

I'm going to say this blog is a work in progress, where the term "progress" has a very loose meaning.

As I explain over at my less technical (i.e. more "touchy-feely") blog, I'm going to be on blog hiatus for awhile, as my husband will be serving overseas with the Air Force.

I often note that I won't be perfect until my next life, so I guess that applies to my blog too. Here's to another life with a perfect blog!

Good luck with tax season!

And so it begins

2010-08-27T18:04:00.042-04:00

Spending a beautiful Friday afternoon with four kids running around (only two are mine), I took a moment to check Twitter chatter, and was excited to read (via @taxtweet) "Obama tax reform panel report released." (I realize I am odd to find the news exciting, but accepted my oddity years ago.)

The report arrives 8 months past the original deadline.

Kay Bell and Professor Nellen give us their first impressions, Professor Nellen writing: "This 126 page report does not include recommendations but instead in an analysis of a variety of proposals that have been made by various groups in the past with a brief explanation of advantages and disadvantages of each. So, really nothing new."

I think Professor Nellen is correct that this report doesn't present anything new. I do hope it gets some kind of political attention, and that it gets dialogue started. The preface notes that: "The Board gathered information from business leaders, policy makers, academics, individual citizens, labor leaders, and many others."

There are a lot of smart people with a lot of good ideas, and I'm glad we're at least attempting to gather the ideas in one place.

The introduction to the summary of alternatives for simplification includes this comment: "The complexity of the tax code is partly the result of the fact that new provisions have been added one at a time to achieve a particular policy goal, but with inadequate attention to how they interact with existing provisions."

I liken the tax system to a medical patient who is prescribed a new medication for each new symptom, without being effectively treated as a whole.

Some wish the panel had been allowed to consider broader reform. "We received many suggestions for broad tax reform, and some members of the PERAB believe that such reform will be an essential component of a strategy to reduce the long-term deficit of the federal government. But consistent with our limited mandate, we did not evaluate competing proposals for overarching tax reform in this report."

As much as I believe broad reform is needed, I'm starting to accept the hard reality that people struggle with big change. (I enjoy reading some of the research on change.) If the alternatives are to start with small change or to debate broad reform that doesn't lead to any reform, I'll take the small change, with the hope of building change momentum.

One big change that is listed as an alternative (on page 50) I support wholeheartedly: Repeal the AMT!

I look forward to reading others' thoughts on the report...

Caution is the better part of valor... sometimes

2010-08-09T13:53:00.027-04:00

Back in Ohio, we used to pass a street sign each week that said: "Right turn with caution." (Which was probably safer than "Right turn with abandon.")

My impression is that accountants are a cautious bunch. We like to look before we leap. When we learn in the news of a disaster that could have been avoided with more safeguards, we point to it and say: "See, that's why we need to be careful."

For example, Key Bell shares a report of Donald Bren's $1.4 million federal tax refund stolen by an ID thief. She writes: "While Bren and others at his rarefied income level are an identity thief's dream target, any of us can become victims."

Kay is (as usual) absolutely correct.

David McClure recently wrote on CPATechViews:

I have dropped out of FaceBook, don’t Twitter or Tweet, and refuse to give real information to any web site. And I wipe my cookies and tracker caches every single night. Because I do not want to let advertisers know who I am, where I am or what I am thinking about. That may seem extreme, but you should consider it as well. I’m a pretty stable guy, not a privacy lunatic by any means, but I am scared.

And so as with all things in life, we find ourselves dealing with the gray area. I understand McClure's position, and at the same time am not taking the same position. Perhaps I am setting myself up for trouble by staying active online. But I keep thinking of the Spanish proverb quoted in one of my favorite movies ("Strictly Ballroom"):

"A life lived in fear is a life half lived."

I'm not about to go sky diving or anything, but I'll stick around on Twitter, and hopefully not have my tax refund stolen. (To any ID thieves out there: there's not a whole lot of money to be gained from swiping my name.)

Dealing with the gray

2010-07-27T14:44:00.033-04:00

Joe Kristan writes an interesting post today, discussing a truth that sometimes gets lost in the shuffle: when it comes to the sources of wealth, "It's not just luck."

My client base is made up of of people that are "rich" by Geithner standards. They are small business operators who have achieved a little success in their S corporations and partnerships, generating enough taxable income to put themselves in the top tax bracket. They have had some luck, or at least not catastrophic bad luck, but as a rule they also work very hard. Many have taken huge chances, and some lost almost everything before they finally achieving some success.

As I mused last year, I too am not a fan of blanket statements about the "rich." There are good, hardworking people all across the socioeconomic spectrum. I believe that neither wealth nor poverty is solely a product of luck.

In this world of gray, we as a people somehow have to figure out how to deal with the outliers: the idle rich and the helpless poor. I grow frustrated with the flawed logic that often appears: that all poor people are poor through no fault of their own, that all rich people are lazy and lucky. Some poor people earned their poverty through bad choices; some rich people really did earn their wealth.

An equally flawed logic exists that a purely free market would solve everything. While I'm a firm believer in the invisible hand, I also know that we must address externalities.

Upon mentioning my belief in capitalism, I expect to hear: "of course you support capitalism, it works for you." It's unfortunate that people often attack an argument by attacking a person's motives. The reality is, I'm nowhere near the "rich" levels by Obama standards. My husband has just completed his medical residency, and I've limited my working hours for the past 7 years (since my daughter was born).

I'm the first to admit I've been fortunate. I've also worked hard to take advantage of every opportunity that has come my way. True greatness requires hard work. A lot of wealthy people have worked and sacrificed for what they have.

I hope we can spend less time casting blame, and more time collaborating toward a real solution.

What did I miss?

2010-07-26T22:11:00.009-04:00

It's a gorgeous day here in the S.F. Bay Area, where we've successfully relocated for good. It's good to be back home.

Moving across the country with two small children was an adventure, to say the least, and quite time-consuming. The most painful part was going to the DMV. (Thankfully, I passed the written driver's license test, missing only one. I was nervous when I got to the question about the legal blood alcohol level. I have no idea! I don't drink.)

I'm quite behind on my reading, but am enjoying catching up. I was happy to read that the tax extender bill with the punitive S corporation provision didn't pass. (Covered by such esteemed bloggers as Joe Kristan, Kay Bell, Tax Girl.)

I wonder what interesting tidbit I'll read about next? Hopefully I can get caught up to real time... at least by Christmas.

Murray Blum for President

2010-06-15T10:50:00.019-04:00

I've now been in the S.F. Bay Area for one week; and in addition to loving the lack of humidity and beautiful views, I am noticing how the fiscal troubles of the state seem to come up everywhere I turn.

A friend in law enforcement discussed rumors that Oakland would be cutting 200 officers. A family member working for the state is down to four days a week since weekly furlough days were enacted. The registrar at my daughter's school said the calendar would be changing, as they will be taking furlough days.

My impression is that California, like many people, was not closely watching expenditures when times were good. And now times are not so good. On both the micro and macro scales, we need to make careful, informed decisions about how we spend our money. That requires we take the time to look at where the money is going. This includes where the money goes both via direct spending and via tax benefits, as Professor Nellen points out in a great discussion of Increasing attention on tax expenditures.

Maybe the movie Dave was right, and we just need to get an everyday CPA into the White House to dig through the books.

Speaking out

2010-06-02T12:29:00.003-04:00

Kudos to Joe Kristan for encouraging us to write our senators, and providing links to do so, to speak out against the S corp tax in the extender bill. This is social media at its best. Let's show people that tax folks aren't all that quiet.

Making headlines

2010-05-29T17:07:00.010-04:00

Tax blogger Robert Flach recently mentioned the long-running television series Law & Order. The other day, I heard about a recent episode ("The Taxman Cometh") where the motive turned out to be timing a person's death to avoid the estate tax. (They may have gotten the idea from the Colbert Report.)

Maybe if the estate tax keeps making headlines, it will actually get addressed by Congress. Just maybe...

The fuzzy definitions

2010-05-26T16:35:00.019-04:00

Reading an interesting post today by Joe Kristan got me thinking about how the tax code sometimes wades into murky waters. The world is not black and white, and so I recognize that the tax law cannot be written to clearly cover every situation. That said, I think the law should avoid the gray area when it can.

Joe writes about a new extender bill that would impose self-employment tax on certain S corporation K-1 income. He writes in his post titled Reputation and Skill:

If enacted, as seems likely, this rule would create odd problems.
It would penalize the smallest personal service providers to the benefit of their larger competitors.. A sole proprietorship would pay taxes at a rate at least 2.9% higher than a competitor whose "principal asset" is the reputation of more than three employees.

The bill also will require businesses and the IRS to determine what the "principal asset" of a personal service corporation is. The bill obviously requires the valuation of intangible assets -- reputation and skill -- but in a way not elsewhere attempted in the tax law. How do you do this?

I agree that there are a lot of potential issues involved if the tax law were to require that we determine a monetary value for "reputation and skill."

This reminded me of a discussion in my graduate course on estate and gift tax, taught by the brilliant and engaging Dr. Boyd Randall. He told us about how previous tax law required that the gross estate include the value of gifts "made in contemplation of death." Answer.com echoes what Dr. Randall said:

Because determining whether a gift was in contemplation of death turned out to be subjective, difficult to prove, and somewhat morbid, a 1976 amendment to the estate tax law automatically included any gift that a decedent made within three years of death (26 U.S.C.A. § 2035(a)).

If this professional service S corporation law is enacted, I will be interested to see how we talk about it a few years down the road. I'm guessing we'll say something like: "Because determining the value of a shareholder's reputation and skill turned out to be subjective, difficult to prove, and somewhat arbitrary, a 2016 amended to the tax code eliminated the self-employment tax on professional service S corporations."

I guess I'll just have to wait and see.

Shooting just around the corner

2010-05-18T15:45:00.008-04:00

I just read Peter Pappas' post about a man in Dayton, Ohio opening fire on an H&R Block employee (which he read about on WebCPA). According to Yahoo! maps, the bar where the shooting took place is just over 7 miles from my house. That's a little frightening.

This seems to be a classic example of shooting the messenger (forgive the pun, as I don't know another way to say it!). And as long as the system is out of control, I wager we'll continue to see taxpayers blaming tax professionals. I figure the only way this will slow down is if we get a system in place that is transparent and understandable to taxpayers. We all know it, now we've got to figure out how to make it happen.

A place to start the dialogue is Professor Nellen's 21 Century Taxation blog, which recently celebrated its third anniversary (congrats!). If we can somehow manage to get a lot of us "messengers" in a dialogue and come to some agreement, maybe we could make progress on getting the public and Congress on board with serious reform. Of course, getting a large body of tax professionals to agree on a reform plan is going to take some work. I figure once I get these kids a little older, I'll make that one of my long, long term projects. Someday my kids will thank me for it! Maybe...

In the meantime, I'll be safe from angry Dayton taxpayers when I move to California in a few weeks. Although I'm guessing the taxpayers aren't much happier there.

Good old stereotypes

2010-05-11T16:14:00.011-04:00

Last night, I got a really good laugh out of last week's episode of Parks and Recreation, especially the part where a stereotypical accountant discusses taxes and Quickbooks.

The premise is the town of Pawnee, Indiana holding an all-night telethon. When the scheduled star doesn't show, they get really desperate, and the tax guy in front of the camera is evidence of their desperation. As the accountant drones on: "When it comes to preparing taxes..." the main character then observes: "This is a disaster."

What, people don't think accountants teaching how to prepare taxes makes for entertaining television?

TV really has fun with the accountant stereotype. Kay Bell has blogged about a comedy in the works about IRS agents. I'm guessing they won't all be perky and engaging.

This clip below has the second bit with the CPA, starting at around :50 seconds, as he concludes his "Quick look at Quickbooks." Classic! I just wish I could get both clips of him. (The first clip of him is at around 13:15 of the full episode here.)

Under Pressure

2010-04-26T22:35:00.008-04:00

Dan Meyer of TickMarks pays me a huge honor in yesterday's post: Too Long Between Posts--Apologies ..

I look forward to seeing the posts of Robert Flach (Wandering Tax Pro), Monica Lavwer (Confessions of a CPA and the Tax CPA)and others as they return to blogging after their working hiatus. Major applause to Joe Kristan, Russ Fox and other working tax accountants (yes, and Peter Pappas, Kelly Erb and tax lawyers too) who were able to post in the midst of the maelstrom.

First off, I've got to agree 100% that the practitioners who blogged through the season quite simply rock. They are definitely in a league of their own. And in this league we can't forget Trish McIntire, who's April 14 "A Little Rant" made me smile. Stacie Clifford also managed to keep posting throughout, though she admits most were borrowed from the IRS.

Second, I must say I am pleasantly surprised that Dan would look forward to my writing. Few things feel as marvelous as respect from one's mentors and peers.

Last, but not least, to have my name even listed in such an impressive group, I feel like I better step up my game! It would sure be a shame if, a year from now, bloggers wrote: "Remember that blog that seemed to have good stuff, then completely choked?"

So with that classic CPA perfectionist thought in mind, I thought I'd share one of my favorite songs.

Tax in real life

2010-04-22T11:23:00.014-04:00

We signed the papers to sell our house on Monday, April 19, to our tremendous relief. They had talked about closing on April 15, but fortunately we got an extra couple of days.

While going through the papers, I of course perked up at the tax related stuff, whereas my husband's eyes glazed over. On the form related to the 1099-S (which reports the proceeds), we had to indicate whether we met the qualifications for exclusion of gain on the sale of a principal residence. I admit, I felt very smart when I said to my husband, "This is to determine whether gain qualifies for exclusion under section 121."

I like that, having seen hundreds of escrow statements over the years, I know exactly what I'm looking at when it's my escrow statement. This was one of the many times I'm grateful to know what I do.

The world, especially the world of tax and finance, is a complicated place. Last night, I taught a group of Boy Scouts a little about finance and tax. It was fun, and the kids really responded to it. As many leading thinkers have said before, most young people are not taught about tax and finance. (See James Maule, Marjorie Kornhauser, Taxgirl to name just a few.)

I believe that technology is helping with education, though I don't know if we'll see real progress until society as a whole makes financial education a priority. For my part, I'll just keep teaching small groups where I can, and hopefully spread some financial know-how along the way.

In the end, I think Schoolhouse Rock said it best. Knowledge is power.

I'm not dead

2010-02-24T11:07:00.003-05:00

In the midst of tax season, loved ones may start to worry when they don't hear from us for days on end. Blog readers may also start to wonder where we've disappeared to.

Rest assured, as said in the oh-so-high-class Monty Python and the Holy Grail: "I'm not dead."

The Three Rules

2010-02-08T10:26:00.022-05:00

In (what I'm guessing is) an effort to scare practitioners away from cheating, the IRS announced last Friday that a "Certified Public Accountant has been suspended for twelve months from practice before the Internal Revenue Service by the Office of Professional Responsibility for providing false or misleading information in connection with the preparation of his clients’ tax returns."

Unscrupulous tax preparers come in all kinds: tax attorneys, CPAs, Enrolled Agents (EAs), unlicensed preparers. Everyone should try and avoid a preparer who lacks integrity. Tax bloggers provide good advice for choosing a preparer, including Joe Kristan, Trich McIntire, Bruce The Tax Guy, Robert Flach, Peter Pappas, the IRS Hitman, and many others.

Upon reading the news of this suspended CPA, I thought this might perhaps lead to more debate on the topic of whether a CPA is more qualified to prepare a tax return than an unlicensed preparer. There's been so much written on the topic in the past few months, that I'm honestly not sure where the discussion left off. (One post that includes links to many others can be found at The Missouri Taxguy.)

I posted my thoughts on tax preparer regulation a few months back, and find my opinion has not changed much since then. I do, however, have some new thoughts on the matter of how such a topic is debated.

When reading about this CPA who was suspended, I thought: "Oh dear, I hope people don't start thinking he is representative of all CPAs."

I think most people agree that one bad apple is not representative of the entire bunch. But when in the throws of an argument, we often give undue attention to the one bad apple in an effort to make a point. This happens in debates about matters ranging from types of tax preparer, gender, race, nationality, and perhaps most of all religion. Since people tend to disagree in all such matters, I suggest we can learn from how others address the challenge of engaging in productive debate. Perhaps the most debated topic of all: religion.

The world reknowned theological and scholar Dr. Krister Stendahl is credited with creating Stendahl's three rules of religious understanding, which are:

When you are trying to understand another religion, you should ask the adherents of that religion and not its enemies.
Don't compare your best to their worst.
Leave room for "holy envy." (By this Stendahl meant that you should be willing to recognize elements in the other religious tradition or faith that you admire and wish could, in some way, be reflected in your own religious tradition or faith.)

When considering the strengths and weaknesses of a group of tax professionals, I try to learn about the group from its members, try not to compare the best of one group to the worst of another, and try to stay open to the possibility that another group has aspects that are better than mine.

This may seem to you completely unrelated to the topic at hand, and that is quite all right. I have a tendency to see connections everywhere, and perhaps may even imagine them. I like connecting the dots, even if I'm the only one who sees the line!

Tax is cool

2010-01-18T09:46:00.017-05:00

Now that it's gone away, the estate tax is getting a lot of attention.

Tax experts sharing their thoughts on the estate tax include Joe Kristan, Kay Bell, Linda Beale, James Maule, TaxProf Paul Caron, and I'm sure many others I've missed in my latest search.

But the talk isn't limited to us talk folk. Last week, Stephen Colbert did a bit on the estate tax.

"As of January 1, 2010, the 45% tax on massive inheritances is gone. But it will come back in 2011. So wouldn't this be a great year to visit your lonely, frail, unhealthy uncle? And just be by his side to make sure no one coats his banister with teflon, or hides a rabid badger in his applesauce, or replaces his Werther's Originals with Werther's Explodables."

That's right people, tax is cool.

Here's the clip from The Colbert Report last week. The estate tax bit starts at around 48 seconds in.

The Colbert Report

Mon - Thurs 11:30pm / 10:30c

Colbert Platinum - Estate Tax & Skull Ballot Box

www.colbertnation.com

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The tough choices

2010-01-15T08:48:00.004-05:00

(For those who also read Confessions of a CPA, I apologize for the duplicate post!)

As I often observe, time is the most scarce of a person's resources. (Rita Keller shared an interesting post on this topic last month.)

Over the past few weeks, I have fallen behind in even skimming the headlines of the 1000+ contents from my of my 168 subscriptions in Google Reader. With tax season barreling down on me, I've finally admitted to myself that I won't be able to keep up. So much interesting content, so little time!

Today, I created a separate folder in Reader for "Daily Reads," which also shows up as its own list on the right of this blog. It was very hard to come up with such a short list.

Some blogs not on the list are fantastic reads that require a lot of my mental horsepower to follow, and I hope to make more time this summer to summon the brainpower to read them daily. These include the tax and legal experts at such blogs as ataxingmatter, Mauled Again, and TaxProf.

Other blogs not on the list are great reads about the world of finance and accounting, which I hope to revisit with a vengeance after April 15 when I am not required to only live and breathe tax. Some of these include BookMarkLee, The Exuberant Accountant, Jr Deputy Accountant, and many, many others.

So my "Daily Reads" are not a review (though of course I recommend them all), but simply the list of what I think a tax manager like me will religiously follow when time is short.

What are your "can't miss" blogs?

A recent surprise

2010-01-07T20:50:00.014-05:00

After delivering several bags of clothes and household goods to my local Goodwill (in December, not January, of course!), I was surprised when the attendant handed me a pamphlet along with my receipt. The pamphlet, titled Goodwill Stores Donation Information, includes a list of "Suggested Donation Deductions."

I was surprised they provided amounts, as my experience has always been that non-profits avoid providing definitive recommendations for deductions when it comes to non-cash donations. I suppose what surprised me most was that they would actually use the term "suggested." Quite daring!

The additional description was more in line with my expectations of a non-profit: "The Internal Revenue Service allows a deduction based on the fair market value (what a buyer would pay for the goods in a thrift or consignment shop). The better an item's condition, the greater its value... Listed below are resale values of items in area Goodwill stores that you may use to itemize your deductions."

(Just to be difficult, I might argue that it technically isn't the IRS that "allows" a deduction, as the IRS does not make the rules, only enforces them. I know, I'm a pain.)

This description made sense to me, as it seems to be saying only that these non-cash items sell for the prices listed. It's like saying: "This is the information about us, and you can do with it what you choose." To me, that is quite different from providing a "suggestion." But I guess since they included the word "suggested" in the title, they are really doing both: stating facts about their prices and suggesting we use those amounts. I'm splitting hairs, aren't I?

I wish we could get this kind of guidance from the IRS. Or is it available, and I've simply missed it? Everything I've read from the IRS uses vague terms, never providing concrete numbers. And I like numbers.

I wonder if other non-profits are providing "suggested" deduction amounts, and how the IRS will factor that information into its efforts (if at all).

Finally, is it odd that I found so much to think about from a basic pamphlet from the Goodwill?

You know you're addicted to Twitter when...

2010-01-04T14:16:00.012-05:00

You're checking Twitter while sitting in the Orpheum Theater in San Francisco waiting for Wicked to begin.

In my defense, I had not been on Twitter for two weeks. That's a lifetime in tweets.

While waiting for the show to begin, I stumbled upon an update from favorite @taxtweet with a link to her post Another top 12 holiday tax countdown. As she notes, I was lucky enough to make Dan Meyer's Twelve Blogs of Christmas. What a pleasant surprise!

Dan is a blogging veteran at Tick Marks. I'm honored to be included in his list. In all honesty, I fear that it won't be long before top bloggers like Dan and Kay discover my secret: I really don't know what I'm doing out here in the blogosphere.

I owe a few more thanks to people smarter than me who take the time to converse with this blogging novice...

Thank you to Stacie Clifford Kitts at Stacie's Tax Tips for saying I have wit. What a lovely compliment! So much nicer than some of the things my 6 year old says to me.

Thank you to Wandering Tax Pro Robert Flach for giving this "new girl on the block" such a warm welcome. I can even forgive him often calling me Marilyn instead of Monica. :)

Thanks to Joe Kristan for saying my blog is worthy of making Dan's Top 12. I'll take "worthy!"

Happy New Year, everyone!

Patience is a virtue, right?

2009-12-18T13:43:00.013-05:00

I've often commented that patience is a virtue with which I have not been blessed. Perhaps this will be one of those things that's supposed to teach me patience.

I refer, of course, to the ever elusive goal of tax simplification.

The cost of tax compliance and enforcement is mind boggling. I believe the cost of inaction in reform is much more significant than the potential costs of actual reform. Clearly, it's going to take more than the White House's panel on "tax simplification without significant reform" to make real progress. As many tax bloggers posted, the President's tax reform panel has delayed reporting on its findings (coverage includes posts from Joe Kristan, Professor Nellen, Robert Flach, Kay Bell, Howard Gleckman).

The Wandering Tax Pro directs us to a Business Week article titled Fight the Deficit Monster with Tax Reform. I wonder if perhaps things have to get really, really bad before they can get better. If so, are we just maybe getting to that point where it's bad enough for the public to harass Congress until reform happens?

I realize it's going to take awhile. I've got another 30+ years to retirement, and I like to think we'll make some progress in that time. I'm up for the marathon. I may not be the most patient participant in the race, but I've got the grit.

Just to make a point

2009-11-25T14:13:00.007-05:00

I wonder if there was a time when tax law wasn't used as a policy tool. If so, it was most definitely before my time.

TaxProf, Joe Kristan, and Kay Bell, provide coverage on the proposed "pay as you fight" war surtax.

I'm all for fiscal responsibility, including making sure we can actually afford our expenditures before we commit to them. (Novel concept, I know.) But this is not the way to go about achieving that. We didn't add a surtax for TARP, stimulus checks, the blasted "Making Word Pay" credit, or any number of other spending bills.

The purpose of this bill is to make a point, and I would rather not spend our limited government resources going through the motions of a bill just to make a point. I'd hope we have another means of engaging in debate about the issues, and that we would stop using taxes as a primary tool for affecting public policy.

Well, it's a nice dream anyway.

Maybe next year...

2009-11-13T20:49:00.004-05:00

TaxVox reports that the results of the President's Economic Recovery Advisory Board are likely to be less than stellar. Included in the post is the following observation:

From its earliest days, the group was forced to work under impossible constraints. Chief among them: Obama’s insistence that no one earning less than $250,000 should pay higher taxes. Exempting more than 95 percent of families and individuals from tax hikes of any kind essentially shut the door on any serious discussion of reform, which inevitably creates winners and, yes, losers.

This, sadly, is similar to my observations on the matter. It looks like we won't see any significant reform in the near future. No end in sight to massive AMT, endless credits, and a brand new Schedule L, too! Oh goody.

(Hat tip: Tax Update's Joe Kristan)

Who can you trust?

2009-11-06T18:54:00.023-05:00

The world is a scary place, and Congress makes it even scarier for taxpayers with the insanity called the tax code.

And of course, there is much more to life than tax. (Many are likely shocked to hear me say it.) To function with so much variety in life, our modern economy relies on specialization of labor, so that different people become educated and trained in different things, and we trade.

Each day, we decide what to trade for. Perhaps the most important decisions we make are related to choosing service providers: doctors, dentists, lawyers, accountants, and so forth. These can also be the most challenging decisions because human beings are much more variable and unpredictable than a simple widget.

When you choose a service provider, you do your best to find the right person, and hope you choose wisely.

The more time I spend in our profession, the more I come to realize that clients are looking for someone to trust. That's why referrals are usually the most successful way to generate new business. Stacie Clifford Kitts has a good post on the topic of referrals.

Of course, the biggest hurdle most people face is that they cannot afford the best service providers. And some people who can afford them are just too cheap. And so, for everything from medicine to tax, people turn to the Internet.

Robert Flach provides and interesting discussion on the issue of tax advice online in his post: Who can you believe? Jim Maule also provides a great discussion in Tax Illiteracy as a Threat.

Alas, I do not have the answer for how to ensure people get access to credible tax information. Robert provides some good tips for people to use in evaluating whether a person espousing tax advice is trustworthy. If I didn't need to earn a living by charging for the value of my services, I could spend all of my time combating tax illiteracy. Instead, I'll need to settle for doing what I can to educate in my own communities while working around "my day job."

I do hope that people can start to do a better job of simply using good judgment. It's amazing how much trouble can be avoided by making good decisions.

In a barely related note, often when I think about choosing wisely or poorly, I remember the line at the end of this gruesome scene from Indiana Jones and the Last Crusade. "He chose poorly." Gotta love the understatement.

Do something

2009-11-02T13:07:00.011-05:00

Several years ago, Congress passed a law that completely eliminated the estate tax starting January 1, 2010. I remember thinking: "Oh, but that will never happen. Congress will act way before then."

So young. So naive.

Regarding this and many areas of tax law, I just want to shout: "Do something!" In the words of Seth Godin:

Make a decision. It doesn't have to be a wise decision or a perfect one. Just make one. In fact, make several. Make more decisions could be your three word mantra. No decision is a decision as well, the decision not to decide. Not deciding is usually the wrong decision. If you are the go-to person, the one who can decide, you'll make more of a difference. It doesn't matter so much that you're right, it matters that you decided. Of course it's risky and painful. That's why it's a rare and valuable skill.

Sadly, it appears Congress is not made up of people with this rare and valuable skill. And it doesn't look like the current administration is in a big rush either. Kay Bell recently wrote about Treasury Secretary Timothy Geithner's comments at an economic conference last week in New York City:

Asked about the prospects for tax reform, Sheppard reports that Geithner dodged the question and indicated that it would be far down the line. Economic growth and public confidence about the economy's future take precedence, he said, followed by deficit reduction, which would require tough political choices.

With those items before it on the policy to-do list, it's probably safe to say that Obama's stab at tax reform is going to suffer the same sad fate as did Dubya's tax revamp effort.

We've got our work cut out for us. Still, I like to think that if we keep telling Congress to "Do something", we just might get somewhere... someday.

I got the part!

2009-10-30T15:36:00.004-04:00

I finally got the part I've always wanted. Peter Pappas has cast me as Glinda "the good witch" in Professionalism: A Love Story. As I commented on his blog -- if I seem as nice as Glinda, then I must have an incredible hidden talent for public relations.

There has been much debate in the tax blogosphere about the issues of professionalism, rules of conduct, and so forth. Spineless though it may seem, I am opting to abstain from this discussion, primarily due to my inability to articulate coherent thoughts on the matter.

In general, my writing has been sadly lacking of late, due to an unexplained lack of ideas. Yesterday, I commented on this writer's block to my husband, and added: "I figure quality over quantity, so I'll wait until inspiration strikes."

I guess I can't keep my mouth shut, even if I'm lacking inspiration. These days, the issue of tax reform remains on my mind. On my "to do" list is to read ideas on simplification from top blogger Robert Flach, along with the AICPA's Tax Reform Alternatives.

Have you been reading any other good simplification ideas lately?

Principles vs. rules

2009-10-21T14:24:00.013-04:00

I finally finished my CPE course on IFRS, which wasn't nearly as painful as one might expect. As Joe Kristan put it: "We're tax! We don't need no stinkin' AA!" (For those new to public accounting, "AA" refers to Accounting & Auditing.)

As a tax practitioner, I could opt to renew my license under the non-attestation category. I take the AA courses because I want to keep the "full fledged" license as long as I can. I keep wrestling up 24 AA education hours every two years, since I figure the hard part's over, which was getting the field work hours for initial licensure.

Based on my limited AA education, I understand that IFRS is a principles-based framework, compared to the rules-based U.S. GAAP. This is an interesting experiment in human behavior, and I look forward to seeing how it unfolds. Can a system based on trust in people to use sound judgment and act ethically be successful? I hope so, though I admit to some skepticism.

I've said before that we cannot regulate human behavior, and so should not over-regulate society; and at the same time we still must have some semblance of law and order. The challenge, of course lies in finding where to land on the spectrum between trusting everyone do just do what's right and forcing them to.

Will we start to see a corresponding move in tax policy toward a system of principles rather than rules? I doubt it. And although I do like Joe Kristan's suggestion to simply pass a "happy fun times tax credit" for everything to be wonderful, I'm thinking the path to getting people to behave morally may be a little harder than that.

But maybe I'm just being difficult.

Broken record

2009-10-03T21:09:00.015-04:00

There's lots of buzz these days about increased regulation of tax preparers, including recent posts from Joe Kristan, Peter Pappas, and Robert Flach.

My two cents on the matter of regulation is in an earlier post. I know I sound like a broken record, but I just keep coming back to what I believe to be the real problem: complexity.

As Mary O'Keefe says, "We need a tax code PEOPLE can understand."

The reason we haven't had significant reform is that people are not shouting for it. As Annette Nellen wrote, "one big roadblock (among many) is that the public is not crying out for simplification."

Why?

Because, as Mary O'Keefe puts it, "Americans are busy with their day to day lives. It's hard to get their attention on important long-term problems."

I hope the new movie "An Inconvenient Tax" will get the public's attention. Down the road, I'll be contacting the AICPA and the NATP to find out what they are doing on the issue. As I ponder ideas for a group of Tax Professionals for Simplification, I am inclined to think the group would need to agree on a plan for simplification. This, of course, presents a real challenge, but one I like to think we could overcome.

To all the tax gurus out there, what plan would you like to see tax professionals support?

21st Century Taxation

2009-09-30T22:31:00.006-04:00

I just discovered the 21st Century Taxation blog and related site about federal and California state tax reform. The site is the work of Annette Nellen, professor at San Jose State University.

She provides a great list of resources on tax reform, including the reports from President Bush's Advisory Panel.

Once I get to reading this, maybe there's a chance one will seem like real reform, and not just a band-aid. I will happily send that on to the White House for consideration!

What topics are you writing the White House about?

How does that work?

2009-09-30T11:15:00.007-04:00

As many tax bloggers have noted, the White House has requested ideas for the President's Economic Recovery Advisory Board to develop options for tax reform.

The blog includes this note:

The mandate to the PERAB is NOT to recommend a new tax system. They are to consider ideas on tax simplification, better enforcement of tax law, and reforming corporate taxes and to present the pros and cons of potential tax options... So be mindful of their constraints when submitting ideas.

I struggle to understand how we can get real tax simplification without recommending a new tax system. Maybe it's that my interpretation of the words "simplification" and "tax system" are not consistent with the government's. Because the way I see it, we can't get simplification without seriously revamping the system.

As often happens, I find myself comparing this situation to medicine (which just might have something to do with being married to a doctor). If we only change a code section here, or a regulation there, we're just treating symptoms and not the disease.

Just like when we keep adding new credits and deductions, we keep trying to cure our economic ailments with more and more medication. And from the stories I hear, more medication is not always the best answer! It often makes things worse.

In this stupor of mine, I cannot think of a recommendation to give the White House that would feel like anything more than treating a minor symptom of a dreadful disease. How depressing.

An Inconvenient Tax

2009-09-25T21:10:00.004-04:00

Recently, I posted about my concerns that those seeking tax simplification were not effectively represented in Washington.

I thought about starting Tax Professionals for Simplification, which may still become a project -- but I think this upcoming movie is going to be much more effective than any such organization led by me.

I can't wait to see it!

An Inconvenient Tax - Official Trailer from Life Is My Movie Entertainment on Vimeo.

Hat tip to Taxgirl for the clip, who I hear just may be in the film!

Slacker

2009-09-15T23:02:00.009-04:00

I'm a blogging slacker. I hesitate to post when I haven't kept up on all the other blogging out there, which is really hard to do. You diligent tax bloggers are amazing.

I'm still at 1000+ unread items in Google Reader, so I won't be caught up any time soon. These cursed 9/15 and 10/15 deadlines are such a nuisance.

As the days tick by, I imagine myself being summarily dropped from the list of tax bloggers anyone cares to follow. I'd like to be part of the cool tax crowd, but may not yet have what it takes. Perhaps when this house gets sold and my kids are out of diapers, I'll have a shot.

Today I figured I'd mention a few posts that have caught my eye:

Paul Caron reports that Tax Analysts presented President Obama's task force with 32 essays from top tax minds on tax reform. I admit I'm eagerly awaiting the task force's recommendations in December.
A great new blog, Bed Buffaloes in your tax code, discusses Tax software and barriers to entry: are tax pros more like physicians or more like hair braiders? I'm always comparing my profession as a CPA to that of a physician, but maybe I'm wrong!

I'm with The Wandering Tax Pro when it comes to TV, as he posts in "If I Had my Druthers."

Yet another Obama nominee with tax trouble... seriously? Paul Caron posts "Home Office Deduction Trips Up Treasury Department Nominee."

And a quick thank you to The Wandering Tax Pro for mentioning a recent post on my companion blog, Confessions of a CPA.

I look forward to scanning several hundred more posts over the next couple weeks, and just maybe I'll manage to come up with an original post of my own. (I can hope, anyway.)

A Day that will Live in Infamy

2009-09-11T22:43:00.005-04:00

Thank you fellow bloggers The Tax Lawyer (Peter Pappas) and The Wandering Tax Pro (Robert Flach) for your posts honoring the significance of this day.

I admit that the ordinary activities of life -- 9/15 tax returns, IRS notices, diaper changes, etc. -- felt out of place today. When my children grow older, I hope to take them to the National September 11 Memorial, which I'm sure will convey the meaning of that day much better than I could ever begin to do.

My thoughts and prayers are with all those who have lost. Please know that no matter how many years pass, we will always remember.

Accounting Cheese

2009-09-06T13:07:00.004-04:00

Just catching up on the blogosphere, and came across this post from Joe Kristan (originally from Taxprof) with two of the worst accounting videos ever.

I watched a few seconds of each, then had to stop because it was just too painful.

I guess I'll just have to get used to being one of the few cool accountants in existence.

Rally the troops

2009-08-29T12:14:00.008-04:00

Thanks to Robert Flach, the Wandering Tax Pro, for his informative comment in answer to my question of how to get involved in pushing for tax simplification.

He writes:

There is really no effective lobby for the individual taxpayer. Until there is, all the other lobbies for special interest groups, with their huge budgets, will continue to entice Congress to complicate the Tax Code in their favor.

National Taxpayer Advocate Nina Olsen is a good loud advocate for the taxpayer and for simplification, but Congress rarely acts on her recommendations.

It's unfortunate that my perception turns out to be fairly accurate -- that there is no effective lobby for the taxpayer in pushing for simplification. Instead, the problem just keeps getting worse with each new credit and deduction.

I was thrilled to read Mr. Flach's offer to join me in organizing Tax Professionals for Simplification in his weekly recap of what's going on in the tax world, What's the Buzz. I'm not sure precisely when I'll be able to delve into the idea (selling a house and all), and I won't be able to devote a lot of time to this (and am sure others can't devote a lot either), but I figure some time is better than none. And I really think it's high time for change!

We'll keep you posted.

Where do I sign up?

2009-08-23T14:40:00.009-04:00

I'm still new to this tax blogging world, but I've certainly read enough to know that I am not alone in thinking tax law is way too complicated.

Since recently reading that the Obama task force on tax simplification may not really get us anywhere, and also reading about how rarely Congress really listens to National Taxpayer Advocate Nina Olsen, I can't help but be discouraged.

I want to get involved in pushing Congress for tax simplification.

I realize I can't do much all by myself, and I've got two little rugrats to take care of, but I'd like to contribute what little time and (questionable) talent I can to making real change happen.

What's the best way to push for tax simplification? Is there an AICPA group, a group in the National Association of Tax Preparers, or some other group? Is there a "Tax Professionals for Simplification" organization?

What's the best place to start, and where do I sign up?

The Cool Crowd

2009-08-19T10:47:00.002-04:00

I appreciated Roni Deutch's post (The Tax Lady Blog) with her list of tax professionals active on Twitter -- not because I'm on the list (which is nice of course) but because I always enjoy finding more people with whom to connect.

Long live Twitter!

Banking Blunders

2009-08-18T17:12:00.022-04:00

June Walker recently posted "You need only one checking account. Do not open a separate checking account for your business."

On this matter she and I respectfully disagree, and it seems most of the tax bloggers disagree with her as well.

Joe Kristan says it well in his usual no-nonsense way:

You will save yourself a lot of time at tax time, and a lot of grief in an IRS exam, if personal is personal, business is business, and that's that. Run your business like a business.

The Tax Lawyer provides some more good reasons for setting up a separate account. The Wandering Tax Pro wrote a good post arguing the case for a separate account.

I was disappointed with June's response, which was inflammatory and, in my humble opinion, uncalled for. As Robert Flach put it:

Just because someone respectfully disagrees with you on a subject does not make them a fool, or stupid, or uninformed.

The thing that bugged me most in her response was the accusation that Robert was being sexist when he referred to "One-man LLCs." To Robert's credit, he responded with an apology for not being perfectly PC, and indicated his efforts to use "he/she" in his writing.

Being female, I'm obviously aware of and sensitive to gender issues. I have tremendous admiration and gratitude for the generations of women that have come before and paved the way for younger gals like me. Because of this, I get really annoyed when people start looking for any excuse to accuse someone of being sexist. To me, June's comment was out of left field, and had no real basis in fact. If we always made sure to use the exact PC wording in everything we said, we'd never manage effective communication.

So in summary, I believe strongly in having a separate checking account for business, and even more strongly in keeping communication respectful and productive.

Favorite Tax Blogs

2009-08-17T12:13:00.011-04:00

The house is on the market, and I'm finally visiting my cherished Google Reader.

Here are the tax blogs I couldn't wait to catch up on...

My Top 5 (no particular order):

Kay Bell's Don't Mess with Taxes
Kelly Phillips Erb's Taxgirl
Joe Kristan's Tax Update Blog
Robert Flach's The Wandering Tax Pro
Peter Pappas' Tax Lawyer Blog

In the Top 10 (no particular order):

Paul Caron's TaxProf
Russ Fox's Taxable Talk
James Maule's Mauled Again
Trish McIntire's Our Taxing Times
Linda Beale's ataxingmatter

And I enjoyed Bruce the Taxguy, who has recently retired his blog for other pursuits, in which I wish him the best.

So that's what this tax blogosphere newcomer loves to read. Peter Pappas gives an annual Rick Moranis award to the 5 Best Tax Nerd Blogs. Invesp Consulting recently posted its Top 25 Tax Blogs.

Where do you go for your tax fix?

Taxing the Rich

2009-08-08T12:58:00.012-04:00

Taxprof directs us to a list of Seven Myths About Taxing the Rich published by Curtis S. Dubay of the Heritage Foundation.

The myth I often hear that bothers me most is listed as Myth 2: "The rich do not pay their fair share."

The rebuttal:

"The top 20 percent of income earners pay almost all federal taxes.

"The top 20 percent of all income earners pay a substantial majority of all federal taxes. According to the Congressional Budget Office (CBO), in 2006, the latest year of available data, the top 20 percent of income earners paid almost 70 percent of all federal taxes. This share was 4 percent higher than in 2000, before the 2001 and 2003 tax cuts.

"When only looking at income taxes, the share of the top 20 percent increases even further. In 2006, the top 20 percent paid 86.3 percent of all income taxes. This was an increase of 6 percent from 2000."

I agree it is not accurate to say "the rich don't pay their fair share." Some wealthy people are dishonest and don't pay their fair share, just as are some poor people. The stereotyping of the wealthy as greedy, heartless beings is what I find to be unfair, and tiresome. I concede there are greedy, heartless wealthy people, just as there are greedy, selfish poor people.

As recently posted by the Taxprof, Tax Lawyer, and Tax Foundation, the share of the tax burden borne by the top 1 percent now exceeds the share paid by the bottom 95 percent of taxpayers combined.

Wealthy American citizens who obey the law pay a lot of tax.

Of course, when debating whether the wealthy pay their fair share, the true challenge is in defining what their fair share -- and anyone's - really is. I'd need to do a lot more studying of economics, tax policy, international tax rates, and a host of other topics before I could feel qualified to propose a definitive answer to the question of exactly what is a fair share.

What I would like to claim definitively is that "the rich" are not all bad people who exploit those less fortunate to make a buck. Many "rich people" are honest, hard-working, and generous.

Lest there be any confusion, I can declare without hesitation that I do not fall into the category of rich. But I do know and work with people who are "rich", and I am continually amazed at their success, which has come from hard work and strength of character.

A couple years ago, a smart man told me something very simple: "Successful people make and keep commitments."

Let's stop maligning successful people for being successful. Would we rather have a country full of people who never strive for excellence? I hope not.

Pencil or PC?

2009-07-30T20:57:00.008-04:00

When I was 9, my family got our first computer for Christmas. I spent countless hours on that DOS machine with its dot matrix printer. Three years later, we bought our first Windows PC. I was in heaven.

I could not imagine life before Word and Excel, nor could I imagine tax preparation without software. When I get frustrated upon running into a software glitch, I have to remind myself that the software really hasn't been around that long, so many a problem still need to get fixed.

Robert Flach, The Wandering Tax Pro, discusses the benefit of preparing returns by hand. Joe Kristan and Peter Pappas share their contrasting views on the matter. My take on the conversation...

I'm passionate about tax accounting. When working on a return, I want to understand every number, the flow of the return, and the law behind it all. And I've always been that way.

I got my Master's in Tax before entering the profession, so I had a pretty solid foundation when I started. But for many accountants, their background tax return is minimal when they enter the big bad world of public accounting. It takes time for them to get familiar with how a tax return works. And in the meantime, the work still needs to get done.

As I mused the other day, I think we're better off if we delegate initial preparation to less experienced preparers, with the experienced professional reviewing the work. Tax prep software speeds up this process. Software will never replace the need for a qualified professional exercising judgment, but it can be a great tool.

I love having the speed and efficiency of software, while at the same time understanding the forms and law behind them. It's the best of both worlds.

Yet another scary IRS agent story?

2009-07-25T22:09:00.008-04:00

Seems the news is flooded these days with stories of IRS agents and their various shenanigans.

I hope stories like these convince people with IRS trouble to seek the help of a qualified tax professional! In a perfect world, the system would be fair, and people could deal effectively with the IRS on their own.

But we do not live in a perfect world, the IRS system is not fair, and so taxpayers are in much better shape if they hire a qualified professional to manage the process.

Let's just hope the taxpayers realize that.

The TaxProf blogs:

Mark Claybrooks, 41, an IRS agent in Walnut Creek, California, has been indicted on charges that he urged delinquent taxpayers to get the money needed to pay their tax bills by refinancing their home mortgages with a mortgage company. Mr. Claybooks is alleged to have received $20,000 from the mortgage company for two referrals. (With references to the Contra Costa Times, San Frnacisco Chronicle, and Web CPA)

Tax Prof also blogs about...

IRS agent Albert Bront, 49, of Valencia, California, screamed “I’m going to kill all of you!” when U.S. Treasury agents served a search warrant at his home as part of an investigation into whether Mr. Bront had filed false tax return. He is being held without bail pending a July 28 preliminary hearing in Los Angeles.

April 15.com blogs about...

IRS Auditor Jim Liu who claimed to have incurred a loss on selling an apartment complex when he in fact he had a rather large gain. To compound matters, he then altered documents to support his bogus claim. Mr. Liu subsequently pleaded guilty to tax fraud and faces up to three years in a federal penitentiary.

Something about health care

2009-07-24T16:16:00.026-04:00

I admit it -- I have not read the legislature's draft bills for health care reform, nor do I intend to. So I'm relying on bloggers to keep me informed, which certainly doesn't make me an authority. But thanks to my lovely disclaimer, I get to go ahead and write my thoughts, lacking though they may be.

My favorite blog quote on the issue comes from Joe Kristan:

The government that brought us profitable and money-saving innovations like Fannie Mae, Freddie Mac, Amtrak and the Postal Service now is going to try its hand at health insurance.

The idea of government running the health care system scares the dickens out of me.

As with many issues of public policy, I have no problem with the ideal that everyone gets the health care they need.

It is the way in which we work toward that ideal and the sacrifices we make along the way that terrify me.

I've spent much of the past few years dealing with two very large government bureaucracies: the IRS and the military. So my confidence in a government health care system is, well, not there.

CNN Money writes about 5 freedoms you'd lose in health care reform:

1. Freedom to choose what's in your plan
2. Freedom to be rewarded for healthy living, or pay your real costs
3. Freedom to choose high-deductible coverage
4. Freedom to keep your existing plan
5. Freedom to choose your doctors

I don't much like the sound of this. But the President isn't calling to talk to me, so I'll have to settle for writing here.

Peter Pappas provides a great round-up of the discussion from key tax bloggers, and here are some posts to check out:

Why do we pay them?

2009-07-17T17:54:00.011-04:00

I'm new to the world of tax blogging, and am already falling behind in my rate of posting. The trend is sure to continue, as we're preparing to sell our first house, which apparently takes time and energy. (And yes, I know this isn't really the best time to sell. Alas, the military doesn't care, and it owns my husband for another 5 years.)

Of course, with selling our home, we faced the question of whether to sell it on our own or incur the expense of a realtor. But it really wasn't much of a question, as we never even considered selling it ourselves -- much to the relief of friend and family.

Question: Why do we pay realtors to sell our homes? After all, we could read all about it and do it ourselves. Information is available all over the place.

Answer: We pay realtors because of their experience and expertise. Because our time and energy are our most scarce resources, and we should allocate them wisely. Because we are likely to mess something up, seeing as how we are not professionals.

Question: Why do people hire tax professionals? All the information is available online, or at the library or local IRS office. They could research the IRS website, state websites, tax blogs, etc.

Answer: People pay us because of our experience and expertise. Because their time and energy are their most scarce resources, and they do not choose to allocate those precious resources to learning the tax law. Because they would likely screw it up.

So those are my thoughts today.

As I said, my posts will be sadly lacking as I manage this real estate endeavor. But hey, I'm already about 5 years away from joining the list of the Top 25 blogs in Taxes -- or, let's be honest, even breaking the top 100. Fortunately, I'm okay being the wallflower for awhile, at least until this house nonsense is over.

(Congrats to all those listed in the Top 25!)

Fair is fair

2009-07-09T19:15:00.027-04:00

As a nation we have grown accustom to certain tax benefits, including the exclusion of health insurance benefits from income.

For most of my life, my health insurance has been provided by an employer (whether my own employer that of my parents or husband), so I've certainly benefited from the provision. But just because I benefit doesn't make it fair.

This is one of those concepts with which some people struggle. When considering the issue, an experience from high school comes to mind. It was back in my semester of Economics. During a discussion on Affirmative Action, a friend of mine spoke out against it. To her arguments, the teacher countered that she should be in favor of AA because it would likely help her (as a white female).

So that teacher lost all credibility with me at that point. Just because something helps me doesn't make it right.

For a good explanation for why it is fair to tax health insurance, I recommend the Taxgirl's post.

Of course, both the tax code and government spending are full of provisions that are not exactly fair, so maybe this isn't the issue to "straighten out" first. And the whole discussion may be irrelevant, since the measure is stalling out in Congress (see the latest post from Taxgirl). But we shall see what we shall see.

Avoiding the IRS audit

2009-07-01T15:53:00.037-04:00

I appreciate The Wandering Tax Pro visiting and commenting on my humble blog. On the subject of IRS "red flags," he poses to me the following questions:

1. Do you believe that by merely claiming any of the 5 items submitted by Mr. Pappas, regardless of the amount, a taxpayer will automatically substantially increase his/her chances of an audit?

2. Would you ever recommend that a client not claim a legitimate and documented deduction because it would increase his/her chances of an audit?

Before responding, I should point out that both Mr. Flach and Mr. Pappas are more qualified to answer these questions, considering they have been in the professional far longer than I. (Mr. Flach has been preparing returns longer than I've been alive, which is impressive to say the least.)

So if anyone decides to stop here, that's really understandable.

On to the questions at hand...

(1) Yes, I do think that, by claiming one of these deductions, a taxpayer increases his/her chance of an audit. I hesitate to say whether the increase is "substantial," as I have limited knowledge of IRS enforcement statistics. (Learning more about them is on my to-do list.) These areas are more likely to have error or fraud, the IRS focuses its efforts on areas especially susceptible to error and fraud; ergo, returns with these items are statistically more likely to be examined.

(2) I am not likely to recommend that a client not claim a legitimate and documented deduction because it would increase his/her chances of an audit. Like Flach, "I do not believe that one should be scared off from claiming legitimate deductions for fear of being audited."

HOWEVER, I believe it's my responsibility to educate the client on the increased risk.

In a perfect world, honest taxpayers would not be subjected to the time, expense, and stress of an audit. They would claim just those expenses and credits to which they are legally entitled, avoid examination, and keep on being honest.

We all know the world isn't perfect, and that honest taxpayers will continue to be audited along with the cheats. And so taxpayers must address the question: If I claim this tax benefit, my risk of audit will increase -- Is the benefit work the risk?

I suppose we could create a risk/reward mathematical equation using IRS statistical audit data. (Hmmm... summer project? Anyone know where I could get good IRS stats?)

I suppose my risk/reward idea is similar to Mr. Pappas' suggested cost/benefit analysis: "What is the comparative value of the deduction? Taxpayers should weigh the benefit of the deduction against the costs (monetary and psychological) that would be involved should the deduction trigger an audit."

Analogy attempt

I'll wrap up this post with a feeble attempt at an analogy.

I'm going on road trip, and have identified the fastest, most efficient route. Partway into the journey, I hear on the radio that there is a roadblock checking for drugs on my route. I consider my options.

Modify my route to avoid the road block, and lose time.
Keep on the route, hope the line of cars isn't too backed up and that I'll get through it quickly.

I can't see the future, so I just have to make the best decision I can with the information available. Several things would influence my decision, such as:

How much time would I lose by avoiding the roadblock?
How much time would I lose if I got stuck at the roadblock?
Would the police find drugs in my car?

So what do I do?

So do I take the safe option and avoid the roadblock, and lose the benefits of a quicker trip?

Do I fail to claim legitimate Schedule C expenses, in the hope of decreasing the chance of IRS audit?

In my practice, I generally encourage clients to claim all legitimate deductions and credits, and inform them of the audit risk.

Nothing too exciting, but there you have my 2 cents.

When tax preparers attack

2009-06-30T16:17:00.046-04:00

The battles continue in the tax blogging world. After a lengthy and thorough debate on tax preparer regulation (tax pros are good at thorough), we jump into the debate of how best to avoid (or at least not invite) an IRS audit.

First, I must say it's great to have experts talk openly about what will and will not get the attention of the IRS. I am much newer to the profession than the tax bloggers, so I value the information they share about "the real world." After all, the IRS isn't going to teach me about the realities of enforcement. During a recent radio show, an IRS representative told a caller that he should, in fact, amend his tax return because he received a 1099 that increase his tax by $40. Hmm... thanks IRS, but I think I'll read what the bloggers have to say.

So Peter Pappas began the debate (perhaps inadvertently) with his post titled 5 Slam Dunk IRS Audit Red Flags. Robert Flach posted a commentary, and the debate ensued.

As usual, I agree with both of them on several issues. And I think they too agree on several key points. The IRS is more likely to scrutinize returns with these five deductions, simply because returns with these deductions are more likely to have error or fraud. It's about probability, and don't we tax preparers love math?

I did not anticipate the change in the debate's focus, which became that of whether a return prepared by a CPA is less likely to have errors than a return prepared by a non-CPA.

Robert is correct that a CPA is not specifically licensed for tax preparation, rather "a CPA is a licensed accountant, authorized to certify audits of financial statements." Just a couple of months ago, I was pondering this exact issue. I was thinking about all the fancy credentials the AICPA offers for CPAs in other specialties - financial planning, fraud examination, business valuation - and wondering how to become a certified tax expert.

So I emailed the AICPA asking about it. Here's the exact wording of the response I received:

"We do not offer a credential in taxation. In general, our approach has been not to develop credential programs around areas for which the public already believes CPAs to 'own'. In addition, we do not endorse a particular tax credential."

And so we CPAs specializing in tax find ourselves in a bit of a quandary. Our CPA designation does not by itself qualify us as tax experts, but there is not another designation available that does.

And now we arrive back at our original issue of debate, that of tax preparer regulation. Is anyone else getting dizzy?

Tax preparer regulation: Late for the party

2009-06-27T11:38:00.001-04:00

Don't you hate it when you thought the invitation said 9, but the party really started at 8?

I figured I'd still come the to party, even though it may mean receiving disdainful looks from those wondering why I'm so slow. So here's my take on the specific issue of tax preparer regulation:

One of my pet peeves (and goodness, there are many) is when a person repeatedly talks about problems but never suggests solutions. Granted, I am always pointing out problems (much to the challenge of co-workers), but all the while strive to find solutions.

Going back and reading my previous post, "Why Regulation Won't Work," I now kick myself for doing just that which I detest -- discussing the problem but not possible solutions. Doh! Let's see if I can get back in my own good graces.

So regulation won't solve our problems. That's simply a fact of life. In all aspects of life, we have a gap between the ideal and the reality. The issue, then, is how to minimize the size of the gap. We must have law and order if we are to avoid anarchy.

A couple of concepts from Economics 101 come into play here. First, we must deal with externalities, both benefits (such as public safety) and costs (such as pollution). And second, we have limited resources.

How do we deal with it? We must decide whether to use our scarce resources to affect an externality, be it public safety, education, law enforcement, whatever.

I'd argue that tax evasion itself is an externality. Most people would not comply with tax law if society did not dedicate resources to its enforecement. Few people argue that we do not need laws or regulations. Rather, the argument centers on the method and extent of regulation.

I think those involved in this debate agree on several things, such as:

Ideally, all tax preparers would be knowledgeable and honest.
The reality is far from this ideal.
The public would benefit if the reality-ideal gap were decreased.

If we all agree on those points, then the key issue is: Would the benefits of regulating unlicensed preparers justify the resources required to do it?

I'm inclined to say no. In my experience, government (and the IRS in particular) does not operate efficiently.

Maybe I'm wrong, and someone will present to us a beautiful, inexpensive, efficient system to regulate preparers. If that happens, I will gladly eat my words. But until them, I'd rather the IRS spend its scarce resources on other things.

(Bruce the Taxguy provides a nice list of links to blogger commentary on the issue.)

Why regulation won't work

2009-06-20T20:30:00.044-04:00

A few seemingly unrelated posts from tax bloggers got me thinking (which is always scary). The posts are...

The Wandering Tax Pro, Robert Flach, discusses the Ethics CPE requirements for Enrolled Agents and CPAs. He writes: "I have been preparing tax returns for about 38 years, without incident. If I do not have ethics by now sitting through 2 hours ain’t going to make me ethical. If I am so inclined to be unethical in my practice listening to a speaker tell me what is wrong is not going to make me 'see the light'."

TaxVox: the Tax Policy Center blog, by Jacob Goldin, discusses the proposed tax on junk food, posing the question: "Would a junk food tax really reduce obesity?"

Tax Rascal discusses the California tax credit for purchasing a new home, which lenders will be authorized to advance to buyers towards a down payment.

The connection I see is one of the unfortunate but very real facts of life: We cannot change people's motivation for behavior.

We can regulate behavior, but not motivation. We can educate, discuss, persuade, encourage... but when all is said and done, people can only be changed by themselves.

Here's how this relates to the above blog posts...

An ethics CPE requirement will not make a person ethical.
A tax on junk food will not make a person change their lifestyle.
A financial crisis will not stop people from buying things they can't afford.

I don't think bigger government and higher taxes are the answer, but I'm afraid I don't know what the answer is. Ideally, everyone could agree on some clear goals for American citizens, which might include acting ethically, being healthy, and living within our means. But it's impossible to get millions of people to sit around the table and figure it out, so until then we're stuck trying to regulate behavior.

It's not the solution, but I guess it beats complete chaos.

(As a quick post script, a great book about this subject is Leadership and Self-Deception.)

What I missed

2009-06-18T09:54:00.005-04:00

After a much-needed vacation (my first of the year), I'm making my way through the 1000+ unread items in Google Reader. Here are a few things I missed in the world of tax...

Regulating Tax Preparers: Lots of buzz about potential regulation of tax preparers, including posts from Joe Kristan (Tax Update Blog), Peter Pappas (The Tax Lawyer), Robert Flach (The Wandering Tax Pro), and Trish McIntire (Our Taxing Times).

Hope for unlimited minutes: The IRS has suggested that Congress repeal the taxes on personal use of employer-provided cell phones. Please, please, oh please let this happen! Lots of blogging on the subject, including posts from Taxgirl, Kay Bell, Tax Prof, and Joe Kristan.

TIGTA Recommendations: The Treasury Inspector General for Tax Administration (TIGTA) has made some recommendations to the IRS regarding tax enforcement, a couple of which are discussed by Robert Flach and Paul Caron.

I hope to read more later. Thanks to all the bloggers tracking the news for me!

Pizza for tax evasion?

2009-05-27T10:10:00.005-04:00

WebCPA reports:

"A Texas restaurant owner has been sentenced to two years in jail after he was convicted of trying to bribe an IRS agent by offering her free pizza and a job."

When the agent first figured the taxpayer was offering her a bribe, she reported it.

Subsequent conversations were recorded, during which the taxpayer "offered the agent $2,500 and delivered $2,000 in exchange for having his tax liability reduced from $49,000 to around $500. In addition to financial compensation, [he] repeatedly offered the agent pizza from his restaurant as part of the deal."

If she had taken the bribe, that could have led to one heck of an advertising campaign: "Our pizza is so good, people will destroy their careers and go to jail to get it!"

Unfortunately for the owner, I guess the pizza just wasn't good enough.

But hey, at least this guy didn't try to have the agent killed by a hit man named Reaper.

Thanks guys and gals

2009-05-27T09:33:00.008-04:00

Just wanted to say a quick thanks to the expert guys and gals who have mentioned me in their online writings. After all, the jury may still be out on whether I've got anything valuable to say. But for as long as it lasts, I'll just enjoy feeling like one of the cool kids (whether anyone else considers me one or not).

So thanks to:

Rick Telberg of CPA Trendlines and the AICPA CPA Insider
Joe Kristan of the Tax Update Blog
Kelly Phillips Erb aka Taxgirl
Robert D. Flach aka The Wandering Tax Pro

I appreciate you reaching out to an online rookie like myself. Now let's hope my two cents really are worth at least two pennies.

Horse play

2009-05-23T18:11:00.002-04:00

I enjoyed a recent post from Professor James Maule about possible tax-related names for horses. Apparently, the 6-year old brown gelding that won the National Hunt Cup was named "Tax Ruling." Maule then brainstormed a lengthy list of possible horse names to be found in the world of tax.

Here was the best part of his post:

"Imagine the track announcer informing the crowd, 'It's Tax Shelter following Passive Activity, but here comes Treasury Regulation with Deduction Limitation. It looks like Substantial Underpayment is back in the race. Capital Expenditure has fallen behind, and Revenue Neutrality has broken down. It's Treasury Regulation, gaining on Tax Shelter, and on the inside it's Jeopardy Assessment.' Yes, imagine how the tax law could saddle the horse racing industry."

Yikes: Ohio to subsidize Hollywood

2009-05-15T13:14:00.026-04:00

Joe Kristan wrote today about a troubling development in Ohio, my current state of residence: "The insane desire of states to subsidize Hollywood has spread to Ohio, where lawmakers are poised to subsidize 25% of the cost of films shot there. That's precisely half as stupid as Iowa's 50% tax-credit subsidy."

Why, as Joe asks, are we using taxpayer dollars to subsidize the film industry?

I realize the film industry employs a lot of people who are not famous or rich, including crew members, costumers, set builders, etc. But doesn't virtually every industry employ people who are not famous or rich? Why should all these others be forced to support the film industry?

If the film folks are not making money under current conditions, they need to deal with it. Try something new, call it quits, whatever. But don't demand taxpayer dollars.

I'm not being hypocritical in arguing that industries should adapt to the realities of the market. I recently posted about the misconception so many people have about tax professionals: that we all oppose tax simplification because complexity means job security. (The Wandering Tax Pro, Robert Flach, recently posted about this as well.)

The President has promised to simplify the tax code, and he set up an advisory board. Under the "let's save any industry in trouble" philosophy, I need to go to my legislatures and demand a "tax professionals credit" if the President is successful in making the tax law simpler.

Any lobbyists out there who want to help save the tax professionals? If you're not too busy getting film credits for Hollywood, that is.

"Head of the Class" star owes big time

2009-05-11T15:39:00.013-04:00

Forbes.com reports that the federal government is suing actress Robin Givens for $292,000 in "unpaid federal taxes, interest and penalties as far back as 1996."

Givens is most famous for her one-year marriage to Mike Tyson and her role as one of the stars of the 80's sitcom "Head of the Class."

So, another celebrity failing to pay tax is hardly surprising. I wish the feds luck in narrowing the celebrity tax gap.

Here's the bigger question that came to mind when I read this story:

Does anyone else marvel at some of the predictable, corny, painful sitcoms that were successful in the 80's and 90's? I admit to watching many of them, but can claim youth as an excuse (as I haven't yet hit age 30). And don't get me wrong, I think there have been a lot of great series over the years. But so many make me stop and ask: "Really?"

Long live "The Office" and "30 Rock." And to "Seinfeld," "Cheers," and "Malcolm in the Middle," I miss you.

(Hat tip: WebCPA)

Tax madness

2009-05-08T12:37:00.017-04:00

Tax Lawyer's blog post today includes tournament brackets for "Tax Madness: All Time Greatest Code Section."

Isn't the term "tax madness" redundant?

Anyhow, this is a fun exercise for us tax geeks. Pappas asks at the end of the post: "What code section do you think is the 'greatest?' "

Being obsessed with detail as I am, I immediately thought: "Well, what do you mean by greatest? Greatest in terms of saving taxpayers money, generating tax revenue, collecting tax revenue, or another definition altogether?"

I drove my professors crazy in college, as you can imagine. ("But what do you mean by this question?" "What if this exception applies?" "What if I read it this way instead?")

Pappas suggests the greatest code section is 3402, reasoning that: "Withholding is the chief administrative mechanism enabling the federal government to collect, without significant protest, sufficient private resources to fund an ever-expanding government."

So I agree that this is the greatest section in terms of tax collection.

I'm thinking "greatest" in terms of the impact on taxpayers, whether for good or ill. And though one could argue that the withholding section has the greatest impact, my inclination would be to crown the code section that imposes the tax in the first place. In general, that's code section 61 (which Pappas named as the runner-up to 3402).

Section 61 says: "Except as otherwise provided in this subtitle gross income means all income from whatever source derived."

Everything is taxable, unless we give you a special hall pass to exclude it. Casts a pretty wide net, eh?

Obama targets multinational corporations

2009-05-04T17:00:00.000-04:00

The President spoke today of his administration's plans to increase the amount of taxes paid by U.S.-based multinational corporations.

He began his remarks with this statement: "Let's begin with a simple premise: Nobody likes paying taxes, particularly in times of economic stress. But most Americans meet their responsibilities because they understand that it's an obligation of citizenship, necessary to pay the costs of our common defense and our mutual well-being."

Agreed!

Here are a few key statements he made:

"For years, we've talked about shutting down overseas tax havens."
"I'm asking Congress to pass some commonsense measures."
"These and other reforms will save American taxpayers $210 billion over the next 10 years."
"We're beginning to restore fairness and balance to our tax code."

So what is the plan?

The White House released a Fact Sheet on its plan, which provides detail on the following goals:

(1) Replacing Tax Advantages for Creating Jobs Overseas With Incentives to Create Them at Home

Reforming Deferral Rules to Curb A Tax Advantage for Investing and Reinvesting Overseas
Closing Foreign Tax Credit Loopholes
Using Savings To Make Permanent The Tax Credit for Investing in Research and Experimentation at Home

(2) Getting Tough on Overseas Tax Havens

Eliminating Loopholes for "Disappearing" Offshore Subsidiaries
Cracking Down on the Abuse of Tax Havens by Individuals
Devoting New Resources for IRS Enforcement to Help Close the International Tax Gap

What's next?

We'll see how this all plays out with Congress. Here are a few links for more on the story...

The Tax Lawyer's Blog: Obama Vows to Close Foreign Tax Loopholes
TaxGirl: Obama Set to Shake Up Corporate Tax "Loopholes" Today
CNN Money: Obama plans corporate tax crackdown
Bloomberg: Obama Seeks End of Corporate Tax Break

Bias disclosure

2009-05-04T14:30:00.000-04:00

Since this blog is about tax developments, it will include government news. I hope the reader (if there is a reader out there) will not find it terribly partisan. I don't think of myself as political, as I tend to only read news about the economy and tax policy. (Although I did hear about the swine flu. My bubble is not entirely impermeable.)

Of course, I've got opinions. And I'm usually too quick to share them. In the spirit of full disclosure, I figured I'd share my philosophy on taxes. And I hope that I'm not breaking any copyright laws by stealing the idea from Tax Attorney and CPA Peter Pappas.

Everyone should pay their taxes. “Taxes are what we pay for civilized society.” (U.S. Supreme Court Justice Oliver Wendell Holmes). “Taxes, after all, are dues that we pay for the privileges of membership in an organized society.” (Franklin D. Roosevelt)

No one should pay more than they are required. “The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.” (US Supreme Court, Gregory v. Helvering, 55 S Ct. 266, 1/7/1935)

Figuring out your taxes shouldn't be so hard. The average taxpayer should be able to figure out their taxes, since the average taxpayer has to pay them.

Raising taxes won't fix all our problems. If we are to encourage innovation, industry, and entrepreneurship, we must let people keep most of their income.

So that's my philosophy in a nutshell.

Back to tracking tax developments...

IRS playbook for 2009-2013

2009-04-29T09:47:00.001-04:00

The IRS recently published its Strategic Game Plan for 2009-2013. The mission of the IRS is to: "Provide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all."

The plan spells out 2 overarching goals for the next 5 years:

Goal 1: Improve service to make voluntary compliance easier.

Goal 2: Enforce the law to ensure everyone meets their obligations to pay taxes.

A few specified objectives for meeting these goals are to:

Consider the taxpayer's perspective
Improve issue resolution
Make it easier to navigate the IRS
Provide targeted, timely guidance and outreach
Strengthen partnerships with tax practitioners
Proactively enforce the law
Respect taxpayer rights and minimize taxpayer burden
Expand enforcement approaches and tools
Target emerging high-risk areas

So what does this mean?

Obviously, I don't know for sure. My psychic powers are nonexistent. And I've never worked at the IRS, I've only dealt with the IRS.

Based on what I know (which, admittedly, may not be a lot), these are my suggestions to my fellow taxpayers:

Try to get it right the first time. The best way to avoid trouble with the IRS is to file accurate, on-time returns.

Don't expect leniency. One of the many rules I live by is to hope for the best, but plan for the worst. For several years, we've been told we'll be seeing a "kinder, gentler" IRS. However, many (perhaps even most) tax practitioners and taxpayers have not found this to be the case. In January this year, the National Taxpayer Advocate reported to Congress that the IRS is too harsh. The hard-line enforcement was identified as the second biggest problem facing taxpayers (with tax complexity being the first). This leads to my next suggestion for those facing tax trouble...

Consider your options. In general, you can't completely avoid paying a tax debt, but you can work to minimize interest and penalties, and can work out agreements to pay over time. Tax attorney Peter Pappas provides a great summary of the forms of tax relief. We've all seen the commercials where people claim: "I owed $60,000, but this company made it so I didn't pay anything!" In reference to these types of claims, I recently heard an IRS representative respond simply that you'll only have that kind of debt forgiveness if you really have absolutely no assets available to pay. Now, I have no expertise in bankruptcy law, so I can't comment on when taxes can be discharged in bankruptcy. I can refer you to another post by Peter Pappas.

Be proactive. If you have not paid your taxes, your situation will not improve if you just wait. Those problems do not just go away. The IRS can take a long, long time to move forward with an issue (so painfully long) -- but if you owe money, they will get to it sooner or later. And they will add penalties and interest. You'll be much better off if you hire a tax professional to take proactive steps to resolve the problem.

I would be very happy to see the IRS be successful in meeting the goals outlined in its Strategic Plan, as that would help the average, honest taxpayer and tax professional. It would not help the average tax cheat, which sounds good to me, since tax cheaters make my tax bill higher.

We'll see how the next 5 years go. For now, I'll just keep working to help my clients navigate the existing system, painful as it is.

Band-aid solutions to tax complexity problem

2009-04-29T09:28:00.000-04:00

On April 15, President Obama addressed the nation on the issue of tax simplification.

The Wall Street Journal article indicated one proposal under consideration would exempt up to 40% of Americans from having to file a tax return. After contacting the article's authors, I learned that the plan was written by Austan Goolsbee and adopted by the Obama campaign.

Titled "The Simple Return" plan, the proposal would not actually exempt up to 40% of Americans from filing a return. Rather, it would make it so the only action required by the average taxpayer would be "checking the numbers, signing the return, and then either sending a check or getting a refund."

A few of the key points in the plan:

The proposal assumes the tax law remains as is, with the same mass of deductions, credits, exemptions, and so forth.
The program would be voluntary. Anyone who preferred to fill out his own tax form, or to pay a tax preparer to do it, would just throw the Simple Return away and file his taxes the way he does now.
The IRS would prepare a "Simple Return" with the data it receives from employers and banks (including froms W-2, 1099, and 1098), which the taxpayer could then just review and sign.
California has already implemented a pilot program of the "Simple Return" plan, which it calls "Ready Return."

I have just read this over in the last couple of days, so I'm far from qualified to render an expert opinion. Still, I'll go ahead an render my inexpert one:

This seems to be a valiant effort to make the existing system more manageable for the average taxpayer. But it treats the symptoms rather than the disease. The real problem is the complicated, convoluted, mind-numbing tax law.

Rather than trying to lessen the headache of working within a broken system, let's try to fix the system itself.

Unfortunately, that's where my "wisdom" (or foolishness, depending on who you ask) runs out. I hope to read more about others' ideas for real tax reform over the summer. Stay tuned.