Jerry Coon, Enrolled Agent

How to choose a tax preparer

The big news last week was that the Internal Revenue Service was going to start regulating currently “unregulated” tax preparers. “Unregulated” tax preparers are defined as all tax preparers that are not enrolled agents (EAs), certified public accountants (CPAs), or attorneys. Those three classes of preparers are allowed to call themselves “practitioners,” as opposed to preparers. For that privilege, they have always been highly regulated and are held to a high standard of conduct.

According to the IRS findings, there are currently 42,896 EAs, 646,520 CPAs, and 1,180,386 attorneys who actually prepare and sign tax returns. The IRS has a good handle on who these people are and the type of work they do. But according to the IRS, there are between 900,000 and 1,200,000 “unregulated” tax preparers preparing and signing tax returns. Conversely, they don’t really have a good picture of who these people are and if they are competent enough to actually be preparing tax returns.

We are talking about some large numbers of tax returns here. About 61,800,000 tax returns were prepared by paid preparers last year. If the EAs, CPAs, and attorneys prepared half of those returns, that leaves 30,900,000 tax returns that the IRS has less control over.

All of that will begin to change on January 1, 2011, when these new regulations take effect in earnest.

With that 2011 date in mind, remember that the same old rules apply this year. Some preparers are regulated and some preparers are not regulated; 61,800,000 taxpayers are going to choose a tax preparer in the near future to prepare their return. What are the factors they should use to make that choice? My personal list goes like this:

1. Will the preparer sign the return? By law, anyone who is paid to prepare a return has to sign that return. If the preparer hedges on that point, there is something drastically wrong. As the saying goes, “Run, don’t walk; get away as fast as possible.” If the preparer won’t sign the return, that doesn’t absolve the taxpayers from what is on the return.

2. Is the preparer available year around? The tax business has grown into a year-round business, because our tax system is so complicated. Congress is making laws all year long that affect not only the future years, but also the current year. The IRS is better at matching up the information sent to them on paper forms such as W-2s and 1099s with the tax return itself. If the information doesn’t match, they send out a demanding letter. The state of Michigan sends out a few million letters yearly proposing all types of assessments. All of those letters require a response. If you receive a letter from any taxing authority, you need your tax preparer to help formulate that response. Ignoring the letter does not make the problem go away. Not being able to get in touch with your preparer is not a viable excuse. Make sure the preparer is available all year around.

3. Does the preparer have any professional affiliations and/or credentials? Is the preparer an EA, CPA or attorney? Does the preparer belong to organizations such as National Association of Tax Professionals, Michigan Society of Certified Public Accountants, or the Michigan Bar Association? The affiliation itself doesn’t prove the preparer is competent, but it does prove he/she is willing to spend some time and money to belong to an organization that most likely does have a continuing education requirement and has an existing standard of ethical conduct.

4. Who is actually preparing the return? Do you meet with a senior tax preparer for a short visit to go over your information, but when you leave, the return information is given to an intern to prepare? Worse yet, is your return information sent to an overseas affiliate in India or Ireland where the return is completed overnight and sent back in the morning? We have strict privacy and confidentiality rules that we abide by here in the USA, but I’m not so sure these other countries have the same high standards that we live by. Find out who is preparing the return.

5. Does the preparer promise larger tax refunds than other preparers? If so, they actually could be more brilliant than all of those other preparers or they could bend the rules a little more than is allowable. Be careful of preparers making that claim.

It’s not illegal to interview a tax preparer before you ask him/her to prepare your return. That might help you make the best decision in light of the factors I discussed above. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns
Action Tax Service on Northland Drive
in Rockford.Contact Jerry at his
website, www.actiontaxservice.com.

Jerry Coon, Enrolled Agent

New tax season presents common situations

It’s finally the beginning of the tax season. I say “finally” because those of us in the tax business have been building toward this date since September. That’s when we started going to seminars and learning how all of the new laws would interact with the tax returns we will be preparing in the next few months. That’s also when we started ordering the supplies and the various software packages that we use to prepare not only the many types of tax returns we file but also the various business reports we file such as W-2s and 1099s.

A tax preparation firm like Action Tax Service uses technology to the fullest extent possible in an attempt to ensure that clients get the absolute best product that we can give them. However, all of the technology in the world won’t help us prepare a return if we don’t have the needed information at our fingertips.

For the most part, employed taxpayers can’t file a tax return until a W-2 is received. Most retired taxpayers can’t file a tax return until a 1099-R or a Social Security SSA-GOV is received. We can use a last check stub to create an estimated tax return, but we are not able to finalize and actually file a return without those official documents.

Let’s look at three common but troublesome situations.

First, the majority of all W-2s and 1099s will be received by January 31, but what happens if a taxpayer does not receive that statement by January 31 or February 10 or even February 28?

Second, what happens if the statement received is wrong?

Third, and even worse, what can be done if the wrong type of statement, such as a 1099, is received instead of a W-2?

What’s a taxpayer to do in these situations?

Let’s discuss the first situation in which the W-2 or 1099 is not received. The reporting procedures for W-2s are different than those that regulate the reporting of 1099s. It is important to remember that even though employees are required to have their W-2s available by January 31, the employer is not required to submit these documents to the Social Security Administration (SSA) until February 28. Note that I said “Social Security Administration” and not the Internal Revenue Service. In our system of reporting, the SSA gets the original set of W-2s. The IRS doesn’t get a full copy directly from employers. Ultimately, the IRS matches up the information from tax returns and other employment-related forms filed by the employer with the information that was submitted to the SSA, but that whole matching process can take up to two years to take place. My point is this: Calling the IRS to report an employer before February 28 is most likely a wasted telephone call. It might make the taxpayer feel better, but the employer doesn’t have to send anything to the government before that date and, even then, the reporting is made to the SSA and not the IRS.

Forms 1099, on the other hand, are sent directly to the IRS, and the SSA doesn’t get a copy of those 1099s.

It goes without saying that our tax system is convoluted and this is just one more example. Why don’t we don’t have one large clearing house where all of these forms are sent? Perhaps it is time for a private company to take over the processing of those forms. With our federal government about to take over health care, maybe they should give up the processing of W2s and 1099s as a trade-off. If private industry couldn’t process those returns more efficiently, more accurately and cheaper, I would offer to eat one of my fishing hats or maybe one of my golf gloves or perhaps one of my Knoxville Nationals t-shirts. I could probably offer to eat my whole boat and it wouldn’t matter because it’s never going to happen. Our federal government is in the acquisition mode, not the privatizing mode.

Employers are required to make W-2s available to all employees by January 31. Making these statements “available” is determined by company policy. Some employers include the W-2 in the employee’s last paycheck of January. More employers every year are taking advantage of technology and e-mailing the W-2 to their employees. Some employers mail the W-2s to the current mailing address on file. There are usually no problems with current employees. The problems arise with ex-employees. They don’t get a paycheck in January and an employer, in this situation, is not apt to e-mail a W-2 either. These W-2s will most likely be mailed to the last known address on file and if it comes back as undeliverable, the company has fulfilled its responsibility to that employee. It’s up to the employee to contact the company and make arrangements to get the W-2.

This is Jerry Coon signing off. Next week, I will discuss the other two situations where the statement received is either incorrect or the wrong statement is received.

Jerry Coon is an Enrolled Agent. He owns Action
Tax Service on Northland Drive in Rockford.
Contact him at www.actiontaxservice.com.

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 jcoon@actiontaxservice.com.