Alphabet Soup

Posted on January 22, 2013 by Russ

With the probable demise of the IRS’s initiative to create Registered Tax Return Preparers (RTRPs), the alphabet soup of tax professionals is now down to EAs, CPAs, CTECs, and JDs. While Robert Flach argues that RTRPs should be resurrected as a voluntary designation, I doubt that will happen (and I don’t see a benefit from it). Before I respond to his post and an excellent post by Jason Dinesen (an EA in Iowa), here’s my thoughts on the designations.

I’m an Enrolled Agent (EA). Enrolled Agents are one of three professions with full rights to practice before the IRS (the other professions are CPAs and attorneys (JDs)). To become an Enrolled Agent, you must pass a difficult three-part exam or have worked for the IRS for a number of years in a variety of assignments (I passed the exam back when it was a four-part exam). EAs specialize in tax; the slogan “We SpEAk Tax” is on my business card because that’s truly what we specialize in.

The public associates Certified Public Accountants (CPAs) as the tax professionals; however, that’s not really the case. While many CPAs do specialize in tax (such as Joe Kristan), many others work in accounting, audit, and consulting. CPAs are licensed by each state (EAs are licensed by the federal government). The CPA exam is not a tax exam. While EAs must take continuing education that is tax related, CPAs must take continuing education that is accounting related (but not necessarily tax related).

The other enrolled preparers are attorneys (JDs). Few of the attorneys who specialize in tax actually prepare many returns; for the most part, they deal with representation issues that may end up in Tax Court.

The majority of tax professionals are unenrolled preparers. They’re not licensed as CPAs, EAs, or attorneys. Most states don’t require tax professionals to have licenses (only California, Oregon, Maryland, and New York require licenses). In California, all tax professionals must have a license; if a tax professional is not a CPA, EA, or attorney, they must obtain a license from the California Tax Education Council (CTEC). CTEC professionals must take continuing education each year, too. However, a tax professional in, say, Iowa need only print business cards and he or she can compete against CPAs, EAs, and attorneys.

There are far more unenrolled preparers than enrolled preparers. Among enrolled preparers there are far more CPAs than EAs. There are 48,000 practicing Enrolled Agents, 225,000 CPAs, and 350,000 or so unenrolled preparers. The fact that someone has a designation of any sort doesn’t necessarily mean anything. My business is almost all referral-based; this is my fourteenth tax season and my advertising expense consists of this blog. If my designation were MTP (Martian Tax Professional) I doubt my preparation clients would care. (It would have an impact on representation, but that’s another story for another day.)

Jason Dinesen noted that his state organization, the Iowa Association of Enrolled Agents, has been decimated by the IRS’s new rules on continuing education. A little over a year ago, the IRS mandated that continuing education providers pre-approve continuing education courses with the IRS. While the California Society of Enrolled Agents (CSEA) and the Nevada Society of Enrolled Agents (NVSEA) have not had problems dealing with this, some state organizations have had problems; apparently, Iowa is one of those states. It is unclear if the new rules on continuing education will survive last week’s court ruling. The IRS has not publicly commented on the ruling (though the decision was announced late Friday and the IRS was closed yesterday for the MLK holiday). I do expect the IRS to appeal the ruling.

Enrolled Agents have a done a miserable job of promoting themselves. While I’m hopeful my new book will help with some publicity, the reality is that if I tell the average cab driver that I’m an Enrolled Agent, the response I’ll get is, “You don’t look like you’re in law enforcement.” Sigh….

My brother turned me on to books by Jack Ries and Al Trout such as Positioning: The Battle for Your Mind. Like it or not, CPAs have won the positioning war with tax preparation; Enrolled Agents aren’t going to win that battle. Perhaps we can win the battle for representation but I doubt it. Overall, the Enrolled Agent profession and the National Society of Enrolled Agents are not good marketers. Banging our head against the brick wall that CPAs own (to the public, CPA equals tax professional) is a waste of time.

So where am I going with this? This post was more of a stream of consciousness than anything specific. I’d love to see the EA designation in its right place in the forefront of the tax world; the reality is that it’s not going to happen in my lifetime. Jason Dinesen notes that the EA designation has been marginalized. Perhaps EAs should make the most of it. I remember a company called Curtis Mathes that promoted themselves as the most expensive television sets made. (The company began to decline in the 1980s after the death of its chairman in an airplane accident.) I wouldn’t mind being labeled as the “Rolls Royce of tax preparation.”

Posted in Taxable Talk | Tagged , , , | 3 Comments

Phil Mickelson Yells “Fore” to California

Posted on January 22, 2013 by Russ

Phil Mickelson has overcome a chronic illness (psoriatic arthritis) and continues to be one of the best golfers in the world. However, Mr. Mickelson golf game may be felled by something that his home state of California and the US government have implemented: taxes.

From the Golf Blog (from Sports Illustrated), Mr. Mickelson is quoted as saying,

There are going to be some drastic changes for me because I happen to be in that zone that has been targeted both federally and by the state and, you know, it doesn’t work for me right now…so I’m going to have to make some changes…

If you add up all the federal and you look at t he disability and the unemployment and the Social Security and the state, my tax rate’s 62, 63 percent. So I’ve got to make some decisions on what I’m going to do.

Ouch: A 62% marginal tax rate is quite high. His income tax rate is likely a bit less; Joe Kristan calculates it at 52%. Whether it’s 52% or 62%, it’s a lot, and when you earn $61 million a year before taxes, you don’t want to see your pay reduced by over half.

Mr. Mickelson could move to Nevada or Florida, and his tax rate would drop by about 8%; still high, but not astronomically high. I suspect Mr. Mickelson is torn between living in one of the most beautiful areas of the world (he resides in suburban San Diego) versus keeping more of his hard-earned income.

Now let’s consider entrepreneurs who call Silicon Valley home. They’ve been building up businesses, and let’s assume they see an opportunity to go “public” (issue stock on a stock market) and cash in. Let’s look at what would happen if they are in California versus Texas (or Nevada):

1. In California, they’ll face the highest state income tax in the country (13.3%) versus no income tax in Texas.
2. In California, capital gains are taxed as ordinary income for state taxes. There is no tax in Texas. (Many states with state income taxes have preferential capital gains treatments, too…but not California.)
3. In California, there is no Qualified Small Business Stock exemption. Not an issue in Texas; there’s no state income tax.
4. California has one of the worst business climates in the country (especially with regulations). Texas is among the best in the country.

So assume you are the president of HighTechCo, a Silicon Valley start-up. You can go public in California, or you can move your business to Texas. If you end up in Texas, you will make more money off your initial public offering (IPO), you will end up in a better regulatory climate, and you can hire employees at generally lower wages than in the Bay Area. Sure, the weather isn’t as good as California, but there are no earthquakes either. I suspect a lot of business owners will elect to use moving vans prior to their IPOs.

As Alan Greenspan said, “Whatever you tax you get less of.” California is going to find out that their tax increases will not be the long-term savior of their budgets. The only solution is cutting expenditures. Business owners can move, and many individuals (such as Mr. Mickelson) and businesses (such as the hypothetical HighTechCo) are going to choose that route.

Posted in California, Texas | Tagged | 1 Comment

Institute for Justice 2, IRS 0

Posted on January 18, 2013 by Russ

Back in December I noted the Institute for Justice’s lawsuit challenging the IRS’ regulations of unenrolled tax professionals (preparers who are not CPAs, Enrolled Agents, or attorneys). The IRS had publicly stated that the lawsuit was without merit. They better rethink that attitude as a federal judge disagrees.

Today, Judge James Boasberg ruled that the IRS has no statutory authority to regulate unenrolled preparers for return preparation. The crux of this case boils down to an 1884 statute on who can practice before the Treasury Department. Section 330(a)(1) states that the Secretary of the Treasury may “regulate the practice of representatives before the Department of the Treasury. [emphasis in opinion]” Section 330(a)(2)(D) allows the Secretary to require that the representative demonstrate…”competency to advise and assist persons in presenting their case. As Judge Boasberg notes,

Section 330(a)(2), like §330(a)(1), does not disclose who those covered “representative” are. But it does tell us what the representatives do — what their “practice” is, in the words of both subsections: representatives “advise and assist persons in presenting their cases.” This statutory equating of “practice” with advising and assisting the presentation of a case provides the first strike against the IRS’s interpretation. Filing a tax return would never, in normal usage, be described as “presenting a case.”

There’s more, though. Judge Boasberg notes that all of the preparer penalties within Title 26 (the Tax Code) wouldn’t be needed if §330(b) covered tax return preparers.

The better answer, consistent with the general/specific canon, is that § 330(b) does not create a comprehensive penalty scheme against tax-return preparers…

Without deciding whether any of these three textual points alone would be dispositive, the Court concludes that together the statutory text and context unambiguously foreclose the IRS’s interpretation of 31 U.S.C. § 330.

The conclusion of the Court is that the IRS overstepped its bounds. Plaintiffs seek declatory and injunctive relief. By failing to object to these remedies, Defendants have forfeited any challenge to them. The Court, moreover, concludes that both remedies are appropriate here.

Plaintiffs first seek a declaratory judgement that Defendants lack statutory authority to promulgate or enforce the new regulatory scheme for “registered tax return preparers” brough under Circular 230 by 76 Fed. Reg. 32,286. The Court will grant this declaratory relief.

Plaintiffs also ask the court to permanently enjoin Defendants from enforcing this IRS registration scheme against tax-return preparers. As the scheme is impermissible, such injunctive relief also appears proper…With an invalid regulatory regime on the IRS’s side of the scale and a threat to Plaintiffs’ livelihood on the other, the balance of hardships tips strongly in favor of Plaintiffs. Finally, the public interest would be served by a permanent injunction because the IRS’s new Rule is ultra vires. The Court will therefore grant permanent injunctive relief as well.

While the IRS is certain to appeal, it appears that the RTRP program is dead (at least for now). It will likely take an act of Congress to expand the IRS’s regulatory power to unenrolled preparers. And that’s not likely to happen in the current Congress.

Posted in IRS | Tagged | 2 Comments

Farmers & Fishermen Get Relief From Catch-22 Situation

Posted on January 18, 2013 by Russ

The IRS announced relief today for a Catch-22 situation for farmers and fishermen. Normally, farmers and fishermen who choose not to make quarterly estimated tax payments are not subject to a penalty if they file their returns and pay the full amount of tax due by March 1. The problem is that most farmers must file Form 4562 (depreciation and amortization), and the IRS won’t be ready to accept that form until after March 1st because of the late passage of the “fiscal cliff” legislation. (Not only does farming equipment depreciate, but so do livestock and orchards.) Farmers and fishermen were put in an impossible situation.

The IRS recognized this, and stated in an email announcement today that there will be no penalty as long as the farmers and fishermen file by April 15, 2013. Farmers and fishermen will need to attach Form 2210-F, check the waiver box in Part I, Box A, and leave the rest of the form blank. (The taxpayers name and identification number should also appear at the top of the form.)

While this is not a big item for me–I have one client in farming–this will be big news for tax professionals elsewhere in the country.

Posted in IRS | Tagged | 1 Comment

The Walking Dead Come Back

Posted on January 16, 2013 by Russ

No, this isn’t a post on the next zombie movie. Yes, Las Vegas does have a Zombie Apocalypse Store (humorously, near one of my clients). But I digress….

Instead, we’re going to focus on a CPA from Northridge, California (in the San Fernando Valley region of Los Angeles) who is very much alive. Masood Chotani pleaded guilty on Tuesday to conspiracy to defraud the US. What he did, with others who are now residing at ClubFed, was to file returns in the names of the truly dead. While the Department of Justice press release only states that the “…deceased people’s Social Security numbers and other identification information [were] obtained from the Internet,” it’s likely the Social Security Death Master File is once again the culprit.

Why this gift for tax fraudsters is still available is unknown. But if you want to purchase the names and social security numbers of the truly dead, you can do so courtesy of the US government. Meanwhile, the DOJ and IRS Criminal Investigation gets to follow up on thousands upon thousands of cases of tax fraud. This is definitely not a digression.

As for Mr. Chotani, he’ll be joining his co-conspirators at ClubFed. He’s also agreed to make restitution. Unfortunately, for the living relatives of the dead who are victims of identity theft, they wait in a zombie-like state for the nightmare of identity theft to be resolved.

Posted in Tax Fraud | Tagged | 1 Comment

California Supreme Court Takes Gillette Case

Posted on January 16, 2013 by Russ

As expected, the California Supreme Court has accepted Gillette vs. Franchise Tax Board. While no date has been announced for the arguments, I’d expect the case to be heard this Spring or Summer, with a decision sometime before year-end.

The Gillette case is very important to multi-state entities that file in California.

Prior Taxable Talk Gillette Coverage.

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Is A Simplified Home Office Deduction Better?

Posted on January 15, 2013 by Russ

Today the IRS announced a simplified option for claiming the home office deduction (Form 8829). The deduction will allow some to take $5 per square foot of home office (up to a maximum of 300 square feet). This new “simplified” procedure will be available for 2013 tax returns filed in 2014. Do note that the home office still must be a qualifying home office to take the deduction. There is no depreciation under this simplified procedure, but mortgage interest, property tax, and casualty losses are assumed to be taken.

Well, is this a good deal for home office users? Frankly, not for many of them. I looked at all of my clients who filed this form, and the simplified procedure would have cost every one of them money. Perhaps that’s because of my client base, but I don’t think so. Most taxpayers taking the home office deduction do keep good records, so the recordkeeping isn’t that big of a deal. After all, these are small business owners who have to keep good records anyway (or are supposed to). The reality is that $5 per square foot understates the cost of most home offices, especially when factoring in depreciation.

There are two groups for whom this new procedure is beneficial. First, those business owners who do not keep good records and just haven’t bothered with the deduction in the past. (This especially holds true for renters.) Second, the IRS (and the US Treasury). The simplified procedure will cost taxpayers money, so the government definitely benefits.

There’s another issue with the simplified procedure: state conformity. I actually expect most states to conform as it is beneficial to them (the deductions will be less under this method).

What the IRS handed taxpayers might appear to be a savings of 1.6 million hours per year (per the IRS email I received today). The reality is that taxpayers and tax professionals would be well advised to spend the 1.6 million hours because the simplified procedure looks like a lemon to me.

Posted in IRS | Tagged | 1 Comment

Entrepreneur Rant on FTB’s Retroactive QSB Ruling

Posted on January 15, 2013 by Russ

Back in December, I reported on how the Franchise Tax Board (California’s income tax agency) would interpret the Cutter decision. I didn’t spend much time on it, as the subject of Qualified Small Business stock (QSB) doesn’t impact many of my blog readers. The FTB decided that since the appellate court ruled as aspect of California’s law on sale of QSB stock unconstitutional, one way around the issue was to void the law in its entirety. And send individuals who took the QSB deduction penalty and interest notices. Surprise!

That said, an entrepreneur named Brian Overstreet has written a column that is about as nasty as can be toward the FTB and California. (I recommend reading the entire column.) As Mr. Overstreet notes the impact:

1. If you are a business founder or early investor who sold stock since 2008 and took the QSB exclusion: Surprise! You are going to get a bill from the FTB for the 50 percent of the taxes you excluded plus interest plus possible penalties.

2. If you are a business founder or early investor and have not yet sold stock: Rethink your business and tax planning strategies. Consider whether it’s fiscally prudent to stay in California.

3. If you a contemplating starting or investing in a California business: Think long and hard. Consider out-of-state alternatives.

Of course, there’s definitely a constitutional issue here, too. Given that some of the impacted entrepreneurs have deep pockets, I expect this ruling to head to court. I suspect the FTB can do this for the current tax year (2012; the ruling was announced in December) but I doubt it will hold up for prior tax years.

The other issue is one any entrepreneur in California should consider. As Mr. Overstreet noted, “Why in the world would any smart business person start or invest in a new California company facing that kind of penalty?”

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What $4.95 Buys These Days

Posted on January 15, 2013 by Russ

Living in Las Vegas gives me, at times, a very jaded perspective on life. I see individuals who otherwise pinch pennies spend $100 on bottle service at a club (or $4.95 for a thimble-sized amount of alcohol). You can still find $4.95 meal specials in the late night/early morning hours at many casinos in town. The latter, if you’re hungry, is a far better use of $4.95 than the former.

Another use of $4.95 is to purchase Robert Flach’s My Best Tax Advice. The 27 pages of tax advice within the ebook (a pdf document) are full of good, common-sense advice. While I don’t agree with everything Robert has written, any individual who follows Robert’s advice will be far, far better off than those who don’t. I especially like his comments about notices from the IRS; as Robert states, “Do not ignore an IRS or state tax notice. The problem will not just go away.” I used basically the same line in my book.

In any case, for less than five dollars you can get some common-sense advice that if followed would help most taxpayers. You can order the book through Robert’s website.

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Estimated Tax Payment Deadline Is January 15th

Posted on January 14, 2013 by Russ

Tomorrow, Tuesday, January 15th is the deadline for making your fourth quarter 2012 estimated tax payments. This is a postmark deadline, so if you are mailing your estimated payments, go to the post office and spend the few dollars to mail your payment certified mail, return receipt requested. If you use EFTPS, the payment must settle tomorrow (the 15th).

Most states have the same deadline for fourth quarter estimated payments (January 15th).

Posted in IRS | Tagged | 1 Comment