Rally the troops

Thanks to Robert Flach, the Wandering Tax Pro, for his informative comment in answer to my question of how to get involved in pushing for tax simplification.

He writes:

There is really no effective lobby for the individual taxpayer. Until there is, all the other lobbies for special interest groups, with their huge budgets, will continue to entice Congress to complicate the Tax Code in their favor.

National Taxpayer Advocate Nina Olsen is a good loud advocate for the taxpayer and for simplification, but Congress rarely acts on her recommendations.

It's unfortunate that my perception turns out to be fairly accurate -- that there is no effective lobby for the taxpayer in pushing for simplification. Instead, the problem just keeps getting worse with each new credit and deduction.

I was thrilled to read Mr. Flach's offer to join me in organizing Tax Professionals for Simplification in his weekly recap of what's going on in the tax world, What's the Buzz. I'm not sure precisely when I'll be able to delve into the idea (selling a house and all), and I won't be able to devote a lot of time to this (and am sure others can't devote a lot either), but I figure some time is better than none. And I really think it's high time for change!

We'll keep you posted.

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Where do I sign up?

I'm still new to this tax blogging world, but I've certainly read enough to know that I am not alone in thinking tax law is way too complicated.

Since recently reading that the Obama task force on tax simplification may not really get us anywhere, and also reading about how rarely Congress really listens to National Taxpayer Advocate Nina Olsen, I can't help but be discouraged.

I want to get involved in pushing Congress for tax simplification.

I realize I can't do much all by myself, and I've got two little rugrats to take care of, but I'd like to contribute what little time and (questionable) talent I can to making real change happen.

What's the best way to push for tax simplification? Is there an AICPA group, a group in the National Association of Tax Preparers, or some other group? Is there a "Tax Professionals for Simplification" organization?

What's the best place to start, and where do I sign up?

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The Cool Crowd

I appreciated Roni Deutch's post (The Tax Lady Blog) with her list of tax professionals active on Twitter -- not because I'm on the list (which is nice of course) but because I always enjoy finding more people with whom to connect.

Long live Twitter!

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Banking Blunders

June Walker recently posted "You need only one checking account. Do not open a separate checking account for your business."

On this matter she and I respectfully disagree, and it seems most of the tax bloggers disagree with her as well.

Joe Kristan says it well in his usual no-nonsense way:

You will save yourself a lot of time at tax time, and a lot of grief in an IRS exam, if personal is personal, business is business, and that's that. Run your business like a business.

The Tax Lawyer provides some more good reasons for setting up a separate account. The Wandering Tax Pro wrote a good post arguing the case for a separate account.

I was disappointed with June's response, which was inflammatory and, in my humble opinion, uncalled for. As Robert Flach put it:

Just because someone respectfully disagrees with you on a subject does not make them a fool, or stupid, or uninformed.

The thing that bugged me most in her response was the accusation that Robert was being sexist when he referred to "One-man LLCs." To Robert's credit, he responded with an apology for not being perfectly PC, and indicated his efforts to use "he/she" in his writing.

Being female, I'm obviously aware of and sensitive to gender issues. I have tremendous admiration and gratitude for the generations of women that have come before and paved the way for younger gals like me. Because of this, I get really annoyed when people start looking for any excuse to accuse someone of being sexist. To me, June's comment was out of left field, and had no real basis in fact. If we always made sure to use the exact PC wording in everything we said, we'd never manage effective communication.

So in summary, I believe strongly in having a separate checking account for business, and even more strongly in keeping communication respectful and productive.

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Favorite Tax Blogs

The house is on the market, and I'm finally visiting my cherished Google Reader.

Here are the tax blogs I couldn't wait to catch up on...

My Top 5 (no particular order):

• Kay Bell's Don't Mess with Taxes
• Kelly Phillips Erb's Taxgirl
• Joe Kristan's Tax Update Blog
• Robert Flach's The Wandering Tax Pro
• Peter Pappas' Tax Lawyer Blog

In the Top 10 (no particular order):

• Paul Caron's TaxProf
• Russ Fox's Taxable Talk
  
• James Maule's Mauled Again
• Trish McIntire's Our Taxing Times
  
• Linda Beale's ataxingmatter

And I enjoyed Bruce the Taxguy, who has recently retired his blog for other pursuits, in which I wish him the best.

So that's what this tax blogosphere newcomer loves to read. Peter Pappas gives an annual Rick Moranis award to the 5 Best Tax Nerd Blogs. Invesp Consulting recently posted its Top 25 Tax Blogs.

Where do you go for your tax fix?

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Taxing the Rich

Taxprof directs us to a list of Seven Myths About Taxing the Rich published by Curtis S. Dubay of the Heritage Foundation.

The myth I often hear that bothers me most is listed as Myth 2: "The rich do not pay their fair share."

The rebuttal:

"The top 20 percent of income earners pay almost all federal taxes.

"The top 20 percent of all income earners pay a substantial majority of all federal taxes. According to the Congressional Budget Office (CBO), in 2006, the latest year of available data, the top 20 percent of income earners paid almost 70 percent of all federal taxes. This share was 4 percent higher than in 2000, before the 2001 and 2003 tax cuts.

"When only looking at income taxes, the share of the top 20 percent increases even further. In 2006, the top 20 percent paid 86.3 percent of all income taxes. This was an increase of 6 percent from 2000."

I agree it is not accurate to say "the rich don't pay their fair share." Some wealthy people are dishonest and don't pay their fair share, just as are some poor people. The stereotyping of the wealthy as greedy, heartless beings is what I find to be unfair, and tiresome. I concede there are greedy, heartless wealthy people, just as there are greedy, selfish poor people.

As recently posted by the Taxprof, Tax Lawyer, and Tax Foundation, the share of the tax burden borne by the top 1 percent now exceeds the share paid by the bottom 95 percent of taxpayers combined.

Wealthy American citizens who obey the law pay a lot of tax.

Of course, when debating whether the wealthy pay their fair share, the true challenge is in defining what their fair share -- and anyone's - really is. I'd need to do a lot more studying of economics, tax policy, international tax rates, and a host of other topics before I could feel qualified to propose a definitive answer to the question of exactly what is a fair share.

What I would like to claim definitively is that "the rich" are not all bad people who exploit those less fortunate to make a buck. Many "rich people" are honest, hard-working, and generous.

Lest there be any confusion, I can declare without hesitation that I do not fall into the category of rich. But I do know and work with people who are "rich", and I am continually amazed at their success, which has come from hard work and strength of character.

A couple years ago, a smart man told me something very simple: "Successful people make and keep commitments."

Let's stop maligning successful people for being successful. Would we rather have a country full of people who never strive for excellence? I hope not.

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Pencil or PC?

When I was 9, my family got our first computer for Christmas. I spent countless hours on that DOS machine with its dot matrix printer. Three years later, we bought our first Windows PC. I was in heaven.

I could not imagine life before Word and Excel, nor could I imagine tax preparation without software. When I get frustrated upon running into a software glitch, I have to remind myself that the software really hasn't been around that long, so many a problem still need to get fixed.

Robert Flach, The Wandering Tax Pro, discusses the benefit of preparing returns by hand. Joe Kristan and Peter Pappas share their contrasting views on the matter. My take on the conversation...

I'm passionate about tax accounting. When working on a return, I want to understand every number, the flow of the return, and the law behind it all. And I've always been that way.

I got my Master's in Tax before entering the profession, so I had a pretty solid foundation when I started. But for many accountants, their background tax return is minimal when they enter the big bad world of public accounting. It takes time for them to get familiar with how a tax return works. And in the meantime, the work still needs to get done.

As I mused the other day, I think we're better off if we delegate initial preparation to less experienced preparers, with the experienced professional reviewing the work. Tax prep software speeds up this process. Software will never replace the need for a qualified professional exercising judgment, but it can be a great tool.

I love having the speed and efficiency of software, while at the same time understanding the forms and law behind them. It's the best of both worlds.

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Yet another scary IRS agent story?

Seems the news is flooded these days with stories of IRS agents and their various shenanigans.

I hope stories like these convince people with IRS trouble to seek the help of a qualified tax professional! In a perfect world, the system would be fair, and people could deal effectively with the IRS on their own.

But we do not live in a perfect world, the IRS system is not fair, and so taxpayers are in much better shape if they hire a qualified professional to manage the process.

Let's just hope the taxpayers realize that.

The TaxProf blogs:

Mark Claybrooks, 41, an IRS agent in Walnut Creek, California, has been indicted on charges that he urged delinquent taxpayers to get the money needed to pay their tax bills by refinancing their home mortgages with a mortgage company. Mr. Claybooks is alleged to have received $20,000 from the mortgage company for two referrals. (With references to the Contra Costa Times, San Frnacisco Chronicle, and Web CPA)

Tax Prof also blogs about...

IRS agent Albert Bront, 49, of Valencia, California, screamed “I’m going to kill all of you!” when U.S. Treasury agents served a search warrant at his home as part of an investigation into whether Mr. Bront had filed false tax return. He is being held without bail pending a July 28 preliminary hearing in Los Angeles.

April 15.com blogs about...

IRS Auditor Jim Liu who claimed to have incurred a loss on selling an apartment complex when he in fact he had a rather large gain. To compound matters, he then altered documents to support his bogus claim. Mr. Liu subsequently pleaded guilty to tax fraud and faces up to three years in a federal penitentiary.

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Why do we pay them?

I'm new to the world of tax blogging, and am already falling behind in my rate of posting. The trend is sure to continue, as we're preparing to sell our first house, which apparently takes time and energy. (And yes, I know this isn't really the best time to sell. Alas, the military doesn't care, and it owns my husband for another 5 years.)

Of course, with selling our home, we faced the question of whether to sell it on our own or incur the expense of a realtor. But it really wasn't much of a question, as we never even considered selling it ourselves -- much to the relief of friend and family.

Question: Why do we pay realtors to sell our homes? After all, we could read all about it and do it ourselves. Information is available all over the place.

Answer: We pay realtors because of their experience and expertise. Because our time and energy are our most scarce resources, and we should allocate them wisely. Because we are likely to mess something up, seeing as how we are not professionals.

Question: Why do people hire tax professionals? All the information is available online, or at the library or local IRS office. They could research the IRS website, state websites, tax blogs, etc.

Answer: People pay us because of our experience and expertise. Because their time and energy are their most scarce resources, and they do not choose to allocate those precious resources to learning the tax law. Because they would likely screw it up.

So those are my thoughts today.

As I said, my posts will be sadly lacking as I manage this real estate endeavor. But hey, I'm already about 5 years away from joining the list of the Top 25 blogs in Taxes -- or, let's be honest, even breaking the top 100. Fortunately, I'm okay being the wallflower for awhile, at least until this house nonsense is over.

(Congrats to all those listed in the Top 25!)

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Avoiding the IRS audit

I appreciate The Wandering Tax Pro visiting and commenting on my humble blog. On the subject of IRS "red flags," he poses to me the following questions:

1. Do you believe that by merely claiming any of the 5 items submitted by Mr. Pappas, regardless of the amount, a taxpayer will automatically substantially increase his/her chances of an audit?

2. Would you ever recommend that a client not claim a legitimate and documented deduction because it would increase his/her chances of an audit?

Before responding, I should point out that both Mr. Flach and Mr. Pappas are more qualified to answer these questions, considering they have been in the professional far longer than I. (Mr. Flach has been preparing returns longer than I've been alive, which is impressive to say the least.)

So if anyone decides to stop here, that's really understandable.

On to the questions at hand...

(1) Yes, I do think that, by claiming one of these deductions, a taxpayer increases his/her chance of an audit. I hesitate to say whether the increase is "substantial," as I have limited knowledge of IRS enforcement statistics. (Learning more about them is on my to-do list.) These areas are more likely to have error or fraud, the IRS focuses its efforts on areas especially susceptible to error and fraud; ergo, returns with these items are statistically more likely to be examined.

(2) I am not likely to recommend that a client not claim a legitimate and documented deduction because it would increase his/her chances of an audit. Like Flach, "I do not believe that one should be scared off from claiming legitimate deductions for fear of being audited."

HOWEVER, I believe it's my responsibility to educate the client on the increased risk.

In a perfect world, honest taxpayers would not be subjected to the time, expense, and stress of an audit. They would claim just those expenses and credits to which they are legally entitled, avoid examination, and keep on being honest.

We all know the world isn't perfect, and that honest taxpayers will continue to be audited along with the cheats. And so taxpayers must address the question: If I claim this tax benefit, my risk of audit will increase -- Is the benefit work the risk?

I suppose we could create a risk/reward mathematical equation using IRS statistical audit data. (Hmmm... summer project? Anyone know where I could get good IRS stats?)

I suppose my risk/reward idea is similar to Mr. Pappas' suggested cost/benefit analysis: "What is the comparative value of the deduction? Taxpayers should weigh the benefit of the deduction against the costs (monetary and psychological) that would be involved should the deduction trigger an audit."

Analogy attempt

I'll wrap up this post with a feeble attempt at an analogy.

I'm going on road trip, and have identified the fastest, most efficient route. Partway into the journey, I hear on the radio that there is a roadblock checking for drugs on my route. I consider my options.

• Modify my route to avoid the road block, and lose time.
  
• Keep on the route, hope the line of cars isn't too backed up and that I'll get through it quickly.

I can't see the future, so I just have to make the best decision I can with the information available. Several things would influence my decision, such as:

• How much time would I lose by avoiding the roadblock?
  
• How much time would I lose if I got stuck at the roadblock?
• Would the police find drugs in my car?
  

So what do I do?

So do I take the safe option and avoid the roadblock, and lose the benefits of a quicker trip?

Do I fail to claim legitimate Schedule C expenses, in the hope of decreasing the chance of IRS audit?

In my practice, I generally encourage clients to claim all legitimate deductions and credits, and inform them of the audit risk.

Nothing too exciting, but there you have my 2 cents.

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When tax preparers attack

The battles continue in the tax blogging world. After a lengthy and thorough debate on tax preparer regulation (tax pros are good at thorough), we jump into the debate of how best to avoid (or at least not invite) an IRS audit.

First, I must say it's great to have experts talk openly about what will and will not get the attention of the IRS. I am much newer to the profession than the tax bloggers, so I value the information they share about "the real world." After all, the IRS isn't going to teach me about the realities of enforcement. During a recent radio show, an IRS representative told a caller that he should, in fact, amend his tax return because he received a 1099 that increase his tax by $40. Hmm... thanks IRS, but I think I'll read what the bloggers have to say.

So Peter Pappas began the debate (perhaps inadvertently) with his post titled 5 Slam Dunk IRS Audit Red Flags. Robert Flach posted a commentary, and the debate ensued.

As usual, I agree with both of them on several issues. And I think they too agree on several key points. The IRS is more likely to scrutinize returns with these five deductions, simply because returns with these deductions are more likely to have error or fraud. It's about probability, and don't we tax preparers love math?

I did not anticipate the change in the debate's focus, which became that of whether a return prepared by a CPA is less likely to have errors than a return prepared by a non-CPA.

Robert is correct that a CPA is not specifically licensed for tax preparation, rather "a CPA is a licensed accountant, authorized to certify audits of financial statements." Just a couple of months ago, I was pondering this exact issue. I was thinking about all the fancy credentials the AICPA offers for CPAs in other specialties - financial planning, fraud examination, business valuation - and wondering how to become a certified tax expert.

So I emailed the AICPA asking about it. Here's the exact wording of the response I received:

"We do not offer a credential in taxation. In general, our approach has been not to develop credential programs around areas for which the public already believes CPAs to 'own'. In addition, we do not endorse a particular tax credential."

And so we CPAs specializing in tax find ourselves in a bit of a quandary. Our CPA designation does not by itself qualify us as tax experts, but there is not another designation available that does.

And now we arrive back at our original issue of debate, that of tax preparer regulation. Is anyone else getting dizzy?

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Tax preparer regulation: Late for the party

Don't you hate it when you thought the invitation said 9, but the party really started at 8?

I figured I'd still come the to party, even though it may mean receiving disdainful looks from those wondering why I'm so slow. So here's my take on the specific issue of tax preparer regulation:

One of my pet peeves (and goodness, there are many) is when a person repeatedly talks about problems but never suggests solutions. Granted, I am always pointing out problems (much to the challenge of co-workers), but all the while strive to find solutions.

Going back and reading my previous post, "Why Regulation Won't Work," I now kick myself for doing just that which I detest -- discussing the problem but not possible solutions. Doh! Let's see if I can get back in my own good graces.

So regulation won't solve our problems. That's simply a fact of life. In all aspects of life, we have a gap between the ideal and the reality. The issue, then, is how to minimize the size of the gap. We must have law and order if we are to avoid anarchy.

A couple of concepts from Economics 101 come into play here. First, we must deal with externalities, both benefits (such as public safety) and costs (such as pollution). And second, we have limited resources.

How do we deal with it? We must decide whether to use our scarce resources to affect an externality, be it public safety, education, law enforcement, whatever.

I'd argue that tax evasion itself is an externality. Most people would not comply with tax law if society did not dedicate resources to its enforecement. Few people argue that we do not need laws or regulations. Rather, the argument centers on the method and extent of regulation.

I think those involved in this debate agree on several things, such as:

• Ideally, all tax preparers would be knowledgeable and honest.
• The reality is far from this ideal.
• The public would benefit if the reality-ideal gap were decreased.
  

If we all agree on those points, then the key issue is: Would the benefits of regulating unlicensed preparers justify the resources required to do it?

I'm inclined to say no. In my experience, government (and the IRS in particular) does not operate efficiently.

Maybe I'm wrong, and someone will present to us a beautiful, inexpensive, efficient system to regulate preparers. If that happens, I will gladly eat my words. But until them, I'd rather the IRS spend its scarce resources on other things.

(Bruce the Taxguy provides a nice list of links to blogger commentary on the issue.)

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Why regulation won't work

A few seemingly unrelated posts from tax bloggers got me thinking (which is always scary). The posts are...

• The Wandering Tax Pro, Robert Flach, discusses the Ethics CPE requirements for Enrolled Agents and CPAs. He writes: "I have been preparing tax returns for about 38 years, without incident. If I do not have ethics by now sitting through 2 hours ain’t going to make me ethical. If I am so inclined to be unethical in my practice listening to a speaker tell me what is wrong is not going to make me 'see the light'."


• TaxVox: the Tax Policy Center blog, by Jacob Goldin, discusses the proposed tax on junk food, posing the question: "Would a junk food tax really reduce obesity?"


• Tax Rascal discusses the California tax credit for purchasing a new home, which lenders will be authorized to advance to buyers towards a down payment.

The connection I see is one of the unfortunate but very real facts of life: We cannot change people's motivation for behavior.

We can regulate behavior, but not motivation. We can educate, discuss, persuade, encourage... but when all is said and done, people can only be changed by themselves.

Here's how this relates to the above blog posts...

• An ethics CPE requirement will not make a person ethical.
• A tax on junk food will not make a person change their lifestyle.
• A financial crisis will not stop people from buying things they can't afford.

I don't think bigger government and higher taxes are the answer, but I'm afraid I don't know what the answer is. Ideally, everyone could agree on some clear goals for American citizens, which might include acting ethically, being healthy, and living within our means. But it's impossible to get millions of people to sit around the table and figure it out, so until then we're stuck trying to regulate behavior.

It's not the solution, but I guess it beats complete chaos.

(As a quick post script, a great book about this subject is Leadership and Self-Deception.)

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Thanks guys and gals

Just wanted to say a quick thanks to the expert guys and gals who have mentioned me in their online writings. After all, the jury may still be out on whether I've got anything valuable to say. But for as long as it lasts, I'll just enjoy feeling like one of the cool kids (whether anyone else considers me one or not).

So thanks to:

• Rick Telberg of CPA Trendlines and the AICPA CPA Insider
• Joe Kristan of the Tax Update Blog
• Kelly Phillips Erb aka Taxgirl
• Robert D. Flach aka The Wandering Tax Pro

I appreciate you reaching out to an online rookie like myself. Now let's hope my two cents really are worth at least two pennies.

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