THE TAX ATTIC with Jerry Coon

Jerry Coon

From a professional improvement viewpoint, it has been a busy summer at Action Tax Service. Continuing education is always the name of the game in the tax business, but this summer was special. Tax professionals Kathy Anderson, Rochel Barnes and Darlene Norden all took a class and passed a competency test created and administered by the Internal Revenue Service. By passing the test, each of them became a Registered Tax Return Preparer (RTRP). In addition, another Action Tax Service employee, Shelley Parker, went through the lengthy process of reinstating her Certified Public Accountant (CPA) license.

Going into this tax season, we will have one Enrolled Agent (myself), four Registered Tax Return Preparers (myself, Kathy, Rochel, Darlene)and one CPA (Shelley) on staff.

A preparer can be licensed in more than one category. I’m both an Enrolled Agent and a Registered Tax Return Preparer. This test-taking, continuing education, and licensing is important because, in the near future, as of January 1, 2014, only RTRPs, EAs, CPAs, and attorneys will be allowed to sign a tax return as a paid preparer. The IRS is making a concerted effort to better monitor and control the tax preparation process. Limiting those who can sign a tax return is one of the best ways to get a handle on both monitoring and controlling that process.

I’m extremely proud of these employees. Congratulations to Kathy, Rochel, Darlene and Shelley. Action Tax Service is ready today for that 2014 date.

We are all also hoping that the Internal Revenue Service is ready for 2014. The current estimate for the tax gap is $450,000,000,000. The definition of the tax gap is the amount of money collected by the IRS as opposed to the amount of money that taxpayers should be paying if all of the rules and regulations were followed. The IRS is charged with eliminating that figure. There were 141 million individual tax returns filed in the 2010 tax year. There were 1.8 billion informational returns, such as W-2s and 1099s, sent to the IRS. The IRS matched up these informational returns with the tax returns. Unfortunately, they found approximately 20,000,000 discrepancies that resulted in the IRS sending out almost 5 million notices proposing to assess additional tax due.

Just as unfortunately, according to a General Accounting Office audit, approximately 48% of the IRS’ notices were “incorrect, unresponsive, unclear, or incomplete.” Almost one-third of the notices did not result in any tax owed.

That is not the way to efficiently close a $450 billion tax gap. The IRS has to get better and preparers must also get better. Let’s see what happens in the 2014 tax year.

In a previous article on health care reform, I went through an example logically explaining why employers, for financial reasons, might cease providing employer-paid health insurance in 2014. I wrote that, after the accounting department tallies up all of the costs and the savings, it would be purely a financial decision which the CEO would have very little difficulty making. The savings would substantially outweigh the costs.

However, in my example, I did not include one cost that bears discussing. My thanks goes to James Razmus for pointing out the missing cost of income tax. Please allow me to finish up my example, taking into account the income tax factor.

The employer could be penalized up to $3,000 for each employee that he doesn’t cover and, importantly, that penalty is non-deductible. If the employer is in the 25% tax bracket, that penalty would increase the employer’s tax by $3,000 times 25% or $750. In my original example, the employer would be ahead by $2,600 per employee. Taking taxes into account, it is positive by $2,600 minus $750 or $1,850 per employee. This $1,850 figure could be more or less since corporate tax rates are a low of $0 if the corporation has a taxable loss or a high of 38% if the corporation’s taxable income is more than $15,000,000.

The $1,850 is less than I calculated originally, but it is still a substantial amount of savings and will certainly turn some heads. Intentionally planned or not, the net result is that employers will be financially rewarded by dropping their employer-provided health insurance coverage. This is Jerry Coon signing off.

 

Jerry Coon owns Action Tax Service in Rockford. He is an Enrolled Agent and a Registered Tax Return Preparer. Contact Jerry through his website: www.actiontaxservice.com.

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