The Tax Attic with Jerry Coon — October 22, 2009

Jerry Coon, Enrolled Agent

Jerry Coon, Enrolled Agent

Recent developments in tax preparation

In the tax preparation business, there are always recent developments. Things change frequently. I have determined that it is how tax preparers keep their minds young and limber. We have to follow the bouncing ball, so to speak, on a daily basis because we really don’t know where it’s going to bounce to next. Let’s discuss a couple of those recent developments.

First, effective for returns that we will be filing in the coming tax season, there will be a box on all individual tax returns that will allow all or part of a refund to be diverted toward the purchase of Series I U.S. Savings Bonds. The denominations available will be $50, $100, $200 and $1,000. Unlike the old Series E bonds, which were purchased at a discounted dollar amount, you pay face value for the Series I bonds. It cost $50 for a $50 Series I bond. The bonds will be mailed directly to the taxpayers.

In order to determine if buying one of these bonds is a good thing, we have to look at the interest the bond will be paying. The interest paid on a Series I bond is calculated by combining a fixed rate and an inflation rate. Both of these rates are determined in May and November of each year. All bonds issued between May and November will get the rates as published in May. All bonds issued between November and May will get the rates as published in November. Interest begins to accrue as of the first of the month in which the bond is issued. Series I bonds totally mature in 30 years. The same interest rate as determined at the time of issue will apply for all 30 years, unless the rules change, of course. As we all know, our U.S. government always reserves the right to change the rules. There is a minimum holding period of 12 months, after which the bond can be redeemed for cash. However, if it’s redeemed within the first five years of issue, there is a penalty of forfeiting three months of interest.

The fixed interest rate that will apply to Series I bonds purchased from May 2009 to November 2009 is 0.1%. Yes, that is correct. The fixed interest rate is one-tenth of one percent. None of us are going to get rich at the rate of 0.1% interest. However, as the great comedian and philosopher, Will Rogers, once said, “I am more concerned with the return OF my money than the return ON my money.” Mr. Rogers would have loved these Series I bonds. But wait, this gets better.

The second component of the total interest rate is the inflation component. According to the official government statistics, we are in a period of negative inflation, commonly called deflation. It’s their story and they are doggedly sticking to it. In fact, for Series I purposes, the May inflation component was determined to be negative 2.78%. Combining this -2.78% and the positive 0.1% from the fixed rate component gives us a -2.68%. This is not possible. Even Will Rogers could see that paying the federal government for the privilege of owning a Series I bond is not a wise thing to do. The formula actually states that the combination of the fixed rate and the inflation rate can never result in an overall negative interest rate. It can’t go below zero. However, that does mean it can go to zero and that is exactly what has happened for Series I bonds issued between May and November 2009. The combined interest rate for those bonds is 0%.

Unless the rules get changed, for the next 30 years, those bond holders will be guaranteed to get their money back, but they will not be paid one cent of interest. I wonder how many of these bonds have been sold since May. This brings the can-in-the-backyard and the mattress-full-of-money options back into play.

A second item that gets a tremendous amount of play in the tax preparer reporting journals is the process of requiring all tax preparers to register and be subject to some minimum continuing education requirements.

Currently, only attorneys who prepare tax returns, certified public accountants, and enrolled agents like me are registered and required to take continuing education to maintain our registration. If you are not an attorney preparing tax returns, not a certified public accountant, or not an enrolled agent, there is no registration procedure and there is no continuing education component. I personally think all tax preparers should be required to take a minimum amount of hours of continuing education. Keeping up on the rules is hard to do, even when taking classes. I don’t think it’s possible without taking classes.

The New York State Department of Revenue recently enacted legislation that will require all non-New York registered CPAs, all non-New York registered attorneys, and anyone else who prepares New York tax returns, no matter where they are physically located, to register with New York this year. There is a $100 mandatory registration fee and a $250 penalty for failure to register for those preparers who forget to register. Registration starts for preparers who did prepare at least 10 New York returns in 2009 and anticipate preparing even one return in 2010, or for preparers who expect to prepare at least 10 New York returns in 2010, even if they did not prepare any New York returns in 2009.

I hope our great state of Michigan legislators don’t read about this one. If anyone sees Tom Pearce reading this week’s Squire, kindly just take it out of his hand. This could be quite a money-maker. I believe this is a one-time fee in New York, but it would probably be an annual fee here in Michigan. This is Jerry Coon signing off. 

Jerry Coon is an Enrolled Agent. He owns
Action Tax Service on Northland Drive in Rockford.
His telephone number is (616) 866-4704, and his
e-mail address is

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