Flickr image courtesy Tim under Creative Commons license
I have joined an “amicus” brief to the D.C. Circuit Court of Appeals on the Loving case against the IRS preparer regulation regime. Also on the brief are boggers Russ Fox and Jason Dinesen, as well as The Tax Foundation.
The IRS is appealing the district court ruling rejecting their power grab over preparers. Accounting Today reports:
The brief argues that the IRS violated the APA’s arbitrary and capricious standard in issuing the regulations, for example, by engaging in a flawed cost/benefit analysis under Executive Order 12866 in rejecting alternative approaches. “The IRS ignored the increased costs to consumers of tax-return preparation services in making this analysis,” said the brief.
Jason’s argument:
As an Enrolled Agent, Mr. Dinesen is not directly affected by the regulations. Nevertheless, Mr. Dinesen believes the regulations would have an indirect adverse effect on his business (and on Enrolled Agents generally) because the Registered Tax Return Preparer designation created by the regulations would have the effect of diminishing the value of the Enrolled Agent designation in the market for tax-preparation services, largely because the number of Registered Tax Return Preparers would be substantially greater than the number of Enrolled Agents.
Next to consumers, I think enrolled agents are the folks most harmed by the regulations. The RTRP designation would make it very difficult for EAs to market their much higher level of credentials.
Russ Fox is also an enrolled agent, but he raises different points:
As an Enrolled Agent, Mr. Fox is not directly affected by the regulations. Nevertheless, based on his extensive experience in tax practice, he has a number of objections to the regulations. In addition to the defects in the regulations described by the district court, the plaintiffs-appellees, and this brief, Mr. Fox objects to the regulations because the IRS already has ample statutorily authorized tools to apply against incompetent or unscrupulous tax-return preparers; because the regulations will not be effective in eliminating incompetent or unscrupulous tax-return preparers; because they will give a tacit stamp of approval to preparers who are not competent; because they will have the effect of driving many low-volume tax-return preparers out of business, thereby increasing the cost of tax-return preparation services for the clients of those preparers; and because administering the regulations will require scarce IRS resources that could be better used for other purposes, such as combatting identity theft.
He is correct, in my view.
My case:
Mr. Kristan objects to the regulations because they will reduce options for consumers of tax-preparation services by driving many low-volume but competent and conscientious tax-return preparers out of business because of the cost of compliance with the regulations; will increase the compliance cost and burden on low-volume tax-return preparers that remain in business; will increase the cost of tax preparation services without increasing the value of those services; will prompt some low-income individuals to resort to tax-return preparers who will evade compliance with the regulations; will prompt some low-income individuals to prepare their own returns, rather than using paid preparers, resulting in less accurate returns; will prompt some low-income individuals to cease filing altogether; will adversely affect Enrolled Agents by diminishing the value of their Enrolled Agent designation; and will likely ultimately be extended to CPAs, attorneys, and Enrolled Agents.
After the revelations regarding the IRS treatment of the administration’s political opponents, why would anyone think it wise to let the IRS regulate preparers? It makes as much sense as having prosecutors regulate defense attorneys.
New U.K. film tax credit indictments. It appears that the Brits are slowly moving towards the Iowa approach of jailing filmmakers instead of subsidizing them. Ic.Scotland.co.uk reports:
Five people are to be charged in connection with a film industry tax relief fraud which cost the public purse around £125 million, the Crown Prosecution Service said.
The group allegedly abused a tax relief that allows investors in the British film industry to offset losses against other tax liabilities in order to cheat the public revenue.
“Around £125 million” translates to around $194 million. And in Iowa film producers are serving time for stealing merely single digits of millions. It just goes to show what you can accomplish with a national effort.
Boo. House bill would give IRS authority to regulate tax pros(Kay Bell) The power grabbers at IRS and their buddies at the national franchise tax prep firms have been thwarted by the courts. Now they are using their congresscritter friends to put in the fix.
Kay sadly falls for it:
The quality independent tax professionals are following tax law changes, staying up to date and providing their clients with reliable tax services. Down the street, however, an inept preparer is undercutting their prices and mucking up the system for all of us — the IRS, tax pros and taxpayers alike.
The IRS can’t regulate anybody into competency. They can make people pass a “competency” test that really is a literacy test. They can make people pay for CPE. But they can’t make anybody competent who wouldn’t be otherwise. What they can do is drive little preparers out of the business with nagging paperwork, red tape and hassles that the big boys can just assign to their compliance departments, and, when necessary, to their lobbyists. This reduces the supply of preparers, increasing the cost of preparation for taxpayers.
The real problem with tax errors isn’t preparers; it’s the horrendous tax law and the inept legislators who make it happen.
In a 2011 paper published by the Mercatus Center at George Mason University, Veronique de Rugy and Adam Thierer recommended “an ‘origin-based’ sourcing rule for any states seeking to impose sales tax collection obligations on interstate vendors.” Under that rule, which mirrors what happens when you buy something while visiting another state, each business collects sales tax on behalf of the state where it is based, no matter where the customer happens to be.
The beauty of this approach is that it treats all retailers equally, eliminates the daunting challenge of dealing with many different taxing authorities, and respects state policy choices while encouraging tax competition between jurisdictions. Evidently the idea makes too much sense for Congress to consider.
That would motivate online sellers to locate in low tax jurisdictions, which is why congresscritters from high-tax places will never allow it to happen.
Not your corporate welfare. Just ours. Iowa Senate taxwriters have been eloquent in criticizing the corporate welfare famously doled out to fertilizer companies over the last year. It turns out, though, that not all corporate welfare is bad, to them. Just that proposed by the other party. The Senate Ways and Means Committee advanced a set of its own welfare programs yesterday, including:
SF 238, which would provide a 30% tax credit (subsidy) “for persons who construct, install, and place in service an electric vehicle facility or a natural gas vehicle facility.” So if you buy a Chevy Volt, Senate Ways and Means wants to pay 30% of the cost of installing special plug-ins.
SSB 1240, which “increases to $50 million from $45 million the amount of historic preservation and cultural and entertainment district tax credits.” These are a cash cow for well-connected developers and rehabbers.
SF 205, which opens up an existing program to divert withheld employee taxes “to create economic incentives that can be directed towards business.” The bill “removes the requirement that an employer…be located in an urban renewal area.” In other words, it makes it just another “incentive” slush fund to pay people to be our friends.
So it’s not a principled opposition to business subsidies. They just want different ones.
Far better to get the state out of the subsidy business and make the tax system good for everyone — not just those with the pull and the consultants to game the system. Far better to enact The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.
The article takes for granted that the costs the regulations will impose will exceed the benefits:
Knowledgeable tax return preparers—who are reminded each year through education requirements to conduct effective due diligence on small businesses—can have a much greater impact on compliance than IRS auditors.
That makes an unwarranted assumption: that the IRS can create “knowledgeable tax return preparers.” It can’t. It can make people fill out paperwork, go through the motions of paying for CPE, and take meaningless open book literacy competency tests, but it can’t make anybody competent.
The IRS has limited resources. Semi-literate South Florida grifters are stealing billions through fraudulent refunds. Yet the IRS seems to think its problem is honest preparers.
Finland will lower the corporate rate to 20 percent in 2014, down from the current rate of 24.5 percent (and 26.0 percent in 2011)…
Finland plans to pay for part of the rate cut by boosting the effective investor tax rate on dividends paid by companies listed on the Finnish stock exchange.
Why not instead create a full dividends-paid deduction. It would eliminate the need for a rate preference for dividend inocme while eliminating the destructive double-tax on corproate earnings.
With less than three weeks left in filing season, the US Federal Circuit Court of Appeals has denied the IRS attempt to overturn the injunction against their preparer regulation scheme. From the Wall Street Journal Total Return blog:
This doesn’t mean the IRS has permanently lost its case, but it does mean that the IRS cannot move forward with its power grab unless and until it convinces the appeals court that it has the authority to regulate preparers.
Meanwhile, filing season continues, with no evidence that taxpayers have been harmed by the availability of preparers who haven’t passed an IRS open-book exam on Publication 17.
Iowa preparer indicted – for helping clients report too much income. From KCRG.com (my emphasis):
Keith Rath, of Shellsburg, was arrested last week by IRS agents after a grand jury indicted him on eight counts of aiding in the preparation and presentation of a false tax return.
The indictment says that on eight occasions over the years 2008, 2009 and 2010, Rath helped clients falsely claim thousands of dollars in business income that he knew they did not earn.
Mr. Rath has pleaded not guilty.
You might wonder why anyone would claim business income they didn’t earn. The answer, of course, would be to claim refundable earned income tax credits. A taxpayer with no “earned income” is ineligible for the credit. The EITC is “refundable,” which means that when there is the credit exceeds the computed tax, the IRS will send you a check for the difference. By reporting imaginary Schedule C income, taxpayers can (illegally) increase their refund check.
In fact, the OECD itself recently issued a report – known as the BEPS report – on how these techniques create base erosion and profit shifting. The problem is so serious, according to the report, “What is at stake is the integrity of the corporate income tax.”
The “integrity of the corporate income tax” is in the third aisle next to the chastity of the bordello.
Film tax credit scams are big news in the U.K. right now. An Irish actress, Aoife Madden, yesterday received a 54-month sentence in her role in scamming a U.K. film tax credit scheme. Irish Times reports:
The group successfully claimed £1.5 million in film tax breaks after they said they intended to make a film titled Landscape of Lives with a £19 million budget, funded by Jordanian backers.
Once they were arrested two years ago, the five hurriedly produced a film called, ironically, Landscape of Lies for just £90,000, which went on to win a Silver Ace award from last year’s Las Vegas Film Festival.
The film, which starred former EastEnders actor Marc Bannerman and Andrea McClean, told the story of a former British soldier’s attempts to discover the truth behind his friend’s murder in an apparent mugging.
Before suspicions had been aroused, Madden’s London film company, Evolved Pictures, told revenue and customs that millions had been spent on Hollywood A-list actors and film crew when it lodged a value added tax repayment application for £1.48 million. It received more than £1 million.
Lost in the coverage is Iowa’s pioneering role in film tax credit scams. A little-known film producer from Minnesota came here and showed the Brits just how it’s done:
Take Iowa. A start-up called Polynation Pictures came looking for backing for a sci-fi flick so lame it would have embarrassed Ed Wood. With a financing scheme worthy of Max Bialystock, the con these folks pulled was nearly as inept as the film they made, but Iowa’s film office was too starry eyed to notice.
…
The $767,250 production Polynation Pictures proposed eventually came in at $3.7 million. This was achieved in part with preposterous expenses. Producers claimed they paid $1,350 to rent six orange road cones. The use of two 6-foot ladders supposedly cost the company $900 (a bargain, as Polynation claimed to have spent another $900 to rent a single 8-foot ladder). Among production necessities was a new Mercedes. The partners set up an array of separate companies and used them to bill themselves extravagantly for work supposedly done on the picture. These were presented to Iowa as “deferred payments”—to be paid if the movie made money (which the enterprise was sure to do when Iowa handed the tax credits over). The only thing missing was a staged rendition of “Springtime for Hitler.”
Polynation mastermind Wendy Weiner Runge received 10 years for her star turn in the film credit program.
The film credit program was touted as a way to make Iowa a leader in the film world. And, in a way, it did.
You might be interested in this interview with Ms. Madden about her role in the film, knowing what we know now. She said this:
This project has been a crazy but wonderful challenge!! I’ve always wanted to produce a feature, and have a number of projects in development, but this was the one I just wanted to lift off the page. I think the biggest challenge was sourcing finance, which is no surprise for an independent film company. We were extremely lucky to find international investors and lobby them to back the project, but this was a lengthy process and has always been a challenge.
A challenge, yes, but I’m not sure they turned out lucky.
Snatching defeat from the jaws of victory. Now that the courts have saved the IRS from itself by shutting down the misguided preparer regulation system, the Senate rides to the rescue to screw everything up again, Accounting Today reports:
The two leaders of the Senate Finance Committee, Chairman Max Baucus, D-Mont., and ranking Republican member Orrin Hatch, R-Utah, have begun developing proposals for reforming the U.S. Tax Code, including giving the Internal Revenue Service the clear statutory authority to regulate tax preparers in case the IRS loses its appeal of a recent court case invalidating its Registered Tax Return Preparer regime.
The IRS can’t answer its phones. Its pockets are being picked to the tune of billions by semi-literate South Florida grifters. And the Senate thinks that preparers are the problem? Preparer regulation is a market-share enhancement program for the national franchise tax prep outfits; the rules were written by a former H&R Block CEO. If Senators Baucus and Hatch want to re-enact these anti-competitive and useless rules, it just shows who they really represent. (Via Going Concern).
The Hawkeye State gets a black eye for being the second worst state for corporate taxes, with a 12 percent rate. It also ranks 37th in property taxes, 33rd in individual income taxes and 34th in unemployment insurance taxes.
They accompany the article with this photo of the “Field of Dreams” — an unwitting illustration of the problems of Iowa tax policy. The Governor last year signed a proposal giving a special sales tax exemption to a private athletic complex being built around the field, made slightly famous in the Kevin Costner movie. It’s special carve-outs like this that make for high rates and complicated taxes all around.
State leaders ballyhooed the plan as a way of moving from old-style industry to new.
Despite tens of millions of dollars in state investment, the promised 3,000-plus jobs didn’t appear. As the Detroit Free Press reported last year, the studio employed only 15-20 people. That isn’t boffo. That’s a bust. The studio has defaulted on interest payments on state-issued bonds, and the guarantors—the state’s already stressed pension funds—may wind up holding the bag. “In retrospect, it was a mistake,” conceded Robert Kleine, the former state treasurer who signed off on the plans in 2010.
He doesn’t neglect Iowa’s film fiasco:
Iowa ended its motion-picture subsidies in 2010, after officials misused $26 million in state money, leading to criminal charges. According to a 2008 investigation by Iowa Auditor David Vaudt, 80% of tax credits issued under the state’s film-subsidy program had been issued improperly (to production companies that weren’t even spending the money in Iowa, for example).
Two film credit recipients are now serving 10-year sentences on theft charges arising from the program. That’s fine, but I really want to see a groveling public apology from the Governor who signed the program into law, the “economic development officials” who turned the keys to the state treasury over to a former Walgreens photo desk clerk in charge of the program, and to the legislators — all but three out of 150 — who voted the moronic program into existence.
“At a minimum, it’s probably going to take longer for people to get through on the phone; it’s going to take longer for refunds to be processed,” said Floyd Williams, a senior tax counsel at Public Strategies Washington.
Williams, who worked for the IRS for nearly two decades and directed the agency’s legislative affairs office for 16 years, says the sequester could also be a boon to those who purposely commit fraud, or accidentally fill out returns incorrectly.
Good thing the IRS can redirect the employees who had been assigned to the preparer regulation program to do something useful, now that the courts have shut down that futile enterprise. The IRS can’t stand their good fortune, though; Tax Analysts reports ($link) that the IRS is appealing the court decision.
It would be even better if Congress stopped using the IRS as the Swiss Army Knife of public policy. Given the agency’s new mandate to take care of our health insurance, their performance at the job of actually collecting taxes is only going to get worse.
Preparers gone bad. Accounting Today rounds up the week in preparer fraud, including a guy in New Mexico who, while serving time for identity theft-related charges, has been hit with 56 counts of fraud and embezzlement. That would be overachieving in underachieving.
Durango man pleaded guilty to tax evasion this week in federal court in New Mexico.
Hak Ghun, 62, is facing 12 to 18 months in prison after signing a plea agreement with the U.S. Attorney’s Office. He also will be required to pay $249,567 in restitution to the Internal Revenue Service.
The man was accused of embezzling from a company that had received investments from the Navajo Nation. For those who don’t get the old TV show reference, here you go.
How H&R Block guy got to write preparer regs. Civil Service! Tim Carney reports:
In 2009, the Obama administration hired Mark Ernst, the previous CEO of tax prep giant H&R Block, as IRS deputy commissioner. Ernst became a “co-leader” (in the words of an IRS spokesman) in drafting new regulations for tax preparers.
This seems to clash with President Obama’s executive order barring appointees from working on regulations directly affecting their former employers.
But thanks to a fine legal distinction, these rules didn’t cover Ernst. “Mark Ernst is a civil servant at the IRS; he is not a political appointee,” an IRS spokesman wrote me. “The Presidential Executive order on Ethics Commitments by Executive Branch Personnel only applies to political appointees.”
Nobody here but us chickens.
Jason Dinesen has a new installment about his client whose identity was stolen in the ID theft epidemic that really got rolling while the IRS was busy regulating preparers. “If you hired the best comedy writers and satirists in Hollywood, they couldn’t come up with a more farcical script about government ineptness.”
A new working paper recently released by the Mercatus Center at George Mason University… finds that contrary to conventional wisdom, sin taxes are often not used to correct externalities but rather for general fund spending. My take on that is politicians don’t really care about externalities. They would like to raise money from people whose activities they despise. The report also found that the goal of “sin taxes” has changed from correcting market failures to protecting consumers from their own choices. That is, people are too stupid to run their own lives and they need help. Finally, the report finds that sin taxes are regressive, i.e., they punish the poor. Unfortunately, my liberal friends never get exercised over this issue. Maybe it’s as the great PJ O’Rourke surmised, liberals hate poor people.
If they would just not wear those icky Wal-Mart clothes and watch their weight, like they tell them to… (Tax.com)
Even accepting that he spent 520 hours working on his own properties, he still lost. Two of the properties were short-term vacation rentals and one was being readied for sale. The time spent on those properties could not be grouped with the time spent on properties dedicated to long term rentals.
When a convicted criminal feels he has been ill-used by an accomplice, the normal recourse tends to involve unpleasant events in the prison gallery. Lawyers are rarely consulted. But when international tax cheating is involved, it apparently works differently.
A group of clients of Swiss bank UBS who claim that bad things happened to them as a result of their Swiss accounts sued UBS. Seventh Circuit appeals judge Posner was distinctly unsympathetic (my emphasis):
The plaintiffs are tax cheats, and it is very odd, to say the least, for tax cheats to seek to recover their penalties (let alone interest, which might simply compensate the IRS for the time value of money rightfully belonging to it rather than to the taxpayers) from the source, in this case UBS, of the income concealed from the IRS. One might have expected the plaintiffs to try to show that they had forgotten they had accounts with UBS (though that would be preposterous, for these were significant investments for each of the plaintiffs). Or that UBS had told them that income earned in those accounts was somehow tax exempt and moreover that the accounts themselves were somehow not foreign bank accounts within the meaning of the tax code and so the plaintiffs didn’t have to acknowledge having accounts with UBS. They don’t make any of these feeble arguments. They do argue, as we’ll see, that UBS was obligated to give them accurate tax advice and failed to do so, but not that it gave them inaccurate, as distinct from no, advice.
While the IRS offshore compliance programs have abused many innocent Americans who have foot-fault violations, that doesn’t appear to be the case here. A U.S. resident who set up a Swiss bank account probably didn’t do so to ensure tax compliance.
At worst, UBS, as we’re about to see, violated an agreement with the IRS designed to prevent the kind of evasion that the plaintiffs engaged in. That might conceivably make UBS an aider or abettor of the plaintiffs’s tax evasion and so make this case a distant relative to Everet v. Williams (Ex. 1725), better known as The Highwayman’s Case and eventually reported under that name in 9 L.Q. Rev. 197 (1893). A highwayman had sued his partner in crime for an accounting of the illegal profits of their criminal activity. The court refused to adjudicate the case, and both parties were hanged. Minus the hanging and with certain exceptions (such as contribution and indemnity) irrelevant to this case, the principle enunciated in The Highwayman’s Case applies to accomplices in civil wrongdoing, as noted in our recent decision in Schlueter v. Latek, 683 F.3d 350, 355-56 (7th Cir. 2012). In The Highwayman’s Case one accomplice was seeking a bigger share of the profit from the crime from the other one; here one accomplice is seeking a smaller share of the costs of the crime from the other one. The principle is the same; the law leaves the quarreling accomplices where it finds them.
The moral? Your banker isn’t your tax advisor, and when you are cheating, you are on your own. At least in Judge Posner’s court.
Overwhelming? A Tax Analysts story on the fallout from the Loving decision overturning the IRS preparer regulation program reports:
“There is overwhelming support for registration” among EAs, said Frank Degen, president of the National Association of Enrolled Agents. While preparers are watching to see what an appeals court will do — as the IRS said it would file an appeal soon — “most practitioners are just interested in cranking out those 1040s right now,” Degen said.
I’d want to see some polling showing that “overwhelming” support. The preparer regulation program strikes me as potentially fatal for the Enrolled Agent brand. EA’s, who have to pass a much stricter test and more stringent continuing education requirements than the registered preparers would have to, already have difficulty marketing their additional qualification. The IRS blessing of a competing bargain brand could easily bury the EA designation. At the very least, I see no overwhelming support for the preparer registration program from EA-bloggers Jason Dinesen and Russ Fox.
Even if seemingly everything goes right – in economic terms and in political terms – we are still on the edge of dangerously high debt and deficit levels with little room to spare.
The Iowa Senate approved the Iowa tax code conformity bill, SF 106, yesterday. The bill was approved 48-0, which is a good sign that it will pass quickly — enabling Iowans to get on with filing their 2012 business returns.
The bill updates Iowa’s income tax for the Fiscal Cliff tax bill changes passed last month by Congress. Key items updated to match federal rules include:
- Conforming with the $500,000 federal Section 179 deduction limit for 2012 and 2013.
- Allowing the optional deduction for state and local sales taxes for 2012 and 2013.
- Conforming to federal research credit rule changes
- Continuing the IRA charitable distribution exclusion
- Adopting the federal “above the line” deductions for college tuition and for out-of-pocket expenses of educators.
The bill does not adopt federal bonus depreciation for 2012 and 2013. The bill does not show up yet on the calendars for the House Ways and Means Committee or for House floor debate, so it may not get to the Governor this week. Update, 9:00 am: An e-mail from the House floor manager for the bill says the House may take it up as soon as tomorrow.
More boffo reviews for the shutdown of the IRS preparer regulation program!
It’s hard to choose just one IRS knee-slapper, but here goes. The agency insists IJ’s “suggestion that the return preparer program is the product of a tainted lobbying effort is belied by support for the program from the Taxpayer Advocate, the Electronic Tax Administration Advisory Committee, numerous consumer advocacy groups, and comments from individual practitioners.” The ETAAC is an IRS-administered panel whose members include lawyers and CPAs—who weren’t subject to the regulations—and people with connections to H&R Block and Jackson Hewitt, big businesses happy to help the government force the little guys out of the industry.
Protecting the taxpayers has never been the point.
Rather than continuing to fight in court, the agency would do better to cashier the rules on legal and economic grounds. They are a classic example of big business harnessing government power to aid the powerful at the expense of small-business competitors. Meantime, won’t someone in Congress tell the IRS to stop exceeding its legal authority?
Regina Jimenez, 60, of Clinton pleaded guilty to two counts of filing false tax returns. She faces up to three years of prison, a fine of up to $1 million and costs of prosecution on each count.
According to court documents, Jimenez operated AA Accounting & Tax Services, Inc. in Clinton from approximately 2007 through 2011. Jimenez used the business to facilitate the theft of more than $200,000 from a client who believed that Jimenez would use the money to pay the client’s taxes.
There’s never a good reason to have your tax preparer pay your income taxes for you. If your preparer tries to get cash from you “to give to the IRS,” ask many questions.
Remember, if the farmer purchases a corn call option as part of this hedging strategy, this no longer qualifies as a hedge (even though is a normal strategy of selling actuals and buying the “board”, for tax purposes, it is not a hedge) and is considered speculation. In many cases, the tax treatment can be harsh since if the option produces income, the IRS will treat it as ordinary and if it produces a loss, it will be considered a capital loss (the worst of both).
Why you should spring for a good GPS unit. You might get lost otherwise, like a star-crossed couple in my home town of West Des Moines. The Des Moines Register reports:
The incident occurred at about 2:12 a.m. Friday, when a car pulled into a police station driveway at 250 Mills Civic Parkway marked for “Authorized Personnel,” according to a police report.
Police said the car passed two patrol cars and drove up a private drive before turning around when it reached a garage. An officer in one of the patrol cars then turned on his top lights and stopped the car.
The driver told officers they were trying get to Beach Girls, an adult entertainment venue at 6220 Raccoon River Dr., West Des Moines, according to the report.
The two officers reported that both the driver and passenger had bloodshot, watery eyes and that the vehicle smelled of marijuana.
If they mistook the West Des Moines cop shop for a strip club, either they already had enough fun for the night, or strip joints have changed a lot since my bachelor days.
Not surprisingly, the judge who ordered the IRS to shut down its preparer regulation program declined to stay his order. The IRS asked James Boasberg, the U.S. District Court Judge who ordered the IRS to stop its preparer regulation program, to stay his order pending an appeal. The judge declined:
As the factors beyond likelihood of success do not decisively tilt in favor of the IRS — indeed, they tip somewhat against — the Court sees no basis to lift its injunction pending appeal. Nor does the Court believe it warranted to suspend the injunction for fourteen days to permit the IRS to seek a stay in the Court of Appeals. This would only lead to more confusion for preparers and their clients as the tax season gets underway. While nothing in this decision prevents the IRS from seeking such relief there, the Court sees no benefit of a brief stay while it does so.
So where do things stand? The IRS will be allowed to continue to administer the Registered Tax Return Preparer test and issue PTINs, but it cannot require RTRP tests or CPE, or collect fees for them. Whether the IRS will continue testing on a voluntary basis, or whether there will be takers, remains to be seen.
You surely didn’t miss the 100th anniversary of the 16th Amendment yesterday. They had a football game and everything to observe it. The 16th Amendment, which gave rise to the current income tax, was ratified by Delaware on February 3, 1913, making it official. And yes, it is official. While some tax protesters insist that the 16th Amendment was never properly ratified, all the federal judges say otherwise — not to mention the folks at IRS, the U.S. Marshals Service and the Bureau of Prisons. So, in any way that matters, it’s official. Still, I can’t bring myself to say “Happy” anniversary.
Iowa’s oldest judge, age 90, steps down. Ruth Klotz, a Polk County Probate Judge, remains respected by the lawyers I know who practiced in her court. Happy Retirement, Judge Klotz!
Martin Sullivan, Is Aggressive Tax Avoidance Moral?(Tax.com). Strange question. If you are paid to maximize shareholder returns, is it moral to do less than your best to do so?
The study’s conclusion is disheartening. The authors conclude that incumbents can get themselves elected by associating themselves with good news for which they ought not take credit because they are not responsible, support policies that generate good news for their districts even if they are bad for the nation, and to use rhetoric to distract voters from the incumbents’ histories.
It’s the little things. The mark of a true craftsman is attention to detail. Two Ohioans’ alleged failure to mind the details has led to trouble. From the Columbus Dispatch:
Roma L. Sims, 34, and Samantha C. Towns, 30, were arrested on Thursday and charged with aggravated identity theft, conspiracy and wire fraud for using the identities to file tax returns and rake in $1.3 million.
But they misspelled several cities when they listed return addresses: Louieville and Pittsburg, according to the criminal complaint. Those geographic goofs caught the attention of investigators.
So did misspelling some of the occupations they listed on the phony tax returns.
I bet they thought those spelling drills in grade school were pointless.
Iowa legislature goes 0-for-January. The Iowa General Assembly has been completed the first three weeks of its 2013 session without settling what Iowa’s tax law is for last year. The legislation needed to update Iowa’s 2012 tax law for the retroactive federal changes enacted in the Fiscal Cliff bill at the beginning of this year hasn’t cleared either house of the legislature. The Senate Ways and Means Committee at least moved its bill (SF 106) out of committee Wednesday, while House Ways and Means hasn’t even done that much with its bill (HF 110)
Many Iowans were affected by the retroactive changes, including educators and people who made energy-saving home improvements. Almost all businesses are affected by the Federal extension of $500,000 Section 179 expensing of depreciable property for 2012. Yet these taxpayers can’t complete their Iowa 2012 tax returns until the legislature decides what parts of the federal changes to accept.
The silliest part: we pretty much know what the bill will look like. It’s almost certain that it will adopt federal Section 179 rules and the other “extender” rules, without adopting federal “bonus depreciation.” That means there’s no reason to dawdle. But dawdle they do.
50 years for Wasendorf. The Wasll Street Journal reports:
Russell Wasendorf Sr., was sentenced to the maximum 50 years in jail after admitting to orchestrating a fraud at his futures brokerage and misleading regulators for almost 20 years.
Mr. Wasendorf, 64 years old, pleaded guilty last September to the fraud at Peregrine Financial Group Inc. that federal prosecutors said had cost clients $215.5 million and masked a business that never was profitable. He also was ordered to pay the full amount of missing funds in restitution.
Mr. Wasendorf got away with it by forging paper bank statements for the regulators and auditors. The scam blew up when Peregrine was forced to move to electronic account verification. Sadly, the chances of full restitution being paid to his victims are less than the chances he will walk out of prison at the end of his sentence.
The IRS also claimed that it would suffer unspecified “costs associated with . . . finding other positions for the 167 Service employees currently working on the return preparer project.” [Institute for Justice attorney Dan] Alban noted, in response, that just over two weeks ago, the IRS complained about understaffing, since “[o]verall full-time staffing has declined by more than 8% over the last two years, and staffing for key enforcement occupations fell nearly 6% in the past year.” You’d think that the IRS would welcome, not rue, the idea of having nearly 200 employees available for other tasks – like answering the phone (at current staff levels, they only do that about 70% of the time).
The preparer regulation program has always seemed a frivolous use of IRS resources when tax complexity and identity-theft fraud are making the tax law almost impossible to administer.
I hate extra apostrophes. Careful Tax Update readers know that I have a terrible habit of inserting extra apostrophes, creating an unintended possessive. I know the rules, but my fingers betray me when typing. Fortunately I can easily change a blog post to turn “it’s” to “its.” Not everybody is so fortunate.
Unless, of course, Steven owns “Steven’s” building.
Today is the last day to make a charitable IRA rollover for 2012. Yes, 2012 is over, but taxpayers who are required to make IRA minimum annual distributions may still have one 2012 transaction left in them.
- Taxpayers who are born before July 1, 1942 who took cash from an IRA in December 2012 can contribute up to $100,000 to a charity today and have it excluded from their 2012 income.
- Taxpayers who have failed to take their required minimum 2012 distribution can avoid the 50% penalty for failing to take their distribution by arranging for the IRA to transfer the minimum amount, up to $100,000, to a charity today.
For an example of the disruption routinely caused by the IRS’s misadministration of the RTRP regulations, see Alban Decl., Ex. 3 (the comments from preparers are illustrative and reference previous examples of similar disruptions); see also Joe Kristan, IRS quietly delays CPE requirement under new preparer regulation scheme , Tax Update Blog (January 8, 2013), http://rothcpa.com/2013/01/irs-quietly-delays-cpe-requirement-under-new-preparer-regulationscheme/ (describing IRS message as “a quiet admission of failure”).
With the Tax Update Blog on their side, who can be against them?
What does a poor college student have that could be lucrative to a thief? A Social Security number. From the Memphis Business Journal:
With tax season bearing down, the IRS has a warning about a new refund scam aimed at college students, seniors and church members.
The Internal Revenue Service said Tuesday the scam tries to get students to give their personal identification and file tax returns claiming fraudulent refunds. It has sent misleading and bogus refund claims using the American Opportunity Education Tax Credit on college campuses throughout the Southeast.
Be very cautious about giving anybody but your employer, your bank, a medical provider or the IRS your Social Security number. And never give it to a scammer.
So the pro tax people managed to shut Mickelson up. Rather than engaging in a discussion about why it is okay to take his money, they stifled him.
Shut up, they explained.
Paul Neiffer points out that now that penalties are waived for farmers who file after March 1, they may not want to file by their usual deadline: File Your Return After March 1 Not Before!
Have you mailed your 1099s and W-2s? Today is the deadline for sending them to recipients. Russ Fox has the scoop.
Iowa is collecting more tax money than it is spending. Iowa House Republicans propose to give the money back as a one-time tax credit. The Des Moines Register reports:
The proposal would capture the state’s estimated $800 million budget surplus, divide it equally among the state’s income tax payers and issue an income tax credit to every taxpayer for his or her share. Senate Republicans said last week the credit amounts to $375 for individuals or $750 for couples who file jointly.
That means, for example, if a married couple’s state income tax liability was $1,000, they would receive a $750 tax credit, reducing the amount they were actually required to pay to $250. If a payer’s burden was less than $375, he would receive a credit equal only to his actual bill.
It’s a simple plan that treats the surplus as a non-recurring event. Unfortunately, there is nothing simple about Iowa’s tax law otherwise. I’d prefer to see it returned as part of a tax reform plan.
House Democrats prefer to spend the money, and the Governor wants some of it to fund his education reform plan. ISU economist David Swenson says the money should be run through the government:
Drawing on a statistical model that predicts economic impacts, he said $780 million in government spending could support roughly 2,000 more jobs than the same amount of spending by households.
Yes, the magical power of the government to transform your money into jobs. If we just gave the government infinite money, we’d get infinite jobs. If that worked, you’d think we’d have more jobs than ever, considering that Federal and state governments are spending more money than ever.
Tax return preparers who just recently were rushing to get their preparer tax identification numbers from the IRS before it starts accepting 2012 tax returns on January 30 are in limbo after a federal district court enjoined the Service from enforcing requirements under the registered tax return preparer (RTRP) designation.
The IRS’s online PTIN system appears to be unavailable. People familiar with the system are uncertain why the IRS took it offline and what its unavailability means for the hundreds of thousands of potential PTIN registrants.
“From a practical point of view, [the IRS] has already shut the [PTIN] system down,” said Dan Alban of the Institute for Justice and the lead attorney for the plaintiffs in Loving v. IRS, No. 1:12-cv-00385 (D.D.C. 2013) “Whether they are legally required to do so is the question.”
Well done, IRS! Preparers are required to have a PTIN. The IRS apparently tied it’s PTIN software to the preparer regulation system overturned earlier this month. Another triumph for tax administration.
TaxProf, What’s FATCA Got To Do With It? Tina Turner Renounces U.S. Citizenship. It’s always easier for the wealthy to avoid the ridiculous paperwork the tax law imposes on Americans abroad. It’s the little jaywalkers that get shot to ensure the serious money-launderers get slapped on the wrist.
Andrew Mitchel has posted two videos explaining Form 5471. Think that sounds dull? If you fail to report your interest in a foreign corporation, the $10,000 fine will make it interesting.
To make ends meet, both parties agree, spending must be drastically cut. Under the White House budget proposal, discretionary spending on everything except the military is projected to shrink to its smallest share of the economy since the Eisenhower administration by the beginning of the next decade. Though he has resisted Republican demands to slash entitlements, President Obama remains willing to look for further savings from Medicare.
This is not, however, the only option we have. There is an alternative: raising more money from all taxpayers, including the middle class.
Nobody wants to talk about this. … Yet Americans would benefit from a discussion of this possibility.
It’s not true that “both parties agree” that spending must be drastically cut. It’s not clear that either party, as a whole, admits it, and at least one party remains in firm denial. The President’s campaign was all about spending money and sending the bill to the rich guy. Still, it’s nice that finally somebody at the New York Times admits that the rich guy isn’t buying. He can’t.
Customer service at the Internal Revenue Service is dismal and deteriorating. (Only 68% of telephone callers who wanted to talk to a human at the IRS last tax filing season eached one, and then only after an average 17 minute wait.) The epidemic of identity theft refund fraud hasn’t yet been contained. Hope for a major reform that might simplify the tax code is waning.
The article also has some serious nonsense about last week’s ruling shutting down the IRS preparer regulation power grab:
“If the injunction stands, the taxpayers of the United States will be grievously harmed,” IRS National Taxpayer Advocate Nina E. Olson told Forbes. “The practical effect of not having some kind of consumer protection for taxpayers going to return preparers is enormous. And I say that seeing all the return preparer fraud, and the return preparer negligence, and the return preparer inadvertent mistakes that happen.”
Enormous? More like what we did forever until two years ago. If anybody has evidence that last year’s tax preparers were significantly more accomplished and accurate than they were before the regulations, they haven’t shared it. And the idea that the RTRP literacy competency test and minimal CPE requirement would have changed that is silly.
Ms. Olson believes that depriving consumers of choices in preparers is in their interest because the diminished choices would be better. That flies in the face of all we know about regulation. The net result would be higher prices, driving more taxpayers to do their returns and driving some on the margins out of the system altogether, while sending more business to the big franchise tax prep outfits.
While I agree that having the Internal Revenue Service regulate tax preparers is not the best option – it is without a doubt a far superior option to having Congress legislate regulation. My opinion of the intelligence, competence, and ability, or rather lack of intelligence, competence, and ability, of the current members of Congress is well known.
The optimal source of tax preparer regulation/licensure/certification, whether mandatory or voluntary, would be an independent industry-based organization, not unlike the AICPA or ABA, such as the National Institute of Registered Tax Return Preparers that I have proposed.
Robert also calls me out:
As I have asked in response to Joe’s assertion, would you want a “casual” electrician wiring your kitchen, or a “casual” dentist filling a cavity, or a “casual” architect designing your home?
If I do, what business is it of anybody else? If I want to pay a talented handyman neighbor or cousin to install a ceiling fan for me, why is it anybody’s business? Why should he be not allowed to take my money just because he doesn’t have an electrician card from the Bureau of Electrical and Mortuary Science? As TaxGrrrl noted yesterday, occupational licensing is taking over the economy, and that’s not a good thing.
The corporate income tax is inefficient and a not sufficiently stable source of revenue for states. It should be eliminated. The individual income tax is likewise not a particularly stable source of revenue for states, and while counterintuitive, progressive tax systems do not work well at the state-level. Income redistribution, to the extent that it should be a goal at all, should not be undertaken at the state-level. So in a perfect world, yes, the state individual income tax should be eliminated as well.
The IRS has turned off its preparer registration initiative following the federal court decision enjoining the program. The Service issued this statement yesterday:
As of Friday, Jan. 18, 2013, the United States District Court for the District of Columbia has enjoined the Internal Revenue Service from enforcing the regulatory requirements for registered tax return preparers. In accordance with this order, tax return preparers covered by this program are not currently required to register with the IRS, to complete competency testing or secure continuing education. The ruling does not affect the regulatory practice requirements for CPAs, attorneys, enrolled agents, enrolled retirement plan agents or enrolled actuaries.
The Internal Revenue Service, working with the Department of Justice, continues to have confidence in the scope of its authority to administer this program. It is considering how best to address the court’s order and will take further action shortly. Please continue to check this site as additional information becomes available.
The second paragraph is the most interesting. While the IRS doesn’t admit that it overreached, this is far short of a vow to fight to the last appeals brief. One can only hope they will reconsider the whole misbegotten regulatory scheme.
Meanwhile, Accounting Today confirms reports the IRS has shut down the PTIN registration system and the Registered Tax Return Preparer testing program. They report the PTIN system is expected to come online again after the RTRP registration system is removed from it. Meanwhile, the Return Preparer Office has apparently turned off its phones.
All of this makes me believe that the IRS is not seeking any emergency stay of Friday’s decision and is planning to do without the RTRP rules for this season, anyway.
TaxGrrrl posts a great interview with the winning attorney in the preparer regulation decision, Dan Alban. She encounters a new perspective on whether regulation actually does more good than harm (my emphasis?:
Finally, with all of the legal niceties out of the way, I asked Alban the really tough questions: What about all of those folks who say that regulation is a good thing? What does this ruling mean for taxpayers? And why would you embrace a scheme that wouldn’t require – at a very basic level – some semblance of regulation to ensure that preparers are competent?
Alban didn’t hesitate. Intent, he says, is key. The intent of any kind of licensing scheme should be to protect the consumer. But Alban, who focuses on a occupational licensing in his practice, noted that frequently, these kinds of laws instead protect established interests from competition. That is, he says, not in the best interest of the consumer.
And with that, I paused. You see, in all of the years that I’ve been writing this blog, I’ve only received a phone call from IRS complaining about a post once. And it was for this one. The IRS wanted to assure me that the exemptions had nothing to do with any special interests. None. Not a whit. Interestingly, many preparers at smaller firms thought differently. I received a number of supportive emails and “off the record” comments about how the new rules felt discriminatory.
Bingo. Regulation always favors the big. It’s no big deal for H&R Block headquarters staff to deal with regulations for all of its franchises. It’s a different story for small operators like Sabina Loving, the solo preparer in a low-income South Side Chicago neighborhood who was lead plaintiff in last week’s decision.
It would appear that attorneys benefited disproportionately from the regulations; as a point of context, the American Bar Association (ABA) has encouraged the regulation of “other” preparers for years. Why is that? Is there maybe something to Alban’s idea that these kinds of laws protect established interests from competition?
And then Alban said something else that struck me: about fifty years ago, only 1 in 20 workers in the U.S. needed government permission (in the way of regulations) to earn a living. Today, that number is 1 in 3. That, he said, is troubling. We are increasingly relying on the government to decide who is qualified to perform services for us. Is that something we want? Does regulation really make someone competent? Or honest?
No, it just gives them one more way to control things.
Paying taxes with cell phone money? The Iowa Department of Revenue yesterday announced a venture with Dwolla to enable taxpayers to pay taxes with Dwolla’s mobile device online payment technology. The Des Moines Register Reports:
Dwolla is a cash-based payment network that provides real-time, low-cost, online and mobile payments, officials said. Instead of charging a floating percentage and fixed fee per transaction for goods and services or dealing with administrative issues of checks, Dwolla’s network costs a flat 25-cent fee on any payment over $10, and it’s free for transactions under $10.
…
Iowa Department of Revenue Director Courtney Decker said the state’s first use of Dwolla will allow businesses that already pay more than $100 million in cigarette stamp taxes the option of using the Dwolla network. She added, “This is just the tip of the iceberg” in terms of Dwolla’s potential in state government.
Dwolla’s service is cheaper and safer than mailing and processing a paper check, Decker said, and it will allow participating businesses to receive their tax stamps more quickly. She added that 89 percent of Iowa individual income taxes are filed electronically, but the percentage of people paying taxes electronically to her department is far lower.
Paying online now requires a slow application process and analog mail delivery to receive permission to make electronic payments. The Dwolla system will be a big improvement if the Department enables it for individual income taxes.
IRS wins another demutualization case. The IRS continues to fight the to tax proceeds on the demutualization of insurance companies. They famously lost the Fisherdecision, which held that taxpayers could treat their payments for insurance premiums as basis when they received shares of stock in an insurance company changing from mutual ownership to a stock company. But earlier this month the IRS won a Federal District Court Decision in California rejecting the Fisher“open transaction” scheme. If the IRS wins on appeal, this will likely end up settled by the Supreme Court. This is the second IRS victory since the Fisherdecision.
On January 18, two key tax developments occurred. First, a federal district court wiped out the IRS preparer regulations. Later, IRS announced that farmers aren’t stuck with the March 1 deadline and can file timely by April 15.
Republican Louisiana Governor Bobby Jindal has made the most provocative tax reform recommendation in many years. Jindal said he was going to overhaul the tax law. If he has his way, he will revolutionize it.
What is his real rate? He will be paying a real federal rate, considering the itemized deduction phase-out, of 40.788%. His California rate will be an insane 13.3%. That will be deductible on his federal return, so the net combined income tax rate is about 48.662%,
But there’s more! Golfers are independent contractors, so they have to pay self-employment taxes. That rate is 3.8% in 2013, but 1.45% can be deducted on the federal return, so the net is about 3.19%. That gets his rate up to about 51.856%, or so.
In 2011, Lefty’s combined rate worked out to about 42.589%. That means his effective rate increased by about 9.266%. But that understates it. Think of Phil Mickelson as a business. His after-tax profit on a given income level has taken a real hit. Where after-tax income was about 57.411 cents out of every dollar in 2011, now its about 48.144%. That means his after-tax income has fallen by about 16% – nearly 1/6. Don’t think it matters? Try it sometime with your own after-tax income.
A 16% cut in margins would be a worry in any business. Mr. Mickelson is in a business where he can boost his margins by nearly 8% with a moving van. He’d be an odd businessman indeed if he didn’t give the idea serious consideration. And he will have plenty of company.
My concern is more for the EA [Enrolled Agent] name itself. I really fear that EAs are getting pushed further and further to the margins. We’ve always been on the margins, so how much further can we be pushed?
The problem is, there’s no good solution for how to enhance and protect the EA name, because there’s so few of us.
So again, where do EAs fit in? There’s just not a good answer or good solution.
I thought the RTRP designation was a mortal threat to the EA brand. Enrolled Agents have to pass a much harder IRS-administered test and more rigorous CPE than the RTRPs would face. Yet few people know what an enrolled agent is. If IRS wants to improve the caliber of tax preparers, they should give more publicity to the existing EA designation and make it more desirable. But that doesn’t help them expand their power over all preparers.
Robert D. Flach proposes a voluntary Registered Tax Return Preparer designation. I have no problem with a voluntary branding, and if Robert and other unenrolled preparers can make a brand of it, more power to them. I don’t see it happening, though, as it would do nothing for the big franchise preparation companies, who already have their own brands.
Republicans want to use revenues from base-broadening solely to reduce rates. Democrats want to use revenues from base-broadening solely to raise revenue. (The quote in the title of this post is from senior Obama advisor David Plouffe.)
We will never be able to begin the tax reform process in earnest until Republicans and Democrats settle their differences on the total amount of revenue the federal government can collect. It was actually Bowles and Simpson who outlined the process: First, you settle on a number for the amount of revenue you want to raise (if any). In their case the amount of revenue was $800 billion over 10 years (using a different baseline). Second, you broaden the base as much as possible. The money from base-broadening is first devoted to deficit reduction and whatever is left over is used for rate reduction.
That requires agreement on how much we can afford to spend. Until that answer changes from “MOAR!” it won’t be enough.
After most of us stopped paying attention Friday afternoon, a federal judge in Washington D.C. stunned the tax world by striking down the IRS effort to regulate tax preparers. U.S. District Court Judge James Boasburgruled that the IRS lacks the legal authority to impose the RTRP program.
So now what?
I expect the IRS to appeal the ruling to the D.C. Circuit Court of Appeals, but that would take months. It seems unlikely that Judge Boasburg would stay his own ruling in the meantime, and I doubt that an appeals court will either.
Dan Alban of the Institute for Justice, the legal team behind the suit, told Accounting Today:
“Anything that’s part of the RTRP regulations is struck down by this decision today,” Alban explained. “The PTIN is a separate regulation and it’s done under separate statutory authority. It’s a ‘shall issue’ type of permit. If you pay the fee, if you pay that amount of about $65, you’ll get a PTIN. The IRS was going to make the PTINs conditional on having the RTRP credentials, but now they’re not allowed to do that. It will go back to how it was last year, when you had to get a PTIN, but anyone could get one and you didn’t have to pass an exam or complete any continuing education.”
So no PTIN refunds, but no testing or CPE requirements, and, presumably, no more RTRP designation. This would seem to end the need to get IRS approval for CPE programs, a requirement that has shut down many local CPE programs, like those offered by the organization of Iowa Enrolled Agents.
As of this writing, the IRS has yet to comment.
So who wins? Small unenrolled preparers are big winners. They are now free of the brain-dead RTRP bureaucracy. Enrolled Agents are also big winners. The RTRP designation threatened to kill the EA brand by confusing taxpayers about the difference between enrolled agents, with their much stricter testing and CPE requirements, and Registered Tax Return Preparers. But the biggest winners are taxpayers, who will not have their costs increased by an IRS-imposed guild system that would reduce the availability of tax preparers while doing nothing to increase their quality.
The losers? The IRS, which loses its ability to bully preparers with the extrajudicial discipline system of the new regulations. The big national preparers, who were instrumental in drafting the rules because they promised to weaken their competitors. And, retrospectively, Doug Shulman, the former IRS commissioner who masterminded the requirements.
When at first you get enjoined, try, try again. In 2010 a Kansas City-area man was enjoined from setting up a bunch of tax shelter plans, finding that the man “Deliberately Advised His Clients to Break the Law, and Helped Them Go About Doing so.” Apparently he dusted himself off and went right back to work. From a Department of Justice Press release:
The Justice Department announced today that a federal court has permanently barred Cash Management Systems, a Virginia corporation, from promoting two tax schemes that allegedly involve disguising wages as tool-reimbursement or tool-rental payments. Also subject to the civil injunction order were Cash Mangement’s marketing arm, Xell Enterprises, incorporated in Kansas; its principals, Bruce Lemay and Richard Herson Mills; and Allen Davison, of Overland Park, Kan. According to the government complaint, Davison provided legal opinion letters regarding the schemes and served on Cash Management’s board of directors.
Judge Eric F. Melgren of the U.S. District Court for the District of Kansas entered the permanent injunction, which the defendants consented to without admitting to the allegations against them. Davison was enjoined from promoting other tax schemes in 2010.
No, you can’t give a tax free “tool allowance” to employees. And just because somebody was enjoined from promoting other tax schemes doesn’t mean this one works.
Companies that make medical devices are paying a 2.3% excise tax to help fund the Federal health-care program. A lot of people undoubtedly think that means the 2.3% will come straight out of the company’s profits (and this in turn can lead to strongly populist instincts about sticking it to the people making a profit in health care). But the people who pay for a tax aren’t always the ones who cut the checks to the IRS.
Roberton Williams, How the New Tax Act Affects the Alternative Minimum Tax (TaxVox): “One curiosity that won’t please high-income taxpayers: the new Obamacare taxes on investment income don’t count in determining whether you owe AMT.”
For the reasons set forth in the accompanying Memorandum Opinion, the Court ORDERS that:
1. Plaintiffs’ Motion for Summary Judgment is GRANTED;
2. Defendants’ Motion for Summary Judgment is DENIED;
3. Defendants lack statutory authority to promulgate or enforce the new regulatory scheme for “registered tax return preparers” created by 76 Fed. Reg. 32,286;
4. Defendants are permanently enjoined from enforcing such scheme; and
5. Judgment is ENTERED in favor of Plaintiffs.
The IRS can, and almost certainly will, file an appeal to preserve its preparer regulation power grab, but losing on summary judgment and being enjoined from enforcing the new rules is a complete shutout for them in District Court.
I am glad that the IRS lost in court. I have hoped the regulations would be overturned, and I thought they should be illegal, but I am not a master of the law covering IRS regulatory problems. Regardless of whether they are legal, I have always thought the regulations unwise.
The regulations have been sold as a way to assure taxpayers of quality preparation by making them pass a test and take CPE. Yet the test is a joke, an open-book review of Publication 17. The IRS has already waived the CPE requirement for 2013. The IRS has already undermined their own arguments.
to expand the power of the IRS by increasing their grip on preparers, while
helping the well-connected national tax franchise outfits by eliminating many of the small independent preparers who compete with them.
Too cynical? Seeing that the IRS has abandoned its stated goals, the unstated goals are all that are left. Considering that the former CEO of H&R Block wrote the rules for the IRS, it’s hard to make the case that this was done with the taxpayer in mind.
What does it mean? It looks to me that the IRS has to stop its RTRP regime in its tracks, absent a stay on the ruling from the District Court or the D.C. Circuit Court of Appeals. No more rulemaking, no more RTRP open book tests, and no more approval of tax CPE by the IRS. No more cashing the $63 RTRP checks. Refunds? It would serve them right, but I don’t know.
Meanwhile, it’s back to the Wild West days of two years ago, when taxpayers had to rely on the reputations and credentials of individual preparers, rather than on a worthless pretend certification from the IRS. Oh, the humanity! Congratulations for the Institute for Justice, the legal team behind the suit.
Some practitioners are upset about the ruling (see Trish McIntire). None of us should have the right have the government lock potential competitors out of the market — even if we don’t think the competitor is adequately trained. It’s the customers’ money, and it’s up to them to make the choice.
In a quiet admission of failure, the IRS Return Preparer Office posted on its Facebook page that it won’t be enforcing the new 15-hour CPE requirement for Registered Tax Return Preparers this year:
We’ve received some questions from people who didn’t get their 15 hours of CE completed in 2012. Here’s the deal: In addition to the 15 hour requirement for 2013, you must also make up any hours not completed in 2012. There is no need to designate or notify us that hours earned in 2013 are for 2012. Be sure to keep records of the programs you attend. Additionally, for those people who answered “no” to the CE requirement question on their PTIN renewal, we will be sending them a letter soon advising them they are still responsible for the hours.
There are about 370,000 tax preparers that the IRS estimates are covered by the new rules. The whole regulation scheme was a stupid idea anyway, except as a power grab by Doug Shulman, Worst IRS Commissioner Ever.
The rules will do little or nothing to improve the quality of tax return preparation. By driving seasonal preparers out of the market, they will raise prices. At the margin, that will cause some taxpayers to self-prepare, and others to not file at all. That does nothing for the taxpayer, except for taxpayers who are shareholders in the nationwide tax return franchise businesses that are the real beneficiaries of the rules.
IRS preparer rules may create a catastrophic preparer shortage. A press release last week from the IRS urging preparers to take the new Registered Tax Return Preparer examination saves the real news until the end (my emphasis):
So far, there are more than 48,000 preparers who have earned RTRP certificates. There also has been an increase in the number of people taking the enrolled agent exam.
Starting Jan. 1, 2014, only registered tax return preparers, enrolled agents, CPAs and attorneys will be authorized to prepare and sign federal individual returns.
There are currently 739,000 tax preparers with 2012 PTINs. Approximately 350,000 of them are subject to the new testing and CE requirements.
It’s likely the population of authorized return preparers will crash. That will increase demand for the big national tax preparation franchises, which probably was the real goal the new regulations – written by a former president of H&R Block. A reduction in preparer supply will increase prices. It will cause some taxpayers on the margin to prepare their own returns, and some to stop filing altogether. Hardly a step forward for tax administration.
To see how this could work, consider this script: Let’s say the Republicans decide to largely give in to what the President Obama is proposing. There is, however, a catch: the president has to agree to raise marginal tax rates on all income classes, not just on the rich. The tax increase would be one-quarter of a percentage point, or some other arbitrary small amount, with larger increases possible for higher incomes, as has been discussed. The deal also stipulates that both the president and Congress must publicly acknowledge that current plans for government spending can’t be financed unless taxes on most or all income groups climb further yet, and by some hefty amount.
This highlights the frivolous, depressing and maddening nature of the “Fiscal Cliff” crisis. They will solve nothing, regardless of the outcome. The President resolutely ignores the continuing fiscal catastrophe. Nothing he proposes pays for more than rounding error in federal spending. His only concern is scoring political points, not solving the problem. A demoralized GOP lacks the nerve, and perhaps the conviction, to call for the spending cuts needed to approach fiscal sanity.
Of course, “The Rich” simply don’t have enough money to pay for our incontinent government.
John J. McCauley Jr., 54, owner and co-operator of McCauley and L’Europa Public Adjusters LLC and PIA Restoration LLC in Providence Rhode Island, and longtime Rhode Island state legislator, was sentenced today to 27 months in federal prison for conspiracy to defraud the United States of more than $500,000 and filing false tax returns…
Like some other politicians, he can take the taxes, but he can’t dish them out. He was Deputy Speaker of the Rhode Island House, according to this report.
Yesterday morning, my son was on a bus on I-80 with 52 other Grinnell College students heading to the Des Moines airport to fly home for the Christmas holiday when the driver suffered a fatal heart attack. The bus veered off the highway to the right, into a snowbank from the 12 inches of snow that fell in Iowa last Thursday. Miraculously, none of the students were injured, and after being transported to the hospital in Newton, Iowa, Grinnell arranged for alternative transportation for the students to the airport.
My older son drove that route yesterday coming home from school in Chicago. Happily, his trip was unexciting. I hope all of you who are traveling this week arrive safely.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
Disclaimer
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
New U.K. film tax credit indictments. It appears that the Brits are slowly moving towards the Iowa approach of jailing filmmakers instead of subsidizing them. 
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
